Subprime problem coming to manhattan?

Sounds quite conceivable to me. Interesting perspective.

Lower prices could naturally beget lower prices.

So what would happen after people stop paying their mortgages? They lose their homes and are unable to buy another. In most cases, they are unable to rent either, as landlords would be none to pleased the the ensuing credit report.

So yes, if they are able, people will continue paying their expensive mortgages. Prices will decline due to increased inventory and decreased demand. People who lose their jobs will find new ones, or will sell (yes, at a loss in some cases) and leave town. There may be a "wave" of short sales", but it won't come from people voluntarily ceasing payment of their mortgages.

^^^
none too pleased

10105, I don't follow at all. How do you equate subprime and prime loans as being one in the same?
Subprime loans were written to purchasers with less than stellar credit, in many cases bad credit, and with little or no income verification. Meaning, they were not ideal for a mortgage. Yet, the banks, in their haste to produce new customers, issued mortgages anyway. Prime mortgages are quite the opposite: well qualified buyers.

Just because you are paying a mortgage on a house that is temporarily worth less than the market value does not mean people will just give up automatically and stop paying it. There is no direct relationship between prime mortgages performing like subprime if they are underwater.

Short sales will happen when people need to sell due to a hardship, owe more money on their proprty than the market supports and are proven by the banks to not have any funds or sources of income to provide for the shortcoming. And until the banks are overwhelmed with foreclosures or short sales, they will not sell for less than market value.

In Forida, where the housing recession has been going on for over 3 1/2 years, and until approx 6 months ago, banks were reluctant to sell below market value. When the typical sale became a foreclosure, and it was financially more sound for the banks to undercut their price, (vs monthly carrying costs) they then began to sell 10, 15% below market value. But this is when approximately 1/2 of all homes for sale on the market are bank owned.

I don't see the same thing happening in NY, especially when co-ops are stil the overwhelming majority of sales. Co-op boards had the strict standards for approval that banks should have. Will there be foreclosures in Manhattan? Most definetly, as even in good times there have been foreclosures? Will there be short sales? Yes. Will the short sales be for under market value? That is doubtful.

Sub-prime and just about all else in between has already damaged the NY financial sector and economy. The ripples of the impact will be felt for quite sometime into the future.

As to RE, bonuses and overall employment remained strong in 2007 which had a favorable impact on the 2008 RE market at least through 1Q. Fast forward to 2009, 2010 and perhaps beyond, compensation will be substantially below boom year levels. The decline in compensation should have its first significant impact during 2009 and 2010 appears very shaky as well. It is during that time, that mortgage defaults can be at high risk of taking place. So sure, it can happen.....high debt levels & rising maintenance payments combined with high unemployment and significantly lower compensation in general, does not a good recipe make.

I don't advocate this... but we have seen people across the country making difficult decisions in bad situations. "Voluntarily" is a matter of definition... could be just sooner rather than later. Further, one could get a rental before defaulting, so it is not like a person is being forced out on the street. Also, one can rebuild their credit report over time (years). The point is that I am not sure that people will continue paying their expensive mortgages.

Kingdeka - I equate the performance of subprime mortgages with prime mortgages... WHEN they are underwater. You see similar performance. ie. high levels of default. The quality of the borrower was supposed to matter, but it didn't.

So you're suggesting that people, in numbers sufficient to make a statistical difference, will find rental apartments while their credit is still good, then default on their mortgages? Because those mortgages are expensive?

10105, there are many many subprime mortgages who do not risk default and are completely solvent. Just b/c a prime is underwater doesn't mean it's subprime. Your whole logic is incorrect.

However, you are correct in that if people lose their jobs for a prolonged period of time, have no income coming in, and have no savings or access to credit to fall back on, then they are in danger of foreclosure or at risk for short sale.

But just b/c a mortgage is being paid for more than what it is worth does not mean it is like a subprime loan. Subprime loans were based on people, not the property. You should not have brought up subprime loas, because they really have nothing to do with your statement.

kingdeka - If their is no difference in performance, then you could prime mortgages becoming "subprime-like". That is the point. (Yes, I understand the difference between prime and subprime.)

Tina - At the margin, it could have a significant influence. This is especially true if the banks, then react and start requiring higher downpayments (and yes, i understand that many coops require higher deposits than the banks at this point). It is an ugly negative feedback loop.

Tina - Expensive is relative. If rents and property prices drop...

I know everyone is hoping for doom in Manhattan real estate but lets also not forget the strong rental market as a backup to supporting a property that the owner may be a little over their head.

In alot of the markets in florida/california/az etc. where suburban homes were built on spec there is 0 rental market demand in these areas.

Manhattan is absolutely different then these markets. Typical rental markets here run at a .5% vacancy rate. Sure vacancy rates are increasing a little and prices are getting pressured but I can't think of a better place in the country to have a property to rent out no matter the economic environment.

I have a friend who bought in 07 around peak prices and with a refinance (rate around 5%) and just a little more cash against the property (30k) they can push the carrying cost of their condo to be break even with January 2009 rental rates.

So sure they had to reset their expectations on appreciation but if they lose thier job tomorrow they can rent the property out and still not suffer a dime.

Bubble markets in the south do not have the rental market to support the prices. Manhattan has a huge rental demand good economy or bad. You need to consider that factor into this assumption.

Mike - Fair point. Obviously, if everyone tries to go this route at the same time, then rents collapse, but we are not at that point.

"Manhattan has a huge rental demand good economy or bad."

A.K.A severe recession, potential depression will not affect Manhattan rental market because Manhattan is different.

Now where have we heard similar "Manhattan is different" arguments before? What? That's right.

Ok dear lemmings, nothing to worry about. Nothing more to look at here. Move along now.

Manhattan is very different, and for you to think that it is not is denying the essence of what Manhattan is all about.

I am still very confused about the title of this thread, "Subprime problem coming to Manhattan". Poor choice by the originator. Manhattan does have a large rental demand, MMAfia. The price is being negotiated, but there is still a huge demand.

MMAfia - I am not discrediting the seriousness of the economy in dire straits at all. My point is only that there is a strong rental market in Manhattan in comparison to alot of markets that have seen some major foreclosure and short sales with Subprime issues. I am not saying we are out of the woods and it cant get worse either. The only point is that there is some support in Manhattan because there is rental demand. And there are alot of people if they themselves lost their job would not be foreced out of their Manhattan apt that they could rent it out relatively easily and alot of them renting it at the current carrying cost of their mortgage. Renting out a 3000 sq ft house on a fringe exurb/suburb of phoenix Arizona, parts of Florida etc has been proven impossible.

Yes i agree its getting scary - and there is always the chance of Armagedon and the entire US Capitalist market blowing up. I also have an opinion that if it gets any worse out there then it is now the entire country has a hell of alot more to worry about much worse then having a little negative equity in a home. Would I purchase a home in today's economic environment? No. Do I think home values in Manhattan could go down considerably? Sure. All I am arguing is that the Manhattan Market from a rental support perspective being the economic center of the United States is a little different then Phoenix Arizona. You cannot argue that fact.

Please provide an arguement with some intelligence instead of a petty "Nothing to look at here. Move along now" pompous attitude with no substance.

According to the Furman Center their were 840,443 housing units in Manhattan in 2006, and the home ownership rate was 23.5% which implies 197,507 owner occupied units in Manhattan in 2006. According to Miller Samuel, there were 40,002 sales of co-ops and condos in years 2005 through 2008. If we assume that they are all owner occupied and that every one of these owners put their unit on the rental market tomorrow, that would increase the 840,443 - 197,507 = 642,937 non owner occupied housing units by about 6.25%. Although the rental market in Manhattan has be historically very very low, I am hearing numbers like 3%, so that would bring the vacancy rate to about 9.25%, still less than the national average of 10% as reported by the US Census Bureau.

the word of 2009 is 'cramdown'. if congress passes it will have a serious negative effect on home prices, specifically non conforming.

Prime mortgages are in fact performing very poorly. Anybody who bought in 2007-2008 is already solidly underwater and the more prices drop the more years/owners you can add to that group. The good news is that refinancing at the current very low rates will stave off a good amount of defaults, but this is just delaying the inevitable.
Rental demand is plummeting as well, inventories are almost twice what they were in 2007 according to Citi Habitats (and they tend to underestimate inventory) and prices are down a solid 20-30% already. Once the majority of leases are up in the summer, the rental market will really feel the pain. Obviously this doesn't compare to Las Vegas where you cant give leases away and things are trading hands for 20 cents on the dollar but Manhattan will not be spared.

So you are assuming no one that lives in Brooklyn/Queens/Bronx/SI or Jersey City/Hoboken that was priced out of renting an apartment in Manhattan last year at peak rents wont take advantage of much cheaper rental rates in Manhattan and move in. I know I did that in 2001 when I moved from Jersey City to Manhattan during the dot com bubble.

We are talking Manhattan specifically not anywhere else. I highly doubt you would ever see 9-10% vacancy in Manhattan - there are way too many people sitting on the sidelines ready to move in.

If the property is underwater, I don't think you can refinance.

True, but I believe appraisers tend to be a bit behind the market.

I tend to agree that there probably will be a substitution effect, meaning Manhattan rentals _should_ maintain some value. However, that doesn't seem to be the case as anecdotal evidence from Brownstoner, etc. suggests that Brooklyn rental rates have continued to remain steady. So the high number of inventories in Manhattan could be seasonal -- i.e. fewer renters enter the market in the winter and would readjust in the summer.

There are two distinct Manhattan rental markets. The stabilized/rent-control group which is "never" going to move (and therefore keep the overall vacancy rate low) and the free market rentals. I think it's fairly obvious that the pool of "free market" renters is composed heavily of _young_ finance professionals, lawyers, advertising folks, etc. The number of people employed in these groups will be far less come summer 2009. I think it's inevitable that prices come way down -- my new construction in Hell's kitchen cannot rent 1 bedrooms at 2400 or 2 bedrooms for 3400.

Did my friend rent his studio at The Orion over the summer for more than his carrying costs? Yes. Do I think he will again next summer? No.

My question is, can the big rental companies - Related, etc - afford to keep high inventory levels? 2nd - if rents fall significantly in NYC, what happens to all the new construction on Williamsburgs/Park Slope/Ft. Greene/etc. that was originally intended to be condo, couldn't sell and tries to go rental? Those firms that built need a certain threshold of income to pay their construction loans -- if many people start to find Manhattan rentals more affordable, what happens to those buildings?

10105 - "Tina - Expensive is relative. If rents and property prices drop..."

Sure. Everything is relative. But if there are any absolutes in the current market, I would throw out the sanctity of one's credit report. If there are other mitigating factors - job loss, relocation - then sure, people will walk away from their homes. But I just do not foresee people sacrificing their financial profiles just to save a few hundred dollars a month.

The stabalized group is slowly diminishing through death and hitting the "luxury" rental level, and is accelerating. These apartments will enter the free market. The free market cycle should be greatly changed this summer by the delay in household creation, the significant decrease in new hires out of college, and people leaving the city when their lease is up due to unemployment.

The issue isn't prime per se, it's debt to income. When banks allowed people to get mortgages of $1.5 mil on a $450K salary, they allowed them to shoot themselves financially. Alot of people overleveraged in many, many ways. Not just condo buyers. Coop buyers who didn't rush off to buy a second home they couldn't afford, people who've owned for more than six years who can still afford the maintenance and taxes and didn't rack up alot of credit card debt, people who don't have children in private school where they've seen annual tuition increase about $10K per child over then past 5 years, etc. may be just fine. I know plenty of fairly well-employed people who are struggling. And then I know some who are unemployed. I know a family who is moving back in with parents (or so the rumor goes). This is, on a very basic level, ugly.

So New York in 2009 will be leading the job losses:

http://news.yahoo.com/s/ap/20090119/ap_on_bi_ge/city_job_declines_1

I think this is going to be the major factor that will bring the prices lower.

"Anybody who bought in 2007-2008 is already solidly underwater."

This statement is wildly inaccurate and untrue.

Tina - I don't necessarily disagree with you. A year ago, it would have been laughable to suggest that the issues seen with subprime mortgages could appear in manhattan. Food for thought.

I don't think people should default on a mortgage w/o significant mitigating factors, but it has happened with increasing frequency in areas where price depreciation has pushed large numbers of mortgages underwater by significant amounts (not just a "few hundred dollars" in monthly savings). People trading their credit profile (and years of fixing it) for getting out from under a large mortgage burden.

Also, "mitigating factors" tend to grow in a recession. If you are over-levered, small changes in income can have a big effect.

The issue with any foreclosures in Manhattan is that they're a double whammy to the local market. Why?

1. Increases supply of apartments on market.
2. Would also mean that seller/owner is likely failing to make maintenance/common charge payments. The effect of this is to increase maintenance/cc charges for existing owners, and, in the case of coops, increase the credit risk of the building.

as far as rents are concerned, they have already been falling in Manhattan in 2008 and there is no end in sight as the local economy continues to snowball downward. I wouldn't hold out much hope for rents as a backstop.

> "Anybody who bought in 2007-2008 is already solidly underwater."
> This statement is wildly inaccurate and untrue.

I figure its the majority at this point, so saying "wildly" is just inaccurate.

I believe it is mostly true at this point... a 20% decline will easily do that.

NYC - show me evidence that the majority of individuals who bought in 2007 are underwater. Have they lost some value? Of course. But, the majority also put 20%, 25%, 30% or more down and have paid their principle down at least a little bit.

Plus, some improved the apartments along the way. And that 20% down doesn't mean every apartment went down that much, especially when you are talking about coops, which require the 20% or more down payment.

New development condos? Some could be. Add up all these factors and prove to me that "Anybody who bought in 2007-2008 is already solidly underwater"....you cannot.

Anybody who bought in 2007-2008 will be underwater in 6 months. Happy now?

waverly... you can't be SERIOUS? Nah... tons of apts flooding the mkts.... no buyer that can actually qualify for a standard mortgage (mariachi players need not apply)... and not a mark left in NYC RE...

Come on people... there's argumentative, then there's denial ..... and then there is DELUSIONAL..... if you don't believe you are underwater and you bought in 2004-2009 =>DELUSIONAL.

"Please provide an arguement with some intelligence instead of a petty "Nothing to look at here. Move along now" pompous attitude with no substance."

This has already been beaten to death too many times to resurrect old threads. That's why there's nothing to look at here and time to move on already.

Just accept it already. Rents will not be the 'savior' backstop for falling prices no matter how much you pray for it to be. Too many jobs will be lost in Manhattan.

Stop adding to the list of hopeful "but Manhattan is different and that's why XYZ will prevent huge price drops" wishes.

There's already a long list of XYZ wishes from the "foreigners who will save us" to the "Manhattan is the capital of the world and everybody wants to live here" to the "retired people will move back IN to the city" to the good old "they are not building anymore land in Manhattan!" arguments. Too many to list. Just add this one to the graveyard of false hopes.

Remember all the Florida is different arguments? What about all the Arizona is different arguments? If you spend enough time, you can come up with hundreds and hundreds of reasons, some with logical merit, but at the end of the day, at some point in time, reality sets in. It sets in later for some than others.

Time to move on already. Just like those who used to argue over and over and over again that we weren't going into a recession have finally accepted the fact without arguing anymore, so should you. Prices are going down, and they will go down substantially.

The Rental market will not save it. Get over it.

> But, the majority also put 20%, 25%, 30% or more down

Where are you getting that stat from?

> And that 20% down doesn't mean every apartment went down that much,

Yes, it means somewhere around half went down less, and half went down more...

> Plus, some improved the apartments along the way.

That makes it worse.... if median is down 20%, and you're saying folks spent money to improve, that actually increases the likelihood of loss.

BTW, lets also not forget that co-ops traditionally outsell condos 3 to 1 or so, but sales were about even over the last year.

So, the likelihood of 20% down decreases even more.

Trompilico - no evidence that everybody that bought will be underwater in 6 months. That is an extreme statement that has no evidence. If that is the case, show me with the numbers.

"if you don't believe you are underwater and you bought in 2004-2009 =>DELUSIONAL."

W67th - I think you are a smart guy and quite entertaining. This statement, however, is utter crap.

NYC - I am not saying people didn't lose money. I am saying that most these people's apartments are not worth less than their mortgages, which is what underwater is. Is that what you are suggesting?

"Plus, some improved the apartments along the way."

"That makes it worse.... if median is down 20%, and you're saying folks spent money to improve, that actually increases the likelihood of loss."

NYC - If somebody threw $150k into their apartment and over-renovated it, sure they could be in-line for a big loss (and I am sure a bunch of people did this). But if somebody got an apartment at a discount because of cosmetic "issues" and put $20k into this apartment with good bones they will have improved the value of the place.

"But if somebody got an apartment at a discount because of cosmetic "issues" and put $20k into this apartment with good bones they will have improved the value of the place."

Decent premise, bad conclusion...

This would just make the 20% decline even worse... because the entire market includes such apartments with improvements. Sure, these apartments would probably decline less than average, but this would also mean that the remainder apartments declined even more.

And, whatever decline these apartments get ends up being effectively BIGGER because the cost basis is higher.

While the market overall is down dramatically... Not everyone who bought in 2007-2008 has seen their apartment depreciate (noting that it is a huge market), let alone depreciate enough to put their mortgage underwater. All it takes is one counter example to prove waverly correct. I concede the point. Still, there is a growing pool whose mortgages are underwater... and this population (even if small) could have a significant effect on the market if it becomes a source of forced selling.

"And, whatever decline these apartments get ends up being effectively BIGGER because the cost basis is higher"

This is also untrue. How is paying $20k out of pocket increasing your mortgage? It is not. How is improving an apartment making it worth less money than if you did not improve the apartment? It is not. When you compare such an aprtment to its comps it will be better off than if it was not renovated.

For example, you buy an $800k apartment in a coop building in a good neighborhood in NYC and put 20% down 2 years ago. You put $25k into the apartment to make improvements...nothing ridiculous, just good, common-sense improvements. Two years later you have about $620k or so left on your mortgage and the apartment is in better condition than when you bought it. Is this unit, which is now in better condition, worth less than the $620k you have on your mortgage? It is not. Could it be? Maybe. But the majority of apartments in NYC underwater? No.

As an aside, one of the negatives with Case-Schiller (from Schiller's own mouth) is that it doesn't take into account when improvements are made to properties.

10105 - I agree with you that this is a concern in any market, including NYC. I think it is a very small and apartment-specific problem right now, but will become more of a problem over the next 12 months.

That is all I am trying to say. Too many people post ridiculous and extreme statement on SE as if they are fact. To say this is rampant in NYC right now is just false.

> This is also untrue. How is paying $20k out of pocket increasing your mortgage?

Didn't say that.... I specifically said the DECLINE is greater.

> How is improving an apartment making it worth less money than if you
> did not improve the apartment?

You are missing the logic here. The renovation doesn't make the apartment worth less money. But, if its worth the same and you spent money on it, you go from breaking even to a loss (or loss to bigger loss).

Apartment median is down 20%. If half of those apartments were renovated since the decline, it means the effective decline was actually greater than 20% because the renovations would have been factored in.

"For example, you buy an $800k apartment in a coop building in a good neighborhood in NYC and put 20% down 2 years ago. You put $25k into the apartment to make improvements...nothing ridiculous, just good, common-sense improvements."

Two people buy their $800k apartments. Both sell for 20% less a year later. One spent $0 on renovations, one spent $100k.

Which one took a bigger loss?

> As an aside, one of the negatives with Case-Schiller (from Schiller's own mouth) is that it doesn't
> take into account when improvements are made to properties.

Absolutely... meaning Case-Shiller UNDERCOUNTS THE DECLINE. Just like I said...

BTW, to tie this to the original point... underwater or not....

Plenty of folks refinance or take home equity loans to renovate.... that has to be factored into the underwater equation as well...

"I agree with you that this is a concern in any market, including NYC."

The amazing thing is that you would have been laughed at a year ago if you made that statement. NYC was supposed to be different (prime, protected by coop boards, etc.). Stunning. So much has changed.

"Absolutely... meaning Case-Shiller UNDERCOUNTS THE DECLINE."

Actually, Case-Schiller is historically off by 5-10% in their analyses. If they are forecasting X, it more often than not, turns out to be X - (5-10%) when you are able to look back at the actual numbers.

"Two people buy their $800k apartments. Both sell for 20% less a year later. One spent $0 on renovations, one spent $100k."

First of all, you changed the renovation by a multiple of 4. Second, why do both sell for 20% less? Maybe one apartment went down 25% and one went down 5%? There are many more apartments than these two that will make up the pool for the median.

Long day and I may have reversed the case-Schiller example. Let me try again. If C-S estimates an apartment to be worth $1 million, it more often than not, ends up being worth 5-10% more than the C-S forecast. C-S trends 5-10% more bearish than what historically happens....sorry for the confusion.

waverly... okay... so we'll wait until foreclosures in NYC to finish our differences...

one other thing, it's amazing how quickly equity evaporates when you are leveraged 10 or 20x... and just b/c 99% of NYC hasn't had to mark to market doesn't mean people know intuitively they are in for world of hurt....

One more other thing... if you have 20% equity in 2007 and price were "just flat" to 2009... you'd lose 6% or 30% of your equity just to get out :)

oh btw.. I was all hot and bothered in the middle of smacking down oldbuyers... my apologies waverly :)

w67th - no worries. Too many times on SE people call out anyone who doesn't echo the latest extreme posting and I am just trying to stand-up for what I think is a more reasonable/moderate stance on this issue. I was never suggesting that apartments haven't decreased in value, but all of a sudden people are throwing around, "all of NYC is underwater" kind of comments...that's all.

but we are.... :) if you bought in 2007-09 (definite)... if you bought 2002-2007 and you didn't pay down loan or took out HELCOs... then you're closer to swimming then being dry :)

w67th - there are definitely some people who bought in tha last 2-3 years at a high price, only paid a little down on their mortgage, used their apartment as an ATM and are in trouble now....I totally agree with this statement. I just don't think that is the majority of people in NYC.

The people who did that, however painful it is, deserve what they are getting for being irresponsible. Sometimes you have to thin the herd...that is how you evolve.

"Actually, Case-Schiller is historically off by 5-10% in their analyses. If they are forecasting X, it more often than not, turns out to be X - (5-10%) when you are able to look back at the actual numbers."

I think you are confused about Case-Shiller. It is NOT a forecast, it is an index based on actual sales.

So I don't know what this "look back" idea is.... Case Shiller is, nationally, probably the most accurate index, and its data does not get "replaced". It looks at completed sales.

> First of all, you changed the renovation by a multiple of 4.
Who cares? Make it 1/5th. It still increases the decline.

> Maybe one apartment went down 25% and one went down 5%? There are many more apartments than these
> two that will make up the pool for the median.

Sure... some will decline more, some less than the median. Thats what medians represent.

But it also means that if you factor in the improvements, the market has declined *more* than 20%. Thats the point.

And there are quite a few people who bought over the last few years, put together what they could (10%, 20%, whatever) because they stupidly and honestly thought that to do otherwise would be to be priced out forever and then found out that they couldn't afford the rising costs all around them and their mortgage that somehow worked on the (newly revised for the 2000's) home affordability calculator didn't work at all so they used their credit cards to tide themselves over a bit, and so on, and so forth. With very few exceptions real wages have been FALLING, and that includes NYC. Yes, they all definitely deserve to lose their homes now.

This is HUMAN behavior, not southern california behavior, not nevada behavior, not florida behavior. It happened wherever the banks let it happen, it happened to stupid people and smart, it happened to careless and relatively careful, and the banks definitely let it happen here. People OVERleveraged, they took on too much debt to get by. That turns that prime mortgage subprime fairly quickly.

That we got a quick 20% decline in Manhattan shows we're smack in the middle of this...

NYC - The information had to do with home price index futures.

"A January 2008 study, “Real Estate Futures Prices as Predictors of Price Trends,” showed that while “implied price forecasts” were reasonably accurate for the most recent round of expiring futures contracts, the index’s contract prices have tended to significantly “overshoot” actual price declines."

The S&P/Case-Shiller Home Price Index is the benchmark the financial press uses to tell us how terrible the housing market is...The index’s findings are notoriously softer than the indexes used by the Office of the Federal Housing Enterprise Oversight.

The index are NOT the futures.... don't confuse them.

The press mentions the actual index numbers. And the Case Shiller numbers are much more accurate than any other numbers, because they use resale comps. The majority of the others use medians, which does not account for any shifts in the makeup of what sold.

They aren't predictions... just more accurate calculations.