Who Wants A Depreciating Asset?
A: The topic of this post really does go against mainstream media, bullish brokers, and naive buyers who are always late to the party. Putting fundamentals aside for a moment and taking a peak at what our future may bring, you can't help but notice the warning signs to the broader economy. And to be blunt, I don't care how strong the currency trade is here for our market, if the US were to go into a recession (whether it be soft or outright nasty) the real estate market in Manhattan will quickly change! The Case-Shiller Index released this morning showed a broad based decline across all metro areas measured. While not shocking, we must note that as the housing market continues to decline, wall street and the securities derived from loans on these homes will cause more problems and we will move one notch closer to a recession. As far as investing is concerned, nobody wants to own a depreciating asset!
Where to begin, how about the media! I was late in reading this NY Times article titled, "New York Condos Lure Deal-Seeking Europeans" but was immediately fed up when I got to this statement added in by the author:
"While natives remain wary about real estate and worry about bonuses and the economic climate, foreign tourists are keeping brokers busy with their eagerness to buy up Manhattan apartments, which many see as investments."So, are we basically saying that foreigners don't know sh*t, are completely clueless when it comes to our slowing housing market, and are blind to the economic warning signs that are expected to hit not only in the US, but abroad as well? Is this what we are pinning our hopes on; the foreign investor? Read "Does A Weaker Dollar Accelerate Foreign Demand", for my take and other top brokers' take on foreigners in our marketplace.
What happens if the dollar rebounds? Are brokers and journalists going to switch their argument from "well, Manhattan is supported by a weak dollar and foreign demand" to "well, a strong US dollar is a sign of a strong US economy and with that comes strength in real estate"? Put me down for this quickchange in broker babble to occur at some point in the future. All BS'ing aside, I like to discuss investment strategies, real data, real macro trends, and how that all may affect asset classes. And I'll tell you one thing, NO ONE WANTS TO OWN A DEPRECIATING ASSET!!
On to the data. According to the Case-Shiller Home Price Index released this morning:
For a visual on this, please see the chart:
Housing downturn cycles tend to take a while to play out. First comes the drop in buyer demand, which leads to low sales volume and inventory building, which leads to weak data reports magnified by mainstream media, which encourages more drops in buyer demand, which causes prices to fall, which hits the investors holding securitized mortgage bonds, which infects the financial sector, which leads to higher lending rates, fewer loan options & tougher underwriting rules limiting who can even get a loan, which restricts buyer pool further, and on and on and on! Those in-the-know of macro trends tend to get cautious ahead of the curve, never timing it perfectly, but also not exposed to the pain & loss that hits home for many naive buyers and blind speculators who think the game will go on forever; (hmmm, go back to the above mention of the NY Times article and foreigners buying now even while "natives remain wary about real estate and worry about bonuses and the economic climate").
While the Case-Shiller Index is rear-view mirror and doesn't apply to the Manhattan real estate marketplace (read my post here why), it still is a dataset relied upon by the financial markets to monitor the national housing market. While not a leading indicator, it does paint a grim picture on housing and if the national market continues to tumble in 2008, then the pain will extend to wall street, the credit markets, and the financial sector and put us that much closer to a recession. No one wants a depreciating asset; not a homeowner, not the banks, not the investors holding mortgage backed securities, not the fed, and certainly not a prospective buyer about to put their money to work. This last part is not as cut and dry though as everyone needs a place to call home.
If a recession were to hit the US economy, than stocks will price that in ahead of time and continue to drop until the cloudy picture clears up. Corporations will get defensive and cut jobs, pay, and spending. The combination of a negative wealth effect and lack of security for one's job will certainly have an impact on buyer sentiment here in Manhattan. Sales volume will quickly slow, inventory will quickly build, and sellers will be faced with something that they had the luxury of not dealing with even as the national housing market crumbled; fierce seller competition. When speculators, foreign buyers, and distressed sellers join the normal every day sellers that just needs to unload a home at the same time, you will know the lagging slowdown finally hit Manhattan. We are a market so closely tied to wall street, and almost everyone on wall street knows there is danger in the air. Recessions do occur, downturns do occur, and housing is a market just like every other; it can go up & it can go down. Manhattan is no different; it is just much better positioned & protected. Think of Manhattan as the General Electric of the housing market, and to keep up with the analogy, I would call markets like Miami, Phoenix, & Las Vegas the ETOYS of housing.
Posted by anon
Wed Dec 26th, 2007 02:58 PM
Noah - a couple recent observations.
1. It seems that we've reached the point here in NYC where the press and the brokers are holding up foreign buyers as the last light in the local real estate market. Whether or not that is dumb money is one question, but the real unacknowledged fact is that that only applies to condo demand. It'll be very interesting to see what happens to coop inventory.
2. The rent vs. buy equation hasn't made sense for buyers in years. The difference is that that equation has largely been ignored in a rising market. Now, not only are folks doing the math more, but rents are actually softening. (One free month at Ludlow, free months in Fidi).
When you actually sit back and think about the market rationally, it's a very dangerous place to invest right now. The market has been fueled by emotion more than reason in recent years - we'll see if that still holds up.
Posted by confused
Wed Dec 26th, 2007 03:10 PM
I am going through the whole rent vs. buy dilemna now.
On the one hand, seeing truly beautiful apartments not get snatched up during the first 30 minutes of an open house makes it very tempting to make low offers.
On the other, I have very cheap rent now, and no 10 plan for being in the city.
I've been in the market to buy for over a year now, but perhaps the time isn't right?
Posted by eric
Wed Dec 26th, 2007 03:10 PM
You had to laugh though when you read, “They’re not really sophisticated investors,” Ms. Somekh said. “But they thought, ‘Where else can I put my money?’”
Maybe they should consider buying up consumer debt...
-Unpaid Credit Cards Bedevil Americans
http://biz.yahoo.com/ap/071223/credit_card_crunch.html?.v=5
Posted by Jeremiah Arn
Wed Dec 26th, 2007 03:37 PM
Those are solid insights, Noah. Even though our market is different here in the Midwest, a basic economic principle is a commodity is not doing well when it relies on less-educated speculators to continue a boom. Housing is just a little more confusing because of that 'home' factor.
One thing an objective investor can do is compare a commodity in nominal and real terms. For example, an average home purchased two years ago at 5% appreciation seems like it's gained 10%. But compare it to oil or gold and the value has dropped 36 and 57%, respectively. Uh-oh!
Posted by Noah
Wed Dec 26th, 2007 03:56 PM
Eric - ha! I know I was considering putting that line in there but decided not to get too many enemies from the article!
Posted by Noah
Wed Dec 26th, 2007 04:01 PM
confused - DO NOT give up an insanely cheap rent just because you have an urge to buy! Consider the opportunity cost! What could your money be doing for you otherwise?
Buying takes up alot of money, has high trasaction fees to close the transaction and realize profits, and will cost you more money on a monthly basis before tax benefits, and possibly even after!
Unless the rent is not cheap, and your timeline to own is 5+ years, keep renting!
Posted by Sang
Wed Dec 26th, 2007 04:58 PM
Hey Noah, it's been a while!
Glad to hear things are doing well. I totally agree with you on this- it's a cling of hope.
Foreigners will not buy something that has a higher chance to depreciate than appreciate just because it's 'cheap'.
Not unless the foreigners are Sovereign Wealth Funds who have extremely long time horizons and don't mind depreciating assets in the short to mid term.
No, these foreigners have to worry about their local real estate market first. The UK's bubble looks like it ready to fizz (it's already started its decline). Same for many other markets. Psychology about real estate in general (always goes up, can't go down) will change mighty quick once they realize that real estate at home is sinking.
Media et al. clinging on to hope. Much like the retailers are.
Cheers!
Posted by elljay
Fri Dec 28th, 2007 04:21 PM
quick question regarding renting vs buying:
when you say "cheap rent" do you mean cheaper than you'd pay on a monthly mortgage or cheap for the area or something else? i live in the east village, on a great block. it's a small studio but a good layout with a loft bed in a seperate space. i pay 1199 and it's a rent stabelized apt. does this constitute cheap? do you think it's foolish for me to continue looking to buy? thanks!
Posted by Noah
Sat Dec 29th, 2007 01:46 PM
yes, I would say that is good considering area. If you buy, your cost would prob double, you would have transaction fees, and you would lose potential income on that money if it was working elsewhere for you. You also will not be building wealth or taking advantage of tax benefits, but in an environment as uncertain as we are now, where prices could easily be pressured, I would NOT rush into buying.
Posted by IT Certification
Tue Apr 7th, 2009 03:52 AM
I don't think that any one wants depreciating assets.