Jobs / Confidence / My thoughts
A: That is the word for today! J-O-B! In true fashion of this site, I want to shift to the next topic that I think will become a major focal point as economists and analysts figure out if we actually are in a recession. We must be prepared for secondary actions that corporate America will take as it realizes the credit crunch is not going away; as my fellow contributor Jeff just said, "this credit mess has more angles than a Tiger Woods birdy putt". How will jobs be affected in upcoming reports? I also want to talk about the importance of confidence and some of my own thoughts on the Manhattan real estate market.
You watch the fed start to focus on jobs now to see how aggressive the rate cuts need to be! Trust me, they are on 24-HR jobs watch for any sign that the credit crunch is directly hurting the US economic workforce. I hate to say it, but I think more rate cuts are in the cards before a new wave of rate hikes kick in further down the road. The reason is jobs losses and a slowdown in job creation, which will come out over the next 2-4 months; lagging effects of the credit crunch.
What does this mean for us, and specifically, for Manhattan real estate investors. Well, if jobs growth becomes a problem, it will be clear the US economy is nearing, or possibly already in, a recession. With every rate cut, comes stated concern by our fed about growth. Recessions aren't good for anyone. Bear markets aren't good for anyone. The fed will be forced to cut interest rates at a time when pipeline inflation is a very real threat; i.e. higher gold & oil prices & agriculture prices. If we do enter a recession, the stock market will be the first to price it into equity prices; this may be happening right now.
As stocks fall, people feel less wealthy. On paper, their 401K's and stock portfolio's normally take hits, unless they are otherwise hedged with short positions or bond investments; however, most are not as many people enjoy being long stocks and overweight these positions that gain in up markets. Why? It's more fun to be positive and long stocks than to be gloomy and short them! Moving on.
As people feel less wealthy, they cut back spending and start to wonder about their job security as job losses grow. They become conservative. They stop buying second homes. They unload any asset exposed to depreciation that is not a primary residence; since everyone needs a place to sleep in they only sell their primary if times get real tough. Investment properties become the first to go when someone gets into 'tough times'. Psychology changes! As all of the above occurs, confidence dips. And in my opinion, its ALL ABOUT CONFIDENCE if you want to stay ahead of the curve, rather than behind it!
That is why I go on record to question the re-acceleration of foreign demand as the US dollar weakens to record lows against other major currencies. Why? Because there is a credit crunch going on that is infecting equity markets and losing a lot of money for financial institutions, bond insurers, home builders, lenders, and consumers that invested in them! To say this has no effect on foreign confidence in our housing market is ridiculous! So, I focus on that as a leading indicator on future sales volumes, which is so critical to maintaining inventory levels. I also wonder about the percentage of foreign buyers that are in contract right now, who will flip when they close?
The chain goes something like this:
CONFIDENCE DIPS --> INVESTMENTS ARE CUT BACK --> SPENDING IS CUT BACK --> REAL ESTATE SALES VOLUME SLOWS ---> INVENTORY BUILDS AS A RESULT ---> FUNDAMENTALS SHIFT AS SUPPLY RISES & DEMAND DROPS ---> ASKING PRICES DROP / BECOME MORE NEGOTIABLE ---> DISTRESSED SELLERS GET CAUGHT ---> VULTURE INVESTORS NIBBLE AT FIRE SALES
This has already occurred in housing markets outside Manhattan! We have been spared thus far, but I think that will change in 2008. While I am short term bearish on Manhattan housing, I am longer term bullish. It is the corrections in the Manhattan housing market where I look to buy in; as I did after 9/11 when I bought my first condo (a 1,093 sft JR w/ 660 sft terrace for $500,000 in the UES). I sold that very same condo last year for $935,000. Now I'm renting waiting for the buy decision to line up properly.
What am I waiting for?
a) fundamentals to shift a bit towards buyers so I can negotiate
b) inventory to rise so I have more options and sellers have to compete a bit against each other
c) my salary to warrant buying; so I need to make more money or prices/rates need to drop
d) timeline to own to be 5+ years; so I need to be able afford a 2BR that I can grow into
e) job security; transparency in incoming salary and that business will stay that way
f) enough liquid assets to do deal comfortably
g) to a lesser extent, the credit crunch to be closer to an end
Now, I have most of the above already, but not all. So, I'll be patient and continue to monitor the changing situation so that I'm on top of a deal if one presents itself.
Manhattan real estate has a history of lagging in recessions and leading in recoveries. Just because we've held on so far, doesn't mean we are immune to any slowdown. I certainly think one is coming. But the difference is, I think a slowdown is completely healthy for longer term sustainable growth! If Manhattan gets a bit out of favor, I'll get interested. Don't day trade Manhattan real estate! Don't analyze every asking price because real estate investing is very personal and depends on your own unique situations! Instead, put your efforts into managing your own finances and investment decisions so that you avoid stupid mistakes, like buying a $750,000 condo with the hopes of selling for a profit next year.
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Comments (4)
Noah,
I think there are quite a few people like you on the sidelines waiting for the NYC market to either flatten or drop. The difference between them and you, I bet, is that once things start to correct it will be hard for those other people to pull the trigger. At that point they will have to buy into a declining market, which is hard to do (unless they have a trader's mindset, like you). That's why when I hear so many people talk about how they are waiting for more favorable conditions, I just smile because most of these people will always be on the sidelines.
What do you think? If foreign money starts to pull out, will all the market voyeurs who have been waiting for more favorable prices have the courage to take the plunge? Or will they continue to talk themselves out of buying?
In the interest of full disclosure, I'm one of those who is renting, waiting for the "right time" to buy. I don't know which category I fit into - the realist or the perpetual pessimist.
Alex
Posted by Alex | November 21, 2007 11:49 AM
Alex - great point. I guess it depends on their confidence. If the market does correct, and look more attractive to me, it probably looks less attractive to those thath have been waiting as now they feel they were right, and that they will hold from buying until the market FULLY corrects.
problem is, no one knows what a full correction might be. if I can get a property that was selling for 1,000/sft, and buy it for 800/sft, I might pull trigger depending on current market, economy, etc..
I have a very complex view on markets, and I will want to see some signs of life for the economy in general, and a sign that the credit crunch is closer to an end, to pull trigger. If prices are lower at that time, Ill have motivation to pull trigger. Not many people analyze this deeply.
I think they most will talk themselves out of it, as headlines cover the slowing market. Problem is, we still just dont know how sever this credit crunch is, that is a scary thing to me and may change my timeline a bit, and delay my pulling the trigger.
Posted by Noah | November 21, 2007 12:12 PM
If you are buying as a place to live and not investment.. I should suggest when the mortgage+maintaince is less or equal to the rent using 20% and 30year fixed... this would be a good time to buy for the average joe.
Rents have increased alot in the past few years, so with the turmoil in wallstreet, you may want to see how rent prices play out also... after .com I saw rents for a 1 br in silicon valley drop from 1,700 to 900 a month! I was really surprised by the drop as landlords were real cocky just months before! How were rents just after 911 in Manhattan?
Posted by uwsider | November 21, 2007 3:36 PM
uwsider - your just dead on. I recall paying 2450 for a 825 sft 1BR on 89th & York before the dot com bust. After, I bought a condo thinking I can get at least 4K in rental income, I got 3K instead as the whole rental market plunged for the first few years after the bubble burst, people lost tons of $$$, the economy stalled, jobs were lost, and confidence was down. It took about 3 years or so until anything started turning after that happened, depending on how you look at it.
Posted by Noah | November 21, 2007 3:45 PM