How Credit Squeeze Reveals Itself
A: OK, after a long talk with a trusted and very successful colleague of mine who is at a different brokerage firm, he told me of what happened to his deal 3 weeks ago that fell apart. Its an example of in what form the credit squeeze effects us here in Manhattan. To say its an isolated incident and that this situation hasn't happened anywhere else or won't happen anymore, is naive. The key to this story is: THE APPRAISAL DIDN'T COME IN!
One of my stated effects of the credit squeeze has been tighter lender and underwriting standards! If you break that down to its core, then you can include the role of the appraiser in the underwriting process as most lenders utilize a third party appraiser for an unbiased report on the property's market value.
As the secondary mortgage markets continue to not function normally, lenders will keep standards tight and try to make the higher quality loans to their books. The days of no money down, aggressive loans for very weak credit, and aggressive appraisals to meet the # are over! Either you realize that or continue to live in fantasyland; which I hear its very nice.
Here is the TRUE, REAL LIFE example of what happened as I relay the events of the story (the colleague, bldg, and firm obviously will remain anonymous):
I HAD A DONE DEAL. OFFER ACCEPTED, CONTRACT SIGNED, DEPOSIT IN ESCROW, AND BOARD PACKAGE HANDED IN TO THE MANAGEMENT OFFICE. THE BUYER WAS QUALIFIED, AND WAS PUTTING 10% DOWN. THEY WERE PRE-APPROVED FOR A LOAN. THE PROPERTY'S SALE PRICE WAS $565,000, ABOUT $40,000 HIGHER THAN THE LAST LINE COMP FROM 12 MONTHS AGO. THE PROPERTY WAS IN MINT CONDITION AND TOTALLY RENOVATED, BUT ON A LOWER FLOOR WHEN COMPARED TO THE LAST COMP. THE SELLER HAD THE PROPERTY APPRAISED FOR A HELOC 14 MONTHS AGO WHICH CAME IN AT $515,000 W/OUT THE RENOVATIONS. THE BUYER'S LENDER APPRAISER CAME IN AT $505,000, SOME $60,000 BELOW THE PURCHASE PRICE, EVEN AFTER THE RENOVATIONS. THE APPRAISER OBVIOUSLY HAD PRESSURE TO BE CONSERVATIVE AND AS A RESULT THE LENDER WOULDN'T COMMIT TO THE LOAN. THE BUYER GOT SCARED AWAY, GOT HIS DEPOSIT BACK, AND THE DEAL WAS DEAD! I HAVE NEVER SEEN AN APPRAISAL COME IN SO FAR BELOW AN AGREED UPON PRICE.What happened here is a real life example of the tightening of underwriting standards and the change of environment in the appraisal world! Gone are the days of appraisers whimsically 'making the #' so the deal would go through!
This is part of the new world we live in. While it's good for the long run and for the lending industry, its an unavoidable side effect from the drunken party of low rates and lax standards that we had for the past 4-5 years! It's also what led me to write that forward looking post about "New Dev Closings: A Potential Problem" the other day, where I stated:
"WHAT ABOUT ALL THE BUYERS THAT SIGNED CONTRACTS ON EXPENSIVE NEW DEVELOPMENT PROPERTIES BEFORE THIS MESS HIT, AND WILL NOW CLOSE THEIR DEAL IN A LENDING ENVIRONMENT THAT IS TIGHTER & MORE EXPENSIVE?"That doesn't mean the market is going to sh*t and about to experience a 30% decline! That also doesn't mean I'm predicting the market. It means I'm trying to explain to you, like I always do, what is changing in the macro economy, why it's changing, and how it will wind up effecting you and I in this crazy market we call Manhattan real estate! What other brokers, besides Doug Heddings of True Gotham who wrote about his credit crunch casualty, will talk publicly in an unbiased manner about this stuff!
The credit squeeze will reveal itself in a number of ways including:
a) appraisals being much more important & conservative; gone are the days of aggressive appraisals to make the #
b) higher rates reducing affordability as risk is re-priced for mortgages
c) tighter lending / underwriting standards requiring higher credit scores, doc's to back up assets, and employment checks
This is the real world. It has changed. Either you are educated about it or you aren't.
SELLERS & SELLING BROKERS - This market is slower than most would like to admit. Yes, inventory is tight and stocks are at record highs, but buyer confidence has declined a bit and there is some caution in the mindset of the buyer pool. Sellers MUST adapt to this and price properly if they truly need to sell; if there is one constant it's that properties are never worth what an owner thinks its worth! There are two gods that you must appease to get a deal done: the BOARD GODS & the LENDING GODS! Right now, the lending gods are stubborn so think about the ramifications of pricing high and getting lucky enough to procure a buyer willing to pay that price; as chances are the appraisal may not come in causing the deal to go sour unless the buyer picks up the difference!
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Comments (13)
noah, is this force strong enough to bring down prices in new york city? i've been priced out for years now, when the hell will prices come down already at least a little bit. who is affording these prices?
Posted by frustratedbuyer | October 11, 2007 10:39 AM
I'm really surprised this happened in a co-op. The board sounds really lax
- they allowed only 10% down
- they allowed the current owner to HELOC
At a guess, I would say the units in that building were trading at a slight premium because of the lax board and perhaps the influx of speculators in that building drove up the price artifically?
Posted by uwsider | October 11, 2007 10:40 AM
frustrated - well, if you've been reading my stuff you know that prices here are supported by strong jobs market, high bonuses, weak dollar bringing foreign demand, incredibly shrinking inventory, rising rental costs, and trend of living closer to work, that means the city. Lots of factors there at work. Until inventory trends reverse, whether it be from declining sales, declining buyer confidence, lost jobs, or weaker bonuses, prices will stay close to these levels.
uwsider - hey boss! This was a condop, so yes they were more lax! Many condops offer those kinds of terms for buyer financing, I didnt want to publish it because colleague asked me not to, so that its completely anonymous.
Yes, lax standards means wider buyer pool; but not sure if it was from speculators! But this was a case of tighter appraisals and we are still learning about how this may or may not effect sales pace here.
Posted by Noah | October 11, 2007 10:46 AM
Nice post as always Noah and thanks for the mention. I have had several so called "casualties" recently. I recently sold a $2M prop for people who had an 4.5% ARM that was going to adjust big time and they couldn't afford the payments. They were forced to downsize and because of higher rates they still have a high monthly mortgage payment even though they crammed the family into a 2BR. The positive point is that they walked away with a few hundred grand that is providing some assistance in making those high payments. It's going to be rough going for these people and many like them for a while. People think manhattan is immune to these types of stories and it just isn't.
Regarding the comment by uwsider about speculators...Manhattan has fewer "speculators" than other areas of the country which is another reason that these credit crunch stories aren't popping up everywhere.
Posted by Doug Heddings | October 11, 2007 11:38 AM
Regarding speculators... There are different types of speculators
1- quick flip, in, fixup, out
2- price speculator, in, rent for loss, sell for gain in a few years
3- home speculators, in, live for 2 years, sell for tax free gain. Can 'just about' get by with the payments or have sacrificed space hoping to upgrade to large space with the gain.
4- foreigners, in, dont even rent, out in a year or after construction
I belive Manhattan does have its fair share of type 3) speculators. They are just very hard to determine. If we have data on how often pepople have been reselling in the past 4 years v.s historical then we can know for sure.
It think also there is a probably quite a lof of type 4) also in terms of PERCENTAGE of condo units (not % of overrall market)
Posted by uwsider | October 11, 2007 11:59 AM
Hi Noah
I also share this experience. I was in contract (as a buyer) for a condo property that appraised low once for -25k and then again w/a different lender -65k! Seller refused to budge on asking price and I was not willing to make up the difference. Dead deal.
Posted by Guest | October 11, 2007 2:58 PM
guest - thanks for sharing that here! I wonder how widespread this really is and percentage of deals that are dying because of conservative appraising!
Posted by Noah | October 11, 2007 3:07 PM
Noah,
I'm new to your blog, and I want to commend you for your superb job of covering the nyc market.
Id also like to share my recent experience. Went to contarct on a condo for my son, and our appraisal came in 40K below the agreed upon price. The seller also refused to lower the price, so we were able to get out of the deal.
I would strongly caution all potential buyers out there to have a contigency in your contract to address appraisal shortfalls.
Do not sign a contarct unless you have the option of backing out if the appraisal comes in too low.
Posted by anon | October 11, 2007 3:44 PM
Its funny you call it "conservative" appraising.. I would call it "real appraising".. none of this "must hit this number.. nudge nudge wink wink" business
Posted by uwsider | October 11, 2007 3:51 PM
uwsider - how right you are. from now on, its 'real' appraising. Its been so long!
Posted by Noah | October 11, 2007 3:53 PM
anon - thanks and thanks for sharing the story! Hmm, what is going on here? I hope I dont wake up tomorrow and have 10 more comments of appraisals coming in lower and deals dying!
Posted by Noah | October 11, 2007 3:56 PM
uwsider,
I like the breakdown of the 4 types of speculators and agree with some of your analysis. That said, I still maintain that there is a lower percentage of all 4 categories here than you see in places like Miami or Phoenix. I have selling real estate in Manhattan for 16 years and this city has always had a much higher turnover rate than the rest of the country. I don't have exact figures but the average time a homeowner owns their home in the country is roughly 10 years (again, not exactly sure) and in Manhattan it has been more like 5-6. I think many of those who are or will be forced to sell in the coming year will be those who have ARMs that they can no longer afford or get out of. Perhaps these people can be considered speculators in terms of mortgage rates. I know many who really thought they wouldn't have to worry about their interest rate because they would "just refinance." Now they are worried.
Posted by Doug Heddings | October 11, 2007 5:56 PM
Noah, I'm another one. My deal isn't busting, but I'm having to pay a higher rate of interest because of it. UWS apartment - huge one-bedroom (805 sq ft), stable condo - 20% down. Completely renovated kitchen, excellent monthlies. Apartment above sold for $725k one month ago - ugly, no renovations. My appraisal came in at only $735K, 50k lower than contract price. I don't think the appraiser actually SEES the apartments!
Both brokers horrified. Bank sensible, thank goodness. I mean, this is at $975 per square foot one block from CPW!
ARGH!
Posted by Susan | October 11, 2007 11:43 PM