U.S. treasuries did extremely well last week and gained ground they had lost five months earlier. The yield dropped 16 basis points and ended at 4.80%. The stock market lost 586 points for the week overall. When traders and investors unload stocks they usually place their monies in bonds and that's why home loan rates stabilized. This week the Personal Consumption Expenditure Index and monthly jobs report are expected to be released and will have an impact on the yield. If inflation numbers are lower than expectations while the data for the economy is worse than expected home loan rates should improve. As a general rule, weaker than expected economic data is good for rates and positive data causes rates to rise.
Please call or email me if you have any questions.
A: While I'm away, be sure to watch the 10YR for a rise in yields! They closed at 4.8% and I don't expect them to stay at these low levels for that long! If your close to a rate lock in, I would consider doing it soon especially if these yields start rising, which is what I would bet on after the huge drop off in past week. The lending markets already corrected at a lag from these rate drops, and who knows how quickly they could rise if bond yields start going up again! Keep your eyes open.
Just a heads up as postings will be light for next few days while Im in SF for Inman Conference! Read my post a few days ago on Rate Check Follow Up for more about this.
A: Making the decision to buy now or wait for a serious downturn has proven time and again to be a virtually impossible feat. The problem is that you never know until well after the downturn has already reversed course where you should have bought in. Being that this realization is one of hindsight, timing the real estate market has always been a very difficult thing to do. Therefore, stick to a 3-step ladder approach in guiding your decision of whether to buy now or continue renting. Originally Published March 26, 2007
It all depends on your own unique situation.
By analyzing a couple of very important facts about your own current situation, you could be able to crunch the numbers and figure out how to make a buy versus rent decision. These include your financial situation, your planned time line to own, and your ability to find value (for resale) and happiness (for yourself).
Take it as a 3 step ladder up to the roof of home ownership. If you can make it up each step without falling, than you should probably consider buying over renting.
STEP 1: Your Financial Situation
Are you employed and can you comfortably afford to buy this home? One of the first things you should do is talk to your financial adviser or trusted real estate agent to discuss how much property you can actually afford. For the most part, what you will find is that you should put no more than 30% of your take home monthly income before taxes towards the total monthly costs of owning the property. To figure out your own situation, do it in reverse. Take the amount that you take home in salary every month, and simply multiply it by 0.30 on a calculator. If you earn $6,000 a month, than you should strive to keep your total monthly living expenses under $1,800/month (6000 x 0.3 = 1,800).
In addition, you should have saved up approximately 8-12 months of your total monthly living expenses in liquid assets AFTER you close on the property! To do this you must first tally up all your liquid (easily converted to cash) assets which include your checking/savings accounts, money market accounts, CD’s, etc.. Now that you know how much money you have, subtract the down payment that you will put towards the purchase and the closing costs estimate that your agent could provide for you. How much do you have left? How many months of living in this new home will you have leftover after you close? To do this, simply take your total liquid assets and divide by the total monthly living costs of the property. It should be between 8-12 months. For stricter co-ops and those who are self-employed, you should be closer to 12-18 months of liquid assets AFTER closing.
Finally, is your job secure? If there is a chance that you can lose this job or be transferred in the near future, than you just fell off the first step and can no longer proceed up the ladder to home ownership. Otherwise, step on.
STEP 2: Timeline To Own
This will be the easy step. Taking into account transaction costs to both buy and sell a piece of real estate, I like to advise my clients to take into consideration their minimum time line to own.
At the very minimum, you should plan to live in this home for 3 years. Ideally, I would like to see a buyer plan to own the home for a period of at least 4-5 years. That way, the home will have had time to appreciate and you will have taken good advantage of Uncle Sam’s tax benefits offered to homeowners.
Keep it simple, if you don’t see yourself owning the property in 2 years than you just fell off the second step. Lucky for you it’s just a step stool!
STEP 3: Find Value & Happiness
Your almost there. At this point you have pretty much figured out that you should be buying a home being that you are financially capable and not pressured to sell in the short term. The only thing left to do is to find a home that is a ‘best of group’ product and meets all your housing needs.
To find a best of group product you must gain knowledge of the properties in your target price group. Even if the apartment has a deal breaking flaw and you know its not the one, you should still go to see it to gain product knowledge. If anything, it will confirm a best of group product when you find it! You’ll know within the first 30 seconds of walking into a property if that is the right one for you. Keep your focus on putting your hard earned dollars towards the permanent features of the property such as location, views, sunlight, and raw space!
And finally, does the apartment have a good feel to it? You’ll know it when it happens. If it makes you happy because you know you are looking at your new home, than you just made it to the roof of home ownership!
Use this as a guide! If you meet all the criteria mentioned above with the exception that you only have 6 months of liquid assets instead of 8, than go for it as long as the building board will accept your application to purchase; especially if your time line to own is 5+ years.
While I just discussed the 3 most important factors towards making the buy versus rent decision, there are also variable factors that could come into play as well. These include factors that change with time such as interest rates, rental vacancy rates, and whether it’s a buyers’ or sellers’ market.
The very idea that these factors change with time makes it very hard to time perfectly. So, consider these only as extras in your decision.
Right now interest rates are still historically low, yet significantly higher than they were only a few years ago. Try not to let it affect you. Since interest rates are constantly moving and no one really knows where they might be heading in the future, it will only cloud your decision-making. If anything, you should research where rates are right now so that you have an accurate idea of what your monthly payments will be for the buy versus rent decisions you must make.
Rental vacancy in Manhattan has been below 1% for some time now. One of the main reasons for this is that potential buyers got priced out of the market and were forced to rent. In addition, many prospective buyers chose not to buy in the hopes that the market would retreat significantly. It didn’t. All it did is result in a very tight rental market with little to choose from and rental prices at 5-year highs. As rental prices rise, buying becomes a more viable decision.
Add it all together and you get a very healthy Manhattan real estate market, especially during the most active months of the year. I would describe the current market as a sellers market but before you go into frenzy about what I just said you must understand what a sellers market is. A sellers market is one of tight inventory and strong demand putting the control in the hands of the seller. In these types of markets bidding wars (even below ask) are very common and good deals are hard to find and don't last long. This is what is happening right now in Manhattan since early January.
UrbanDigs Says: If you climbed to the roof of home ownership and you found a great apartment that is priced right, go for it! If you made it to the top but only found a property you liked but didn’t love, than wait! When the frenzy dies down you might have more bargaining power but less options to choose from in the generally slower summer months.
A: I'm off to San Francisco from TUE - FRI for the Inman Real Estate Connect 2007 conference. I am greatly looking forward to meeting all the bloggers that I share this community with and speaking on a few panels as well. Posts will be light while I'm away.
A list of Speakers at the conference.
Panel 1: Show Me The Leads
Panel 2: The Blogging Superstars
Should be a great time. If you need me for advice or an opinion on any specific circumstance, shoot me an email and Ill do my best to get back to you when I do my daily checks. Otherwise, I'll be back for next week.
So I decided to forgo buying a new development condo in Manhattan in favor of buying a townhouse! I finally found it - a gorgeous pre-war two-family townhouse in Bedford-Stuyvesant, Brooklyn. The asking price was $785K but due to a seller that had already picked out a new investment property and a broker who really knew how to make a deal happen, I am in contract for 470 MacDonough Street for less than the asking price. When we close, I will let you know exactly what I paid for the property. Here is why I suspected that the price was negotiable:
4/18/07 - property is listed at $899K
5/19/07 - price reduced to $815K
6/17/07 - price reduced to $799K
6/22/07 - price reduced to $785K
Talk about a serious seller (see Noah's post on "Timing A Low-Ball Offer" where he discusses what to do if a seller reduces multiple times in a short period)! So on 7/12/07 - before I thought there might be another price drop generating new interest in the property, I made an offer below the asking price.
My potential new home/investment property is only a few blocks from the A train at Utica and is only 4 blocks from Bread-Stuy, my favorite coffee shop (they have the best red velvet cake!). The townhouse has gorgeous and very unique looking fireplaces, moldings, stained glass and the original light fixtures.
Even though the sale was broker to broker, which is usually a very easy/smooth transaction because everyone knows what they are doing, I have never bought or sold a townhouse before. So I had no idea what the home inspection would turn up. Based on numbers other agents had quoted me regarding the condition of their properties, and the description of the property being that it needed "mostly cosmetic work," I thought the house would need about $75K of work. Included in this figure was:
1. Window replacements ($500 each) for 15 windows - $7,500
2. Stair rail reinforcements, etc. - $3,500
3. Remove and replace cellar floor slab - $6,500
4. Paint, refinish floors - $10,000
5. Bathrooms, kitchens (basic upgrades, we aren't talking SubZero here!) - $40,000
6. Restoring ceilings, fireplaces, misc other - $10,000
GRAND TOTAL (So I thought!) -------> $77,500
Then I got the home inspection report back (the cost of the inspection was $750). I almost had a heart attack & I thought about pulling out of the purchase. In addition to the renovations I thought were needed, the home inspector dropped a bomb on me with the following expenses that I was not anticipating...
Trade Area Approximate cost
1. Electrical re-wiring / upgrading - $20,000
2. Re-lining of fireplace chimneys (typ.) if desired - $15,000
3. Replace roof hatch - $2,500
4. Replace roof membrane and install proper flashing - $5,500 (property description said that it had a "new roof" so this was a complete surprise)
5. Install insulation at cock-loft - $6,500
6. Correct water damaged surfaces, various - $5,000
7. Check / clean main chimney - $1,000
8. Install fixed ladder to roof - $1,500
9. Replace cellar hatches with steel hatches (each) - $1,500 (x 2)
10. Remove and replace cellar ceiling - $3,500
11. Foundation wall pointing - $5,000
GRAND TOTAL ------------> $78,500 !!! (not including my $77,500 estimate)
On the surface, the home inspection indicated that the house needed DOUBLE the amount of work I thought it needed. I went back and tried to renegotiate the price, but found out that the broker had already significantly cut her commission to make the deal happen (she was more than generous!) and the seller had come down to his absolute rock bottom price. They also had someone coming back for a 2nd showing and an open house scheduled. I quickly took a look at 3 more properties that had come onto the market, which only reaffirmed my decision that I wanted this house.
A. Went into a temporary depression because I really love the house but thought that it might not turn out to be the great investment that I thought it would be.
B. Called the home inspector to find out exactly what work HAD to be done right away, and
C. Had a sit-down with my contractor (who fortunately had come to the home inspection) to see what he thought really needed to be done right away, what could wait until later, and how much it would really cost me.
After speaking to the home inspector and my contractor, I learned that the chimney stuff can totally wait, the basement ceiling doesn't need to be redone, its more of a cosmetic thing, (eventually I will want to refinish the basement anyway to increase the value of the property) the ladder can wait, the celler hatches can wait, and if I downgrade my expectations for the kitchens and baths, $100K should cover everything.
My contractor also promised to have the owner's duplex done in 3 months and the one bedroom rental done a month later. I had budgeted 5 months for the property to sit completely vacant during the renovations, so hopefully this will help my bottom line (although I know realistically construction never happens on schedule).
I had also highballed my expenses, (which of course, can fluctuate):
Taxes = $1700
Insurance = $2400
Water - $50/month = $600
Heat - $300/month (installing insulation should help keep this lower) = $3,600/year
And I had lowballed the rents I am expecting:
Owner's duplex $2,300 (I really should be able to get $2,500)
One bedroom rental $1,300 (I really should be able to get $1,400)
So I am hoping the expenses and rents come out in the middle of my projections and don't turn into the "worst case scenarios."
Then I called my mortgage banker and asked how much the extra $25K - $50K (in case it costs more than expected) home equity line would cost.
Basically, before I knew about the extra work needed, I was looking at a break even cash flow the first year, and depending on taxes and expenses and how much they increased, I should have been cash flow positive after year two.
My assumptions were based on a 5/1 interest only ARM at 6.125%. I want to tie up as little cash as possible so I can have my money working for me elsewhere. I also want to have as much cash in reserves possible in case my numbers turn out to be wrong. Based on the additional home equity line I will be needing, I am going to be cash flow negative about $200 a month. After my accountant works her magic depreciating the property, I will be cash flow positive.
When I really think about it, aside from the mortgage payment, everything is pretty much speculation. If I think too much about how many unknowns there are in this investment, I start freaking out a little bit. The good thing is that I own my current apartment on the UES and can always sell it if it looks like I am going into the poorhouse.
I feel strongly that you can't get an amazing return on an investment with your money sitting in an on-line savings account making 5% interest. You have to take risks in life or you won't be rewarded; 'you have to be in it...to win it!'. I'm 30 years old and if I am going to take a chance on something, the time is now, not when I'm 60. In doing my research to select a neighborhood, Bed Stuy is the last place within a 15-20 minute commute to the city where you can buy a two family property with charm for under $785K that doesn't need a complete gut reno.
The streets in and around the Stuyvesant Heights historic district are beautiful and tree-lined and the neighborhood block associations even put out large flower pots on the sidewalks to make them look even nicer. Almost everyone meticulously maintains the landscaping in the front of their homes. The house I am purchasing is one and a half blocks outside of the Stuyvesant Heights historic district and there are talks about expanding the district to include my block (which some people are fighting because of the restrictions that come with owning a landmarked house).
Even if I am slightly negative on the cash flow for the first two years, I will "make" money by depreciating the property for tax purposes. I am betting on the area appreciating in value as people seek out neighborhoods with affordable town homes. My number crunching indicates that I will be cash flow positive in 2 years. Since this is a ten year investment for me, and possibly longer, I am confident that I am making a good investment. I will eventually move into the property and rent out the second unit when I decide that I need more space.
Next up: the Termite Inspection (cost = $150). If it turns out that the entire house is being eaten alive, I can back out of the contract. There is also a clause in the contract that if the tenants don't move out as they are supposed to (the house is supposed to be delivered vacant and broom-swept), in time for a Sept 1st closing, I can back out of the contract. I don't want my 10% deposit sitting around in a non-interest bearing escrow account while the current owner spends six months to a year evicting his tenants.
I will keep you posted on my progress and I look forward to reading your comments! Thanks!
A: Exactly 1 week ago I wrote a post titled, "Bond Yields Fall / Lending Rates Next" in anticipation of relief in the lending markets for all you prospective purchasers out there. Here is the follow up. In the post I predicted relief in lending rates as the lagging effect of the mortgage markets react to the fall in the 10YR bond yield. Since, we have had some fear installed in the tradable markets with the accompanying uncertainty causing a flight to quality in the bond markets. That drove down equity prices and drove up bond prices resulting in lower bond yields; bond prices and yields move in opposite directions. Due to this change in market psychology and resulting lower bond yields, those buyers looking to lock in their rates have something to be excited about. Lets analyze.
First off, here is the drop in the 10YR bond yield over the past 30 days. As you can see, yields are down about 40 basis points (0.40% - WOW) since July 6th!
When I wrote that post a week ago, lending rates were at...
JUMBO Loan Rates Quoted At...
30YR Fixed - 6.875%
7YR ARM (principal + interest) - 6.375%
5YR ARM (principal + interest) - 6.125%
*Disclaimer - Rates are subject to change based on loan amount, credit, risk adjusters, and a minor banking relationship with Wells Fargo. All may affect the final rate quote.
...as quoted by Michael McGivney of Wells Fargo.
Today I went with Steven Maasbach of Manhattan Mortgage Company to provide me with rate quotes. Here they are showing you the drop in the past 7 days or so. Please note their disclaimer.
JUMBO Loan Rates (no points) Quoted At...
30YR Fixed - 6.625% (drop of 0.25%)
7YR ARM (principal + interest) - 6.25% (drop of 0.125%)
5YR ARM (principal + interest) - 6.125% (no change)
*Disclaimer - Interest rates and products are subject to change at any time without
notice. Manhattan Mortgage is not responsible for any rates that may
change prior to lock confirmation.
So, what do you do if you are in the midst of signing that contract or just recently signed the contract and are attempting to time your interest rate lock in? WATCH 10YR YIELDS!
Now that 10YR yields had a huge drop in a relatively short period of time, I would expect the lagging effect into the mortgage markets to continue for a few more days on top of what already happened; hopefully! Here is what to do and how to follow it yourself.
BE PATIENT & DON'T LOCK IN YET - -> The recent move will probably still take a few more days to trickle through to lending rates. As long as 10YR bond yields continue to stay around 4.78% OR continue to trickle lower there should be some more slight relief in lending rates to come early next week. Any move BUT UP means you can be a bit patient for that lock in.
LOCK IN RATE WHEN 10YR YIELD BOUNCES HIGHER ---> Only lock in the rate if you see a surge in 10YR bond yields in the coming trading days; as a bounce in bond yields is very possible and if it does happen it could be sharp! Thats what you are waiting for to pull the trigger on your lock in! If 10YR bond yields surge to 4.95% on Monday, then you lock in your rate immediately! You are on '10YR bond yield SURGE WATCH' as the indicator to pull the trigger on locking in! I can't be more clear on this. If the surge doesn't happen, then be patient. If it does, lock the rate in that day as the next few days should see a rise in lending rates as the lagging reaction.
I don't see any action from the fed even in the face of what happened this week in the credit and equity markets. I think they are still on hold so in the meantime, you must understand how to ride the short term volatility in the bond markets if you are trying to time your rate lock in. Its the best near term indicator we have.
A: OK, so the stock markets are getting killed down almost 3% with the psychological effect much greater which is what comes with a day where the DOW is down 400 points. I'm getting emails from UrbanDigs readers asking me to explain what the Residential Mortgage Backed Securities (RMBS) is and why its causing such a stir. So let me attempt to explain to you in lay terms what is going on.
There have been many advancements in the financial systems over the past decades. In the real estate lending industry, there was the introduction of real estate investment derivatives called CMO's, or collaterized mortgage obligations. The purpose of this financial derivative, beyond the spread of interest rate risk, was to provide more liquidity in the mortgage markets so that fresh new cash can be supplied to YOU, the consumer, keeping loan product options plentiful and costs relatively cheap. I hope I don't need to explain why more loan options is beneficial to the consumer; but to get an idea, think back (or research it if you are like me and was too young to understand) to the 1970's/1980's where the traditional method of funding home loans was derived from funds raised by savings banks. The savings and loan crisis followed soonafter.
Moving on. Lets define CMO's so I can proceed in explaining its significance.
Collaterized Mortgage Obligations - is a financial debt vehicle that was first created in June 1983 by investment banks Salomon Brothers and First Boston. Legally, a CMO is a special purpose entity that is wholly separate from the institution(s) that create it. The entity is the legal owner of a set of mortgages, called a pool. Investors in a CMO buy bonds issued by the entity, and receive payments according to a defined set of rules. The mortgages themselves are called the collateral, and the bonds are called tranches (also called classes), and the set of rules that dictates how money received from the collateral will be distributed is called the structure. The legal entity, collateral, and structure are collectively referred to as the deal.
Now lets translate to today's world. To get a fresh supply of cash to fund more credit, the lenders pooled the mortgage loans and sold them to investment bankers who in-turn packaged and resold them to investors. The dollars were huge, and so were the fees. These CMO’s were seen as safe investments since their value was 'derived' from underlying mortgages that were collateralized by the real property itself.
Lets now sum up the current housing environment and why there are these issues in the RMBS markets:
--> Nationwide housing is slumping big-time
--> Home Builders are in big trouble
--> Interest Rates have been rising / Debt is more expensive
--> Defaults & Foreclosures have been spiking
--> Home prices across nation (outside Manhattan) have been falling
--> Home Equity Withdrawal surged as home prices rose leaving little equity as housing market turned
--> Creative Loan Products reset at higher rates
--> Inventories at record highs (outside Manhattan)
--> Credit Tightening / Credit Spreads Widen
--> Loan Standards Tighten / Fewer options for borrowers
--> Umm, oil prices are near $80/barrel by the way. That can't help!
Get the picture of what is going on? Now, the face value of the mortgage backed securities as I mentioned above is worth a hell of a lot less than it was years ago and finding buyers for the packaged loans intended to be resold is not as easy as it used to. In other words, its less liquid!
Problems are NOT just limited to subprime borrowers as Countrywide Financial CEO publicly stated that he is seeing evidence of a spread to prime borrowers with rising defaults there as well. Up until a few days ago, arguments were being made that subprime was contained. Doesn't appear to be the case. Nobody knows how deep this rabbit hole goes and how many buyout plans in the private equity world may not go through! Its all a guessing game.
These are credit fears. These are fears that liquidity, which was so crucial during the most recent stock market boom and buyout mania, is drying up. In an illiquid world, no one is happy and it puts our fed in a very tight position of having to consider a rate cut to pump liquidity into the financial systems in the face of global growth and inflation; a very dangerous game!
The markets right now are in RISK REDUCTION mode! That means crazy volatility in equities and an end result that will be very hard to predict. Man, I wish I was a trader in this type of market as these were the most profitable type of days.
Few Thoughts Unrelated To RMBS
1. As stock markets correct, fund managers and private equity hedge funds may pull the trigger on some longs and reduce their risk. This may add to the volatility on the downside.
2. Yen/Carry trade may come back in the spotlight as the Yen gains in value against the US dollar. Recall this is what caused a huge selloff in stock markets back in February as the value of the Yen rose against the US dollar causing panic for these investors. In case you didn't know:
A strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate. A trader using this strategy attempts to capture the difference between the rates - which can often be substantial, depending on the amount of leverage the investor chooses to use.
3. With all the uncertainty, strange how Gold prices (normally considered a safe haven) aren't rallying and instead are sharply lower? Perhaps a link to the Yen/Carry trade liquidation?
Today's Wall Street Journal carries an article called Living Life Like Eloise: More Hotels Add Condos:
The trend isn't limited to luxury hotels, although luxury hotels make up the lion's share of the market. According to Lodging Econometrics, 17% of all hotel rooms in development in the U.S. are part of a residential mixed-use project, many of which include so-called condo hotels, not pure residences.It just so happens that I am currently updating my database on the New York Lodging Market. So the article carried a certain resonance for me. I want to break it down because there is a marriage of lodging and condominiums at the high-end of the New York market that is emerging. (By the way if the luxury market in New York isn't your thing, you can skip this and read other news highlights on the web like the giant squid eating all the fish in California).
Most residential units for sale in luxury hotels are intended for the exclusive use of the owner, who pays an annual maintenance and services fee. With condo hotels, though, developers sell hotel rooms to individuals who typically can stay in the units as many as 90 days a year. The rest of the time, the unit is rented out nightly like a regular hotel room, with the hotel management and the room owner splitting the revenue. Hoteliers sell timeshares or vacation clubs as well.
The WSJ article is not just about the trend towards residential living with "hotel amenities", something we New Yorkers have been hearing a lot about lately. Its about how the increased cost of land, construction and service worker wages needed to supply the luxury digs and over the top amenities in 5 Star Hotels is requiring the sale of condos to subsidize development. So despite the hot lodging market in the US (its sizzling in New York) developers need to get some cash out up-front by selling condos. In fact Lodging Econometrics is cited in the article as estimating that 95% of luxury resorts in the U.S. are being built as part of bigger overall projects, vs.10% in the 90s, and essentially functioning as amenities. Gardner-Johnson a real estate advisory firm is quoted as saying that, "The Four Seasons gets a 90% premium for its condos over comparable apartments". Well in this trend New York as in most other trends is on steroids. Check this NY Mag article on the most expensive apartments ever sold in New York....many hotel related:
But getting premium prices versus normal condos isn't the only benefit cagey developers have gotten in New York. One infamous developer reportedly gamed the system with his downtown condotel. It is supposedly located on land zoned strictly for commercial activity (like hotels), but they are selling condo-tels; bam, instant residential real estate. Some very sharp apprentice must have figured that one out. Some of these sharpies are taking it to the next level with condo-tel time shares. They can convert hotel space to residential space and then sell it multiple times to tragically rich foreigners who have so much money their math skills have become impaired. They pay a quarter of the full retail price of a condo for 8 weeks a year of use or something.
Now hold on kids because we are going to come full circle. As noted above, the hotel market in New York is sizzling and one of the reasons is that after 9/11 not only was their a dearth (SAT bonus point word) of hotel investment, but several hotels converted to condos including 995 Fifth Ave, The Plaza, The Mayflower, and a portion of the rooms at the St. Regis and The Essex House. In fact hotel supply declined in 2004 for the first time in 10 years due to this trend....and of course right into a booming market.
So lets hit "the numbahs". The Manhattan lodging market is one of the hottest in the nation and has been for 20 years. According to PKF Consulting New York City Lodging Rates averaged $271.08 per night in 2006 up 11.6% year-to-year. Room utilization was a near capacity 85.5% (anyone try to get a room in NYC lately?) and the highest since 1987. The US stats by comparison 63.4% occupancy, an average room rate of $97.61 was up 7.6% year-to-year. Forecasts are for more of the same with PricewaterhouseCoopers predicting a 12.6% rise in room rates and a tiny decline in occupancy due to new supply. So far this year the numbers are tracking towards their estimates. Now being involved in a lodging project we have done some work on what as been driving this phenomenon on the demand side, as well as the supply side discussed above. We looked at a lot of variables and the most important factor in driving New York hotel occupancy that we could find....drum roll please. Foreign visitation. We found an R squared (fancy statistical term for correlation) of 78.6%, the highest of many factors we looked at. We are joined in this observation by some smart guys at Hotel Investment Strategies, LLC a lodging investment advisory firm in New York who said in a report earlier this year that "Any diminution of demand by price-sensitive domestic visitors has been more than offset by demand from foreign visitors. They appear to be immune to the price of Manhattan's lodging because of favorable exchange rates". Importantly, the dollar keeps falling versus the Euro, Pound and Looney (Canada and Europe are the biggest generators of tourism to New York) and tourism continues to boom, with growth of 4% in 2006 predicted by NYC Visit.
The ultra hot New York lodging market has predictably caused a gusher of supply with 3,000 or so hotel rooms expected to be added in 2007, 5,300 in 2008 and 2,000 or so in 2009. Notably, some of these rooms will be condo-tel rooms by plan. Others may become condo-tels due to tightening economics for hotel building, still other entire structures may become condos (if zoned for it) in mid construction if the hotel market cools. Importantly, just as the weak dollar and foreign visitation is driving the lodging and condo-tel markets, its driving the New York condo market both directly and due to the fungibility of supply outlined here. The weak dollar is good up to a point....but that's the subject for a future post.
A: The markets are rattled. There is a flight to quality going on right now into bonds sending bond prices higher and yields lower out of fear for growing problems in the RMBS (residential mortgage backed securities) markets, credit markets, and housing industry. Is it warranted? Sure. Is it just beginning? Not for housing it isn't. Will the markets absorb the shock and bounce? Again, I really don't know. What I do know is that the source of fears that are combining forces right now to cause this pain in stock market prices is NOTHING NEW! I have discussed this time and again on the site. However, as time goes on it seems the problems get more and more real and that is what is causing uncertainty to take over. And the tradable stock markets HATE uncertainty causing a flight to quality in the bond markets.
Lets go one by one.
MuBiS - A term I'd love to coin! Instead of Mortgage Backed Securities, why not call it Mortgage Unbacked Insecurities? That is more in line with what is going on! You see, when you take out a mortgage it doesn't just stay with the lender the entire term of the loan. The most profitable time period for a new loan is the very beginning when the interest costs are the highest. In all amortized loans, as time goes on you pay less and less interest and more and more principal. So, a common loan product may have up to 3 or 4 changes of address or parents so to speak as it gets packed up and resold on the open mortgage markets.
What you need to know is that liquidity is starting to DRY UP in these mortgage backed securities markets making it more and more difficult to find a new buyer of a packaged loan. Get it? As liquidity dries up, less options are available to consumers as fewer and fewer buyers of the loans are available. In other words, credit is tightening and the CDO (Collateralized Debt Obligations) and MBS markets are helping drying it all up. Hence the concerns.
For more on this, read Barry Ritholtz's site The Big Picture daily for in depth reporting on these markets. Some of his MBS posts on the topic:
The Great Credit Contraction of 2007
CDO Hedge Funds = Enron
10 Questions About CDO's
Credit Crunch / Liquidity Drying Up? - A number of private equity deals are having trouble securing credit and financing to make the deals work! I reported a few days ago on the growing trend of so called cov-lite loans (article titled, "Buyout Boom Brings Reason To Worry" that I published 6 days ago!) in which the banks were stretching to do deals with loan types that favored the borrower and increased risk for themselves. Fears are starting to ripple through equity markets much sooner than I thought!
In today's Forbes article titled, "Crunch Time":
What started in the subprime mortgage bond market earlier this year is filtering into the broader credit markets, but the nervousness is less a sign of deteriorating credit quality--defaults are at historic lows of 0.3%, according to Coffey--and more an oversupply issue.There IS a reason why I discuss stuff like this on a NYC based real estate site! Here are some of my past posts on the credit crunch topic:
Reuters Loan Pricing estimates $134 billion in leveraged loans in the syndication pipeline, up from $42 billion last year and $24 billion the year before. That reflects the boom in leveraged buyouts over the last year.
At the same time dozens of deals like the Chrysler and Alliance Boots loans, have been postponed or canceled in the weeks since investors started getting spooked about credit quality concerns in the mortgage bond markets.
Thirteen loans have been pulled from the market, according to Reuters Loan Pricing, including $4.9 billion in so-called covenant lite loans for the LBO of U.S. Foodservice, $4.5 billion of covenant-lite loans for the ServiceMaster (nyse: SVM - news - people ) deal, and $1.3 billion in loans for the Swift & Co. takeover. All three deals stuck the banks with bridge loans that could not be sold.
Credit Crunch: Tighter Loan Standards
Lenders Starting To Tighten
Housing Woes - Housing across the nation has got some serious issues! Did anyone catch the statement by CEO of Countrywide Financial yesterday who compared the current housing appreciation environment as the 'worst since the Great Depression'? Anyway, everyone must understand that housing is an illiquid investment. That is, it takes time to sell and convert the asset to pure cash; as opposed to say a stock. Therefore, when the market turns from such a huge runup over the past 5-6 years, it will take some time to play out! We are arguably about 2 years into this national housing correction and it very well may take another 2-3 years to reverse the underlying fundamentals that are causing such pain; i.e. high inventory, tighter credit, still high prices. To use an analagy, when you take such a large ship that is going so fast driven by one small propeller, it will take a while to slow it down and turn!
Here are some of the recently release datasets for housing industry:
New Home Sales Sink 6.6% in June -
The pace of new home sales was weaker than expected in June, according to the government's latest look at the battered real estate and home building market.Pace of Existing Home Sales Slump; Prices Tick Up -
New homes sold at an annual pace of 834,000 in the month, down 6.6 percent from the revised 893,000 rate in May. Economists surveyed by Briefing.com had forecast sales would slow to a 900,000 annual sales rate in June.
The pace of existing home sales fell to a more than four-year low in June, according to the latest reading on the state of the battered real estate market, although year-over-year price comparison showed the first uptick in nearly a year.UrbanDigs Says - In my opinion, Inventory, Wall Street & Jobs are the most direct fundamentals to the sustained growth of the Manhattan real estate marketplace in this past housing boom! Right now, this is what is supporting us and at the same time these fundamentals are the biggest threats to keep your eyes on! Should wall street flounder, resulting in a loss of jobs and high end salaries then it is very possible that more and more inventory will hit the marketplace at the same time that buyer demand loses a big umph. So far it has not happened and even a few down days on wall street is not a trend make as we are only off record highs of the Dow by a few hundred points. However, where we will be in 6 months is another question. If you see stocks get killed, chances are that will start a chain reaction of events that would directly impact our housing market that has been so strong in the face of multiple adversities happening outside our city!
Sales of existing homes slowed to an annual pace of 5.75 million in June, according to the National Association of Realtors, compared with the revised 5.98 million sales pace in May. It was the slowest pace of home sales since November 2002, as rising mortgage rates and problems in the subprime mortgage sector continue to put a squeeze on financing.
A: Doing a final walk-through is a MUST in the days before a scheduled closing with so much of your money being put into what is probably one of the biggest investments of your life! So, when you conduct the walk-through, be prepared for the worst! Here are some tips as well a great way to handle yourself if the apartment isn't in the condition you were hoping for!
When To Schedule The Walk-Through - This is one of the last steps of the buying process. The final walk-through should be held at least 2-3 business days prior to the closing. The reason is you want to give all parties involved in the transaction (buyer, seller, both attorneys, lender, etc..) enough time to reschedule should the closing have to be postponed by a few days. Don't wait for the seller broker to contact you to schedule this. Instead, be proactive and have your buyer broker or yourself (if no broker representation on the deal) contact the seller broker a week before the closing to set a date for a last check.
Wait For Apartment To Be Vacant - For existing apartments, you must wait for the seller to have moved out before conducting a final walk-through. In these types of deals, you are looking for damage beyond 'normal wear & tear' that may have occurred to the property. Minor scratches on the floor or walls from the hired moving company DO NOT count as major damage and will not be enough to postpone a scheduled closing. However, holes in the walls or chunks of flooring missing ARE something that should warrant a complaint!
For new developments, you are really looking for unfinished work, damaged materials, water damage, etc.. For large buildings with many units, one has to expect a few little things to be in need of attention, so rather than get all emotional about it, do the right thing and follow my advice a few paragraphs down on what to do! Chances are in this scenario that the closing will take place and the money would be put into escrow until the problems are resolved OR the closing will take place as it normally would and the issues will be addressed in the first week or two of occupancy for ALL new residents. Generally the first few weeks of occupancy in a new development is the time frame given to fix any and all minor issues reported.
What To Check For - As you do the walk-through, check to see if all electric outlets are working, the appliances are working, and that no major damage beyond 'normal wear & tear' occurred. The deal is, the property should be in the same 'AS IS' condition as it was upon the day you reached a fully executed contract of sale for the apartment! Checking for water damage or fire damage is also a good idea and should warrant a complaint if you find evidence of either.
What To Do When Problems Arise - It's very possible that you do find some major issues a few days before the scheduled closing! Good thing you did the walk-through! Now, its up to you to make a checklist of the problems (with worst problems at the very top) and take a picture of the actual issue at hand. When you get home, put all this into a word document and add in the images to physically show the problem you are complaining about! Call your attorney and lender and tell them to postpone the closing and then give this checklist + backup pics to the seller broker. The seller broker should have no excuses for not addressing the issues you brought up, IF you brought them up in this manner.
In the end, all the major issues should be addressed so that a 2nd walk-through can be scheduled and the closing can finally take place soon after!
SAMPLE CHECKLIST + PICS (thanks to a very thoughtful and thorough client of mine)
A: Its raining, its dark, its dreary, and as depressing as a Monday can get! So, why not dream what it would be like to have $4,000,000 at my disposal to buy a place like this PH unit at 10 East 14th Street in Union Square. Can someone please buy my blog for $3.8M?
This prewar loft unit was updated as CONTRACT SIGNED on June 6th, 2007 but was just sent out via an e-blast to the brokerage community as available? Perhaps a deal gone bad? Whatever the current status is, if its back on market or not, it's still digs I would like to call my home!
10 East 14th Street; Apt. PH-7
First Came on Market: 5/15/2007
Asking Price: $3,995,000
RE Taxes: $919
Interior Size: 2,466 sft
Exterior Size: 2,000 sft Private Roofdeck (hot tub anyone?)
PPSF: $1,620/sft not including Private Roofdeck
Marketed By: Jon Isaacs of Core Group Marketing
** The Union Square Lofts is comprised of two distinctive buildings located steps from Fifth Avenue, the South Building at 5 East 13th Street and the North Building at 10 East 14th Street.
** Building features include: High ceilings from 11-14 feet, sequence matched walnut paneling, wide plank flooring, state-of-the-art Kitchens.
Some photos for you to enjoy!
A: I was out at about 5 OH's today, all in the low end in Upper East Side and Murray Hill, and found it to be a bit slower than previous weeks. While this is not a full report and is only my own experience with some buyer clients, I did talk to a few colleagues running open houses and they reported fine activity! Jumping to inventory, I see 104 new listings hitting the Manhattan sales marketplace in the past 5 days. Not a bad statistic and certainly a nice trend that if it continues should help alleviate the ultra-tight inventory problem here in New York City. However, neither of these reports is enough to declare any trends at this time; just something to keep an eye on as I report to you what I see right now!
Here are some direct quotes from brokers I know who have sales listings regarding this weekend's traffic:
Douglas Heddings (publisher of TrueGotham.com) -
"Only had one open house and its not a good gauge. Last week I had over 80 people though at a 1br for 499K. 7 offers all over ask."
Peter Comitini (publisher of Comitini.com) -
"I haven't been doing any open houses, but we talk about this at our weekly meeting, my office is very busy. Tuesday seems to be the best summer evening OH night. Slowing just slightly the past week? maybe? Our manager announced that June was the Chelsea Office's biggest volume month ever. I have been marketing this building in Flatiron at $8.4M. It has been a constant stream of appointments and very heavy call volume."
Paul Anand -
"Very surprised to have over 20 people come to the open house on a beautiful summer weekend...We have offers coming in this morning...Listing asking $575K...first day on the market...people that come to open houses in the summer, 85 degree beautiful days are serious buyers or they would just be at the beach..."
Wendy Jodel -
"309 east 87th, Apt 3H, we had 14 people at yesterday's open house. A good showing."It's nice to get some direct quotes from brokers at various firms. Anything that brings you street level information and a clue as to what is happening right now in Manhattan real estate in my opinion is worthwhile reading.
In general, I have to agree with them. Good products are moving fast and frustrated buyers who have been fed up with so little choices are moving quickly on apartments that fit their needs. It doesn't even have to be the perfect apartment anymore because quite simply, that doesn't exist. Every prospective homebuyer in New York City should realize that they will have to compromise on some aspect of their purchase. In my opinion, the focus should remain on the bones of the property in question that helps assure a healthy resale value; these include:
3. Natural Sunlight
4. Raw Space
Coming in next is monthlys in line with your affordability, building amenities, renovations, etc..I'll try to do more hands on reports like this with quotes from fellow brokers so you can keep tabs on any changes on the front lines on this crazy real estate marketplace!
A: With disappointing earnings from GOOG, CAT, INTC, and continued uncertainty in the subprime markets, stocks are getting a bit jolted today. Honestly, its completely healthy as the tradable markets have been on a tear for the past few years. You must understand that traders are emotional and react as such! With slumping stocks, there is a flight to quality in the bond market pushing bond prices higher and yields lower (bond prices and yields move in opposite directions). The 10YR bond yield dropped convincingly below that 5% mark today and if it holds, should provide some nice relief to prospective buyers with easing lending rates as we get into next week.
Here is a chart showing you the past 6 months (and the original surge) of the 10YR bond yield but does NOT include todays 8.5 basis point drop (0.85%) so far:
Here is today's drop with 10YR yields currently at 4.94%:
Now, yields are still at a higher trading range from where we were earlier in the year when 10YR yields were around 4.5% or so. This is what comes with volatility and so much uncertainty, however, it doesn't change the fundamental challenge to contain very fast global growth and inflation. Even the fed recently declared that inflation is their #1 concern, reducing expectations of any fed cut.
I still think yields are in a general upwards trend, especially as global central banks raise their rates, so all of these short term moves are really only helpful to discuss for those who:
a) recently signed a contract of sale and are deciding WHEN to lock their rate in
b) very serious prospective buyers with a time pressure to purchase who need to understand where lending rates are headed so that affordability can be analyzed
UPDATE: 2:09PM EDT - Let's see what happens. According to Michael McGivney of Wells Fargo, a direct lender, here are today's rate quotes for three popular loan products:
JUMBO Loan Rates Quoted At...
30YR Fixed - 6.875%
7YR ARM (principal + interest) - 6.375%
5YR ARM (principal + interest) - 6.125%
*Disclaimer - Rates are subject to change based on loan amount, credit, risk adjusters, and a minor banking relationship with Wells Fargo. All may affect the final rate quote.
UrbanDigs Says: As 10YR yields drop, a lagging effect will hit the mortgage markets giving you lower offered rates in the days to come. The question you need to look into now if you fit into criteria 'a' as I noted above is, will this dropoff in yields HOLD? If it does, expect better rate quotes early to mid next week for lock-ins. If it doesn't, any relief will be short lived. If yields keep dropping and reach 4.85% or so, wait a bit longer as the lag to hit the mortgage markets will take a few extra days. Stay on top of this & lock in your rate accordingly!
A: When money is cheap and tax code is friendly, leveraged buyouts (LBO) become very popular; as it has been for the past few years. With tons of liquidity out there and almost any company a potential takeout target, equity markets have been surging providing a great wealth effect for investors. This wealth effect translates to big bucks on wall street and the like and provides the Manhattan marketplace with very healthy and high quality demand on the buy side. But what if the takeout party ends? What if liquidity dries up a bit? How will that effect our housing marketplace? Before theorizing on the trickle down effect of all this, lets start simple and look at what is happening today and HOW these buyouts are being funded to see if there should be something to worry about. One side of the discussion focuses on covenant-lite loans, which have become increasingly popular as the method of funding LBO's.
First, lets break down what the two main types of covenants in this case are.
Positive Covenants - require a borrower (a company, private equity house or other financial sponsor) to meet set standards such as providing certain information at defined intervals. These type of covenants tend to be pretty ‘boilerplate’ and require the borrower to pay taxes, act legally, pay interest on loans and so on
Negative Covenants - restrict the borrower from certain courses of action, such as restricting dividends, limiting capital expenditure or other financial variables
And now, the definition of a cov-lite loan that removes some of these maintenance or controlling measures from the lender.
Covenant-Lite Loans - Is the general description of financial structures whose main terms have fewer or no maintenance covenants. A ‘cov-lite’ loan does not include the legal clauses which allow a lender to control and track the performance of a company and if needs be declare a default if certain criteria are breached. With covenant-lite loans, a bank can only act if a borrower attempts to take specific actions, such as adding more debt or making an acquisition. More-traditional maintenance covenants allow banks to step in at any point if a borrower's performance drops below a certain benchmark. Not so with covenant-lite loans.
According to a recent S & P report on the topic titled, "Recover chances lower for cov-lite loans" -
The popularity of "covenant-lite" loans that made up almost a third of new leveraged loan structures this year may result in lower recoveries when borrowers default...Here is a list of some leveraged buyouts using covenant-lite loan structures:
Recovery estimates for covenant-lite loans, which lack traditional financial covenants that allow lenders to require minimum levels of leverage and interest rate coverage, are typically 8 percent to 14 percent lower than for equivalent borrowers with full maintenance covenants, according to S&P.
"This means by the time a default occurs, there may not be much business enterprise value left to recover," S&P analyst Ana Lai said in the report.
Now these are some big names and obviously don't represent the biggest threats. These are just a few noted in the article making it easy for me to give you real life examples. If you want to get a visual on the growth in popularity of these types of loans over the past year, just look at this chart on the right which shows you how through June of this year $97B of loans were structured using cov-lite versus $24B for all of 2006:
My Point - Forward thinking. I am by no means an expert of leveraged buyouts, credit risk, derivative products, cdo/abx markets, etc.. However, it doesn't take an expert to see how the industry adapts to continue to be able to lend to support such massive buyouts in the private equity sector. I'll repeat this again --> Right now you are seeing an environment that is a result of years of ultra cheap money and tons of liquidity. What is yet to be seen is the effect of globally rising interest rates to levels we see today; that will take 1-2 years. For the near future, I don't think the end result will be that bad, in fact I think the environment will remain bullish for some time. However, red flags are waving for the years to come when we will be able to look back at how many of these massive buyouts were successful, and how many caused major problems to banks and other lenders. If the latter proves worse than anyone expects, well, that will dry up liquidity, cause equities to correct, and result in higher rates across the board. Something that very well could trickle to real estate here in Manhattan. A discussion to revisit down the road!
A: Just got back from a 3 day vacation, not nearly enough, and I wanted to discuss briefly some of the things I see in the general economy. Its hard to ignore that oil prices have been creeping higher in the past few months and that bond yields have held onto their big moves upward since mid May. This world is a global world and what is going on oversees is fast growth, higher commodity prices, hawkish central banks, higher interest rates and tons of liquidity! Our fed is still on the sidelines as it watches from front row seats the battle of HOUSING WOES vs. INFLATION; which fundamental will win out and force the fed to cut rates or raise them. I'm betting on the latter!
Here is what I see going on right now that is worthwhile to discuss.
CDO / ABX Markets Uncertainty - While it's not making the major headlines as it did a weeks ago, the subprime mess that led to a disruption in the MBS (mortgage backed securities) markets is not going away. Bear Sterns's two hedge funds directly tied to these trades are virtually worthless (valued at 1.5B in 2006), leaving investors with no chair when the music stopped! The trouble in this sector is more than confusing and this morning I heard a very interesting theory to describe it; the cockroach theory! It goes like this. When you see one cockroach creeping around, its virtually impossible to tell how many more are behind the walls. Well, Bear Sterns two hedge funds are the cockroaches running around in plain sight! Question now is, how many more are behind the scenes.
This is leading to a level of uncertainty that the tradable markets hate most! It is leading to a rise in safe haven plays, like gold and other commodites, and is still yet to reveal itself on just how bad the problem is. Expect rates to rise if this problem worsens.
Barry Ritholtz over at The Big Picture has a great post on this topic titled, "WTF is going on in the ABX markets":
Its one thing when we see that the BBB bonds -- the junkiest sub-prime crap in the Residential Mortgage Backed Securities (RMBS) universe -- getting shellacked due to foreclosures.The ABX index measures the risk of owning bonds backed by home-loans to people with poor credit. Just take a look at some of the charts he posts to get an idea of the sharp moves in these markets. Crazy.
But today, we see that the AA and even the AAA are getting whacked. It looks like either a fund is getting liquidated across all asset qualities -- or someone is panicking.
Historically Low Rates / Tons of Liquidity - Two big drivers of the current boom in the equity markets. Stocks LOVE low rates and liquidity which lead to leveraged buyouts and other types of investments with cheap money! Believe it or not, money is STILL CHEAP and there is a ton of liquidity still out there. Generally speaking, this is one of the main reasons why I think rates are trending higher over the medium term. By this time next year I will be very surprised if rates are at or near current levels; I expect them to be higher especially as global central banks continue to be hawkish and raise their overnight rates.
Housing Woes Continue - Not in Manhattan though! Nationally, housing still has some major issues. Lending rates have surged and held at those new levels, no surprise there, and inventory continues to grow. The latest housing data showed housing startes up 2.3% but building permits plummeting to its lowest rate in 10 years. Builders do not expect a recovery anytime soon and have not cutback on building plans as much as they need to in order to correct this inventory problem. In short, with inventories very high across the country, buyers have choices, control, and patience. Outside Manhattan, many areas are having a tough time!
Here in Manhattan, a strong buyer pool and healthy demand is negating the slowing effect of higher lending rates. Manhattan inventory is very tight giving sellers an unusually strong summer to move properties in. I don't expect this to change anytime soon as inventory takes time to reverse course. I'm hoping that in a few months buyers have more options to choose from.
High Energy Prices / Commodity Prices - Oil is trading at fairly high levels at $75/barrel or so. Gold, wheat, and other commodities are also trading at fairly high levels. While our fed is maintaining that high energy and commodity prices are yet to creep into inflation figures, I wonder if..
a) this represents a flaw in how inflation metrics measure inflation
b) higher raw costs will eventually creep into inflation indicators
To me, its just hard to ignore the rise in these raw commodities and argue that they will never creep into the prices of goods passed onto the consumer. Which leads me to the fed and their recent statement to Congress.
Hawkish Fed / Inflation Trumps Housing Woes - The fed did publicly announce that INFLATION CONCERNS trump housing woes as public enemy #1! To me, that is a hawkish tone that indicates to the tradable markets a higher probability of higher rates down the road than lower ones!
According to Fed testimony:
The economy should grow modestly this year, and even more in 2008, but a pullback in housing and the possibility of even higher energy prices pose serious risks.Can't argue that! I fully agree and inflation SHOULD be the main concern moving forward. If rates don't rise that much I would consider that a winning situation for consumers and small investors; but I'm not too optimistic about the prospects of this playing out.
"The ongoing housing correction could prove larger than anticipated, and energy and commodity prices could continue to rise sharply" and that could "spread to other parts of the economy," said Bernanke. Therefore the "upside risks to inflation is [the Fed's] primary policy concern."
A: I would define a 'Starter/Investment Property' as a type of investment strategy that would look something like this: BUY ---> REPLENISH ACCOUNTS ---> RENT OUT ---> BUY BIGGER & REPEAT ---> SELL DURING NEXT FRENZY. Originally Published January 31st, 2007.
The goal of this investment strategy will be to start small, keep your credit perfect, buy bigger, and eventually own a few rental properties that would be constant source of monthly revenue while at the same time having the tenants build your wealth for you. Then wait patiently for a good selling opportunity!
To do this properly means sacrifice and discipline to buy a property that you wouldn't necessarily would want to live permanently in, but is in a location prime for rental income (i.e. near bars/restaurants/parks/subways); as tenants will pay more money to be closer to these city amenities.
FIND THE PROPERTY
This is the tough part. When looking for a starter/investment property you must focus on keeping the monthly payments as close to $1.00/sq. ft. as possible; if its under $1/sq.ft. then be careful the asking price was not raised to compensate). Try to do this without sacrificing the proximity to the above mentioned city amenities!
With a rental property some property features pay more than others. For example, an alcove studio on a prime street in a W. Village walk up might ask the same monthly rent as a small 1BR in a luxury hi/rise in the Upper East! So, location NOT luxuriousness of building is what pays off here.
Try your best to pay for location, light/views, and raw space before shelling out your $$$ for renovations, roof decks, and doormen!
Devise a bid strategy and take into account a possible seller reaction. Play a game in your head to see where the negotiating might go and plan accordingly based on what your target price is. Don't be afraid to low ball; just don't expect a good response if you bid 25% below asking! DO NOT STRETCH YOURSELF ON THIS FIRST PURCHASE! Remember that the goal here is to eventually buy another property and rent this one out!
Get your price and sign that contract (read my post, "My Offer Was Accepted! Now What?")!
After flopping down X amount for your down payment plus X amount for transaction closing costs you may feel a little depleted. Not to worry! You are on the right path to building wealth using the tax advantages of homeownership as a historical guide!
Take the next 1-2 years to recover financially and replenish your liquid assets! Don't start spending your money on vacations and unnecessary goods just yet, as the job is not done. Your goal RIGHT NOW should be to save up enough money to buy your next, bigger property!
If it takes you 5 years to get back to where you were before, than so be it! The apartment you just bought is not meant to be sold right away; rather the ideal situation will be to rent out the unit for monthly revenue until the next selling opportunity!
BUY BIGGER & REPEAT
After a few years have passed and your liquid assets after taxes have built up again, it's probably time to start considering buying a bigger apartment and rent out the initial starter investment property. Be sure to learn the products in your target market so that you can bid accordingly.
SELL DURING THE NEXT FRENZY
The entire goal of this strategy is to build wealth for yourself by adding rental properties to your portfolio; hopefully in addition to a new bigger property that you now own and live in. If you have succeeded in doing this in a 5 year period, than you are in great shape so far.
The last step of the puzzle is to WAIT for the next buyer frenzy to hit NYC where you will look to sell 1 or all of your properties and take profits. Uncle Sam offers you 2 tax advantages when you sell so that you can get out of paying Capital gains taxes on the profits from the sale.
1. 1031 Exchange: Allows a tax payer to defer the paying of taxes on a gain when an investment property is SOLD & a new property of like or greater value is PURCHASED. In other words, if you first purchased a property for $400K, and then 1 year later sold it for $500K, you can then defer the payment of taxes on the $100K Capital gain in this transaction, as long as you purchase another property worth $500K or more.
2. Primary Residence Tax Benefits: If you have lived in your property, as your primary residence, for at least 2 out of a period of the last 5 years, you will not have to pay Capital gains taxes on the profit when you sell. This benefit equals up to $250K of tax-free gains for singles, and up to $500K of tax free gains for married couples. Of course, this is dependent on how you filed your last tax return; single or married.
Finally, here are some apartments/buildings you should keep an eye on if this strategy meets your investment needs:
1. 151 East 20th Street (Gramercy Park) - 5 floor prewar elevator building in Gramercy Park. Pied-a-terres and sublets allowed without board approval, as noted in central systems. Desirable location where good products are very hard to find. Should get good rental income.
2. 110 Thompson Street (SoHo) - 6th floor walkup building between Spring & Prince Streets allows pied-a-terre's and sublets; however exact sublet policy is unknown. This designer studio is in a great location and is in renting condition as is. Although its a hike up, this one probably wont last long.
About This Blog - Well readership is growing so I guess the site is doing at least a decent job discussing the Manhattan real estate market and how best to profit from it. But with that I have been getting a rising number of emails lately about posts that I don't write, confusing me with some of the other contributors of the site. So, I think its time to explain to you who writes on this site, how to know who writes a post, and what topics each writer will cover. I'll also explain how this site came to be.
To know who wrote the post simply look directly beneath the 'date - title' of the article. It will say...
"Posted by urbandigs at 7:39 AM I Comments"
Here is who we are and how you can identify the writer:
NOAH ROSENBLATT (urbandigs) - I started this site in AUG 2005 with the hope to make New York City real estate more transparent for those not in the industry, as well as discuss tips, trends, and reports on macro economic conditions that might ultimately effect our real estate marketplace. I try my best to report on what Im thinking about that day and write about a learning experience in the field that I think is worthwhile to pass on to you so you can better handle or take advantage of a specific situation with your real estate investment.
I have great plans for this site and currently am working on a market index for Manhattan in the hopes of bringing to you a more real-time gauge for the current real estate environment in New York City. It is a few months away. I started following the tradable markets when I was 12 (a $300 investment in SGI: Silcon Graphics), and never looked back. I earned a BS in Psychology from Union College in 1998 and then began trading NASDAQ equities with Tradescape right after. The Asian Financial crisis was a great market to learn all the fundamentals of disciplined trading in order to take advantage of the good times to come, but NOT enough to think ahead and envision the severity of the downfall that eventually followed. That learning experience was priceless.
I started The HotSpot Haven back in 2002 in the hopes of bringing a fast and informative directory for finding free and pay wifi hotspots across the globe. Another great learning experience that was profitable but never took off. Demand for wifi content slowed teaching me that content is king on the net and that my next venture online would have to be educational, sticky, real time, interesting, and worthwhile.
I became a licensed real estate agent with Citi-habitats back in AUG 2004. I have been following NYC real estate pretty closely since 1999, when I first looked to buy in. I didn't buy until NOV 2001. I started UrbanDigs.com in AUG 2005 after a long 17-month or so brainstorming session of what the site would be about. I actually registered urbandigs.com domain name back in JUNE 2004, 2 months before I became an agent. However, I didnt do anything with it until about a year and a half later. That time was worth the wait and this site is the end result. If I suceed in doing what I would like to do for this site, you will have a great resource for your buy/sell investments in Manhattan. Its a 5-yr plan that I'm almost halfway through.
CHRISTINE TOES (toes) - Christine is my colleague at Citi-Habitats. She has an amazing work ethic, is a very eager, fast and efficient learner, is an aggressive investor, and is a GREAT real estate agent to work with. She has a strong motivation to see as many products as possible, especially new developments, and to keep that knowledge and use it in her buy and sell side strategy for her clients.
Christine will report alot on new developments she visits as well as her personal experiences in the field. She is currently writing on the next investment she will make after making a great profit off a starter studio she bought and sold recently.
JEFF BERNSTEIN (jeff) - Jeff works as a partner of Guild Partners, a residential investment and development company. Jeff went to Union College as well and reached out to meet me. We finally met about 3 months ago and our conversations were incredibly interesting. I knew he would bring a great angle to this site from an inside perspective of a developer. He agreed.
Jeff will write on specific macro economic events that might cause major effects down the road as well as articles on new developments and up-n-coming neighborhoods. He will write from the perspective of his day to day experiences bringing to you an entirely different angle on Manhattan real estate investments. He will also write about topics that are forward thinking and may not necessarily be in the mass media of todays financial news, but could be in the near future.
Please understand who is writing the post and that there are three contributors to this site's content, all of which have a different angle. I hope this clears some things up for anyone who thought I put a bid in for that Bed-stuy townhouse! I didn't, that was Christine!
Time-Off - I, urbandigs, am taking a few days off with the family and dogs. Not sure if Jeff or Christine will be posting while Im away and I probably will only report on some macro economic conditions if anything until I get back. Postings will be light until Thursday.
Here is the correct link to the development map of Harlem from the post on July 11th. There was an error in the "a href" code to link out to out preventing users without a password to access. Please try again below and post comments if you still are having trouble.
MAP OF HARLEM CONDOMINIUMS
A: A week ago I posted on NEW LISTINGS to hit the Manhattan housing market in each month so far this year. If you missed it, check out the inventory check here. I was surprised to see a consecutive increase in new listings in each of the months of 2007; as opposed to a decline of new listings that would help explain today's very tight sales market. At the time I did a check on July after only the first holiday week of the month and it came out to only 108 new listings. So, I just wanted to do a quick checkup on how the month has fared since, after the holiday slowdown passed. What I found is that in the past 7 days (July 7 - July 13) there has so far been 243 NEW listings to come to market.
Neighborhoods included: Beekman, Carnegie Hill, Central Park South, Chelsea, Clinton, E. Village, Fin District, Flatiron District, Gramercy, G Village, Little Italy/Chinatown, LES, Midtown, Murray Hill, SoHo, Sutton Area, Tribeca, UES, UWS, W. Village
Of the 243 NEW Listings, only a few are new development listings which include units released for:
50 Orchard - 12 New Listings
100 RSB (Avery) - 5 New Listings
650 6th Ave - 3 New Listings
2628 Broadway (Ariel East) - 5 New Listings
2112 Broadway (Apple Bank Condo) - 2 New Listings
So only 27 of 243 new listings are from new developments. I think that is fairly healthy for the market with approximately 216 new existing units hitting the marketplace in the past 7 days (aprox 31 new existing units/per day). If we continue this trend we would see approximately 591 new existing units hitting the marketplace by the end of July! It would be a nice recovery after the very slow first holiday week of the month! Lets see how it pans out. Personally, Im still not seeing any difference for my clients!
A: I couldn't resist. For anyone that wonders how the hell Manhattan real estate continues to just churn out dollar signs, just take a look at the latest market price for 1 parking spot; yes, just one! Nothing surprises me anymore in this incredible city.
Out of 5 parking spots that are being put up for sale in the basement of 246 West 17th street, a new condo development set to be completed next January, would be buyers are jumping onto waiting lists in the HOPES of paying only $225,000 to secure a spot!
Gotta love it. Or hate it. To put that into perspective, the NAR's latest data report puts the median price of a home in the US at $223,700! So, a Manhattan parking spot is now more expensive than half of the homes sold in the US last month!
According to CNN Money's article this morning:
Manhattan real estate agent Tom Postilio said there is a waiting list of seven or eight people hoping to pay $225,000 for one of five private parking spaces that has been approved in the basement of 246 West 17th Street...The trend of buying parking spots for individual investments and renting them out seems a bit far off to me given the numbers, but then again, in this city real estate is the key to building wealth. To me, here is how the numbers break down if one would put down 20% to finance a parking spot investment:
...The developer of that building is seeking permission to add another four spots, and Postilio said the addition spots are likely to cost even more than the current price, although he could not give an exact price.
"Supply and demand being what it is, there's probably going to be an increase," he told CNNMoney.com.
The paper says that property appraiser Miller Samuel estimates that the average parking space in the expensive neighborhoods of Manhattan now costs $165,019, or $1,100 per square foot. That compares to an average apartment price of $1,107 per square foot
PARKING SPOT PRICE ---> $225,000
DOWN PAYMENT ---> $45,000
LOAN AMOUNT ---> $180,000
INTEREST RATE --> 6.65% (non-jumbo loan gets slightly better rate)
Monthly Payment ---> 1,155.54 ($450 in interest is T/D)**
Going Rate For Spot Rental ---> $450 (or so)
**Update at 3:44PM - For investment interest, only the interest against the income produced is deductible. So, if you get $450/mth rental income, only that amount of interest is tax deductible for investment income producing property.
At this stage of the game, the investment side of buying a parking spot doesn't quite add up to me. However, if the price of a spot increases to say $300,000 in 5 years time, then of course the investor will make out pretty well, even with the negative cash flow. To be honest, I am not that educated on the state of the Manhattan parking spot market, nor am I in a position to forecast any future trends in this market. However, I will certainly buy into the argument that parking spaces for sale are very hard to come by and demand for parking is very high! Not a bad fundamental start to possibly a new trend.
Quick Tip - By the way, a GREAT site to search for local garages for buyers who need a space is NYCGarages.com. Type in neighborhood, narrow it down, and all the local garages and their #'s pop up on the map so you can sit at home and do your pricing and availability check!
Your thoughts? Is a NYC garage spot worth $225,000?
Nope its not just the real feel temps of 105 degrees being felt citywide. Harlem is on fire from a development perspective and I'm going to try to show you why and why I think it will continue in the next couple of pages. Check out where new development has gone up or is going up on this Google map I made (yes this is what I do all day):
MAP OF HARLEM PROPOSED CONDOMINIUMS
For those of you aficionados who say - Dah! We already know...I hope you invested in the late 90s, because here are the stats:
* Washington Post
Despite this significant boom in Harlem, I think the best is yet to come. Away from those in the know, there are many who don't realize the huge changes that have happened in Harlem and what is to come, but lets back up for a minute.
Why did this happen?
Numbers Shmumbers you say...Why did it really happen?
Non-profits and social services organizations role in the Harlem Renaissance is undeniable - although their major contribution to it was in part through a surreptitious avenue - they moved uptown. Former President Bill Clinton's 2001 move to offices at 55 West 125th Street was the spark that started the fire. Non-profits and social services organizations quickly clustered around Clinton's offices absorbing much of the neighborhoods 3.4MM square feet of commercial space and quickly driving a doubling of rents to $35 per square foot range in 2004. The second Harlem Renaissance was also at least in part sparked by the Upper Manhattan Empowerment Zone (UMEZ), which began in 1994 and has financed 152 initiatives with $134MM in and leveraged $695MM in total investment. The UMEZ allocated 27% of its funds to tourism and cultural industrial development, 58% to business investment, and 15% to workforce and human capital development.Snore! Why are people really moving there?
Tons of commercial developments over the last decade are making Harlem a better place to live. (The following are merely highlights)
So what's to look forward too?
Columbia University - The University has a proposed $7 Billion expansion on 17 acres in West Harlem designed by Renzo Piano and Skidmore Owings and Merrill.
East River Plaza - This game changing project will be a 500,000 square foot retail center development, which is a JV between Blumenfeld Development Corporation and Forest City Rattner. The center, on 6 acres stretching from 116th Street to 119th Street along the FDR Drive will include Home Depot, and Target as anchor tenants when it opens in 2008.
Harlem Park - Bringing Class A office space to Harlem, Vornado will deliver a 640,000 square foot 21 story mixed use building at 125th & Park by. The building will reside adjacent to the 125th Street stop on the Metro North commuter rail. The project is already 11% leased with a planned completion in 2009.
Harlem Piers Re-development - This is an $18.7MM publicly financed project to build two piers on the Hudson River between St. Clair Place and West 135th Street. The first will be used for excursion boats and water taxis with the second to be reserved for recreation including sunbathing and fishing. The connection to pedestrian and bicycle paths will fill a missing link in the planned coastal greenway on the Hudson River side of the city.
Harlem Hospital Center - The Harlem Hospital is in the second year of its five-year modernization plan. The $249 million five-year modernization plan includes demolishing antiquated buildings, renovating 183,000 square feet, and building a 150,000 square foot Patient Pavilion. Plans include a new Emergency Department, state-of-the-art critical care and diagnostic units, and new, fully equipped operating rooms.
Museum for African Art - The Museum for African Art will have a 90,000 square foot, $80MM new home designed by Yale’s Dr. Robert A.M. Stern. It is being called a cultural gateway to Harlem. It is set to open in 2009 at its new permanent location, 5th Avenue and 110th Street. It is the first new museum to be built on "Museum Mile" since the Guggenheim in 1959.
Avalon Morningside Park - Avalon's 20 Story 296 units rental apartment building at Morningside Drive and Cathedral Parkway is one of the largest new residential developments in Harlem. Importantly, Avalon is a trend setting public REIT, who has blazed trails in the Lower East Side Noho and Long Island City already.
How has all this impacted the residential real estate market?
If I have overwhelmed you with data, good. The point is the Harlem Renaissance is for real, its here to stay and things will only get better from here. While in a downturn Harlem like other "growth" areas could get hit hard. But you can bet I'm one investor who will be a buyer on any dip. Go check it out for yourself, but wait for the heat wave to end.
For anyone who has been following my search for the best way to invest about $150K-$200K in real estate right now, here is the update...
I put in an offer on a one bedroom that I really liked at the Gramercy. I offered $10K less than the asking price of $765K, but I offered to "pretend" that I wasn't a real estate agent in the hopes of getting a better price on the apartment. For anyone thinking they can save money this way - guess what - they don't care if you come with a real estate agent or not. The developer has a budget for paying real estate agents and they don't care if it is a direct deal or not. (Side note: I actually offered to cut myself out of a transaction at the Link for a friend of mine so he could save some money and I was informed that it absolutely didn't matter if I was there or not - the developer wasn't going to give him a price break on the apartment).
The other part of my offer strategy at the Gramercy was to ask for the sponsor's transfer taxes of 1.8% of the sales price to be added into the sales price in what is known as a "seller's concession." The seller's concession can be a great tool. Even if you negotiate a savings of $10K off of the price, if you are able to negotiate a seller's concession for the transfer taxes, it actually looks like you paid MORE for the apartment than the asking price. In a seller's concession, up to approximately 3% of the closing costs can be legally added to the purchase price, so you can mortgage some of your closing costs instead of paying out of pocket at the closing. So for a $765K apartment, if the sponsor allowed a seller's concession of 1.8% of the sales price, that would be a concession of $13,770. So even if I offered $755K, with the seller's concession of $13,770, it would actually appear to anyone looking in Property Shark after the closing that I actually paid $768,770. If you are ever researching past sales and the final sales price is a really weird number, it could be that the seller allowed a seller's concession and the price wasn't the true price for the apartment.
I wasn't that surprised that the Gramercy didn't take my offer. The developer is not negotiating on anything right now because the apartments are selling so quickly. You may wonder how the whole "brokers buying new development for themselves" thing works... It depends on the building. The Gramercy (and 212 E 47th, for example) does not allow brokers to represent themselves (meaning I can't buy for myself as a broker so that my company gets paid a commission, I get my normal cut of the deal, and I save money on the transaction). It was actually suggested that if I wanted to "save money," that I use a different broker at my company and work out a deal with them so I can get back some of the commission! I was going to save money by using a broker from my firm rather than my negotiating directly. It's crazy. On the other hand, some companies pay brokers 4% commission even when they buy for themselves. So there is an incentive for us to buy for ourselves in some buildings over other buildings.
Anyway, I digress. After my negotiating tactics failed, I decided that paying the full asking price at the Gramercy wasn't quite the deal I would feel good about since I am planning to hold the property for 10 years and I may not ever even live there. A friend of mine reminded me that Donald Trump probably wouldn't buy a one bedroom in new construction in Manhattan right now as an investment property (you certainly can't make positive cash flow).
I turned my attention back to Bed-Stuy again. I looked at another 8 or so properties (on top of the 15 or so that I have already seen) and found one that I absolutely love! It needs TLC but the "bones" are there - it has mouldings, fireplaces, original light fixtures, pocket doors, and the floors are lovely.
I figured, why take the easy route and buy something new where I won't have to do ANY work at all? Far better to make myself crazy by buying something built in 1899 that needs at least $75K of work! At least it will be a great learning experience! But as I did the walk through with my contractor and the home inspector/engineer tonight, I realized that I am in love with this house in a way that you can't fall in love with new construction. It's beautiful - it is just crying out for a little attention - and it will be absolutely gorgeous when it is finished. So I feel great about my decision.
After the contracts are signed I will give you the breakdown, but here are a few notes that you may find interesting...
Expenses of owning a 2 family townhouse/brownstone (if you own one and my #s are off, please don't hold back!):
Taxes - taxes in Bed Stuy are very low - taxes for a two family range from $1,700 - $2,200. Contrary to popular belief, these are not reassessed when you purchase your house. They are reassessed on a larger scale and have nothing to you with what your particular home sells/appraises for. Taxes for this home are about $1,800/year, or $150/month.
Water - runs about $1-$2/day, or $30 - $60/month
Heat (oil) - $200-$300/month
Insurance - $1,500-$3,000/year, so estimate $200/month.
Total Expenses: approx $700/month (not including any maintenance issues)
These figures are comparable to common charges and real estate taxes for a studio/one bedroom condo in Manhattan. There will be more upkeep in a house than in a condo, though! The roof needs to be replaced approximately every 10 years (and I hear that's about $7-$10K), then there's the boiler...
What have I gotten myself into!? More to follow after contracts are signed...
A: Following up on yesterday's post regarding the # of new listings to hit the Manhattan marketplace each month of this year, I just wanted to provide you with some data as reported by superstar appraiser Jonathan Miller 4 days ago. Given the surprise in what I discovered yesterday, it should help better explain the current NYC real estate marketplace.
All of this is from the article in CNN Money published July 3rd.
And some notable quotes from the article:
I am posting this article today because too many readers didnt understand the inventory data I reported on yesterday, assuming that I was showing TOTAL inventory trends for Manhattan. Those numbers are way too low to be total inventory. Rather, yesterday's post was on the # of new listings to actually come to market for each month of 2007. I was curious to see the trends expecting to see a dropoff in new listings for the past few months. But that didn't happen.
It seems sellers are hearing the call to sell in the generally slower summer months as this time around there is very little competition and still healthy buyer demand. However, there still is not enough product to meet demand giving prospective buyers a hard time. More to come on inventory trends as this story continues to write itself.
In the meantime: WE NEED MORE PRODUCTS TO SELL TO MEET DEMAND!!
A: I decided to do some research in inventory trends, and specifically new listings (condo, co-ops & condops) to hit the market in the most popular neighborhoods of Manhattan for every month of 2007. I was curious to see how inventory has changed since the frenzy months of JAN - APRIL and today. Now you must keep in mind that this chart ONLY shows you the # of new listings to hit the market for each month of this year and NOT the total number of active listings on the market. Unfortunately my internal systems are not accurate in producing this data leaving me left to report on what data I have access to that I deem reliable. Of course, there is no way for me to check every single piece of data to verify its reliability, but I did do spot checks on each month to make sure listings fit into the criteria I set; and I found it was fine!
Neighborhoods included: Beekman, Carnegie Hill, Central Park South, Chelsea, Clinton, E. Village, Fin District, Flatiron District, Gramercy, G Village, Little Italy/Chinatown, LES, Midtown, Murray Hill, SoHo, Sutton Area, Tribeca, UES, UWS, W. Village
Conclusions: Hmm, very interesting and NOT what I would expect. With inventory so tight right now, I would expect to have seen a decrease in new listings hitting the market in the months of May, June and July; which led to the tight inventory environment we see today. Instead, I see a consistent increase in new listings hitting the market with a peak in June. It appears there will be a HUGE dropoff come the end of July as only 108 new listings have hit the market so far this month. Part of that is obviously due to July 4th holiday but come the end of the month I expect total number of new listings to be significantly lower than the 1,190 registered last month!
Inventory right now seems very tight to me. I am having trouble finding good products for all my buyers, who range in budget from $500,000 to about $2.4M. This is something I am used to working in Manhattan real estate, but this environment seems especially tough. Good products that are priced right are selling fast while high priced products don't seem to be cutting their prices as quickly as one would hope. The reason probably is that with such tight inventory, even overpriced listings are getting good traffic; and with good traffic comes stingy sellers unwilling to aggressively lower their price.
I wish I could find out the actual number of contracts signed per month for this year so we can see how that trend compares to the # of new listings that hit the market. It would also be very helpful to have an idea of TOTAL ACTIVE inventory for each month of this year to see if there is in fact a dropoff in the months of May & June. One thing I can tell you, is that the frenzy months of JAN - APRIL did produce great sales volume that removed alot of inventory from the open market; one contributor to today's tight inventory problem.
A: Just saw this news reports released via AP on Yahoo Finance, "Rates on 30-YR Mortgages Sink". This is the lagging effect of the 10YR bond yield dropping from 5.1's to 5.0% over the past week or so. However, in the past 2 trading sessions the 10-YR bond yield is UP 12 basis points and now trading around 5.12%! You know what that means. Don't expect lending rates to stay at these relief levels after the huge runup in early June! I would anticipate lending rates to rise over the next few days especially if bond yields continue their volatile upwards trend.
According to Yahoo Finance article released at 11:32EDT today:
Rates on 30-year mortgages sank this week to a one-month low, while rates on most other mortgages also fell, good news to prospective home buyers.Recall that to get to that 11-month high of 6.75% the 10-YR yield had to pop to 5.3%. We are not that high but much higher than where bond yields were on Monday. Here is a chart showing you the past 5 days.
Freddie Mac, the mortgage company, reported Thursday that 30-year, fixed-rate mortgages averaged 6.63 percent. That was down from last week's 6.67 percent rate and was the lowest since early June, when rates stood at 6.53 percent.
The moderation is welcome for people in the market to buy a home. In mid-June, rates on 30-year mortgages climbed to 6.74 percent, an 11-month high.
A: US Dollar is getting pounded today as the Bank of England does what it needs to do to stave off inflation concerns and keep economic growth at bay; it raised its overnight lending rate 1/4 point to 5.75% strengthening their currency over the US dollar. With our fed on hold for the foreseeable future, we don't have the catalyst to support our own dollars. Meanwhile, the European Central Bank left rates unchanged at 4% but will most likely hike rates before October. At home, energy & commodity prices are still high, inflation seems to be moderating (for how long I wonder) and the economy seems resilient to the still worsening national housing correction. In short, there is NO WAY the fed can afford to cut rates anytime soon and bond yields are clearly in a generally upwards trend.
Three reasons why the fed can NOT cut interest rates and rather could be argued in favor of a rate hike include:
1. Globally Rising Rates / Strong Global Economies - Rates are in an upwards trend across the globe as central banks attempt to balance growth & inflation at the same time. A very hard job to do. With very strong economies in Europe, Asia, and some other emerging markets (much stronger growth than we are seeing here in US), rates have risen to slow things down and help prevent inflation from getting worse. The job is still not done yet because the story is still being written. Right now, you are STILL seeing the after-effects of years of ultra cheap money and mega liquidity! While the engine to this freight train has been slowed, the speed of the train is yet to come down with it! No way the fed cuts rates while global central banks continue to hike theirs!
Keep close tabs on how this plays out because in the years to come we will eventually see the ultimate effects of rising rates and trimmed liquidity. For now, enjoy the good times and try to learn how long it takes for globally rising rates to have a slowdown effect on economies; which is the ultimate goal by the way. Why slow things down? Central banks know that by letting economies grow like wild fire and inflation to get out of control will have much more severe long term effects than if slowed down in a calculated manner.
2. Weak US Dollar Must Be Supported - Due to the Bank of England's rate hike to 5.75% we are seeing strength in the british pound versus the US dollar. It now takes over $2 US dollars to buy 1 British pound, a record high I believe. Here is a 1 year chart showing the downward trend of the US dollar's worth versus the pound:
The drag on the US dollar doesn't stop here as the Euro is also enjoying highs against the dollar making American assets very cheap for Europeans. An argument can be made that Manhattan real estate is being supported by foreign buyers taking advantage of currency trends; among other fundamentals.
As long as our fed stands on the sidelines with monetary policy, which they obviously are doing, the US dollar will gain little support from our policy makers and will continue a trend of erosion.
3. High Energy & Commodity Prices Could Be Inflationary - At a lag that is. With the price of oil hovering over $70/barrel and the US dollar weakening causing other commodities to rise (gold, silver, etc.) future inflation concerns are warranted. Rises in the price for corn, oats, wheat, milk, cocoa, orange juice, etc. just can't be ignored. No matter how you cut it, with commodity prices at such high levels one can only hope that this doesn't trickle down the economic system in the future leading to a general rise in prices paid for goods. For some, this has already happened.
Looking at the big picture, we have enjoyed ultra cheap money and tons of liquidity for many years leading up to today's global environment. Now that rates rose a bit, its narrow minded to think its over. In general I see a cyclical upwards trends in global rates the end of which is not in sight. It is very possible that rates continue their slow, upwards trend for years to come. Fact is, these are very confusing times and todays economy is vastly different than from past history. Questions I wish I could have answered include:
1. How will credit be effected by CDO mess?
2. What the longer term effects of high commodity/energy prices will be?
3. How high will rates have to go?
4. How low will US dollar fall before stimulative measures need to be taken?
5. What is the next unforeseen event?
6. What can possibly stop globalization?
7. Which global economy will be the first to unravel?
8. How will hedge funds react to changes in tax code?
9. Will capital gains tax be changed?
10. Will the fed's next move be a hike or cut?
A: Sorry guys, I had a bidding war for an exclusive sales listing of mine and 2 new sales listings that just came to market. With July 4th upcoming, I had to get business taken care of leaving me no time to post to urbandigs.com. Just wanted to wish everyone a Happy holiday a bit early! Its generally a slow holiday for brokers dealing only with sales, but I will be around working anyway. Man, I got no life. I'll get back to posting and live chat soon so at least you have my take on what I think is going on macro economically and in Manhattan real estate.
PS: If there is any particular TYPE OF CONTENT that you enjoy seeing here or that you would like to see me report on, please don't hesitate to either comment here or email me!
I strive to give you what you want to see but its hard when I don't hear from you. I can only assume that what I would like to see and discuss, is the same or very similar to what you would like to see discussed in this open forum. As always, this blog's ultimate goal is to be forward thinking and discuss how to best invest in Manhattan real estate, and hopefully learn a few things along the way! Bringing transparency to New York City real estate will continue to be a personal goal of mine, but as Ron White once said, "I'm only one man!"
FYI - I am hot-n-heavy working on a very cool tool that is a direct result of many emails and observances from my time in the field with buyers and sellers. However, this tool will take time to do right and that means data collection for months so we can properly build what I have in mind. In the end, I think you will find it VERY useful and educational in my attempt to make the Manhattan real estate marketplace a little more transparent!