Toes' Predictions for 2008

I already know where I want you to take me:

PETER LUGERS IN BROOKLYN!

Seriously though, Christine is definately on the streets of Manhattan real estate more than I am, especially over the past few months. This is excellent front seat information on what buyers are thinking.

If there are any buyers out there, I would love to hear your take on what Christine says. Is it dead on? Close? Totally off?

Personally, I just think we have pain to go through and that Manhattan re will show a lagging effect. Of course I could be wrong. But I think 2008 will be a challenging year for Manhattan, and I expect sales volume to slow and inventory to build, swinging it a bit ore into a buyers market.

Plus we are yet to see the full effects of:

a) new dev closings & resales
b) problems with appraisals coming in at #, deals going through
c) credit crunch & tighter lending standards
d) effect on wall st
e) effect on bonuses for 2009-2010
f) economic fallout from housing slump/credit crisis
g) effect from illiquid secondary mortg markets
h) effect from ratings' downgrades / corporate insolvency / ability to raise cash

I expect more waves to this credit storm to come and for it to spread to areas not considered before; i.e. Florida's state pension fund.

Great post though Toes!! Manhattan re will always be the hottest and best market to work in and invest in!

I am a potential buyer and appreciate Christine's post. I have been attending open houses on the UWS and in prime Brooklyn for some time now, as well as paying close attention to price movements. I'm not in a rush to buy, and my definite sense is that things are slowing, and that "reality is dawning" on the market here, based on the following observations:

1. Open houses. The attendance has been pretty mediocre. There were a couple of OHs in Brooklyn that had very good - even blowout- crowds, but of the dozens I've been to, they were the exception rather than the rule.

2. Price cuts. While one property I loved "flew off" the market (it took 6 weeks, at least 3 open houses, and sold "close to ask", according to the broker), many properties have experienced multiple (yes, multiple) price cuts. Including many properties listed well after the start of the credit crisis. To be sure, some of these properties were way overpriced, but some were reasonably priced.

The important point is that in many many cases aggressive pricing by brokers IS NOT HOLDING among the properties I'm looking at (2BRs, good hoods). This is a radical shift from the last few years. And it gives me reason to be a patient buyer.

3. That said, on a $/sf basis, the sky has not fallen. I don' think you're going to find a nice property in prime Manhattan for $800/sf right now, and I don't believe that will change. Brooklyn, on the other hand... I've seen some sweet properties in prime areas pushed down to the $600s from the $800s.

4. W/r/t effect of Wall Street, demand will be muted for sure. Bankers are revisiting their personal LBO models and adjusting their cash flow forecast downward.

5. The mood has changed. I know some recent buyers who are experiencing remorse, and I know recent buyers who are really happy because they just found something they like. I also know some current buyers who have decided to sit on the sidelines and wait this out. The climate of rapidly escalating prices that drove people to "panic buy" has all but disappeared.

Hi,

I'm not a first-time buyer. I bought in 1996, sold and bought in 2001, and sold in 2004 and now rent. I've been following this market (some people like the Yankees, I like real estate) since 1995.

I still believe the market is overpriced, but I am looking for a two bedroom + (maids, dining, homeoffice) unit, and know little about smaller units. Permits may be down, but there's still an incredible amount of new construction, and now for some very large buildings. Most of the early condo development was for conversions and small buildings, primarily in Chelsea and FiDi. Now Murray Hill/Kips Bay, mid-town east and west, the far west from Chelsea all the way up, the upper east, central Harlem, are abuzz with jackhammers. Some of these may be rentals, but even that would affect the market. I know a few people who signed contracts for units in new developments closing in mid-2008 who have not sold their current homes yet.

To Noah's list I'd add a couple of more factors:

New developments not receiving tax abatements;
Taxes rising yearly on properties receiving five to ten-year abatements affecting monthlies;
For larger units, a HORRENDOUS shortage of pre-school, kindergarten and sixth-grade spots. I'm going to be very interested in seeing what happens in April, if not 2008 then 2009.

In terms of population growth, I believe the prediction was for a huge amount of growth 2000-2010, much more moderate growth 2010-2020, and then a pick up again 2020-2030. I think, for the short term, most of the growth has occurred. I also think those growth numbers may be affected by a tightening job market. New York is a difficult place to contemplate without a decent job, at least for those looking to buy.

great comments both of above!

ANON - is there any hint of "if the deal is there, and we like, we'll go for it" in the psych of the buyers you refer to? OR, is it basically a wait and see attitude? If prices dont fall, will these buyers continue to rent?

Hi again,

I too have been spending quite a lot of time on the open house circuit in the last six months. I'm getting the sense that a lot of the attendees have been looking for quite some time, like me, and are still not impressed. That impression may be subject to my own personal biases, but in the resale market at least I'm not seeing much willingness to leap. I think many of us are weary, it's been a long, uphill price climb, what's another six months to a year? Most decent apartments (two bedrooms), with 20% down, result in at least $9000 - $10000 monthlies (before tax benefit, although the re taxes may push you into the amt), still quite a bit more than renting.

Noah - some people (including myself) I think will move for a good deal. But this is tricky. As psychology shifts, "getting a good deal" may be construed as "catching a falling knife" for some people who can afford to wait.

"Most decent apartments (two bedrooms), with 20% down, result in at least $9000 - $10000 monthlies (before tax benefit, although the re taxes may push you into the amt), still quite a bit more than renting."

hard to argue that Brenda! Sucks to not build equity, but Im paying 3000 for a 900 sft 1BR in UES. Same apt to buy would cost around 800K - 900K or so, most likely, and have total monthlies around $1500 or so, and transaction costs to do the buy/sell deal.

That means (assuming 20% down, 6.75% rate) monthly nut of $6,000 or so before tax benefits, or double my cost to rent same type apt. And I didnt talk about opportunity cost here.

Toes,

Could you give us an idea of the average household salary and age of "90% of my buyers are first time buyers and are purchasing in the $300K - $2M range."

I just want to get an idea of what makes up an "entry level" buyer

Another first time buyer here. For me, I've been looking for last 2 years in the 500k - 800k range and disgusted with the prices.. now that I see flattening of prices.. another 6 months to hold off is nothing.

I can purchase the unit in cash, but prefer to use only half of it to 'double down' when/if prices fall even further. I am a big believer in RE for long term investment.. but these prices are similar to buying stocks in 1999 (prices NOT in line with any fundamentals).

So basically, for my primary residence, i'm willing to pay a reasonable price so I'm not going to risk waiting for any large prices declines. But at the same time I refuse to overstretch myself incase the prices do go lower as I want to double-down.

The only thing that would change my mind is mass-layoffs on wallstreet next year.. or even a big recovery in the dollar (overseas speculators dumping) If so, I'll wait for even lower prices

anaon4this,
I don't know where you get your info from but you need to do some more research. First, comparing real estate with stocks is just wrong. They are such fundamentally different assets that it makes no sense. Second you are treating real estate as Vegas. It's not. Third, you are trying to time the market which you can not. You have waited for 2 years so you've lost substantial equity already(probably anywhere from 90k-110k). The younger you are the better it is to buy real estate as Christine said....time in the market is more important than timing..... A better strategy would be to know the current market values of individual neighborhoods and than pounce on one that is priced UNDERvalued from some desperate seller. For some sort of a macro sense you can look at your job/wage/population growth and incoming inventory. If you see a "MATERIALLY SIGNIFICANT"(ie Wall Street Crash) turn of events in either one of these than you might take a second look. Remember, when you purchase real estate "time" is now your friend.

Noah, Brenda and anon4this are absolutely right - the rent vs. buy economics now are so skewed that on that basis alone, we should all be shorting this market to hell (if we could). That said, there's an argument that there should be a premium for owning on a relative cost basis, but that premium now is extreme. I remember when people would buy only because it actually saved them money vs. renting. Now you pay a premium for the privilege of owning.

I base my decisions on financial costs and benefits, where the "privilege of owning" doesn't have an attributable value in and of itself.

Rents need to catch up to prices, but in this economic environment it's hard to see that happening.

excellent point Steve! You cant trade real estate like you trade a stock, yet many buyers look at it as such.

anon4this may have missed 2 years of gains, but obviously he feels there are macro fundamentals that have yet to impact this market. So, confidence plays a role there.

No one wants a depreciating asset, certainly not someone who will lose sleep over it. If you are unsure, better off to wait until your comfortable with all aspects of the investment.

And Christine did make a fabulous point, its TIME IN MARKET that counts, not timing the market.

Noah and Christine,
Brenda mentions "a HORRENDOUS shortage of pre-school, kindergarten and sixth-grade spots". This has become quite a hot topic among my friends recently -- since NY Mag published an article 2 weeks ago. I'm wondering if you are hearing more of young couple/families moving to the burbs instead of staying in Manhattan. The trend in the last few years was to remain in the city and developers are building family sized apartments. Will those prices fall in the next few years as families are forced out of the city when the kiddies reach school age?

Steve,

Just a few points.

1)
I compare stocks and RE in terms of P/E ratios. Which in RE terms would be rent v.s mortgage calculation. It is way out of whack similiar to P/Es of tech stocks in 1999.

2)
The fact that I waited 2 years, I believe I saved about 50K from renting as the mortgage+maintaince+misc costs would be 'at least' double my rent

3)
"time in the market is more important than timing..... "... If presented with the home price graph from Schiller for 1980 to now

http://graphics8.nytimes.com/images/2006/08/26/weekinreview/27leon_graph2.large.gif

Can anyone really say that with a straight face, especially now the fraud loans/appraisals, double digit appreciation has stopped

4) I'm going to wait to see how spring shakes out to make a determination of what to do... Since most rest of the country's RE is tanking, I might just take my million and retire instead...

Someone asked what my entry level buyer profiles are like...

My entry level buyers most recently have been people in non-finance jobs buying with some kind of help from their parents (usually the $30K needed to beef up their reserves to get into a co-op).

I had someone living in a rent stabilized studio just get sick of the apt and his landlord. He'd been saving money for 6 years since his apt was cheap. He wanted the pride of ownership, freedom to do what he wanted with his own apartment, and to build equity since he isn't planning to move for the next 5-7 years. I thought he would never buy. How many people REALLY leave a rent stabilized apartment? But after seeing about 25 places, he pounced on an apt where he saw value (one bed, elevator, UES west of 2nd, lots of windows, reno, $430K). Since it was a co-op, he didn't have the reserves needed, so his parents gave him a gift. He was a producer making just a bit over six figures.

My other buyers are similar except that they are paying $2,200 in rent for alcove studios or one beds in walk ups, and don't mind that their payments are going to $2,600 to purchase something similar to what they are already living in, because after the tax deductions, their payments are more like $1,800. Usually these are mid to late 20-somethings, maybe early 30s. The early 30s buyers who are single are looking for something with enough closet space for 2 people:)

I don't have many finance people right now, they are all sitting on the fence until they find out what their bonuses are. I have people in IT, marketing, producers, and pharma companies that are all ready to buy when they find the right apt. I see two of my finance people ($700K-$1.2M range) buying shortly after they get their bonus numbers, so I wouldn't be surprised if there was an uptick in entry level apartments in the first quarter of 2008. I think there have been enough price reductions that they will be ready when they find something they love.

I think the rent/buy equation is a very important one which everyone should run the numbers on.

I have just run some numbers and found it very interesting.

I'm assuming I continue to rent at $5k but with rent increasing at 5% each year. I'm assuming that I keep the $675k deposit and closing costs I have put aside in a CD. Total next cost of living in NY after 5 years is $106k with the $675k left after the 5 years.

The alternate scenario sees me buying at $1.8mm and putting the $675k to work on $600k down and $75k closing costs. I've then assumed a pessimistic scenario of RE decreasing in value by 10% next year before increasing at 4% over the following 4 years.

After 5 years after selling for only $1,895k I have spent $357k to get back my $675k.

Is this exercise too simplistic? Is a $5k rental really comparable with a $1.8mm purchase. If not, the numbers get skewed. If house prices simply level next year before increasing at 4% for the following 4 then the numbers start to look more level and if house prices rise by only 4% per annum over the next 4 years then ownership looks more compelling.

What I can say is that at any given time that if the cost of renting is the same as the cost of mortgage interest + maintenance/taxes then it's unequivocally better to purchase unless you are assuming that inflation no longer exists.

Also, if your time horizon is different the math is totally different. If you're looking at a 3 year horizon then renting is the way to go under whichever scenario. It's simply not worth the closing costs / mansion tax. If your time horizon is 10 years then the answer is buy buy buy unless you feel your crystal ball is better than everyone elses and you absolutely know that you can buy the same property cheaper at a lower fixed rate next year.

The rent vs. buy analysis caused some of my friends to miss out.
They had rent regulated apartments the deals were below market and they felt it was insane to buy. Eventually many of my friends for their own reasons ended up buying a few never bought . But even if the market fell an additional 20 percent most of the buyers will still be ahead. The tax, leverage, and inflation aspects of ownership RE push the probability of success to the buyer over time. Interest deduction 500,000 exemption per couple on profit
on the sale. Its hard when the psychology changes from sellers market to buyers market there is a big difference In a sellers market buyers need to move quickly to make a deal or loose a deal In this market for now the buyers has the luxury of being able to move cautiously this immediately translates into a ten percent price differential I guess if you believe we are going into a depression and that actually occurs you probably better off staying on the sidelines. If it is a market correction then your betting you can catch the bottom of the market not as easy as it sounds and when it turn up again it will jump due to the change in psychology If you need a home and you can find what you like in this market you can negotiate a pretty good deal. I think part of the problem is the fear people have of making a mistake the shame of it all but sometimes not making the deal is the mistake m

Leo - No, Im not hearing this at all. I dont think the problem has gotten bad enough to start a true trend that would be widespread enough so that we would notice it in our buy or sell side clients.

Ill certainly keep you apprised if I do encounter this though in the future!

Im all for helping people get back on their feet financially.....BUT I live in NYC and prices of real estate here have gone up 5x in the last 10 years and I CANT AFFORD TO BUY AN APT...what about people like me who are impacted by the HIGH INFLATED REAL ESTATE PRICES....what is the govt going to do for me so that I CAN AFFORD TO BUY REAL ESTATE....and all this about how real estate is going down in the rest of the country is so HYPED UP.....the people owning these homes for the last 5 to 10 years saw APPRECIATION in their properties that was dramatic so that a 10 to 20% falloff still leaves them WAY AHEAD>....just seems like the govt is doing nothing to help first time buyers who have been priced out of the real estate market....why not put a cap on home prices - kidding....

Im all for helping people get back on their feet financially.....BUT I live in NYC and prices of real estate here have gone up 5x in the last 10 years and I CANT AFFORD TO BUY AN APT...what about people like me who are impacted by the HIGH INFLATED REAL ESTATE PRICES....what is the govt going to do for me so that I CAN AFFORD TO BUY REAL ESTATE....and all this about how real estate is going down in the rest of the country is so HYPED UP.....the people owning these homes for the last 5 to 10 years saw APPRECIATION in their properties that was dramatic so that a 10 to 20% falloff still leaves them WAY AHEAD>....just seems like the govt is doing nothing to help first time buyers who have been priced out of the real estate market....why not put a cap on home prices - kidding....

Almost everything Christine Toes said fits my spouse and me. Although we rent a beautiful apartment subsidized by my employer (also own a small house in Pennsylvania), we were tired of 10+ years of throwing away rent money and have just reached the moment where our combined salaries matched our modest needs. We found a lovely studio in the 300K range (doorman building in Murray Hill--up and coming 'hood?), offered full price, and simply refused our broker's prompt to start a bidding war (someone else also offered full). Bottom line: We love the apartment and plan to live in it; so no matter what the market does in the near future, we're happy.

Michael makes a good point. There is a lot of talk about people attempting to "time the market." Many people simply haven't been able to afford the market. Or, if the banks were willing to give them a loan, the amount of take-home pay devoted to housing costs seemed prohibitive. I think that's part of what has caused this mess, people have been ABLE and ALLOWED to go in over their heads (and have felt compelled to because of ever-increasing prices), and I think this probably has and will happen in Manhattan also, only our building boom occurred later than most areas so we haven't really seen all of the ramifications yet.

A home is both a place to live and a long-term investment. It has to make some sense on both levels. Most people would truly love to own their home, most are not cowards or over-analyzing investors when they don't go forward.

What a GREAT post! This is what blogging is all about. Congrats!

Here on the East End of LI, everything under a million is in play. Buyers are trading down their dreams and saving both mansion tax (1% of total if over $1M) and peconic land tax (2% over $250K). Most of our wall street buyers are on hold til after the first of the year. Will they make a move in Jan? Don't know yet. Anyone who wants to be in by summer needs to be in play by Feb/Mar, unless paying cash. I expect a big rental season and a late surge buying season in Apr/May.

keep expecting, Michael, keep expecting

Things are really looking up in Manhattan market. There is an increased flow of first time buyers in the market, besides others. But just a few months back we were really worried with the dropping sales. It was the time when we had kept our fingers crossed and patiently waited for things to change. However, it looks like the market has taken a favorable turn. You see I am an agent listed with resortscape.com ( http://www.resortscape.com/default.aspx?ct=r&q=&utm_medium=linktous&utm_source=PT ) and in the recent months there has been an increased number of foreigners investing in our market. Last month only I have sold a farm house to a French couple. This increasing trend has given that much needed push to our slow market. I believe things are really looking up for all of us.

keep believing, asley, keep believing

http://business.timesonline.co.uk/tol/business/industry_sectors/construction_and_property/article3026028.ece

Renting no door man / no roofdeck / no amenities what so ever..for 2500 in soho... Thompson and Prince..... have been saving since graduation and with my some help and wise investing I can come up with 20 % of 500 k - to get a nice studio. So ..after a 30 yr fixed at 6.75 (asuming ) thats about 2500 plus CC and tax = 3200 per month... so for 700 a month or approx 8k a year..I owne in Manhattan ... and have all the amenities I could want..... forgot the tax breaks as well...ooo ,and my GF is moving in and will help we with the monthly as she also has a 2K a month rent...Can someone tell me what Im missing..cause it sounds good to me... all i can think of is my 8k a year plus my 20% or 100K -
in a CD or equivalen..at 5.5 % which is about 6k a year in interest plus my 8k - so 14 k a year is my option .....??????