Looking Ahead In A Rear-View Mirror?
A: An appropriate title for what I would like to discuss today. Who the hell cares what happened during the bonus season in 2007? Who cares what happened during the summertime. That's over now, and to grasp what may be ahead of us we must analyze current buyer confidence and try to understand why that may go up or down; which brings us to the bigger picture, the macro economy. Last week's bullish real estate report on Manhattan was a lagging report. Which is fine, but be careful not to believe anyone's future predictions if they are based solely on this report! That would be like trying to look ahead by glancing into your rear-view mirror!
For the record, I started discussing a dip in buyer confidence back in August, about 3 weeks after Bear Stearns kicked off the now infamous mortgage problems & credit concerns:
"New York City real estate still needs more inventory to meet demand. While I am still assessing whether the current credit concerns are infecting us here (nothing yet other than some psychological concern), the more important trends to watch are inventory and price points. "AUG 27th --->
"Today I would like to discuss the change in psychology that I am noticing due to the 5-6 weeks worth of headlines around the current credit/liquidity squeeze.I was very clear in stating that accompanying this dip in buyer confidence was a continued tight level of supply in the Manhattan real estate marketplace. I spent part of September discussing the very tight inventory, and the significance that it will play in holding prices steady for the time being:...Combine these changes in thinking and what you get is a MORE CAUTIOUS BUYER more willing to sit on the sidelines than to jump in and bid close to ask."
"Out of all the variables out there to analyze a local housing market, look no further than the buyer characteristics of that marketplace to get a solid sense of what inventory trends probably are. The two are most likely related! Right now in Manhattan, inventory has declined 32% in the past 12 months and is only showing some signs of increasing in the past few months; but nothing concrete enough to make any trends yet. The reason very well be because of the healthy buyer pool that caused this restriction of inventory in the first place!SEPT 24th --->Moving on, as long as inventory remains tight in Manhattan prices will be sustained! Which brings us to what may affect this trend..."
"Inventory in Manhattan is very tight, and as a result, prices are holding and buyers scramble to find a product that meets their needs. I think the headlines of the credit squeeze, along with higher rates and tighter loan standards has had a psychological effect on the buyer pool by pouring some caution into the minds of would be buyers."Now, action that occurred during July, August, & September will be reported in the 4th quarter that covers closings (amongst other data) for the months of Oct-Nov-Dec, lagging but right now the best source of information we have to analyze the New York City housing market. Which brings us the bullish report that Elliman released last week. I thank Doug Heddings for breaking it down and pointing out a few very important items:
4th QUARTER 2006 ---> 4th QUARTER 2007 (via TrueGotham's breakdown)
Great stuff, but as Doug points out, highly skewed due to the 90+ ultra luxury units that sold at The Plaza & 15 Central Park West.
What do we know? We know the bonus season (JAN-MAY) of 2007 was very active. We know that foreigners signed many a contracts, especially in new developments in the first half of 2007 due to currency trends. We also know that inventory got taken down sharply as a result, leaving us with very little supply for the remainder of 2007. After all, did you know that we had a total of 6,236 units available for sale in December 2006, and only about 5,000 units or so available for sale exactly one year later! Thats a decline of about 21% or so if I'm not mistaken.
So what has happened now that this world (credit crisis, recession fears, rising unemployment, declining manufacturing, tighter lending standards, rising jumbo rates, massive uncertainty on wall street, declining stock prices, declining confidence, etc) is very different than it was this time last year? Let's take a look at what Manhattan real estate did from the 3rd quarter to the 4th quarter (that is, once the scarier world described above began), and be very cognizant of the fact that this market is seasonal and generally slows down as we near Nov-Dec:
3rd QUARTER --> 4th QUARTER (via TrueGotham's breakdown)
Hmm, a result of the seasonal slowdown or the credit crunch; or perhaps a bit of both? It's clear much of the bullish data occurred in the first half of 2007. We can see that Manhattan real estate slipped in terms of sales price, days on market, sales volume, and listing discount during the final 3 months of 2007. Even as inventory continued to shrink by 1.4% (probably the result of sellers taking listings off the market before Thanksgiving), days-on-market rose as it took longer to sell a property.
UrbanDigs Says: Recall the title of the post right now and the forward looking nature of this site. What makes this time around different is that as the seasonal element will shift from generally 'very slow' to generally 'very active' (end of year slowdown ---> bonus season pickup), the macro environment continued to deteriorate; evident by rising unemployment, rising uncertainty, falling stock prices & future financial sector layoffs that are widely expected to come. All of this a result of the credit crisis and meltdown of subprime mortgage markets.
You can't look ahead by glancing into your rear-view mirror! What happened, happened, and is over and done with. We must look at where we are now, both economically & on the streets of NYC real estate, for any indication of where our market may be heading! And right now I am concerned about the economy, job losses, and recession possibility/severity, that may contribute to a further dip in buyer confidence. The situation must be respected and watched very closely. Even in this circumstance, inventory must reverse course, and build substantially BEFORE we see any significant pressure on prices.
Comments (8)
boooooooo, no comments!
Posted by Noah | January 7, 2008 5:06 PM
Dont forget that Interest Rates are coming way down which will re-fuel the market even more. You can do 5.5% on a 5/1 Jumbo already. Get another 75-100bps lower (which is coming) and the afforability levels go way up again.
Posted by Mike | January 7, 2008 5:26 PM
Mike - true but lets not forget that lending rates are NOT directly tied to fed funds rate. They should go lower, but not nearly as uch as you would think given the repricing of risk and new focus on quality of credit.
In addition, if fed does lower that much it is because the US economy is in such bad shape that they are choosing to ignore inflation pressure to instead focus on growth.
My point, its not as cut and dry as rates go down and housing goes up.
Posted by Noah | January 7, 2008 5:53 PM
Mike,
If low rates were truly the answer, Japan's RE would not be 50% off the peak after 10 years when their rates are 0.5% !
Posted by uwsider | January 7, 2008 6:12 PM
Plus, what's the hurry? I can't see the Fed having any room to raise rates anytime soon, so why should that be such a great impetus?
Posted by Brenda | January 8, 2008 9:55 AM
You cannot compare Japan to NYC. No way. They had as asset bubble much larger than anything we can ever seen and you cant compare those apples to oranges.
Second, yes, mortgage rates are not tied for FF but they are tied to treasuries and the economic slowdown will continue to bring yields down. You will see the 10yr bond below 3.5% this year, you will see the credit crunch stabilize by continued foreign cash infusions, and you will see mortgage rates continue to come down. They will not go as low as last time as the risk spread will be higher, but they will continue to come down.
Posted by Mike | January 8, 2008 10:13 AM
Mike - the real issue is LIBOR not treasuries. You must not be a mortgage broker.
Posted by anon | January 8, 2008 11:59 AM
anon - Not to start a fight, but LIBOR is not what "new" mortgages are based off of, its what resets are based off of. Second, we dont care so much about LIBOR in manhattan. We do care in most of the other country, but not in Manhattan. Values have not gone down in Manhattan to date. The problem in the rest of the country is that not only did they buy houses with 0-10% down on a floating rate mortgage, but they cannot refinance as the value of their house is now so much lower, their LTV is >100%. They dont have the capital necessary to put up to refinance. That is not a problem in Manhattan as LTVs are only getting better. In NYC, you can refinance at will, buy more apartment at will as rates will continue lower.
Posted by Mike | January 8, 2008 3:54 PM