Noah's 2008 Predictions
A: All for the sake of discussing, so why not! My 2007 predictions hit about 50-50, so lets see if I can do a bit better this time around. Just a disclaimer, this is by no means investment advice and is simply for the sake of discussion and your comments. I'll try to break it down by category and this time I won't include the wild card as I know some readers thought that was me bailing myself out. DISCLOSURE --> I bought my condo in Nov, 2001 and sold in July 2006. I rent now. I am also waiting to buy back into Manhattan real estate with a product that can meet my needs for a longer term timeline to own; so either my salary needs to rise or prices need to fall. Unless things fall into place, I refuse to buy a place I cannot afford.
NATIONAL HOUSING - More ugliness as affordability on the buy side is still a problem. Mortgage resets will continue to make struggling homeowners payments even more unaffordable. I do not think the gov't sponsored rate freeze plan will be as effective as some think. Inventory will continue to be a drag on national housing and buyer demand will continue to be pressured. Prices will continue to drop in most of the struggling markets like Miami, Las Vegas, & Phoenix with some markets seeing 10-15% drops. I am fairly negative on national housing for 2008, however, if I were in the market for the longer term I would start to get VERY interested in bidding for distressed properties that have realized a 20-30% correction in price since 2006. All in all, I think its going to get uglier before it gets better and I expect foreclosures & delinquencies to rise in 2008 causing more pain for wall street financials. I also expect commercial to follow residential and get hit in 2008.
Towards the end of 2008 I expect the rate of declines for major datasets to slow, showing a glimmer of hope for 2009.
MANHATTAN HOUSING - I expect a slower than normal wall street bonus season in the months of JAN - APRIL, in terms of buyer demand. As for bonuses, yes I think they will be given out (with some departments seeing drastic cuts in bonuses) but its HOW THEY ARE SPENT that I'm a bit concerned about. I expect inventory to build as we near summertime, as a result of a slower than normal bonus season, and wall street to deteriorate as we get more clues about whether we are in a recession or not. As wall street falls, so will confidence and demand on the buy side for Manhattan real estate products. At the same time, we will see more types of sellers contribute to inventory builds toward the end of 2008; speculators, foreign buyers flipping, second home's selling, and struggling buyers who bought a bit more than they can chew or whose job security has changed to the negative. I expect job losses to grow during the first two quarters of the year as a result of the credit crisis and hit to the financial sector, leading to what I described above.
I'm also a bit concerned about appraisals coming in for contracts signed on new developments BEFORE the credit crunch hit. If sales do start to slip, how will banks lend on a product that sold for $1,400+ a square foot a year earlier? This worry is also tied to the state of the credit markets; should we see improvement this concern will ease.
While we won't see a crash by any means, I think sellers will find that its a bit harder than they thought to move their property above last years comparable sales. As always, data proving or disproving this will not come until mid year at the very least due to its lagging nature.
THE FED - I expect more rate cuts. The credit crisis is still evolving and I expect more write downs for more banks, lenders, insurers, state pensions, etc..We are yet to see the full effects of this situation or how widespread it will be. It could easily infect global economies and start a slowdown everywhere. As a result, I expect our fed to reduce the fed funds rate by at least another 50-75 basis points in the first half of 2008 to counter any lagging effects to the US economy. I also expect targeted measures to be taken by our fed by pumping more liquidity into the financial system to help restore investor confidence and stabilize the non-functioning secondary markets. How low the fed will take the FFR depends on incoming inflation data that could be pesky due to high energy and commodity prices; which is amplified by fed easing making the situation that much more difficult.
STOCK MARKETS - One of my better calls from last years predictions. I expect a very volatile 2008 making this a tough call. All in all, I'm negative on stocks due to the credit crisis and unknown effect it will have on the US economy. We still don't know who holds what, the value of these securities, and how bad the total write downs will be. We also don't know how bad this mortgage/debt problem goes and how the consumer will handle it.
I expect a flat to down year for wall street when all is said and done. To put percentages on it, by DEC of 2008 I expect to see stock markets to range between -5% - +2% or so. I'm aware of all the sovereign wealth funds, fed easing, weak dollar, and global influence on corporations, but I just can't ignore the after effects of this credit storm on the US consumer. With confidence down, mortgage equity withdrawal way down, a deteriorating housing market, rising debts, and negative savings rate, I think the US consumer is tapped out. Ultimately this will come out.
I am very bullish on agriculture, global/domestic infrastructure plays, gold, oil, miners, and large cap tech with global exposures. I am still negative on retail, airlines, financials, insurers, homebuilders, food chains, and anything exposed to housing, mortgages, or consumer debt.
JOBS - Ugly. I think 2008 will show the effects of the credit crisis with major job losses across the financial sector; except for Goldman of course. I also expect a recession to show its ugly face at some point during the year, if we are not in one right now. As the recession reveals itself, corporations will get defensive and cut jobs; with the financial sector being the hardest hit. Since the Manhattan real estate market is so closely tied to wall street, if this occurs we should expect to see a change in confidence, sales volume, and inventory. If it doesn't and we get through this with no recession and limited job losses, then the US economy is way more resilient than I give it credit for.
I think this downturn is necessary to get past this credit crisis, weed out the bad bets, clean out corporate balance sheets, allow for integration of regulation and gov't sponsored reforms, and clear the clouds for a brighter future.
INFLATION - Since I expect the fed to cut rates further, I expect energy & commodity prices to stay at high levels. The one factor that can counter this is a global slowdown. In that case, global central banks will lower their rates and perhaps provide a bottom for the US dollar. Although many argue about the accuracy of US data reports on inflation, specifically the headline vs the core argument, I expect the past year's higher energy & food prices to continue to trickle into inflation reports. This is what will prevent the fed from acting more aggressively with rate cuts. Deep down inside I believe we are in for a few years of inflation problems, although this may occur while the US & global economies slow; stagflation. All I can say is, its a much more expensive world today than it was 5 years ago.
DISCLAIMER - I'm not always right! And my true experience is with equity trading and the behavior of stock movements. I learned a lot along the way and I feel I have a much deeper understanding now, than I did 5 years ago, but that does NOT mean you should make any investment decisions based on what I say here! Talk to your financial adviser for that. As for buying or selling real estate here in Manhattan, no one can time the market perfectly and longer term investments usually prove to be great decisions. So, if you are thinking of buying now, consider your job security, liquid assets, salary, timeline to own, and whether you can afford a product that meets your needs rather than day trade housing and waiting for the perfect entry point! Real estate investment decisions are very personal and everyone's situation is unique. With that said, I welcome any comments regarding what I said above!!
Comments (12)
Noah,
I think you're right on most of your post, but why do you say there won't be a housing crash by any means? I'm not arguing here, but can you give me a sense of why after such irrational highs, we won't see a comparable slump(crash), like there was in the late '80s to mid '90s?
It seems with the foreign investment happening on levels like (and greater than) it did in the later Reagan years, and eventually a major downturn even in Manhattan - some reports stating up to 30%+ adjusted for inflation by 1995 - might be in store again, if not worse.
I guess I'm asking what makes this different, aside from the dangerously weak dollar?
Thanks again for the great info!
Posted by Norm | December 27, 2007 2:31 PM
Firstly, I have recently been introduced to your web-site and I send my appreciation and compliments.
We are in unprecedented times, and the more information available the better off we will be. Many of the complications we face have been caused by the simple fact that most consumers are uninformed when it comes to homeownership.
I have to agree on much of your forecast for 2008. I think that a lot of ugliness lies ahead, and more focus on policy, as opposed to percentage points and yields, will be required to facilitate an improvement. I can save my complete rant on Fannie Mae and Freddie Mac for another post, but these extortionists need to either step up or step out of the picture. The first step – raise the conforming limits in metro areas that really need it. A loan of $417,000, representing 80% financing, yields a purchase price of $521,250, and just enough space for your double bed and wardrobe. What is frustrating is that conforming limits in Alaska, Hawaii, Guam, and U.S.V.I are 50% higher than the continental U.S. If the precedent is set that these limits are NOT uniform throughout our territories, then why not use some sense to adjust the limits in other higher priced geographic areas?
In regard to Manhattan real estate, I echo the concern surrounding new development purchases. As a mortgage consultant, I have a host of clients that have been waiting 12-18 months to close on their unit. Their mortgages were approved around the same time they signed their contracts, which you can tell was long before the credit crunch hit. Luckily for these specific clients, the shift in credit markets will not impact their decision/ability to purchase, but it will affect their financing in some way, i.e. larger down payment, inclusion of a second mortgage to keep their first mortgage within conforming limits, switching loan program to an ARM where jumbo rates are much lower than a jumbo fixed rate, etc.....I have to believe that many borrowers will be facing that issue with a lot less flexibility. This will lead to renegotiating their purchase price, or the need to walk away from the deal entirely. Some of these same borrowers signed their contracts when their Wall St. bonuses were larger than ever, and their job security as firm as ever. A re-assessing of affordability will not help the inventory, though it will be a necessary step for all consumers.
Needless to say, the excitement has just begun.....
Posted by MortgageDons | December 27, 2007 2:32 PM
Norm - interesting..I'm not too familiar with the specifics regarding the downturn in the early 90s, but I do know inflation was a killer then and rates were sky high, with rates in mid teens & underwriting standards tight.
These days, those two elements (rates & underwriting) are very different so I dont think it will be as bad as that downturn. With that said, we are going to be entering a very different lending environment in the years to come as the irrational lending that was done between 2002-2006 will not be seen again for a loooooong time. I think that is a fundamental we'll have to deal with.
I dont see a crash because Manhattan is much different than it was in the late 80s/early 90s. The city is much cleaner, crime is way down, major infrastructure enhancements are underway (2nd ave subway leading the pack), and buyer demand is so diversified. We'll correct, its when Im not so sure about. It might not come until late 2008/2009.
We are yet to see job losses hit our re market. We all know thats coming right in the sector that many have relied upon as a HUGE part of the boom; wall street & financial bonuses!
Posted by Noah | December 27, 2007 3:03 PM
mortgagedons - many thanks!!!
great comment! Although I don't see that limit being raised, I agree with your argument as long as underwriting requirements are met! smarter lending.
as far as walking away from the deal, many new devs required 15% down just for that reason and stipulated in the contract that the entire deposit will be lost if the buyer walks away. it will certainly be interesting times to follow and learn from.
Posted by Noah | December 27, 2007 3:25 PM
Noah,
I found your site several weeks ago and have found it a great source of info. Given the markets as they are today, it seems as if there is still low inventory and a great deal of real buyers in the markets. I'd be interested in hearing your views on the coop vs condo market (holding value) as we enter a possible decline in the manhattan housing market. Also, what part of the market is most vunerable (in terms of size)?
Posted by cw | December 27, 2007 3:54 PM
cw - welcome! hope to see you in comments often!
Well, first off condos have been taking up market share in the past few years with new devs closing. Used to be like 75% co-op, but I think its closer to 65%, or maybe a bit lower now, co-op here in Manhattan. Also, co-ops have much stricter guidelines for purchasing and restrictions that make investors and speculators stay away.
With that said, I expect condo owners to be more volatile in any downturn, which would mean co-ops would prob retain value a bit better. Nowadays, condos demand a premium over co-ops but if the market deteriorates, you may see condos fall percentage wise a bit more than co-ops.
High end, with less sales volume obviously has most downside. Hard to answer this part of your question though until I know more about how bad economy gets hit. We may see lower end get hurt the most, if these guys lose their jobs, bonuses, or get salary cuts.
Neighborhoods with higher concentrations of condos OR younger, less established owners (financial district, hells kitchen) will be more exposed. While areas with exposure to families and more established owners (like UES/UWS) will probably hold onto its value more.
Posted by Noah | December 27, 2007 4:06 PM
That is true regarding the binding monies placed on a property at time of contract signing.
I agree, I cannot imagine a buyer forfeiting their down payment, but I do see a flurry of attempted renegotiations lying ahead.
What I foresee are some ugly battles between buyers whose financial situations have changed, and their developments that provided very aggressive, often times misleading dates as to when they will be closing on the property.
Much of the fuel to a buyer's negotiation will come from exactly what Noah mentioned as a concern - appraised values on new development units that decrease between the period of contract signing and closing. This is less of an issue in Manhattan specifically, (a huge issue in Miami) but an issue nonetheless.
As developers reduce prices to attract new buyers, the existing buyers that agreed to purchase a unit farther in advance will face a rude awakening as the actual closing date approaches. These existing buyers have already been approved for their mortgage, with an appraised value equal to the purchase price at that time. Most appraisals are valid for up to 90 days, and will need to be recertified after that. Those existing buyers will be adversely affected when their updated appraisal includes the more recent, now reduced sales prices of units within the same building. Not only will that affect the loan approval and its terms, but nothing raises more concern for a buyer than agreeing to purchase something for more than what it is valued to be.
Posted by MortgageDons | December 27, 2007 5:43 PM
I still won't forget your earlier use of the hackneyed phrase that "Manhattan is an island and is a unique market" or something to that effect, which I believe all real estate agents have to memorize in order to get their license.
But you are way ahead of most, if not all, NY realtors in changing your call. I look forward to less haughty realtors in the months ahead.
Your macroeconomic analysis and ability to link economic variables to the NY real estate market are first class! And your website is user-friendly.
I wish you more successes in 2008.
Bobby
Posted by Bobby | December 27, 2007 7:20 PM
Bobby - I still cant argue..."Manhattan is an island and is a unique market" as that is why we have bucked the trend for so long.
Many many thanks for the words about the site and I'll certainly do my best for 2008 and beyond!
Posted by Noah | December 27, 2007 7:41 PM
Noah,
The basic necessities like oil, wheat and steel has achieve new high. On the other hand, the economy is showing signs of slowing down. I cannot discount the possibilities of a stagflation in near future.
What we can for see here is with the large amount of available data from the US economy. We have yet to see the whole picture when we include another factors from China.
It shivers me when I came to know about 10% of the maids in Shanghai change their job to become Stock Investors in this year alone.
Let's see what will happen after Beijing Olympic!
Alfred Chew
http://www.mylevel2quotes.com/
Posted by Alfred Chew | December 28, 2007 2:02 AM
Your assessment is way too optimistic. Most of the Wall Street bonus money is coming in the form of restricted stock, not cash to spend on apartments.
Posted by Wall Street Watcher | December 28, 2007 10:22 AM
Wall Street Watcher - well I did say I was negative on manhattan re in general. Im hearing that its bonuses for 2009 and beyond that will be the real pain as no significant revenue will be generated in brokerages in 2008 now that the mortgage derivatives game is virtually over!
First half of 2007 still saw solid gains for many firms, before hell swept in. While bonuses will be lower and as you say, NOT in the form of cash, what do you expect for bonuses a year from now?
And thats not even taking into account the # of job losses that will occur in this sector. I guess you are saying I am not negative enough.
Posted by Noah | December 28, 2007 10:31 AM