Yale Club Highlights
If you were unable to attend the real estate panel at the Yale Club last night, you missed out on some great news and views. But have no fear, while Christine & Noah were working (Christine doing the introductions and setting up and overseeing the whole gathering through the auspices of the University of Virginia Club, and Noah playing panel bad boy) I was scribbling away in the audience trying to capture as many of the juicy tidbits for you as possible.
First off, all of us at Urban Digs would like to thank Melissa Cohn (MC) Founder and President of Manhattan Mortgage Company, the number one mortgage brokerage in the country (if I got that statistic right) and Jonathan Miller (JM), President and CEO of the well known appraisal firm Miller Samuel, for serving on the panel with Noah (NR). We also want to thank one of the deans of New York City Real Estate, Michael Stoler (MS), Senior Principal at Apollo Real Estate Advisors and host of the Stoler Report television show for playing host and trying to maintain some semblance of decorum despite Noah's efforts to cause a rumble.
Secondly, I'm not the fastest writer in the world so I can't claim 100% accuracy and what follows are my interpretations of what I heard, actual quotes are marked. I know I definitely missed some points here and there, but I think I have captured most of the informational content. If anyone was there and wants to add their comments, or correct/embellish my re-telling please feel free.
Here is a list of the data points and comments that caught my attention and that I was able to get down on paper....I couldn't get the questions, but the answers are what mattered, so here they are:
MC - June, July, August mortgage apps were in line year-to-year. In October mortgage apps fell about 15% year-to-year. Last 4 weeks we have seen a lower pace of sales, but not seeing price declines. "People willing to pay the price are the people buying the properties".
NR - Sellers are anchoring to peak 2007 types of prices of $1,400 per square foot. They have not yet faced the reality that to move their properties they will have to compete with other listings and offer buyers a margin of safety. I think forces are conspiring for a significant break in prices, it hasn't happened yet, but buyers are going to be in charge soon.
JM - "Properties that are selling are selling in a reasonable amount of time because they are priced correctly." Because of the reporting lag sellers in New York City are usually three quarters behind the market in terms of their price expectations. Inventory is now greater than last year, but lower than 2 years ago.
MS - With all the cranes operating around town now we will be at peak inventory levels soon.
MC - Foreign purchases of NYC properties are down 50% year-to-date. A number of foreigners bought downtown and now need to sell as a result of the world financial crisis. Banks are pulling back from lending to foreigners. There used to be ten that were active, that number is down to four.
JM - A third of buyers in new developments were foreigners, which is double the historical numbers, but new developments are only 20% of sales in the city so the overall impact of foreign buyers has been greatly exaggerated.
MS - Several new buildings were sold 100% to Irish investors through syndicated deals. One building at 23rd St and 3rd Ave ended up being sold by the developer as a college dorm (for NYU?), after the Irish investors who were supposed to take the units pulled out. The building was made for foreign investors, with units that were more like hotels rooms.
MC - People buying today need a place to live or a place to go and that's why they are buying. There will always be people who have some kind of change in their life and need new shelter. Market volumes won't go to zero.
NR - The Hamptons are going down! (repeatedly)
JM - Coops and condos have been about 50/50 in terms of volumes. Coops didn't have speculation. In Q3, there was a 7.9 months inventory absorption rate in New York City, vs. 60 months in Miami and 40 months in the Washington D.C. condo market. There is still a surprising drive to purchase property, but the amounts people are qualified for is way lower than it was.
MC - Jumbo mortgages start at $417,000 and will go up to $625,000 by year-end. With the average apartment costing $2 million in New York, it's a jumbo market and you are losing a whole segment of first time home buyers who just don't have 20% to put down.
JM - Funny thing, banks all of a sudden have questions about appraisals now.
MC - Banks are still relying on closed comps, we have not seen low appraisals yet (where appraisals reflect lower market prices and impact what sellers can realistically list their apartments for).
JM - Tomorrow I am putting out the latest statistics on Brooklyn. (He gave some numbers, but we won't break that news here on Urban Digs). Nothing much has changed from last quarter, but in East New York where there was sub prime credit being used and speculation, prices are down significantly. In contrast to "brownstone Brooklyn" in the northwest has held up much better.
MC - Underwriting standards are now limiting total debt payments to 38 - 40% of monthly gross income and requiring 20% down. Post closing reserves of 3 - 36 months of debt service are required. A credit score of a minimum of 720, up from 660. If your credit score is lower, you may still get a loan, but your rate will be higher. There are no interest only loans available if you have a lower credit score. Probably one of the biggest changes is that there are no case-by-case exceptions made anymore. "New York City is a city of exceptions". Many people work for themselves or are business owners, etc.
NR - "Buyers want to get downturn risks priced into their purchase." Most of my buyers have moved to the sidelines and are waiting for those discounted prices. I am advising them to do so. I would expect the Upper East Side and Upper West side to hold their values the best. I think areas where there has been lots of new supply added like Downtown, Midtown West and the West Village will get hurt more than other areas.
MC - Families want to be in those neighborhoods. Thank god for all the private schools on the Upper East and Upper West sides.
JM - I am not yet seeing a big difference in price changes among Manhattan markets, based on contracts being signed now.
MC - 30 years fixed rate mortgages are 6 7/8 - 7 1/4% vs. 6% pre crunch. Every 1/2% increase cuts buying power by 10%. Things have gotten worse since the bailout was announced, rates have gone up not down.
NR - A lot of investors are seriously looking at curve steepening trades. As a result of all these bailouts, the government is going to be printing, printing printing. With massive treasury issuance upcoming to fund these rescue packages/bailouts, debasing the currency, we could be setting ourselves up where long-term rates are eventually going to go up substantially. The fed can control the short end, but not the long end. Should the credit quality of the USA come into question, should the foreign funders become unfriendly or sell their holdings, the long end will see rising rates and that will affect borrowing costs for everyone. This could be the 5th or 6th chapter of the housing slowdown in the years to come.
MS - 5-15% of all buyers are walking away from contracts on new developments.
JM - I don't see a significant improvement in the market until 2012.
MC - It will take more than a year until there is positive movement in the credit market.
NR - I see a 2 - 4 year downturn in the New York City market. Did I mention that the Hamptons are going down! Manhattan is still considered a 'sexy' investment, as opposed to other markets that are completely hated and filled with fierce sell side competition. We are not there yet here, although the ingredients for the recipe are setting up. The correction is likely to be an 'L' shaped adjustment.
MS - In many cases developers are going to be the ones who break on price. In many cases its no longer in their hands. The banks are now in charge. The projects are costing more than they were supposed to and are selling out more slowly and the banks are starting to call the shots. The big European banks were a significant factor in financing and they are in trouble and are no longer lending for development in New York.
JM - We are not yet seeing any trend to seller financing.
JM - There are serious city financing problems due to the shortfalls from real estate transfer taxes and the city will likely raise property taxes to cover it.
JM - I have not seen appreciable softening in the luxury market. I consider the luxury market to be the top 10% in price or $2.8 million and above. I am more worried about the bottom end of the top 10% bracket or the $3 - $8 million market. This was the everyday Wall Streeter market and is the area that many developers targeted. I am less concerned about the market for apartments worth north of $8MM.
NR - One silver lining from the busting of the commodity bubble (signaling the slowdown in global economies) is fast falling energy prices. While maintenance costs are highly correlated to the management of any one individual building, if the building was well managed and finances in order, you might get some relief in maintenance as energy prices continue to fall. Property taxes are another story. With the city facing serious budget issues now that wall street is done, I would expect property taxes to rise to make up for the shortfall. Collected revenues from wall street were down a staggering 96% last quarter, and this story is not going to change; in fact, the city might owe some refunds to financial firms.
MS - As far as the commercial real estate market goes, commercial office rents are falling and commercial office building prices are down 15 - 25%. Land prices are down 20 - 40% from the bubble like $400 per FAR level.
Comments (22)
Great job last night, Noah & Toes. This is for Toes (and for Jonathan Miller, who gave me a funny look when I mentioned the figures). The article I mentioned was in Forbes (apologies, I thought it was The Real Deal) and found that time-on-market had significantly increased throughout Manhattan (in the West Village by 90%) over the last 6 months.
http://www.forbes.com/2008/10/01/manhattan-housing-slow-forbeslife-cx_mw_1001realestate_slide_2.html?thisSpeed=20000
http://www.forbes.com/realestate/2008/10/01/manhattan-housing-slow-forbeslife-cx_mw_1001realestate.html
Posted by Rick | October 16, 2008 10:09 AM
Thanks JEFF!! I enhanced some comments of mine a bit, hope you dont mind, but for most part you got ir accurate.
I also added the answer to the maint and property tax question from one member of the audience.
Thanks for taking notes!
Posted by Noah | October 16, 2008 10:42 AM
From the transcript:
"5-15% of all buyers are walking away from contracts on new developments."
Does that mean "walking away from their deposits"? If so, that's pretty significant. Could mean that 5-15% of people are ahead of the rest in terms of reality-check. Maybe they work in industries that have leads on where economy/markets are headed and think risking a couple hundred thousand could be worth the opportunities coming up in the next couple of years.
Posted by Yannis | October 16, 2008 10:44 AM
Yannis,
Yes I believe that what Mike Stoler was saying is 5 - 15% of buyers in some new developments are walking away from their deposits. I know I have seena quote in the media regarding a European gentleman who walked away from a $500,000 desposit on a $5 million condo....no joke....that's a pretty costly exit strategy.
Posted by jeff | October 16, 2008 11:28 AM
Noah
Explain your "long theory" re mortagage rates. I understand that the bailout will most likely be funded by massive treasury issuances causing investors to flock to the ten thus raising it's yield, which should cause rates to rise. That should happen in the short term. But what's this about long term? And when, how high, and for how long? Obvi not holding you to exact numbers, just wondering what type of environment.... Are we looking at an 8 to 9 point environment three to five out? Will we hold around six? Are we looking at 10+?
Posted by k91 | October 16, 2008 11:44 AM
Got sick last night so I could not make the talk unortunately. Thanks for the detailed notes.
Posted by Colgin | October 16, 2008 11:53 AM
I think the US will print and take on more debt to fund the recovery of this credit mess. I think global govt's/cb's will print and bail out as well.
I think the treasury market is arguably in a 20 yr secular market, and with massive issuance upcoming, I worry that the treasury market will get bubbly.
As a result of all this, way down the road, there will be a price to pay. Should the credit worthiness of the US come into question by the tradable markets (forget a downgrade, just come in question) OR our friendly funders become not so friendly or they slow purchases of our treasuries, stop purchases of our treasuries, or worst case, sell their T-holdings to deal with their own problems at home, expect the long end of the curve to see surging yields.
Not sure where its headed, but the fed can not control the short end and I think the long end will see rising yields. 10 yr is at 3.93%, and with all this intervention, I think the ultimate end game is a inflationary recession. Perhaps the 10yr goes to 7-8% over the next 2-4 years?
You cant time these things.
Posted by Noah | October 16, 2008 11:55 AM
sorry, meant to say the fed can NOT control the long end, only the short end.
Posted by Noah | October 16, 2008 11:58 AM
Off topic, but Noah what's your opinion on the short-the-VIX trade?
Posted by anon | October 16, 2008 12:55 PM
Noah,
Thanks for the summary. I agree with your speculations about long-end UST risk. It's not really about a downgrade risk for the US. The US can't default. What it can do is print its way out, which is what would ignite the inflationary recession you mention. It's already printing as fast as it can, but bank credit is contracting even faster. Once the banks equilibrate, you can bet the Fed is NOT going to turn off the monetary spigot. Then, blammo.
Too bad nyc real estate lags so hard. I'd like to get in on a 30 yr. fixed right now. Guess I just need to increase my short on TLT.
Posted by Eric | October 16, 2008 1:02 PM
anon - i like it if you can stomach it
Posted by Noah | October 16, 2008 1:17 PM
Eric - your right, the US cant default. And thats not even what I refer to. If the perception of credit quality worsens for US debt, without a downgrade or a default, similar to bond insurers back in late 2007 (the markets downgraded them for the rating agencies), it could cause yields to spike.
Posted by Noah | October 16, 2008 1:19 PM
Great show last night Noah. Nice to hear such strong viewpoints during a time of great instability! Congrats.
I have a couple of quick questions:
1. You predict that the credit crisis is, and will continue to catalyze woes in the economic and finance industries - how do these differ from each other and what will be the effects?
2. How badly affected do you think the infrastructural industries to the real estate business will be? How bad are the knock-on effects going to be for the construction, engineering, architecture, etc. industries?
3. You reckon that the installation of tighter regulations will prevent this kind of crisis from happening again. Nonetheless, is there anything to be achieved by finger pointing, and is anyone taking responsibility anyway? Will uneducated consumers become more educated? Will mortgage brokers (Melissa Cohn...) and lending facilities stop providing misinformation and become more socially responsible?
Thanks again boss.
Posted by Matthew L | October 16, 2008 2:04 PM
Hi Rick, I'm not sure about those numbers. They're comparing time on the market in March to time on the market in September? They're not doing a year over year comparison, which would be more accurate. There is always more activity in the 1st quarter of the year than in the 3rd quarter. There is no doubt that volume is down and time on the market is longer, but I would question whether they are comparing apples to oranges in the Forbes article. Thanks again for coming last night, great panel! - Toes
Posted by toes | October 16, 2008 3:17 PM
Matthew - Thanks!!!
Let me try to answer:
1. The credit bubble burst. Credit went parabolic from 2002-2007. Now its contracting. The end result is killing the banks and other financials. The result of damaged banks, is no lending, not even to each other. The residual damage is in commercial paper, and other debt markets. The end result of this is that individuals and businesses have a hard time getting loans and lines of credit. That means business owners may not be able to place orders, pay bills, or worse, pay their employees until this gets unclogged. The ultimate end result will be seen in job losses and very weak economic growth, and we know how the stock market will adjust to this.
2. Fairly bad. Construction is already contracting big time. Now that commodity bubble busted, a sign of a slowing global growth story, infratsucture plays and mining plays, and steel plays etc., are all getting hit. We have overcapacity. This will result in layoffs across the board, cutback in production plans, cutback in research and development plans, etc..Lets hope that this unintended consequence does not cause energy to rise in the future, but it may if development is choked off. I expect to see plans unfinished, and jobs cut. The effect of equities and commodities getting killed will be many hedge funds going out of business and forced liquidations/deleveraging of all asset classes. I hope to buy in on some infrastructure/engineering plays when prices get too compelling as they overshoot to the downside, just like they overshot to the upside.
3. Yes, we are already seeing it. The lending industry has self corrected itself and tightened its own lending standards on their own terms as a result of the massive losses from toxic holdings. Many companies died out and the sharks are eating the rest. The end result is a smaller industry, stricter guidelines, tougher lending, and eventually heavy regulation of the securitization model that was one ingredient to the parabolic credit boom. Damage to investors on the private side has been done and many have learned their lessons. There will be finger pointing, there will be jail sentences, and there will be lawsuits.
Consumers I believe have become a bit more savvy, pay more attention to what they can afford, do not view housing as a speculative investment anymore (non sexy), and have become more frugal. Saving is in our future and I expect savings rate to rise noticeably in the years to come. Consumers will still have to fix their own balance sheets.
The regulation is likely to come big time on mortgage companies, big banks, appraisal firms, etc..so that fraudulent and shady behavior is very limited.
Best I can do right now with what I see. Things may unravel a bit differently, but the credit world is in such disarray right now, we have to see how the story ends and how regulation is enacted to see how close I got.
Posted by Noah | October 16, 2008 5:22 PM
Hi Toes, and thanks for the response. I did think the same thing when I realized it was a 6-month period and not YOY. Obviously the slow summer months that period captured will skew the time-on-market longer. What gets me still is the sheer volume of the increase. Even w/ a 50% margin of error, that's a 45% time-on-market increase in what many have considered to be Manhattan's most bullet-proof neighborhood. I suppose we'll know with more certainty in the coming months. Thanks again for your efforts in organizing a terrific panel.
Posted by Rick | October 16, 2008 6:39 PM
Noah,
Can you explain the interplay between the pricing and trading of MBS, the T's and mortageg prodcuts? I have read that favorable pricing of MBS could mean favorable pricing of mortgage products (from borrower perspective). Put another way, I guess, is what are better PRIMARY indicators of mortgage product movements (and I know there are lot more factors) - either MBS trading/pricing or T yield/pricing?
Thanks.
Posted by k91 | October 17, 2008 12:09 PM
K91 - MBS trading, but most dont look there. Usually the 10YR tracks lending rates well enough to use as more generalized indicator. read this
http://www.urbandigs.com/2007/11/bond_yields_mortgage_rates_no.html
Dan Green explains how rates are priced for mortgages:
"Mortgage rates are "made" from the price of mortgage bonds using a mathematical bond formula. This is fact. And by exclusion, this also means that mortgage rates do not come from the price of the 10-year treasury note."
Agency bonds are an example of MBS...say FNMA 30 YR bond yield...you can find agency yields here:
https://personal.vanguard.com/us/FundsBondsMarketSummaryTable
under US GOVT AGENCY YIELDS...today its 5.19% for 30YR..watch it the next few days or weeks and if it trends higher, you'll see how rates react
Posted by Noah | October 17, 2008 12:21 PM
thanks Noah,
Just to clarify, higher MBS pricing correlates with lower mortgage rates and vice versA, correct?
Posted by k91 | October 17, 2008 1:11 PM
K91 - correct. Higher prices equal lower yields. Just like any bonds.
Posted by Noah | October 17, 2008 1:14 PM
Has anyone studied the correlation of commercial real estate in Manhattan to residential real estate in Manhattan?
Posted by Nick | October 17, 2008 4:20 PM
Great Show, very enlightening.
Posted by SF Home Buyer | October 21, 2008 2:33 PM