Manhattan Real Estate & The Dollar Rally

Don't forget about ongoing mortgage and maintenance costs. I'm assuming that no banks are going to provide Euro mortgages on NYC real estate. So as the dollar strengthens, the cost of a USD mortgage in Euros increases and becomes a larger burden for foreign owners. Same goes for common charges.

Maybe those buyers were rich enough to not be taking out large mortgages and probably couldn't get the same ltv on a second home across the pond as a NYC resident on their primary residence in the first place. However, it is possible that the movement in fx rates will incent foreigners to sell their apartments (or maybe just repay their USD mortgages faster) not only because of gains on their equity investment but also as it becomes more costly to carry their apartments.

The thing about psychology is very interesting.. Generally most people don't recognize a good thing until it passes them..

Watching the TV show "Deal or No Deal" shows this well..

The European buyer who bought 2 years ago has now been awakened by the possibility of things going in opposite direction.

great point David!! Thanks for the comment.

This whole discussion seems very backwards to me (though perhaps the actual psychology of the foreign investors is backwards, making the discussion accurate).

Until 4 weeks ago, foreign buyers were buying a depreciating asset. Even if Manhattan real estate stayed even or posted mild gains, they still lost money. Now, for the first time, some lucky buyers found a bottom and may have seen some appreciation.

Shouldn't that signal the opposite? Until 4 weeks ago, foreigners would stay away, waiting for a bottom? And now that there is a bottom, time to buy and take advantage of the runup?

Steve - what bottom are you referring to?

Bottom in the dollar's value relative to the Euro. Sure, nobody knows if this is a true bottom or if it'll come crashing down farther soon. But hypothetically, assuming this is a bottom (for a few years, at least).

Here in Tucson AZ we also saw (and are still seeing) demand from foreign buyers (mostly Canada) buyers can purchase amazing winter homes for much less then at anytime in the past. Specifically when you figure in a 30% decline in the prices here.

Or... a Euro (or Pound) investor sees their economy/money tanking and feels the US $ will continue to rise so they get out of their currency while it is still high(ish) and get into US $ via a NYC purchase. Or.. this. Or That... There are many possible ways to take the currency and RE plays to make or lose money. For every deal there is another one on the other side of it. Who cares? Lets just watch where the numbers go.
As for Tucson - the Canadians were/are not fully informed, knife catchers (who may still make out alright since they bought at what looks like the top of their exchange) who, now that their real estate has begun to tank as well as their $, should start to dry up as a prop-up for AZ/NV/CA real estate.

As far as commercial real estate goes. Foreign investors saw New York as cheap due to the weak dollar and because rents in London, Paris, Moscow and Hong Kong are higher, so they believed there was upside here. With the horrific declines in London commercial real estate prices caused by several REIT collapses, I am hearing that UK property investors who haven't lost their shirts are looking closer to home for opportunities these days.

Noah-
While your analysis is accurate, I think you are only looking at one side of the equation, the glass half empty side. The Bear debacle in mid-March scared the heck out of many foreign investors. I had a number head to the sidelines fearing that the dollar would get "even weaker". The dollar finding a bottom (if it has) would give foreign investors 2 ways to win if they buy now: 1-capital appreciation, 2- currency appreciation. Considering that most foreigners bought at higher dollar values, I doubt they are going to pour out of their investments because their losses have been pared. Rather, I think a signal that the dollar is better for the long term will restore confidence and possibly stimulate a surge of foreign buying (in the hopes they are catching a dollar bottom). Just my opinion. Time will tell.

Normally I ignore A Fine's gaseous blather as it's typical broker spin and market-pumping, but he may have a point. But it is funny how he and his ilk have screamed "foreign buyers will save us because the dollar's weakening" and he's now screaming "foreign buyers will save us because the dollar's strengthening".

That said, the effect of a perceived "bottom" could lead to a surge of foreign buyers, although the surge would likely be brief if it is merely a psychological perception of a bottom. We'll see if any surge materializes.

The flipside (to Fine's flipside) is that the costs of carrying an apt are in dollars, which will cost these foreign buyers more. Further, the NYC real estate market is not a very good investment now from a peak-price standpoint AND a rent v. buy analysis. Downside risk is much higher than upside risk.

Furthermore, there are much lower risk ways to bet on currencies than an illiquid asset with high carrying costs that is still at its peak and just at the beginning of softening.

Finally, Europeans who have been on the sidelines have just seen their potential second homes go up in price by 10%. In a weakening economy, will that lead to MORE buying or LESS.

Sorry Fine, the more I think about it, the less I buy your spin. But "A" for effort.

Andrew Fine,

You are assuming these European foreigners have unlimited amounts of cash..

an 800k apartment is now 880k for them, I'm sure they can just pull out 80k from thin air and have no problems with a loan esp since their own local economies are starting to fade...

It would be interesting to see 'facts' if the average foreign buyer is a multi-millionaire or an average joe speculator who was able to get a easy loan...

Beanz- (I'll lay off an easy gas reference), most investors would rather sense a bottom than "catch a falling knife" as they say on the street. Yes, a cheap dollar has helped our real estate market enormously, and there is no doubt that if the dollar had a huge rally it would be counter-productive to our market.
I think the key is a restoration of confidence in our market. I have little doubt and plenty of empirical evidence that the Bear Debacle in March sidelined many foreign investors. A sense of a bottom in the dollar and restored confidence could go a long way. Time will tell. I fully respect both your opinion and Noah's.
Oh, and thanks for the "A" for effort.

uwsider-
The down payment requirements for foreign investors are typically far higher than for a US citizen with a ss#.

Andrew - great to see you commenting here!! I read your blog.

My response would in summary would be this: LOCAL CONFIDENCE

The fact that the US dollar caught a bid, and the uptrend may have begun, in theory, should mean that it is a good time to buy US assets to ride the wave. However, that in my humble opinion is more theory than reality. A headfake.

Investor psychology is more geared towards getting more deal for the buck, in which case the dollar weakness presented an ongoing opportunity to buy cheap US assets, even though the asset may further devalue as the dollar devalues. I think the chance of a generalized buying spree on the basis of a stronger dollar is VERY MINIMAL. The reason lies in where the purchaser is.

They are at home, in Europe, where their economy/media/blogs/markets are now dealing with a slowdown that is causing their local currency to lose value against the dollar. That force is very hard on investor psychology and in that state of mind, buying a speculative property/2nd home property in Manhattan or for investment purposes, is likely to be greatly diminished. Rather, they will focus on tightening their own belts at home preparing for the slowdown that is coming.

Ask yourself this, 6 months ago, would you consider buying in Europe because the currency trends were upwards, just as our economy was shitting the bed? Probably not!

It’s a great argument, up for debate. But that is how I stand on the dynamic. Thoughts?

AFine - I truly think you're stretching. But I've read your stuff unwittingly before and expect that you would do and post anything to talk up the market.

But that aside, here's why you're grasping at straws:

Foreigners buy because (1) they want NYC real estate and (2) they can afford it.

A weak dollar contributed to their ability to afford it. The dollar's recent strengthening just made their investments 10% pricier. Hey, I took economics - I truly subscribe to the theory that higher prices generate lower demand. Unless you're saying Europeans have a positively sloped demand curve. That would be a new one, even by your standards.

The argument that foreign investors will want to ride the currency wave is dubious. Why would I invest in NYC just to ride the currency wave? Can't I just invest in more liquid, more efficient vehicles rather than real estate, which has so many other variables and may be overpriced?

And you will say "but they have tons of money - they don't care." Sorry, the "buyers are stupid and indifferent to prices" argument doesn't fly with those who have a functional cerebral cortex.

And you will say "they will rush into the market now" to take advantage of the bottom. And I will say doubtful, my little broker friend, because if they were sitting on the sidelines until now, they are probably watching their pennies. And if they're watching their pennies, why would they jump now that property is MORE expensive. Can they jump in now? Can they afford as much apartment? Wouldn't they have purchased when they could afford it?

That doesn't even take into account the many other drivers of foreign demand, such as their own local economies (disposable income, net worths).

AFine - make yourself sound credible. Address some of these other issues in your blog.

From what I heard, the US dollar has not rallied against the Yen. Won't that mean more buyers will be buying in Manhattan from Asian countries, as well as wealthy Arab states such as Dubai?

From my observations of Price Appreciation and demand over the last 10 years in regards to housing, I don't see that if the price goes up there is less demand.

In fact, the opposite occurs. When Price appreciates, the hype causes an enormous piling up in the asset. A bubble.

If Price Appreciation causes lessing demand, then we would not have a bubble, right?

Now, we are in a contraction in the housing market. Prices are falling... and guess what. It continues to fall further. So, it seems that when the price falls, demand further deteriorates.

These are observations. I'm sure everyone would agree here, no?

So, it may be that in the short term, foreign buyers may take the ride up in the Dollar until they sense a top.

Then it would make sense for them to sell again when the Dollar reverses on the down side.

The funny thing is that logic and the psychology of people do not mix. We don't buy large assets the same way we buy shoes or TVs. We buy those smaller items when they are a bargain price. When they fall in price.

But for larger items..... we jump in to make a killing before the reversal at the top.

Any comments?

Noah- Thanks, I'm glad you read my blog. I am a big fan of yours as well.
The argument I keep hearing is that foreign demand will go down 'because prices just went up 10%'. All I am saying is 10% from what? If you perfectly timed the currency market and bought NYC real estate? Everything is relative, isn't it? I think the cheap dollar attracted investors for a long time on the hopes that it was actually cheap, but it got only cheaper. When Bear Stearns collapsed, IMO confidence went out the window taking foreign investor confidence with it. Now that there is some stability (and perhaps the very worst is over), confidence is creeping up and the foreigner may be coming back in. If it was an option, I would underline the word may in the last sentence.

Investor Llew- interesting observations.

Beans- You have some valid points, but your whole theory assumes that it is somehow middle class europeans buying with 10% down and now they are freaked out that the euro economy is hitting the skids. And again, 10% pricier from what? A perfectly timed bottom? On a relative basis the dollar is still cheap (just look at a long term chart).
I'm just engaging in a healthy debate. You could lay off the insults, it would make your opinion seem more credible.

Andrew - few things. In reality, the credit crisis started in JULY of 2007, and some can argue before that when subprime started to show issues at major banks. However, most here in the US didnt really notice the severity of problems until Bear Stearns collapsed. So, in my opinion, most main streeters are late to acknowledging when a problem this big really starts. I am on record stating that I believed confidence in our market started to decline (more cautious buyers) back in AUG of 2007, 7 months before Bear collapsed. It was not generalized, but enough to warrant me going on record and reporting it here.

http://www.urbandigs.com/2007/08/does_investor_psychology_matte.html

Once BEAR collapsed, the headline shock bolted the naysayers into reality, and only then did they really start to believe what credit deflation and a credit crisis is capable of.

Second, do not discount PERCEPTION! Perception affects confidence, and confidence affects investments. True, the dollar is 10% stronger agains the Euro in past few weeks, and technically, US assets are 10% pricier than they were 2 weeks ago, but it is the perception of more expensive US assets that does the damage to the psych of an overseas investor.

Third and most important, is locality. This is by far the most important, direct aspect to a declining foreign currency. Lets discuss currencies that are declining against the dollar for this discussion. The Eurozone is slowing and slowing fairly fast! They have been dealing with the credit crisis, just like us, for almost a year; except their economy continued to grow while we opened the spigots on monetary policy to quell slowing growth. Now, its their turn. Trichet acknowledged a slowing Eurozone, and for a CB with a single inflation mandate, that is strong stuff. That started the wave of media stories on the coming Euro recession, or sig slowdown. How do you think that affects local confidence? Its tough over there, trust me, I know investors there and talk to them often. Spain, Ireland, Germany, France in particular. Even my wife's home town of Czech republic is slowing. This affects local confidence, and investors over there who may have normally took on MORE RISK and MORE LEVERAGE to buy US based assets on the cheap, are going to diminish.

Finally, the cheap dollar DID attact many foreign buyers into our market. That DEED IS DONE! Its over. It happened. People dont get this. We are at now now. What happens to that inventory, that is likely a speculative purchase, an investment purchase, or a second home when the buyer starts to get crunched at home with a slowing economy? Think ahead. Think outside the box. If anything, the level of NEW DEMAND from foreigners will go down, especially when reports for Q4 2008 and Q1 2009 come out for Manhattan showing price drops (mainly from the removal of hyper high end closings from past year quarter results). That in and of itself will affect psychology. Nobody wants to buy a depreciating asset, and contrary to all the 'cash on the sidelines waiting for a downturn', when it comes, the herd like mentality kicks in and buyers back off, so they do not catch a falling knife.

There are far easier ways for Europeans to benefit from a strong USD rather than messing with real-estate in a market of questionable health & excessive investment.

Jumping quickly into a soft, illiquid market and assuming the market risk for the next several years would seem a bit irrational in my view. It would be much easier for a foreigner to invest in the USD via the futures market (assuming leverage is desired) and allow Manhattan market values to digest the obvious & serious financial problems at the city, state & private levels. In the meantime, they can simply check into the Four Seasons and relax.

On the flip side, if the current currency trend direction continues and foreign property values further decline significantly, you may have American investors begin to look for values abroad. This has happened before & there is no reason it cannot happen again. It would be interesting indeed if us Americans became the "new and improved foreign investors" with the deep pockets to bail property owners out.

Granted there may be a little less buying from Europeans, but they certainly will hold if one presumes that they are trying to capture the currency benefit of dollar appreciation as a main reason for their Manhattan investment, and given the dollar peg in much of Asia, there is the possibility of renewed interest form there as the dollar comes back (if, indeed, this is not a head-fake).

Well... since everyone seems to be ignoring observations, I will add just one more in hopes people are paying attention.

It's fairly easy to recognize a down turn in GDP. GDP down turns happen when Unemployment is AT IT's LOWEST!

There are real psychological reasons why this happens. But look at a graph that charts Unemployment and GDP. You will see that UE will first bottom out and then GDP follows.

The psychology behind this is that businesses tend to be optimistic and unaware of the upcoming economic event when the Economy is overheating.

So they hire as much as they can, optimistic that the current trend will continue. But, of course, the are incorrect. The *hit hits the fan, the economy turns, businesses forecast doom and gloom and wallah!! They start laying off and firing employees. Causing UE to rise more dramatically.

Interesting, isn't it?

So, those that ignore the psychology of the markets will always be in the wrong direction. That includes Housing.

Well... since everyone seems to be ignoring observations, I will add just one more in hopes people are paying attention.

It's fairly easy to recognize a down turn in GDP. GDP down turns happen when Unemployment is AT IT's LOWEST!

There are real psychological reasons why this happens. But look at a graph that charts Unemployment and GDP. You will see that UE will first bottom out and then GDP follows.

The psychology behind this is that businesses tend to be optimistic and unaware of the upcoming economic event when the Economy is overheating.

So they hire as much as they can, optimistic that the current trend will continue. But, of course, the are incorrect. The *hit hits the fan, the economy turns, businesses forecast doom and gloom and wallah!! They start laying off and firing employees. Causing UE to rise more dramatically.

Interesting, isn't it?

So, those that ignore the psychology of the markets will always be in the wrong direction. That includes Housing.

Interesting. I think that foreigners have impacted the market mostly at the higher end, say 3 mil and up. These people bought because they wanted a place in Manhattan, and maybe they found the price to be cheap as well. I don't believe that foreigners have had an appreciable impact on the lower segment of the market, and that there was just a lot of hype on the subject by brokers to entice locals to buy.
These wealthy foreigners don't view their Manhattan apartment as a major part of their financial portfolio, they will sell whenever they want to sell, and the currency rate won't matter at all.
The reasons why Manhattan real estate will continue to fall in price over the following several years are:
1) More expensive mortgages that are harder to get with more money down.
2) Weak wall street bonuses/weak financial sector in general.
3) Weak local economy due to the downturn on Wall Street.
4) Dimunition in quality of life as service get cut to make up budget short falls.
5) Increasing inventory.
6) Fewer streams of demand (e.g. retiring baby boomers, people buying apartments for their kids because they think prices will go up.)
7) Inferior leadership in Mayor's office after Bloomberg leaves.

The stronger dollar may adversely impact tourism, which will in turn further strain the government from a revenue standpoint, and therefor have an ancillary impact on real estate values. However, the foreign purchaser has been a red herring, and the idea of these people buying and selling as a form of currency arbitrage is too attenuated for me.

I enjoy following your blog! The Bend Oregon real estate market continues to slow. It looks like a good time to buy in your area.

MH23,

Bravo! I hope your lists comes partly from reading all my posts here the last few months on NYC quality of life issues, etc. I think the factors you site are the ones people should be focusing on. The foreign buyer issue is probably over-hyped. I agree whole heartedly the view that the recent trends in real estate worldwide shifted from supply/demand driven (with normal elasticity curves) to hype driven and that we are on the backside of the "real estate is the key way to build wealth" trend which is a negative albeit a minor one. People moving to New York to take high paying jobs and experience the cosmopolitan lifestyle of the few world financial capitals is the key for New York real estate now. The outlook is currently a little shaky. I will through out one new factor, which is that city's with strong mass transit systems are the most cost effective places to live in a world where energy supply, not money supply will be the gating factor for growth. One this count NYC scores big time and this should be added to the positive side of the ledger.

I definitely agree with mh23. The biggest hit industry is banking and there will be a big loss of money for NYC residents. What would really turn back prices would be an exodus of people due to lack of jobs. I don't think foreign demand affects homes worth less than $500.