It's All On Employment Now
I like to follow "smart money" a legacy of my first job working for a firm that researched only companies where "smart investors" had taken large stakes. I recently read an interview in Time Magazine and a synopsis of a speech by Sam Zell at the Executives Club of Chicago. The the famous "grave dancer" vulture real estate investor has time and again bought assets (real estate and many others) when most investors were too petrified. Note his recent acquisition of Tribune Inc. - when most think the newspaper business is dead. He has also been prescient in selling before the last call was sounded at asset parties. Zell will go down in history (in my opinion) for hanging his Equity Office Properties Trust on Blackstone Group and others they re-sold many of the assets to (like Harry Macklowe), just before the real estate cycle ended. I think if I were Zell, I'd be licking my lips right now thinking about the bargains I would be picking up if all hell broke loose....his favorite environment, I would guess. But not Mr. Zell, he denied that his sale of Equity Office Properties was a "top marking event" and sounded an optimistic tone about the real estate business referring to the lack of supply and virtual standstill on new construction....at least as it concerns his Equity Residential Properties Trust (NYSE/EQR).
According to a recent article in the Tribune - which he now owns:
"The new year could bring a new reality for landlords and investors, said Carroll of Cohen Financial. The downtown Chicago leasing market faces 6 million square feet of new offices in development that will start coming online in 2009."But hey, Why talk down your own positions and why bring attention to the fact that you blew out at the top in a bidding war?....you might want to do the same thing again in the future. So while I am a big fan of Sam Zell, I watch what he does more than what he says, publicly. This is because it's easier to understand when assets look priced for perfection than it is to predict the economy....which is why Warren Buffett and Sam Zell don't trade macro bets; they invest in assets they understand well, buy them cheap and sell them dear. It just so happens that this oftentimes correlates well with economic turning points (although many times it doesn't). Zell's bull case for the economy avoiding recession and his apartment owning EQR weathering the storm was largely predicated on the economy sustaining something like full employment. According to the article, "He expressed confidence that as long as the unemloyment rate stays below 5.5%, it was very very unlikely that the subprime contagion would spread". This was based on the idea that fortunately the sub prime mess hit when the economy was strong, not weak. Let's hope the asset implosion doesn't wag the dog.
In a December 3rd speech, Fed Governor Janet Yellen made central reference to unemployment but in my opinion likely understated the risk to the labor market of caution by employers: "To sum up the story on the outlook for real GDP growth, my own view is that, under appropriate monetary policy, the economy is still likely to achieve a relatively smooth adjustment path, with real GDP growth gradually returning to its roughly 2½ percent trend over the next year or so, and the unemployment rate rising only very gradually to just above its 4¾ percent sustainable level. However, for the next few quarters, there are signs that growth may come in somewhat lower than I had previously thought likely. For example, some of the risks that I worried about in my earlier forecast have materialized—the turmoil in financial markets has not subsided as much as I had hoped, and some data on personal consumption have come in weaker than expected. I continue to see the growth risks as skewed to the downside in part because increased perceptions of downside economic risk may induce greater caution by lenders, households, and firms."
So it should be of no surprise to you that all eyes are riveted on Friday's Labor Department Non Farm Payroll Report. Bank lending has been temporarily curtailed by asset losses, the Fed is doing its best to keep a liquidity crisis at bay....and many feel that if we can just get through this extreme indigestion period all will be well again. It comes down to confidence: will employers start to cut back in anticipation of tougher times or will they wait to see how things play out. The early look - an independent survey by payroll processor ADP, which came out this morning - isn't so great. "Private Sector companies in the U.S. added 40,000 jobs in December, according to the ADP employment report released Thursday. It's the weakest growth since 27,000 jobs were added in August." Additionally, exports don't seem to be bailing us out as "Factory employment has fallen for 18 straight months." As Urban Digs has noted, financial service layoffs are still coming, but these firms reportedly reduced employment by 5,000 last month, "The third decline in the past five months."
The other advanced data, Initial Jobless Claims released this morning, read a little better. First time jobless claims fell 21,000, breaking a recent string of increases, but continuing claims kept on rising, hitting the highest level since November 19, 2005.
Hang on till Friday.
Comments (8)
All this gloom and doom looks silly given the recent numbers on NYC real estate. Inventory is way down, prices are way up, and there are many sources of buyers - lawyers, retirees, foreigners, some finance types, as well as people who own businesses, and people who bought 5-10 years ago and now want to trade up to raise a family.
I know buyers want lower prices (I was one recently), but wishing does not make it so.
Posted by Buyer | January 3, 2008 8:01 PM
you sound like a homeowner...I was once too. Here are facts:
that manhattan re report was skewed by high end market BIG TIME! Also, if you compare the 3rd qtr to the 4th qtr you get these data points:
* Overall median sales prices dropped 1.7%
* Overall number of sales dropped 28% from 3rd to 4th Quarter
* Inventory dropped 1.4%
source - truegotham.com
I'll discuss this tomorrow. Most of the gains in that report were early in 2007 and were skewed by two buildings, 15 CPW & Plaza where average sales were $10+ million! The latest data confirms what we have been saying since September. We are not lagging here, we are forward looking and we discuss what is going on now. Some people dont like the prospects and Im very sorry about that, but this doom & gloom that everyone calls it, is us discussing facts!
careful how you interpret these data reports, as it can be very misleading.
And to quote the NY times article:
"The reports noted, however, that average prices were being pushed to record levels because of the increasing number of apartments selling at the top end of the market, above $10 million. Many of these deals were at 15 Central Park West and at the Plaza, two buildings in which 94 of the 1,342 condos sold in Manhattan in the fourth quarter are located."
And CEO of Douglas Elliman stating: “I’m not forecasting high appreciation,” said Dottie Herman, the president of Prudential Douglas Elliman. “I’m forecasting that the market will be flat” in 2008.
Bravo to Dottie for being a realist and not a cheerleader.
Posted by Noah | January 3, 2008 9:25 PM
1.7 percent??? During the winter??? It always drops a few points during the 4th quarter. I am sure you have the numbers at hand and I don't, but 1.7% sounds like *less* of a drop than most 4th quarters over the last decade, as people want to do deals before the holidays.
I work in finance, and I had my best year ever, by a large margin. Good riddance to the turkeys in mortgage packaging. Now they can go get real jobs. The rest of us with brains are doing fine and more than fine, contrary to what is reported on gloom and doom sites.
Inventory is way way down. Sellers are *not* taking their brokers advice to lower prices for a quick easy sale (read Freakonomics). Tons of people want to raise families here. Tons of people want to retire here. NYC is cheap compared to London, Paris or other major world cities. You do the math on prices: low inventory, high demand from the whole world, from all age groups.
You say "I was once too". Sounds like you have tried to time the Manhattan real estate market. Good luck with that. I think it is bad advice.
Posted by Buyer | January 3, 2008 10:06 PM
Also, brokers are not "honest" or "realistic" when they argue for lower prices. Brokers do not necessarily want higher prices, they want quick transactions. The extra 5 or 10 percent matter much more to the seller than to the broker, who financially benefits from moving on to the next property quickly.
So neither the bullish or bearish brokers are more honest or realistic necessarily. The data indicates strongly that Manhattan prices are rising due to low inventory and high demand.
Posted by Buyer | January 3, 2008 10:48 PM
The incomes of New Yorkers who work in advertising, media, fashion, publishing, retail etc, etc. are influenced by the economy througout the US. I am not a doom and gloom person regarding NY real estate, however I would rather hold on to my down payment money as a cushion against an economic downturn or my personal job situation than invest 90% of my liquid assets in real estate. This is a personal decision for me but I suspect others are evaluating their own current and potential incomes to see if it is the right time for them to buy an apartment.
Posted by Pez | January 3, 2008 11:47 PM
Buyer - you raise some very good points. I agree with some and disagree with others. First off, I tried to time the market on the buy side, as I saw a great opp after 9/11 in NYC real estate, and I was very bullish at the time for a 3-4 yr timeline. On the sell side, it was more out of necessity and financial reasons that I sold. Also, the 2nd ave subway work that was coming (I had a direct view on 2nd floor of 2nd ave on 93rd/94th streets)
how could you ignore the current macro environment, the debt problem out there, the change in lending standards, negative sentiment, jobs losses that are coming, the change in sentiment that will bring, etc..are you blind?
And your comment about brokers being wrong to advise clients to lower prices if apt is not selling is just utterly ridiculous. Watch how quickly demand changes if we enter a recession and jobs are lost. FORWARD THINKING BUYER!
Posted by Noah | January 4, 2008 8:34 AM
Me thinks you protest too much. This piece was about the labor market and how critical many continued hiring, which goes along with faith in the expansion is right now. If a recession comes it will impact NYC housing, particularly when its centered on Wall Street. My piece back in the spring "What is up with NYC Real Estate" goes into chapter and verse why NYC is a special case, under built, and has not succumb to the shellackering the rest of the country has. My position stated on Urban Digs several times is that the boroughs will get whacked in this downturn as they are being over-built, and affordability in NYC will improve. I am not gloom and doom on NYC real estate, just realistic, going forward. And hey...check out that employment report this a.m.....ugly...but probably gets revised upwards. Never dwell on one statistical report.
Posted by jeff | January 4, 2008 8:42 AM
I think that there has been a total avoidance in NYC on considering the effects of lowered lending standards in this market. Just six months ago we would have qualified for an apartment with only 10% down and a 10% heloc and no mortgage insurance. Not today. The buyers at 15 CPW and the Plaza are not the same as the buyers at many other developments. Many people scraped together the 10% to get into condo developments where they are now paying 50% of their after-tax income on housing. Banks were underwriting mortgages at 3 to 3.5 times income. The earlier standard was 1.5 times. AND many of these developments have only 5 or 10-year tax abatements, increasing by 10-20% of market value yearly. A $1.35M mortgage with $1500 a month in taxes and $1200 a month in cc's and about $1200 on a $150K heloc is going to run someone close to $12,000 a month. That's just for a $1.5 million condo. Not a lot of room for job uncertainty, divorce, rising health and education costs, etc. Everyone talks about how the co-op standards have protected our market, but most of the sales these last couple of years have been condos.
Posted by Brenda | January 7, 2008 4:56 PM