2007 Predictions Revisted / Told Ya So
A: For readers of UrbanDigs.com, the current situation we are in right now is NO SUPRISE! Knowledge IS Power and I hope that you have learned a thing or two about investing in Manhattan real estate and the macro economic fundamentals that DRIVE both the economy and the housing market. There is a reason to learn about this stuff so that you can become a savvier investor and at the very worst, understand WHY we are in the situation we are in right now and what trickle down effect that may or may not have on our local real estate marketplace. Lets revisit what I predicted back on January 2nd, 2007, as well as look back to some of the posts I wrote many months ago warning of the coming credit crunch that is now headline news. Told Ya So!
2007 Predictions Link From January 2, 2007
MY 2007 HOUSING PREDICTION --> I expect a slight increase in activity in the months of JAN - MARCH which is proven mid year by lagging housing data reports on deals during this timeframe. Remember that housing data is lagging. I wouldn't be surprised if housing shows some price gains during these months as well as an uptick in sales volume.
During the course of the summer I worry that economic jobs data might come in lower than expected, putting some pressure on housing as this industry still searches for a bottom. Activity will again slow during the summer months and desperate sellers will once again have to negotiate more than expected to move a property. Overall, by the end of 2007, I expect NYC housing to experience a decline of about 3-5% or so as fundamentals continue to correct for longer term sustainable growth. If the first few months prove to show gains of 1-2% in prices, then the summer months and remaining months of 2007 will show a wipe-out of these gains plus a few more percentage points.
Should economic data come in weaker than expected in jobs and wages, I would expect housing to suffer for a bit longer than expected with sharper movements.
Keep close eyes on lenders during this time to see if banks tighten the noose of easy credit! Should this occur, as a result of a slowing economy (job losses and downward wage pressure), housing could be in for a bigger slump than previously expected and might last for a few years longer until an outside force (such as monetary policy) stimulates buyer demand again.
All in all, I expect a slightly down year for NYC housing prices with activity staying stable as lower prices and deals attract more buyers. Put simply, the fundamental of 'negotiability' as experienced in buyers' markets, will show itself in data during the course of 2007. You can't have a market where there is widespread negotiating and still show solid gains in pricing at the same time! That would be a paradox.
WHAT REALLY HAPPENED --> Manhattan housing was VERY strong from the months of JAN - APRIL or so and experienced many bidding wars, shortage of inventory, and solid price appreciation given such a short time frame. The wall street months came through. The solid transaction volume left us with no inventory as we head into the summer months and right now we are still struggling to get supply where it needs to be to meet demand. Overall, I would say NYC prices are up 3-5% for the year or so and are currently holding onto gains given the tightness in inventory.
I am starting to see a bit of a psychological effect in buyers/sellers given all the headlines around the current credit mess. How this plays out is still yet to be seen
The credit crunch is here and that is extending the housing correction across the nation and limiting the options available to prospective buyers with less than stellar credit.
MY 2007 STOCK MARKET / ECONOMY PREDICTION --> The US economy will prove its resilience once again as corporate profits continue to be strong, but NOT as strong as previously predicted by the equity markets. I expect wages and jobs to come under a bit of pressure; especially in housing related industry's where job losses will skew the overall national jobs numbers downward. Wages will stabilize but for the most part remain strong as 2007 proves to be another good year for stocks; just not as good as 2006. I would think 8-10% gains in major indexes for the full year as long as nothing crazy happens with energy prices or unexpected unnatural disasters. The end of the year might prove worst for the US economy as housing related consumer spending cutbacks may prove real.
WHAT REALLY HAPPENED --> Stocks surged from January to mid July as the Dow went from 12,500 in January to a high of 14,000 in mid July. Quite a move. Since, credit concerns and a drying up of liquidity installed enough fear and uncertainty in the markets to correct about 4-5% from record highs, leaving us right now at 13,270 on the Dow. The DOW is up about 6.5% or so in 2007.
Jobs data has been strong with an unemployment rate of 4.6%, but are showing some signs of slowing. Lets see if my end of 2007 prediction of slowing jobs comes true. Average hourly earnings have remained strong so far this year.
My wild cards of Housing & Energy are still in play for effecting the US economy and stock prices as we end the year out.
MY 2007 FED / INTEREST RATE PREDICTION --> I'm going to play it conservatively and say that at the end of 2007 the fed funds futures will be either the same or at 5%; down 1/4 point from where we are today. I'm going to bet that inflation pressures continue to ease with the correction of energy prices allowing the fed to focus on economic expansion issues that may arise. If jobs and wages show weaker than expected numbers, partly as a result of weaker housing, than the fed might ease a bit to psychologically stimulate the economy. But this can very quickly change if inflation data comes in higher than expected.
WHAT REALLY HAPPENED --> Fed stood still and left the target fed funds rate at 5.25%. A cut of 1/4 point has not happened yet but is very possible given the recent turmoil in the credit markets. Inflation here at home has been moderating, although global growth and still high commodity prices make the future threat of inflation trickling very real. The fed publicly has stated that inflation is still their primary concern, removing chances of an aggressive rate easing campaign.
The latest fed meeting left no change in rates as expected, but included a statement that they are monitoring the credit markets for signs of distress. The fed recently pumped $62B into the credit markets, following the action of many global feds doing the same thing, to help ease liquidity issues as an alternative move to cutting the fed funds rate.
Not bad so far! My oil prediction is off for now as I predicted oil prices to tumble to around $50/barrel by years end. Certainly a possibility if you start to see these credit concerns infect the global economy causing a slowdown in emerging markets and Europe/Asia. If global economies slow, oil demand will certainly be a leading indicator of it!
Told Ya So - The current credit crunch is not news. It is the end result of what happens from years of ultra cheap money and excess transforming one asset bubble into another (stocks ---> housing). As rates rise and borrowers stretch to purchase homes with exotic loan products and no resistance from lenders in giving them the loan products, the credit crunch scenario becomes more likely. Here are my previous posts and an excerpt from each regarding this scenario before it happened.
January 18th, 2006 --> Regulations on Lending? You Bet Ya! - If regulation is enacted on the lending industry I think the biggest side effect will be less options for potential homebuyers. While this is a good thing in protecting uneducated buyers, it will be 1 of many ingredients that will prolong a slowdown in the housing market.
As rates are much higher now than they were a few years ago, I would expect homeowners who took out 3YR ARM's to face tough times when the locked in rate expires. Combine that with a cooling housing market and a dynamic shift of control from sellers to buyers, and desperation might cause the homeowner to sell at a loss.
December 28th, 2006 --> Housing Data In: Not Too Shabby...But! - Things to look out for in 2007 that will cause the housing market to retreat:
1. Weaker Economic Data Showing Weakness in Jobs & Wages
2. Lenders Tightening Loan Restrictions & Ease of Borrowing Ending Years of Credit Giveaways
These are the two biggest threats to housing's future and will occur if the bond market is right in predicting a recession in late 2007 or 2008. But for now, the stock market is getting the headlines as equities bet on a soft landing!
January 30th, 2007 --> Credit Crunch? Tighter Loan Standards? - Resetting into higher interest rate loans could create a credit crunch down the road that could extend the leg of the housing correction; especially for much of the country outside of New York City.
March 9th, 2007 ---> Developing Story: No Loans For You - Fact is, outside of NYC the housing market is fairly weak and loans are getting harder and harder to lock in. Its only the beginning and what happens next is still unwritten.
It's the domino effect that is going on right now and its only a matter of time until this starts to affect prime lenders as well.
Right now we are neck deep in an environment where tighter lending standards are being put in place for subprime borrowers. It is only a matter of time until prime lenders follow suit; especially if the fed gets involved and puts regulations in place to protect the consumer. This 'credit crunch' will restrict purchasing power and limit the buyer pool's size and stretchability when it comes to how much they can afford!
March 16th, 2007 --> Views/Truths About Subprime & Economy - I feel that what we are seeing in the sub-prime world is just the tip of the iceberg and that this disease has already spread to some prime lenders but is yet to show its surface marks. The real issue is any change in lending standards that comes as a result of this problem! If regulations are put in place to protect the consumer and the industry itself, than that means a credit crunch as tighter lending standards will restrict purchasing power and help sustain the housing downturn. That is my worry.
I've been talking for a long time that those who used risky mortgages to rationalize a purchase price above their means will meet with major problems in the years to come. And I expect 2007-2009 to bring these weak players out. How the industry adapts is what I am not sure of yet.
Comments (10)
Hi - Are you seeing any change in buyer behavior or a change in the NYC housing market given all the credit issues? Everyone says that jumbo loans don't matter in this city, and NY is immune from the economy, but now that many banks are predicting bad bonuses (because so much profit is being wiped away by the deal commitments they made), I wonder if it is already affecting the NYC housing market, or if it is too early to tell.
Posted by John | August 11, 2007 8:47 PM
Yes I am. I am seeing a slight psychological effect in buyers and sellers. In buyers, they are a bit hesitant to jump into a deal. In sellers, they are a bit nervous and want to unload as fast as possible without sacrificing price via desperation.
Early stages. But an effect nonetheless
Posted by Noah | August 11, 2007 10:11 PM
Let me share my thoughts as a potential buyer.
I've been looking for a year in the 600-700k range with a focus on value. I'm in my early 30s, combined income over 300k, 900k in treasuries/stock and no debt.
What mainly turns me off is the prices of similar units only 2-3 years ago were 30% less. I just do not see how that can be justified therefore I feel like the last fool to pay these crazy prices. Its not a matter of price but of conviction of bing correct in my analysis for me. My conservative approach has allowed me to grow my assets to what they are today (ie NEVER overpay! Dont be the last fool and buy low and sell high)
I strongly believe a factor in the strong economy was the subprimes being peddled which we all know was pure fraud. I want to see how the NY economy plays out without this.
If I feel the NY econ is still strong after this mess subsides, I will jump in at these prices and admit my analysis was wrong.
Posted by anon4this | August 11, 2007 11:26 PM
great comment anon4this! Keep me in the loop as you continue your search and ultimate decision.
Posted by Noah | August 12, 2007 9:17 AM
John/Noah - explain why jumbo loans don't matter in this city. I would imagine that, unless you pay all cash, you need a jumbo loan to afford an apt in NYC, no? There may be other ways around this , but i would think that NYC would in fact be extremely vulnerable to the increase in rates on jumbos.
Posted by them2005 | August 12, 2007 4:31 PM
I never said Jumbo loans didnt matter in NYC?
They do. Majority of deals use Jumbo loans. All I said is that I am seeing a psychological effect in buyers now as they wake up to reality of higher rates, harder to get loans, and headlines of credit mess. I am NOT seeing mass consistency though, just spotty effects amongst my buyer clients.
In fact, it seems buyers are gathering a vulture mentality, and are ready to go and jump in and buy if there is in fact any correction.
Prices have gone up for so almost 6 years straight now, that any correction or deal, would make the buy vs rent decision much easier. I think there are alot of buyers sitting on the sidelines ready to bottom feed..jobs and salary are still high and going directly to a bank can still get you a loan right now; although at a higher rate than months ago.
Posted by Noah | August 12, 2007 5:11 PM
Sorry Noah - was referring to John's comment above regarding jumbos.
The one thing to bear in mind is that higher rates could also in the medium term justify yet higher rent levels. Don't know if this plays out.
I also have to think that there are buyers on the sidelines waiting for a correction. There have been for years, and their steady capitulation has helped to sustain the price levels here, which it probably will continue to do. That said, the advantage should go to highly liquid buyers, since some would-be bottom feeders will still need mortgages (not a problem for many, but some may have difficulty affording/qualifying). Another question is how the flow of foreign money pouring into Manhattan will be affected by the credit crisis.
Finally, if rates really do move dramatically, I'd think some people who were thinking about moving will be stuck in their places since moving/switching costs would be much higher.
Posted by them2005 | August 12, 2007 5:52 PM
For clarification, I do think jumbo loans matter. My comment was that many other people contend that things like rates, etc. don't matter in Manhattan. NYC certainly has the largest interest from foreign buyers of any U.S. city. It is also the wealthiest single city. However, I think the issues that are now roiling the financial markets are actually going to have a profound impact on NY. In fact, one could argue, the dramatic change in the credit environment, if we have a sustained repricing, will actually affect NY more as I do think even with co-op 20% down policies, many people here still have large mortgages that certainly feel very different with even relatively modest changes in rates.
Posted by Anonymous | August 12, 2007 6:26 PM
Noah,
One of the statements that many in the RE business continue to make is that NYC is resistant to downturns in part because of the large % of co-ops and that many require 20%, 25%, 30% or more down.
My wife and I just bought in NYC 4 months ago and while I see some truth to this statement it is also important to point out that much of what is shown to a co-op is not exactly accurate. For example, a person's parents give them money to put into their account to make it look like they have more money so they can get approved. This happens on a significant number of transactions and the credit crunch will limit the families that can give this money to a child for a number of months. The co-ops will also be stricter going forward and require more people to put 2 years worth of maintenance & tax in escrow...this alone will knock more people out of the game or lower the amount they can pay for an apartment.
Also, the increase in rates will lower the amount people can pay if there mortgage is going to increase by $500-600 month. There are only so many people that can pay $800-1,000 per square foot. That is why so many people have looked to Brooklyn, not because they like the commute.
If the rates have gone from 6% to 7% for jumbo loans (and they have) there must be some impact on price.
I know that the RE industry depends to a certain degree on the constant buzz of how hot the market is, but some correction in price will clearly occur. I do not think it is going to be a 15-20% massive drop, but some change in price must occur.
Thanks.
Posted by Craig | August 13, 2007 2:42 PM
craig - fantastic point. Please relay this comment onto todays post comment thread, as it is fairly related to that topic!
I will have to touch base on this in the near future.
Thx!!
Posted by Noah | August 13, 2007 2:45 PM