NY Times: "A Downturn Begins"
A: Mother Media is starting to publish the headlines that readers of UrbanDigs knew well in advance! Honestly, this report to me is a bit early as mixed results show the downturn in some areas, but not all. I am still on record for the nasty price reports to come out in 1Q of 2009 or so, released in early April 2009, showing price declines across the board. If I had to estimate where we are right now, I think we had the quick adjustment of 12%-18% from peak levels already, with pockets of distress doing deals at lower levels or wherever a serious bid that can get financing comes in at. Even though this report is earlier than I predicted, the effects will not be.
The NY Times front page of the real estate section states, "A Downturn Begins":
Median prices in Harlem and East Harlem were down nearly 20 percent, to $440,000 at the end of this year’s third quarter, from $549,000 at the same time last year, according to data from Miller Samuel Inc., a real estate appraisal and consulting firm.It wasn't all bad, as some neighborhoods including the UES, UWS, & FiDi showed price increases; but don't get too excited folks because that is the lagging data talking where plenty of new developments are still being closed. We are at now now and I will tell you that the price that deals are happening at in ALL neighborhoods in Manhattan are down right now from peak levels!
Similarly, condominiums in Midtown East and Turtle Bay dropped 18.6 percent, to $1.197 million from $1.47 million; and condos in Midtown West and Hell’s Kitchen dropped 8 percent, to $1.01 million from $1.099 million.
You read this blog, you are ahead of the curve. As I said to you guys in July's "Preparing For Price Reports w/out New Devs" piece:
"...Price data is lagging and misleading, and just as it mislead on the upside and brought unwarranted happiness to many homeowners out there, it will also bring unwarranted depression and media headlines! Be prepared, be ahead of the curve, and understand that when it happens it will probably cause interpretations to be exaggerated as a market that just eroded!"So here is the report, and people probably think the market just fell in the past month or so. Not so, this has been happening for 8-12 months at least already as buyer confidence started to decline with the beginning of the credit crisis. I went into more detail in July, some 4 months ago, in the "Low Ball Bids & Cold Feet" piece:
"If you come here mostly for the front line, real time conditions here in Manhattan, I would have to describe the buyer confidence level as one of low ball bidding and cold feet. Eventually, this will cause a media problem for us; because what went into the price data to skew it upwards, will eventually come out and skew it downwards. As the upside data came out, it painted a misleading upside picture. When the downside data ultimately comes out, it will be equally misleading as a market that just fell off a cliff."For any broker that is just now realizing that this market has some upcoming problems and that prices are only now starting to turn, you are ridiculously behind the curve! Denial is a powerful force and it's understandable that brokers do not want to hear any negative news, data, trends, or near term predictions for fear it may bring down their business. Brokers get paid on commission and have a vested interest in you buying or selling. As such, trust, honesty, and unbiased consulting from the client's point of view must be earned. Falling for broker babble in times like these is what the greater fool theory is all about.
Lets be real here. The market is adjusting to an unsustainable appreciation in housing prices resulting from:
a) boom on wall street; jobs and equity markets providing positive paper wealth effect
b) parabolic credit boom
c) easy money & exotic loans
d) cheap money & artificially low rates
e) strong local economy
f) weaker dollar brought in outside investors
g) tight supply
h) 70% co-op housing stock limiting speculators
i) new dev building boom promising that the sky is the limit with potential profit
j) higher quality of life, cleaner city
k) trend to live closer to where you work
etc..With the exception of 'h', 'j' and maybe even 'k' still, all of these fundamentals have reverse course with great speed and depth. Housing & credit deflation has murdered wall street and we are in the early phases of the job loss cycle in the financial sector that will ultimately lead to slower consumption, conservative behaviors that will exacerbate the problems to retail as time goes on. The job losses that start on wall street will eventually lead to the restaurants, real estate sector, gov't jobs, retail jobs, and on and on. As with most cycles, the process feeds on itself.
Manhattan is not immune, and we are in the first phase of the downturn right now where the initial jerk downwards from the peak reveals itself. As time goes on we will see who must sell and who overexposed themselves. That is when things get hairy. My concern is that the media will enhance the decline of buyer confidence to the downside, just as it enhanced confidence on the upside during the boom.
Most brokers would have you believe that there is 'sideline money' waiting for a 5-10% drop to swoop in. This can NOT be further from the truth! Humans generally react with a herd like mentality and when the reports start to come out that a housing market downturn begins, buyers usually back off for fear of catching a falling knife. If you believe brokers, a report like this will bring in droves of buyers seeking a bargain. If you believe what I am saying, reports like this will result in further declines of buyer confidence, weaker bids placed, and the backing away of buyers who weren't sure if now is the right time to jump in. As I said in December 2007, "Who Wants A Depreciating Asset?".
The good news, if any, is that this has to happen when you take into account the national housing downturn, severe credit deflation, elimination of wall street, and the negative wealth effect and jobs effect that comes with it. Real estate is illiquid so it takes time for things I say here to come out in public reports. You can't day trade real estate. As real estate prices correct, the process of finding value begins and the sooner it starts the sooner we can cleanse the market. The bad news is, we are likely early in the cycle and yet to see the full effects of job losses, negative wealth effect, budget issues, and how quality of life is affected. My biggest fear, as I publicly stated in the Gotham Gazette interview is:
"My biggest fear is seeing a change in crime, cleanliness, drugs, homelessness, etc. to this great city. Everything that Rudy Giuliani did to clean this city up, I fear may be undone by this Wall Street centered crisis. The worst-case scenario for Manhattan is if crime increases and quality of life deteriorates as the local economy and individuals hurt from this deep slowdown. If the perception of Manhattan as a "great place to live" is psychologically altered, that combined with the negative macroeconomic forces can put downward pressure on real estate values for many years to come"
Posted by Brian
Sat Nov 8th, 2008 10:18 AM
Noah:
I could not agree with you more. When you combine everything you said there and put in the fact that credit is tightening, its a very dangerous mixture. I saw a rate sheet from a multitude of banks l2 weeks ago and none quoted a rate with anything under 20% down. I'm also seeing that foreign buyers, if there are any left, have to come in with 50% down and up. Banks are looking at them as second home buyers and don't want the risk. We also have another 20-30 thousand new developments coming on. If we split the difference to 25K and put that inventory out over 2 years, your going to have 12.5K per year of new inventory. If only half of that inventory hits the sales market, you have over 6K new units hitting the market in some form or another. Even if they switch to rental units, it will put downward pressure on rental prices and the rent to price ratio will be out of whack for the area again. It will just continue. We cant fight gravity. The best thing to do would be to find the floor for prices and have everyone put their prices there. Unfortunately, this is impossible in the real world.
Posted by Noah
Sat Nov 8th, 2008 10:26 AM
Brian - thanks for comment. Where did you get that 20-30K new devs coming on #? Is there a source for this shadow inventory?
Is it including all 5 boroughs? Just Manhattan?
Posted by Brian
Sat Nov 8th, 2008 10:30 AM
I actually read it in an article. I will try to find it for you and post the link.
Posted by Douglas Heddings
Sat Nov 8th, 2008 10:56 AM
Hey Noah,
Doug here. Well stated and you know that I'm in total agreement with you on all fronts. As we discussed last week, i think the deals that are getting done these days are about 20-25% off peak values already and I suspect we will see further depreciation over the coming months. The good news is that prices will eventually (6-9 months IMHO) hit a level where all the pent up buyer demand burts through the dam. I think we're going to see transaction volume sky-rocket in the second half of 2009 with buyers finally getting the opportunity to purchase Manhattan real estate at more reasonable prices. Hopefully credit will loosen as well but that remains to be seen. It's such a bizarre time for everyone right now.
Posted by Eric
Sat Nov 8th, 2008 11:21 AM
Doug -
You are way underestimating the duration of the problem we have. There is absolutely no evidence right now that "pent up" buyer deand will burst through any dam any time soon. There is in fact more evidence that a serious recession will drag on deeply into next year. More importantly, credit will never be anywhere near as lose as it was, and furthermore the fincial services industry which was really the backbone of income and expensive real estate in this city is impaired for at least 5 years.
Property values in NY more than doubled in the go-go years of 2001-2007. It is pretty clear that those years were driven by worldwide cheap credit and an economic bubble. NY was already a fabulous place to live in 2001, and had appreciated remarkably already over the previous decade as a reflection of that. Why, then, wouldn't it be more likely that prices decline by something closer to 40-50% over the next 3-5 years as the market adjusts back to reality and trend line.
While I don't know exactly what the outcome will be, I think an objective evaluation of the evidence would indicate a much longer and deeper property devaluing than you suggest. The short correction scenario certainly sounds nicer, but I think is based more on hope than the objective evidence of what we have just been through and what the last five years of price appreciation were really built on.
eric
Posted by Brian
Sat Nov 8th, 2008 11:30 AM
Noah:
The 20-30K were the units NOT developments in the next 2-3 years. Don't want to confuse you or anyone else with such an awkward number for developments. I Believe your article yesterday on Zombie Condos touched on the excess inventory coming onto the market. Unfortunately, I don't have a link for the article.
Doug:
I think credit will loosen, but for the right individuals. Those with cash and Prime credit. I think it will be a long time before we get back to the days of such loose standards to drive the market. In the Condo market saw values drop 38% from 88-96, and this downturn seems to be worse, so we could see a further drop in prices.
http://realestateqa.blogs.nytimes.com/2008/10/23/expert-qa-a-downturn-for-new-york-real-estate/#more-112
Posted by Noah
Sat Nov 8th, 2008 11:34 AM
Doug certainly gets it, and his honest estimates of what he feels the market is at right now is greatly appreciated.
I have to agree with Eric though on timing. By this time next year, we will be neck deep in:
a) Manhattan job losses
b) slowing retail
c) early stages of budget shortfalls
d) service cuts
e) individual duress
The job losses scare me the most as it will be 2-3x what we see today on wall street, and it will then start to trickle to losses in the real economy here as consumption slows.
It will def be a multi year event. There will be a time when prices fall enough to bring in buyers though, question is when. Also depends on how bad the overall economy gets. Personally, by this time next year I see unemployment at 8.5%, we are at 6.5% now, and rising more. That will continue to rise even after the economy turns but wont feel like it for most people.
Posted by Douglas Heddings
Sat Nov 8th, 2008 12:58 PM
Perhaps I should have been more clear beacuse I don't disagree with Noah, Brian or Eric's assessments of price depreciation and market direction. In fact, I think you're all spot on and I also agree that this will be a long time event that is unpredictable. Here's is what I meant by transaction volume picking up (from my own selfish..and of course hopeful perspective). Volume per agent is going to increase in about 6-9 months as prices come down as much as 40% from peak levels. There will be far fewer real estate agents thus making the number of transactions per agent greater. I know that Noah has at least a dozen buyers waiting on the sidelines as do I and I think a 40% drop in prices will be more than enough for many of them to get back into the market. As far as credit loosening goes, many of you aren't addressing the VERY competitive private portfolio and savings bank loans that are still available to "qualified" buyers. Thank goodness that "qualified" has been redefined and the subprime loan is no longer available. Although I certainly benefited from a business perspective from the sub prime lending period, I was NEVER a fan of it. I stated at the closing table when i sold my house in Bridgehampton 2 1/2 years ago that I thought banks like WaMu would be gone due to their lax lending standards. I just wish I was smart enough to short the stock!
Anyway, I think we're only in the 2nd inning of a game that may go extra innings and it is going to be very uncomfortable for most of us. That said, I don't believe it's the end of the world and I still think that the future of Manhattan real estate will be positive...eventually.
Posted by Noah
Sat Nov 8th, 2008 04:53 PM
I get what Doug is saying. We are on the same page. I have a dozen or so clients waiting for a decent correction to put their money to work. While the downrun may very well linger for a few years after the initial adjustment, I think most will be fine putting their bids on if a property could be bought for 30-40% below peak levels.
Even if that occurs in the 4th or 5th inning of a 9 inning game.
And I do agree that the real estate industry will shrink significantly, and more established agents will survive and perhaps take market share down the road. However, the next year or so will be slow for everyone as the adjustment occurs and sales volume stays low. I do not see myself matching this years production of 12-13 deals, for 2009. If I can do 7-9 deals next year, that would exceed my expectations.
Posted by Brian
Sat Nov 8th, 2008 06:54 PM
Lets keep in mind some of the new rhetoric that's been coming out of city hall and Washington. There is talk of raising property taxes 7% while also asking Albany to raise the city sales taxes. This would also hurt prices. I know they have other ideas, but those are the most popular on the table right now. Lets also not forget about congress. They want to give judges the right to modify loans. This would tighten credit up more than anything. Banks would then only lend to prime candidates and rates would also go up to add in the cost of an extra risk premium. The responsible would pay for the mistakes of the irresponsible.
Posted by Noah
Sat Nov 8th, 2008 07:21 PM
Im pricing that in Brian...prop taxes are going up, no question. Its going up because the cut is being taken out. And then it may even go up.
This is definitely part of the equation.
Posted by Sebastien
Sat Nov 8th, 2008 08:11 PM
Long time reader, first time writer.
I moved from NYC to San Diego about 2 years ago (sold near peak levels in NYC) and I believe there is a lot to learn about the Southern CA decline in the last few years (a good blog for local stats is www.piggington.com).
San Diego prices are now close to 2001 prices for less desirable areas (30 to 50% off peak), and prices in desirable areas are at least off by 20% from peaks. It took 2 years to get where we are in San Diego, and the local market is probably still 10-20% overvalued.
My point is that the NYC will not recover for a while and forecasting a bottom at the end of 2009 is probably optimistic. I would not bet on a bottom until some time in 2010 and then a very slow upward slope in line with inflation afterwards for few years.
On a personal level, this is probably when I will take the opportunity to put my money back in the market (Noah, I am a potential buyer in NYC if you want to add to your list of buyers!)
Posted by Noah
Sat Nov 8th, 2008 08:17 PM
what took so long?
Nice to see you talking here Sebastien!
Posted by Fred
Sat Nov 8th, 2008 09:03 PM
the best way to think about it is in terms of what folks can truly afford under normal lending conditions. at an 8.25% interest rate and 6k in monthly cash flow available for debt service at 360 months that gives you about $800,000 in borrowing capacity. that's someone who makes $250,000 per year and before you factor in interest deduction, maintenance, taxes and repairs. at a 30% downpayment, the buyer needs $260,000 or so to close. the big question is why would anyone tie up $260k in real estate today (or in 12 months) when they could rent the same space for, say, $36,000 and put the rest in the market that is most likely going to yield at least 10% for the next few years? no one is talking about how the primary reason that Manhattan went up was based on the CDO pyramid. I actually feel badly for all the equity that is sitting there - it's history. we will see $500 PSF on the UWS and elsewhere before this is over.
Posted by brenda
Sun Nov 9th, 2008 06:32 AM
Noah,
The revised board of ed building projections will not be pretty for the areas that built heavily in Manhattan. Obviously some people will need to move due to economic/employment issues, opening up some spots, but I just think that there are (and will be more) too many apartments in the city of a size to suit families for the number of school positions, public and private, that exist in many areas.
Posted by mh23
Sun Nov 9th, 2008 08:00 AM
Interesting discussion. One aspect of this that should not be overlooked is the impact this will have on families who either live or who are thinking about living in Manhattan. With quality of life sure to erode, and schools and other services to be severely cut, do not be surprised to see more people looking in the suburbs which have already come down a great deal in price, and could benefit from the decline in perceived family friendliness of Manhattan. This has happened before, and I suspect it will happen again this time. When you factor in all of the tax savings, coupled with the benefits of public schools that are good and in many cases great, watch how many more families with means leave the city, and how many who are considering Manhattan change their minds.
Posted by anon
Sun Nov 9th, 2008 06:07 PM
"with quality of life sure to erode"....why would you think that quality of life would erode MORE in manhattan than in the surrounding suburbs?
Posted by Noah
Sun Nov 9th, 2008 06:34 PM
when did I compare to outside suburbs? Why cant the quality of life we got used to here the past 5-7 years or so, can deteriorate in Manhattan? If you live here, you aren't in the burbs, so you compare it to here.
Posted by fred
Sun Nov 9th, 2008 08:52 PM
quality of life started to erode when all the good mom and pop retail got pushed out by Related et. al. now the city is gonna come in and take the rest via property taxes. if you own, your quality of life will deteriorate simply because you wont have as much expendable income as you would in the 'burbs. it's so straight forward.
Posted by sideline
Mon Nov 10th, 2008 10:32 AM
Noah,
As usual I find myself in full agreement with you. I have a practical question about this decline and the possibility of $500/sf on the UWS (seems ambitious). How will co-op boards react to all of this? Assuming that your buyer's financials and credit are good; will boards balk at letting deals happen at prices that are way under peak? Can they reject an applicant because the sale price is too low?
Posted by Bart
Mon Nov 10th, 2008 10:44 AM
Fred.
You make an excellent point about "what folks can truly afford under normal lending conditions". To come up with $260,000 as a down payment and closing costs is actually very difficult in this environment.
There is also the plight of "Generation Debt".
As a young professional who has just saved enough for an engagement ring. Luckily I sold energy stocks in late June which was the absolute peak of the energy market. (Granted I had been keeping track of the market but was the first time I ever had that kind of luck!). And I had saved the rest myself. But this effort was two years of being a hermit and eating two meals a day of hummus.
But when I look at how long it will take for me to save $260,000, it could be a decade. In this low interest environment, plus interest income is taxed, savers are actually losing money. I would rather plow the max annual into my 401k for the tax deferment, and the max into a Roth IRA for the tax free withdrawal. After maxing all these, there is not too much left to put in the bank. Certainly not a lot considering the $260,000 hurdle to home ownership
One way young people of the upper-middle class got down payments was as gifts from their parents. But a lot of that parental wealth has dissolved.
Also our generation is burdened a lot of student debt. This represents a monthly payment eats away the money that can be put into the bank. But the interest rates on these loans had been low, but they've been inching up.
Also our generation does not have the benefit of rent stabilization. That means a much higher percentage of our income goes to rent.
One thing to realize is that there are fewer Gen X and Y'ers than Boomers.
So I think downward pressure on New York City will continue especially given the demographic challenges of Gen X and Y. This generation have real constraints regarding wealth generation and these are the very people who should be buying a home to start their lives.
Bartmann
Posted by Noah
Mon Nov 10th, 2008 11:34 AM
sideline - I think there was a law passed recently that makes a co-op disclose the reasons for rejecting. Its a great question, I dont know.
What about a rejection so that a co-op board owner or friend can buy at the distressed price or lower? Like cheating!
Co-ops are shady like that and I do hear stories. Especially small ones. Good comment, and time will tell.
Posted by Anthony-SI Real Estate Blog
Mon Nov 10th, 2008 11:55 AM
Noah,
This market has really turned on fundamentals. Buyers are buying if all the parameters of their expectation are met, including price. The underlying fundamentals of value have to do with the income demographics in the potential buyer pool, including unemployment. In Manhattan's wall st.really holds the key, so a decline in values should be expected. Remember, housing is never a depreciating asset fundamentally because of its utility. That is what I explain to buyers when they worry about values.
Posted by brenda
Mon Nov 10th, 2008 03:03 PM
Bart-
I think you make a great point. Who is going to purchase the baby boomer's property? And how? Even younger boomers are often having difficulty buying in this environment, even with healthy incomes. If boomers have recently taken hits to their retirement accounts (and many, many have) their home if they've owned for some time is now their primary source of cash. Do they stay and live with little to no mortgage but taxes and maintenance and very high daily living expenses, or do they move on?
Interesting questions, but then I must confess that I find demographics rather fascinating.
Posted by Bart
Tue Nov 11th, 2008 10:26 AM
Brenda,
Younger Boomers:
I know many younger boomers as you called them. They arrived in New York in the late 70's. And got rent stabilized apartments; often studios and perhaps a one bedroom. Now in their mid-50's their apartments are truly cramped. (Imagine a harpsicord, murphy bed, and tons of books all filling a small Greenwich Village studio.) But from their perspective, why would they pay 3,800 for a one bedroom when they can stay in their Bleecker Street studio for $450?
The path for real estate owner for these younger boomers is often to buy a weekend home outside the city, often in the Catskills. But even for these Younger Boomers, at the height of their earning potential, owning a piece of New York real estate is a dream they long ago stopped dreaming.
From the Younger Boomer's perspective, the quality of life in New York city is becoming worse. Sidewalks and streets are more congested, old-time favorite restaurants close (because of increasing rents) and new restaurants open that have $15 dollar hamburgers with a side of attitude.
Unlike Noah who is the expert of granular data, I can only look at larger social realities, and I still maintain that there is long term downward demographic pressure on New York real estate.
Bartmann