Who in their right mind would make the largest purchase of their life assuming their down payment is going to erased and then slowly come back over 10-15 years?

I am no economist but somehow this seems much bigger than anything we faced in the 80's and 90's and my feeling is the worst is yet to come. We have soared to great heights faster and higher than in any time I can remember(been here 27 years) I don't think we can "print" our way out of this one...but I hope you are right. I have never seen people this frightened even friends with relatively secure... [more]

I am no economist but somehow this seems much bigger than anything we faced in the 80's and 90's and my feeling is the worst is yet to come. We have soared to great heights faster and higher than in any time I can remember(been here 27 years) I don't think we can "print" our way out of this one...but I hope you are right. I have never seen people this frightened even friends with relatively secure jobs, I don't think low interest rates and a nicer city will be enough. Also most of the new population here is not the typical city dweller, they have more in common with Honda pilot driving soccer moms/dads in the burbs. As services begin to dwindle here and the city becomes more like the "city" again I think a lot of these people are going cut and run. The families with 2.2 kids are not going to stick around long if they witness even one mugging on Hudson street. Maybe I have been reading to much doom stuff? dledven 1 day ago ignore this person report abuse Ali-i hate to be a downer, but i don't think 5-6% interest rates are a reality for NYC buyers of 2 bedroom 2 bath units. There are very few banks willing to make a loan above the $620k, the down payment requirments are huge, and considering that the stock market is down 50% (potential buyers net worth), and companies are laying people off (with that number constantly increasing). At the end of the day pricing is built on supply and demand, and right now people don't qualify for loans or just can't afford to pay the prices being asked and the supply is building up. NYC10013 1 day ago ignore this person report abuse Ali - I would agree with you if major changes weren't happening today in the finance industry's compensation and employment. I would not underestimate how many finance jobs are being permanently eliminated (ie not coming back for 5+ years) and how much comp is going down. I know math doesn't equal reality but let's throw around some #s just for debate. Assume prices at their peak were too high by 30-40% relative to rents and incomes (you can make an argument that the % is higher than that but I think the majority would agree with 30-40%). So prices need to decline by 30-40% just to be in equilibrium with 2007 rents and incomes. Rents are down 10-20% - that's a fact, even though the market reports put it at closer to 5% down - I'm looking at renewing my tribeca doorman building lease right now and rents are down 15-20% from when I signed my lease a year ago. Assuming the same price/rent ratio, prices now have to decline 40-60%. Financial services makes up ~33% of NYC's income (at least in 2007). It's probably much higher than that when you factor in industries that make their money off of finance (lawyers, consultants, etc) but let's go with 33% to be conservative. At least half of that income is gone for the next 3-4 years, if not more. PE firms won't be paying out any carry for 5+ years. Many, many HFs will close up shop or if they stay open they won't be paying out carry for 3-4 years. Comp at the highest paying IBs was down 50% vs 2007. Headcount at virtually all IBs is down 25%+ from peak and that number is rapidly increasing (you'll see another major round(s) of layoffs at the IBs in the next 3-4 months). I think we will see a 10-15% permanent (permanent for the next 5+ years, that is) reduction in NYC white collar jobs (my definition is PE, HF, IB, law, consulting, accounting, media sr mgmt, etc - no offense to anyone out there). So using income ratios prices would need to come down 50-70% from peak to be in equilibrium with historical ratios. While I'm hoping that prices follow your prediction, I think that's wishful thinking to be polite. I'm a renter and would like to buy so you would think that I'd want prices to decline. The reason I hope you're right is that my comp will probably be higher if prices follow your prediction bc that would mean the recession / depression we're in right now ends up not being that bad. However, I believe this is the worst recession / depression since the Great Depression and the % declines I laid out above will end up being realistic / optimistic (markets usually overshoot to the upside/downside). My two cents. divvie 1 day ago ignore this person report abuse front_porch 1 day ago ignore this person report abuse It sure is lonely out here. There are people in my firm who agree with you all above, using many of the same well-thought out arguments. However, I don't buy the "Wall Street is going to take us down 50%" argument. Wall Street has gotten its butt kicked before. If you look at NYS Dept. of Labor stats, what's remarkable is that the mugging is relatively consistent -- when Wall Street dives, the sector loses 25% of its jobs. Not 20%, not 40%; consistently a quarter. In some ways, 10013, those jobs never do come back (remember when the stock exchange had people in it?) but in other ways, Wall Street at its peak always makes and spends outrageous amounts of money. Of course, since those Wall Street jobs are disproportionately high-income jobs, losing them drags down the whole city. However, that happened in 2000-2001, and we also experienced a terrorist attack, and we didn't see a decline in real estate prices anywhere near the order of 40%. Recessions happen. Jim Grant will argue that if you don't allow them to happen, you end up even worse off -- which may be some of what the country is seeing. I am sorry we're in a recession now, but we have a mayor is as smart as anybody who could want in this situation. In the long term, I agree that housing prices are gonna track employment. But we have a pretty diversified jobs base in the city -- I know publishing is getting killed too, but, say, health care appears to be holding up. Citywide, we have a great source of labor and skills in our immigrants. That leaves one other issue, of the "correction" in rent-to-buy ratios that we were "due" for -- prices too high relative to rents and incomes -- and I think some of that ratio expansion is because it's more fun to live here. I hear burkhardt saying families aren't going to want to stick around when there's a mugging, but can I really bring you back to the 70s, when my friends' parents bought on Central Park West despite the killings, or on the Upper East Side despite having to step over mountains of garbage rotting from the strike? Or let's even go back to the late '80s, when I as a single woman found Tribeca with its crackheads and its giant rats scary, even though I wanted to go to its cool restaurants, and when I didn't like living in Park Slope because there was a rapist in the subway and it took private security patrols to stop people (more crack effect) from ripping radios out of cars. And schools? My friends all went to Hunter and Bronx Science and to Stuyvesant, and if they couldn't get in they went to Horace Mann. Now, you can get a pretty decent safe public education for your kid in large swaths of the city. We're not yet at the point we should be at -- decent safe public education for all New York kids -- but we sure are closer. I agree we need credit to create volume -- I feel dledven's pain about getting a mortgage, and that's a big reason why we're losing deals. I look forward to trying to borrow $400K and being told that my six-figure earnings history means nothing because I don't have a job -- but I feel like Obama will loosen credit a little, and that will help. And now spring is coming, and some places will move, and then some watchers on the sidelines will be galvanized by losing places they were eyeing. We've come down 20%, depending on whose stats you use; that feels like a lot. I've been hoping to trade up for years, and I'm still not jumping up three rungs of the ladder, but I like what I'm seeing. The real estate market could be light and sideways for a long time, until Wall Street recovers -- but I feel like there will be little, if any, additional price skid across the broader market. The exception might be, say, $20 million properties might become $10 million ones -- but I don't think $3 million and below is going to see much more price drop. Of course, I know, it's a very lonely view. ali r. {downtown broker} larsr 1 day ago ignore this person report abuse Anyone who thinks that the adjustments that are occuring within Wall Street, and now the broader economy, are anything like past downturns do not understand the magnitude of problems. The unwinding of this credit bubble, which has been building for decades is so beyond the scope of any financial pullbacks since the Great Depression. To think, otherwise, is wishful thinking. There is a reason the Federal Reserve is pulling untested tricks out of their bag. It is because the crisis we are currently facing is very, very bad. I do not know when, or at what level, the real estate market will reach equilibrium. All I DO KNOW is that we are nowhere near that point. By way of background, FWIW (not much), I worked on the Street in for the 80's and 90's as an Investment Banker and what is happening now bears no resemblance to those times. It is much worse by orders of magnitude... larsr Divvie and Ali - you make some very good points. I was in financial services during 9/11 (still am today) and the post-9/11 downturn was a hiccup compared to what's going on today in terms of permanent job losses and comp reductions. Also, comparing the post-9/11 manhattan real estate mkt to today is comparing apples and spaceships - it seems like people are glossing over the fact that we've just finished experiencing the largest US real estate bubble in at least the last 100 years. We're now entering (or already in) the worst recession in what is probably the last 75 years. This sounds sensationalist but it's really just the reality of our situation today. I'm sure we could dream up some other crappy things to add to the situation but that's about as bad as you could ask for with respect to US real estate (in particular NYC since this recession is compounded by the credit issues which are directly impacting employment and comp). Not trying to be debbie-downer, just to put things in perspective. We're talking about the perfect storm (to the downside) in NYC real estate in the last 100 years. Diversified job base? Majority of NYC employment is financial services, law, consulting, accounting, media, publishing, tourism and the service industries (doctors, restaurants, etc) - yes, there are plenty of other industries here but they make up the minority of jobs and income. Literally every single one of these industries is hemorrhaging jobs and comp. Diversification only helps if the industries aren't correlated. Vast majority of NYC law firms have laid off 10%+ and will likely lay off 25-40% by the time they're done. Vast majority of large NYC-based media companies has laid off 10%+ and will likely lay off 15-25% by the time they're done. These jobs are gone for the next 3+ years and only a very small fraction will be replaced with new jobs in NYC at smaller firms. I think we'll see 10-12% unemployment in NYC in the next 12-18 months (and that's after a lot of people have already left the city because they won't find jobs so they won't be counted as unemployed in NYC). The NYC economy is completely f*cked for the next 3-4 years. Bloomberg realizes this and that's why he's moving so swiftly with some of his proposals. I would agree with you that prices would probably decline another 10% or so and then be flat for a while if the economy was already starting to improve - we're probably 12-18 months away from that at a minimum. I seriously doubt current sellers can hold out 2-3 years - if they're selling today it's either because (1) they have to due to financial constraints or (2) they think real estate mkt is only going to get worse. Otherwise they'd just hold on for 2-3+ years. I think buying manhattan real estate today (or advising someone to do so) is extremely reckless given our current economy (which is getting worse, not better, by the way) and how little prices have declined thus far (call it 20% down from peak). I know RE brokers need to make a living but I would do that by trying to drive down prices down as quickly as I could to increase transaction volume (if I were a broker), not by trying to convince everyone that it's OK to buy today at current prices. TenthStreet 1 day ago ignore this person report abuse Great discussion. I think a lot of people are anchored on peak prices. They believe that NYC would decline 50%-ish only if quality of life diminished dramatically a la the 1970s (crime, nearly bankrupt gov't, white flight, etc.) But I would ask those people to imagine NYC in 1999: it was pretty safe, there were plenty of good restaurants and bars, young people were flocking here, Wall Street was booming. . .and residential prices averaged $400 psf. Is it really that dramatic to say that real prices will return to the level that prevailed during those not-very-dark times? princetonbabe 1 day ago ignore this person report abuse front_porch 1 day ago ignore this person report abuse 10013, if I'm reckless to tell people to buy at current prices (something I myself am looking to do so I've got my $$ where my mouth is) what did that make any real estate broker who worked in '06 or '07? Markets cycle, and then they correct. The proper way for a homeowner to deal with this information is to see a home as a good to be consumed and enjoyed long-term, but not as an investment. If we get back to this Robert Kiyosaki-ish view, it will be good for us as a nation. However, let's not make the mistake, as market watchers, of extrapolating the current trend and calling it judgment. Saying "down down down" now, especially in hopes of generating new sales volume, is just as reckless as saying "up up up" was in 2006. ali r. {downtown broker} NYC10013 about 24 hours ago ignore this person report abuse Ali - I like most of your posts so don't take this the wrong way. With all due respect (as Ricky Bobby would say), what brokers did in 06 or 07 is irrelevant as to whether it's reckless to recommend buying today. I agree with you that a home is a good to be consumed but that's assuming prices are increasing at normal historical rates - prices will decline at record rates (or thereabouts) for the next 12-24-36 months - so buying now is not "consumption", it's approaching lunacy. Who in their right mind would make the largest purchase of their life assuming their down payment is going to erased and then slowly come back over 10-15 years? Saying down down down is not reckless if that's where prices are going. Assume prices are going down another 30% - who cares if it happens in a week or a month or two years? It's only "reckless" if prices should remain flat using fundamentals and the entire broker industry is trying to talk it down for some reason. billshiers about 22 hours ago ignore this person report abuse "Markets cycle, and then they correct. The proper way for a homeowner to deal with this information is to see a home as a good to be consumed and enjoyed long-term, but not as an investment. If we get back to this Robert Kiyosaki-ish view, it will be good for us as a nation. However, let's not make the mistake, as market watchers, of extrapolating the current trend and calling it judgment. Saying "down down down" now, especially in hopes of generating new sales volume, is just as reckless as saying "up up up" was in 2006." Maybe that's how a homeowner should look at things, but for potential buyers, it's a different story. If I'm using my life's savings on a downpayment and taking on over a million dollars in debt to buy an apartment, it better damn well be a reasonable investment. Otherwise, I'll rent. I don't think any of the bears are merely extrapolating from current trends. There was enormous real estate appreciation in the past 5 - 7 years due to a massive real estate bubble. Those prices weren't real - they were inflated by bubble psychology and economics. That's all gone. Bubbles don't deflate just a bit - they pop. Prices won't have floored until we have given back every bit of appreciation that has occurred in the past 5 - 7 years that was not based on fundamentals that continue to exist. So long as anybody is pretending that 2005 or 2006 or 2007 prices make one iota of sense, the market still has more room to fall. front_porch about 12 hours ago ignore this person report abuse 10013 and bill, like I said, it's lonely out here -- my husband makes the argument you guys make. But the answer to "Who in their right mind would make the largest purchase of their life assuming their down payment is going to erased and then slowly come back over 10-15 years?" is: 1) someone who does not feel that you can predict the course of prices over the next 10-15 years with certainty; (if I felt as certain as you two do, I wouldn't buy either. However, I would also stop being an agent and just take my money and short real estate prices and expect to live on my investments. But my two years working on Wall Street taught me that the only people I've seen make money betting on the direction of markets are people who have access to really special, discrete bits of information.) and 2) someone who wants to live in a nice apartment (I know not everybody thinks rent/buy is aligned yet, but given that we are willing to make a 30% down payment, what hubby and I can get for our money buying is nicer than we can get for our money renting); and 3) someone who feels like they're not all that sure about alternative uses for their down payment money -- I just bought some stocks for retirement, but I'm not really sure that I want to go all into the stock market with our cash right now; and 4) someone who does not believe that they are making the largest purchase of their life, but merely the largest purchase of their life to date. In other words, someone who expects to have more money in the future. Hubby and I have been working for around twenty years (we're in our early 40s) and I expect, realizing that I might be wrong, that we'll be working for at minimum another 20, and we'll save some more money from that. We are going to try to buy a place big enough to ride out a long cycle if we have to, but it's not like our ability to amass capital stops just because we've bought. Just because we are throwing a large portion of the resources we have amassed to date into housing (not all, because we'd buy a co-op) doesn't mean we won't be able to make and save even more money. So that's the psychology behind it. ali r. {downtown broker} barskaya about 12 hours ago ignore this person report abuse "Who in their right mind would make the largest purchase of their life assuming their down payment is going to erased and then slowly come back over 10-15 years?" - someone who plans to stay there for 15 years. "If I'm using my life's savings on a downpayment and taking on over a million dollars in debt to buy an apartment, it better damn well be a reasonable investment. Otherwise, I'll rent." - your home is not your investment account, it's more like your savings account. Ali is right saying that home is there to provide you with shelter, comfort and quality of life. Try to move from rental to rental with 2 kids or install those california closets that you always wanted in your rental place. If you want your money to grow look at the other sourses that would give you good return. Were would you invest our days? - Dow is down, S&P is down, NASDAQ is down. - Treasuries at 0%? - Enron and Worldcom were thought to be blue chip in their heyday. Lehman had a sterling track record for over 150 years. The scandals like Madoff will leave a growing number of people reluctant to leave investments in the hands of other people. - Real Estate, on the other hand offers transperency: you know what you are buying, the yield that you are able to obtain is healthy – particularly relative to Treasuries, you have a significant amount of control over the performance of the asset and appreciation over the long term will be there. And on top of that real estate is a great hedge against the inflationary cycle which is sure to follow. It is very difficult as a broker to not sound self serving, but I believe that income produsing property in New York City is an excellent place to park capital. elena (broker) P.S. Sorry princetonbabe for hijacking your thread. theburkhardtgroup about 12 hours ago ignore this person report abuse I think for now we can agree we have major economic head winds ahead. No one knows where this is going to wind up and with no need for extensive technical analysis it would be prudent to at least wait and watch over the next 6 months. It certainly can't hurt as I don't see any signs that buyers are going to rush in and drive prices up. I understand that buying a home is not like buying a bond or stock and agree you make the decision to purchase a home based on quality of life issues more than technical ones. But that said I would not want to buy a home in a market filled with so much uncertainty with the real potential of seeing a large loss in equity 6 months to a year from now. And the upside to waiting is there is a very good chance you will be able to purchase a home you may not have thought was within reach today. The downside to waiting...prices remain flat. front_porch about 11 hours ago ignore this person report abuse Actually, burkhardt, the downside to waiting could be that prices go up, but since no poster on this board, including me, who believes that's likely, let's look at the other possible downside . . . prices remain flat, and the cost of money (i.e. interest rates) go up. Right now, credit sucks and rates on conforming loans are at five; what if you wait six months . . . and credit still sucks, and rates on those same loans are at six and a half? In terms of your purchasing power, the market will have moved against you. ali r. {downtown broker} p.s. I don't know rates for nonconforming loans off the top of my head, but same argument. NYC10013 about 10 hours ago ignore this person report abuse Ali - your argument assumes prices will stay flat if rates go up (rates will go up significantly given how much money the US govt is printing). I would turn it around on you and say that's another big reason not to buy today - prices will crater even further when rates go up - real estate has an emotional component to it but it's just math in a normal environment - the three main variables in that equation are (1) price, (2) interest rate and (3) how much you make = how much house / apt you can afford. Assuming prices will remain flat when rates go up is completely unrealistic. The current (conforming) low rates is main thing that's keeping the (conforming) real estate market from cratering more than it already has. This topic has been discussed on a couple other threads but it hasn't gotten as much mention in mass media as one would think it deserves. Increased mortgage rates is the next shoe to drop in residential real estate. theburkhardtgroup about 10 hours ago ignore this person report abuse There certainly are a lot of ifs either way you slice it. But I will stick to the opinion prices fall another 15-25% and that will more than offset any rate increase. You can't magically get back lost equity but if rates go up 1% and prices down 20% or more as many think you come out ahead. Not only do you save $400k on a $2m dollar property you can simply pay additional money above your fixed payment to offset the erosion of the higher interest rate. my point is you can implement different strategies to deal with higher rates, if you lose 20% or more in six months you have NO options. It is a game of risk/reward and my money is on wait and see. modern about 10 hours ago ignore this person report abuse "prices remain flat, and the cost of money (i.e. interest rates) go up." The chance of this combo happening is slim to none. If borrowing rates go up, prices are not staying flat. They are going down even further. Buying a Manhattan apartment right now is a lousy investment, no doubt about it. However, I am not a strict rent vs buy person, renting sucks unless your goal in life is to live in a cookie-cutter apartment where there is little difference between a rental and owning. So it might make sense to buy to get what you want for your lifestyle, but don't try to spin it as a good investment, it is not. theburkhardtgroup about 10 hours ago ignore this person report abuse nyc10013 of course you are 100% correct if rates go up and especially significantly as you assume we will be back to 400-$600 ppsf2. And those who liked gritty old NYC will have their wishes granted. NYC10013 about 10 hours ago ignore this person report abuse I think most people would agree prices need to go down another 15-25% from here for most potential buyers to get interested - BUT that assumes rates stay where they are today. I think rates will go up a minimum of 1-2% (if not more) over the next 24 months which would decrease purchasing power by 15-40% (or more). So prices would need to drop 30-65% from here if (when) that scenario plays out. Not pretty. barskaya about 9 hours ago ignore this person report abuse Ok, so thread are totaly hijacked :) so I don't feel bad anymore "the three main variables in that equation are (1) price, (2) interest rate and (3) how much you make = how much house / apt you can afford" - Actually amount of mortgage depends on the income (rufly 4 times of yearly income). Purchase price depends on the assets (cash in bank). At higher price bank would like to see that you have more teeth in the deal, so your down payment comes up to 30% elena (broker) elena (broker) NYC10013 about 9 hours ago ignore this person report abuse Amount of mortgage depends on income (3) and interest rate (2) - if the max mortgage you qualify for is $1mm at 5% interest rate I can pretty much guarantee you the max mortgage you qualify for at 8% interest rate will be less than $1mm. Normal market is 2.5-3x income. I'm assuming that the average buyer has enough cash in the bank to afford the down payment for the mortgage they can afford and enough in reserves (may be optimistic given our country's savings rate). So the last variable in my equation becomes price - say your dream apt is $3mm but you can only afford $2mm given your income and mortgage rate. If the price comes down to $2mm you can afford that apt so that's the kind of apt you can afford. ShortRegrets 7 minutes ago ignore this person report abuse Elena, Re: "Real Estate, on the other hand offers transperency: you know what you are buying"... The probalem is that RE is like trading on margin. One does not buy the entire place, but rather commits to payments over 30 yr. And if the first three of those years look like one could lose a job -- i.e. just being rightsized with one's entire department... then no, one will not buy. I think theburkhardtgroup is right on. Quality of life goes through a paradigm shift. Living in a rental for a family of four is OK. What's not OK, is being committed to a mortgage while one of the family earners might lose a job. Those thinking Mnh appts wont go through a 50% loss because sellers wont take a 50% loss are wrong. Decreases come in gradation -- first sellers lose only 10%, next round of sellers loses another 10% and so on until we hit 1998 figures. All, I am ready to make a bet -- today's buyers will be tomorrow's sellers. If I lose we go for drinks at a decent place, my invite, bill not to exceed $200 :) I dont know of a good way to short NY RE, so here you go. Initially my metrics is to find three sellers in 02/01/10 or earlier who either bought or went into contract as of 12/01/08. If more than one taker I'll chose the best conter offer :))) So, who wants to put their money where their mouth is being long NY RE? COME. ON. :))) 41 comments Add your comment Sorry, no more anoymous posting. divvie(*) no saved listings no saved searches My Page - Logout Create Discussion Create New Discussion Search Discussions Categories Sales (4,800) Schools (25) Developments (266) Anything (524) Market (554) Boards (66) Services (89) Rentals (381) Renovation (188) Brokers (121) Neighborhoods (156) Home | Sales | Rentals | Talk | My Page | Help About | Contact Us | Real Estate Professional? | Privacy Policy | Terms | Feedback | Submit Your Site | Advertise with us | Mobile | We're Hiring! Copyright © 2009 NMD Interactive, Inc. http://www.streeteasy.com/ Powered by Magical Internet Robots. [less]