A Marketplace With Vultures
A: New York City real estate is a completely different animal than most other markets across the country. One thing I think many economists and experts would agree on, is that real estate IS a local phenomenon governed by the fundamentals of supply/demand and macro conditions affecting the specified area. Given the steep housing correction going on across the country, and the lack thereof here in Manhattan, one thing is for sure: there are plenty of vultures flying around waiting for either a correction or for a desperate seller to produce a deal here at home.
I am a man that likes to analyze data. I like to quantify an investment before I make it. I like to break things down so that I can understand something that on the surface seems confusing. So when I see a housing market that has bucked the national trend and remained so strong in the face of such macro uncertainty, I want to understand why. In addition, when I hear so often from my buyer clients, "I'm waiting for a downturn to jump in", I want to know how many others there are out there who are thinking/planning the same way?
Fundamentals I see that are crucial in maintaining the NYC housing market RIGHT NOW include:
1. Very Tight Inventory
2. Strong Jobs
3. High Salary's & Bonuses
4. Weak Dollar Increasing Foreign Buyer Demand
5. Rental Vacancy Rates Below 1%
6. Skyrocketing Rental Rates
7. Trend To Live Closer To Where You Work
8. Urban Lifestyle Demand Very High
Now this does not discount the current credit crunch and liquidity crisis now going on, nor does it take into account any ramifications of how these concerns may ultimately play out here at home or globally. It is what I think is currently powering our Manhattan marketplace.
When I look at these fundamentals, I wonder which ones would change should the current credit mess ultimately result in a major stock market correction, a US economic recession, or global recession. Should any of these macro events happen, I think the following fundamentals that are helping to power the NYC real estate market will be most directly effected:
1. Very Tight Inventory --> more sellers and weaker buyer demand reverse inventory trends?
2. Strong Jobs --> jobs market goes into recession shrinks buyer demand?
3. High Salary's & Bonuses --> recession causes pay cuts and cutback of bonuses restricting afordability and buyer demand?
4. Skyrocketing Rental Rates --> similar scenario to 2000-2001 after dot com bust that saw correction in rental rates?
One thing I can tell you is that there are many buyers that have been priced out of buying in the Manhattan marketplace for the past few years, as well as those that have been eagerly waiting for a housing correction to hit NYC to jump in. Forget foreign demand due to the weak dollar as I don't see that trend changing anytime soon or the number of new workers or relocations that help maintain the demand side of NYC's housing equation. In short, there are plenty of vultures flying around waiting for Manhattan real estate prices to dip.
I just don't think many other markets can make that claim. Frustration on the buy side is all too common here in Manhattan as I see it everyday. Buyers that are earning great incomes and who have saved up hundreds or thousands of dollars that just can't seem to quantify paying $1M for a 850 sft 1BR condo in a doorman building. But if that price drops to $800K, well than they would become much more interested. Now that is an extreme example of a 20% decline in housing prices; but the point remains the same:
AT SOME POINT BUYERS WHO HAVE BEEN WAITING ON THE SIDELINES WILL BE READY TO JUMP IN AND CLAIM THEIR DEAL IN A NYC HOUSING CORRECTIONThis is not broker babble, and it is NOT any attempt by me to try to expand my business or convince any buyer clients of mine that I know read this site to pull the trigger on a deal.
This is how I truly feel. If you read this site, you should know that I am not a car salesman and do my best to report to you what I see going on in this fast changing housing marketplace. There is a reason Manhattan real estate LAGS in corrections and LEADS in recoveries. The fundamentals that are so in-balanced in local markets such as Miami, Phoenix, or Ft. Lauderdale are completely the opposite here in New York City.
In terms of the credit mess and the end result of subprime borrowers defaulting on their homes, we just don't have those issues in Manhattan. First of all, anyone that has trouble affording a property here in Manhattan, obviously is going to lean towards buying a co-op because of all property types, a co-op offers the most bang for the buck. Second, there is no way that a co-op board will approve a weak home purchaser. On the contrary, most co-op boards have stringent financial guidelines that must be met and backed up in order for the deal to go through. This discipline in home ownership in a way provides a hedge against the loose lending standards that many banks got used to in the past few years. It protected out marketplace. And lets not forget that Manhattan is comprised of about 75% co-ops; not the most speculator friendly marketplace! What we do have is the side effects of the subprime debacle leading to less loan products, more stringent underwriting, and higher rates.
UrbanDigs Says - The biggest threats I now see to Manhattan housing include a major stock market correction that can effect jobs, salaries, and bonuses as well as a recession in the jobs market in general. A lesser but more probable threat is the end result of the credit crunch that brings less options and higher rates to the prospective home buyer affecting their affordability. If all this happens and Manhattan prices do correct, mark my words, at some point the vultures will come in and scoop up the deals especially if rental rates are lagging in their lateral correction.
If you want to discuss longer term threats to our housing marketplace, I think you need to look for changes in the other fundamentals now in place; such as the trend in living closer to where you work, the demand for urban lifestyle, and a reversal in the weak US dollar that removes the attractiveness of foreign investment. A long term bear market in US equities and the US economy are also threats for a longer term correction. Question is, what do you think will actually happen? Me, I'm not a doomsday kind of guy. If Manhattan corrects, I will be one of the vultures eager to jump in!
Posted by uwsider
Mon Aug 13th, 2007 09:56 AM
You should also add that not everyone will be able to be a vulture. Only those who:
- still have a stable job with high pay and good history
- very little debt, perfect credit
- over 30% downpayment and VERY liquid after closing
remember that co-ops will be MORE picky during a downturn as they cannot risk defaults. Also banks will be probing your finances like craxy...
Posted by Noah
Mon Aug 13th, 2007 10:32 AM
excellent point UWsider! Obviously missed that point in the post.
Yes I agree that the buyer pool will be adjusted as a result of the changing fundamentals in jobs market, stock market, and bonuses; should it occur.
Thanks for writing!
Posted by Jeff
Mon Aug 13th, 2007 10:36 AM
Noah,
Great post. Its important in these uncertain time to revisit driving fundamnetals. I've been a little quiet lately due to the huge volatility happening in the marketplace. Having written about my worries about the markets back in May - when no one was really worried. I am now trying to sit back and assess whether the current environment of fear actually implies less chance of a big debacle and isn't a very healthy adjustment. (Usually the stuff everyone is worried about isn't what gets you its the surprises....and there still may be some). My friend Mike Stoler wrote about the positive side of the turmoil last week in the NY SUN. http://www.nysun.com/article/60134
As I have spoken to real estate opportunity funds that often finance or co-invest in deal around the city to take their temperature on new investments I am seeing a significant pull back from risk. However, its about in line with everything you have been reading. Its a credit squeeze.....less favorable terms, more risk aversion, lower number of deals will be done. Its not a credit crunch, where you can't borrow money or raise equity... period, even if its a plain old refinancing on a mortgage thats rolling off. The fed and other central bank interventions overseas are aimed at heading off a crunch in bank to bank lending.....a critical area, where they can not fail. They must keep the gears turning and they seem determined to. The fallout here in town of fewer LBOs, fewer real estate deals etc. will impact jobs and bonuses of that there is no question. But if we don't have a real crushing market decline or big surge in un-employment the NYC real estate market is likely to have a pause that refreshes and come back even stronger. NY is a tight market as you rightly pointed out. With fewer dollars available to developers now, there will be less supply in 18 months time....when hopefully job contraction will have sorted itself out.
Posted by Noah
Mon Aug 13th, 2007 10:56 AM
right on Jeff! I like the description of the credit squeeze, not a crunch with exception of bank to bank lending.
Posted by anonymous
Mon Aug 13th, 2007 12:54 PM
I respectfully disagree that co-ops will be more picky in a downturn. Having been on my co-op board during a mild nyc downturn the LAST thing you want is an apartment in your building on the auction block. And the last thing the bank wants is to have the apartment on their books. My experience was that we were willing to become more flexible in some areas and then prayed for a correction in the market. Image in everything and it is always shocking how many rules will get bent and broken on a case by case basis.
Posted by Noah
Mon Aug 13th, 2007 01:12 PM
Interesting take ANON..I first bought after 9/11 and that was a condo, so I dont have any firsthand experience with that specific topic.
But, I can see where you are coming from and where uwsider is coming from. If anything, I think they will be less likely to conform to prospective purchasers that are outside their listed guidelines, especially if lenders tighten underwriting and make a loan committment harder to get. If anything, they will want to make sure that the deal gets through, and specifically, that the buyer can actually get that loan given the changing environment.
Posted by newbie
Mon Aug 13th, 2007 01:23 PM
I couldn't agree with you more on the current state of NYC RE. I've heard the same thing from friends in San Francisco and Boston - prices are still holding up for places in desireable urban neighborhoods. Outlying suburbs are another story.
Thanks for the insight!
Posted by Noah
Mon Aug 13th, 2007 01:58 PM
no prob newbie! Thx for sharing info from what you are hearing in SF & Boston!!
I was in SF a few weeks ago for Inman conference and real estate there was definitely holding up very well price wise, with lack of inventory and still healthy demand. At least that is what locals were telling me, but it was consistent from everyone I asked.
Posted by dfsavgny
Mon Aug 13th, 2007 04:22 PM
While I am drawing no parallels to the early 1990's, I remember doing an awful lot of workout work and valuing REOs. If we enter a recession, or if the interest bump on adjustable mortgages puts a lot of sellers into the market, there could be a snowball effect and lenders (whoever they are NOW?) looking to dump apartments they were forced to take over. I certainly remember that there were tons of studios that could be had for less than $50,000. Unfortunately, I didn't buy any at the time.
Posted by Jen
Tue Aug 14th, 2007 08:00 AM
Why does the vulture get this rep? Why am I a vulture because I can't accept that it costs one million dollars for a two bedroom in Brooklyn and if i capitulate, that someday it will be worth two million, when I don't see most people's salaries moving with the same velocity? And I see economic forces in this country which are limited at best. Hello Dick Cheney, Deficits do matter!
It was said just before the Great Depression that when the janiror was giving you tips on stocks, it was time to get out. Just because everyone says "Manhattan real estate, you can't lose" doesn't mean its true.
To be honest, I've been considering purchasing something that will appreciate in Euro's rather than American dollars.
Posted by Noah
Tue Aug 14th, 2007 08:54 AM
vultures are not a bad thing in nature! They have an efficient means of survival. And that is what I meant by the metaphor. Being a vulture can be likened to being a contrarian investor, which I proudly am, and buying an asset when it comes down, and is a bit out of favor.
Also, I was referring to Manhattan, not Brooklyn in the price example in post!
There is nothing wrong with waiting for a dip to buy, and honestly, dont worry about the rep of that strategy!
Posted by Larry Nusbaum
Tue Aug 14th, 2007 12:09 PM
"I was in SF a few weeks ago for Inman conference and real estate there was definitely holding up very well price wise, with lack of inventory and still healthy demand. At least that is what locals were telling me, but it was consistent from everyone I asked."
It's quite right, Noah.
Posted by Noah
Tue Aug 14th, 2007 12:28 PM
Thx Larry! BTW, someone on The Big Picture was calling for you to step in and share thoughts on one of Barry Ritholtz's post! Now sure which. Just remember someone saying, 'wheres Larry Nusbaum!'
Posted by sam
Wed Aug 15th, 2007 07:49 PM
Hi Noah
I think you are wrong. The stock market and low interest rates fueled this boom and without them it will go away. I asked you the question, a couple weeks ago what would happen if the market tanked and there were no bonuses this year. It is tanking.
I have been expecting this for a very long time. No one not even vultures want to buy a depreciating asset. Once the psychology reverses (and it will if we don't have the $30 billion of bonuses), Manhattan will join the rest of the country. In fact, since all that funny money disappears, I think it will be worse. I am betting a 5-7 year correction about 40% inflation adjusted. I am saying we are going towards $700 per square foot.
S.
Posted by Noah
Wed Aug 15th, 2007 11:14 PM
Sam - as always your comments are greatly appreciated and I enjoy hearing your view!
I'll have to stick with my side, and just dont see a correction of that long a period or that severity in prices. But, it all depends on how deep this credit mess goes and if it effects global economies and therefore taking 2 key drivers to equities away for a long time to come.
Im certiainly looking forward to learning about this cycle and its fair to see that my generation has not seen anything like this before. I think the early 80's was last time this bank liquidity crisis last occurred.
Keep commenting Sam! Lets see how this plays out.
Posted by Larry Nusbaum
Thu Aug 16th, 2007 08:21 AM
http://millionairenowbook.blogspot.com/2007/08/bay-area-home-prices-steady-slow-sales.html