Bonus Bummer

Noah, you said..

"you may see a peak $7M property trade at $4M because the seller was forced to hit the bid and move the property; perhaps erasing 4-5 years of gains instantly"

Don't you think it could get even worse than that for luxury apartments? I have been following this market for years, luckily I did not buy yet, but prices have easily doubled over the course of the past 5-6 years. I would think with the carnage out there, it could get worse and see prices go to even earlier levels?

Noah:

What is not yet clear to me, from your post and from the various Bloomberg articles that you are quoting, is the following: what percentage of the 2008 bonuses are indeed paid in cash vs paid in securities? From a press release of Credit Suisse it seems that their bonuses may very well be paid in illiquid securities, such as shares in CDOs (!). I imagine that a number of Wall Street firms would pay their bonuses in a mix of cash and restricted equity ...

Is there anything known about that yet?

PaulB - of course it can. Anything is possible given the severity of this crisis + the nature of this crisis. It all depends on the level of desperation of the high end seller.

If the seller has loads of equity OR the seller recently bought and is underwater at the same time they are forced to sell, both may be willing to hit a low bid to move the property, especially if the unit was on market for a while and has seen no bids yet and they wake up to this new world.

It all depends on the seller in this situation. We know bids are coming in low, but some sellers aren't interested to move the property at those levels. That may be the best bid they ever get, for all we know.

The main point is, how many 4-5M+ buyers are really out there right now COMPARED TO PREVIOUS FEW YEARS THAT SAW RECORD SALES PRICES FOR THESE HIGH END UNITS? I would guess significantly less!

Chris - hmm, good question. Let me as a few people and get back to you

"The thing is, the average base salary is about $150,000 - $250,000 or so, with bonuses making up the majority of the expected earnings for wall street employees."

You wish! Actual base salaries are much lower: My colleagues who are senior analysts (VP) with 4-5 years of experience, make only $100-120k base.

And these folks are CFAs, MBAs from top schools, have multiple licenses and work 80-100 hours per week minimum to try to keep their jobs. They can also get personally sued by the companies they follow and investors. No one would do that job just for the base salary they are getting. GM factory line workers make more money than that!

Maybe base salaries are higher on the investment banking side...?

true its prob too high for average, but managing directors can base 200K - 225K, while entry level vp/associates are more in the 125K - 150K base level I think...

Noah,

I am curious to know your anecdotal analysis of buyer by industry in various categories. As an example, if we segment the market by dollar spend into 4 groups, the $6M categories, what percentage of properties that move within each category are purchased by Wall Streeters? I think this is an analysis that is missing in much of the discussion over the past few months.

We get it - Wall Street is cooked for the next few years, and we can expect Wall Streeters to make up a smaller percentage of the buyer population than they have in the past. But I know a lot of Wall Streeters live in CT, Westchester, North Jersey and LI. So what percentage of the buying population are they in Manhattan? I ask because I live in a very nice pre-war building on the UWS and I think at most 10% of our owned units are occupied by Wall Streeters. The rest are doctors, consultants, entrepreneurs, publishing industry folks, etc. I have seen all the data about how Wall Street employs only 5% of New Yorkers but accounts for 30% of income (or something like that), but this still doesn't answer the question above. I don't think we can fairly assess the impact of the Wall Street woes until we have a better understanding of what percentage of total buyers they represent.

OT - Great question, and I would love to know too, but I dont think there is any way to quantify the % of properties that are purchased by wall street employees - let alone by category?

I realize it is not a metric that is actively tracked, but was hoping you would have some insight based on what you have seen / are seeing with the buyers and properties you represent. Sweeping generalizations are appreciated (i.e. 50% of all product over $5M, 20% of all product under $1M).

well my biggest deal was 3.5M and after that 1.6M, so I am not a established high end broker. Im also only 3 years in sales after first year in rentals with citi-hab in 2004, and usually business only starts to pick up after your 3rd or 4th year in sales, because of the referral based nature of this business. First few years is always very tough.

The 3.5M deal was NOT wall streeters. Most of my ACTIVE clients today are professors, doctors, lawyers, software engineers, medical device sales, entrepreneurs, in media, etc..My wall street buyers are all pretty much waiting! Not surprising.

Do you think that the severity of the impact we're expecting to see re: luxury apts could have somewhat of a trickle down effect and help to cushion the blow to the more inexpensive places? Won't there be people that are forced to trade down (buy cheaper apt) to try to pull some equity out if they plan to stay in Manhattan?

@ Chris

For the 44 percent drop reported by the Comptroller's office, it appears that those numbers, which are based on tax rec'ts only counts cash compensation, not equity. According to the NY Times:

The comptroller’s estimate, a closely watched guidepost of the annual December-January bonus season, is based largely on personal income tax collections. It excludes stock option awards that could push the figures even higher.

http://www.nytimes.com/2009/01/29/business/29bonus.html?hp

Anon - I think so. Also, we cant ignore the difficult lending environment in seeing the more severe effect in high end, compared with say sub $2M properties. With such interesting times, I would not be surprised to see more people trade down. But then again, you may see some people decide to move to burbs, where housing slowdown is further along.

there is a whole other level to the bonus issue: the big promote incentives paid by private equity, in particular real estate related private equity are also gone. the promotes not only drive annual payouts for the non-partners but they also reflect the bonuses paid on the IB side. i would not be surprised to see the entire payout for 2008 (paid in 2009) reach 95 levels....and stay there for a few years or more. net impact = median income is coming way down in Manhattan.

OT, I too would like to know the percentage of Wall Street buyers in Manhattan. But I think it's very difficult to explain the incredible rise in Manhattan prices over the past 5 years based on the earnings of "doctors, consultants, entrepreneurs, publishing industry folks, etc." So without the data I still think it's plausible to conclude that the price increases were primarily due to Wall Street bonuses, and once those bonuses are largely removed (not to mention jobs and job security), the prices will fall back.

Further to that point, I agree with Noah that high-end units will get hurt badly, but at least those buyers have a balance sheet (even if it's been hit significantly in the market). The low- and middle-end Wall Street buyer (associates, VPs) is arguably in a worse position. They were buying on large incomes ($300-600k) and a small nest egg (let's say low $100k's). With down-payment requirements up, incomes down dramatically, and *no* job security, I would expect these folks to disappear as buyers entirely -- there is nowhere for them to trade down to. So I don't see moderately priced units ($750k-$1.5m) having any more protection that the high end.

OT raises an interesting question, but I am not sure the size of the pool of Wall Street buyers will tell you as much as you think.

I say this because markets are made at the margin by what the highest bidder is willing to pay. Now, there are far fewer Wall Street types buying (bidding) up prices, which has to effect the whole market.

Just a thought...

I would also add to this discussion the Rent v Buy equation.

Those left on Wall Street were once faced with home price appreciation which easily skewed the Rent/Buy Equation to the Buy side.

With jobs, salaries and home prices facing rapid and uncontrollable Deflationary forces many will choose to Rent rather than purchase a depreciating asset.

Also important to factor in is the (soon to be terrible) budget crisis that NYC will face. With Wall Street eviscerated, the only Tax base the city will have to feast on are Property owners.

This will further detract from any Buy-side motivation.

Noah and Anon,
Don't you think the trickle down effect would be more likely to have the sub 2M aprtments drop in price? If I can get a 3 bedroom with a deck for only 10% more than a 1 bedroom or small 2, I would opt to go big. Mid price will have to drop to compete with the BIGGER apts becoming less expensive,no?

Noah, thank you for yet another great article.

A number of the comments ask for additional data, much of it is probably unavailable.

Let me add to that. Do you or one of the other posters know of NYC-specific or even better, Manhattan-specific data on the following two classic measures of real estate valuation?
- price/income ratio
- price/rent ratio

Apparently Goldman put out a report on NYC real estate a couple of weeks ago, trying to quantify the expected downside but I have not been able to track it down.

Thanks

Noah, thank you for yet another great article.

A number of the comments ask for additional data, much of it is probably unavailable.

Let me add to that. Do you or one of the other posters know of NYC-specific or even better, Manhattan-specific data on the following two classic measures of real estate valuation?
- price/income ratio
- price/rent ratio

Apparently Goldman put out a report on NYC real estate a couple of weeks ago, trying to quantify the expected downside but I have not been able to track it down.

Thanks

Does anyone have a call for the timeline on home price depreciation in Manhattan? I have been on the sidelines for the last 2.5 years (only to see prices skyrocket from '06-mid '08). I am looking forward to seeing prices come down to reasonable levels. Personally, I think that the media will really play into Manhattan's falling prices. I am expecting inventory to skyrocket this spring and with the fear of falling values, lack of financing, and job insecurity we could see prices come down another 25%-30% in '09. 2010 will be interesting!

Noah,

Your article is fascinating because it discusses the luxury Manhattan housing market.

There is also significant downward pressure on the middle and low ends of the New York housing market as well.

I know newly minted MBAs who moved to New York and after about two years of bonuses, had enough of a down payment to put on their studio or one bedroom apartments. But now I don’t even see many of my friends in MBA programs who are getting internships.

And I know many baby boomers who paid the down payments for their childrens’ apartments. Sometimes the parents also paid the mortgage with the idea that their children would vacate the apartment after four years of college. Then they would have a place in New York. But many of these boomers have seen their portfolios shrink, and don’t see real estate as a sure thing. Added to this is the problem simply getting a mortgage.

But the issue here is that the major hurdle to apartment ownership, the down payment, remains while the typical sources of large cash influxes: bonus, and gifts from parents, are diminished.

Noah you bring up a good point about living a life you are accustomed to. When you make a down payment on apartment by getting it from parents, or in the form of a bonus, is very different from saving for it. In the first example, no significant lifestyle changes were required: day to day bills were paid and at the end of the day a lump sum of cash is received. In the second example, luxuries were suspended: vacations were kept local, eating in restaurants, going out drinking with friends, and shows and concerts were rare events. Even having children was delayed in the name of saving for the down payment. To amass a down payment in New York usually means several years of extreme frugality. And in a city like New York, with so much happening, and the cost of living so high, frugality usually means being a hermit.

In Japan’s period of deflation, people still had money because they were savers. It’s just that if they bought property, the value was riding on a deflationary trend. In contrast, Americans have an almost negative savings rate. Additionally, with rising unemployment, the generator of wealth and savings will be restricted for at least a year.

So for a “bottom” of the market, there may not be one in the classic sense of a deep V. Rather, New York City real estate is certainly headed for a correction and then probably period of protracted stagnation.

Bart

Great article Noah. Front line reporting - the big correction has begun. I know of several new high end developments in Chelsea that have just slashed prices in a major way. I looked at a new unit that is now on the market for $400,000 less than the one above that closed 2 months ago.

Well ... there is some serious political opposition brewing to the Wall Street bonuses announced by the NY State Comptroller Thomas DiNapoli today:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aKvNNghfuh34&refer=home

If the federal government finds a way to legally oppose these bonus payments, or coerces the firms that received federal aid into submission, the 2008 bonus bummer could turn into a real BUMMER.

A couple of comments. Lawyers, accountants, hedge fund and fund of fund marketers, restauranteurs, hoteliers, real estate developers, investors and brokers, construction industry people, architectural and design folks among others were all beneficiaries of the New York boom of the last 10 years. It wasn't just employess of the name brand Wall Street firms that we all hear about and where the media are tracking layoffs. The slowdown has been so neck snapping it's incredible. The amazing thing is that this time doctors and others in recession resistant industries will get hit too. Anyone notice that many of the best doctors in NYC stopped taking insurance over the last few years...OOPs. the boom was pervasive and the bust is pervasive. it will trickle down to all price points and you will see rents drop across all price points as well. As could be expected the areas with the most fluff....the junior....non master of the Universe....Wall Street price range of $2 - $5MM will likely get hit hard due to all the new supply brought on in this segment. The emerging markets of Brooklyn, Harle, Long Island City and downtown, where there was lots of supply and less attraction than to prime midtown/village and UES/UWS, will also get hit the most. My guess is $700k to $2MM price points in prime Manhattan nabes will fair best....but still get hammered by 25%+

hey Noah
I want a little attribution for this!
A few weeks ago i posted my theory about the higher end properties (5mm +) on streeteasy saying exactly the same thing you are: that they will undergo the most severe correction of all

Prices down 50% only take us back a few years, which in the bigger picture is quite conservative. There should be no argument regarding this. A 1/3 retracement of massive gains is almost normal in the history of appreciating assets. I would not get too caught up in technical details. I would think most people on this blog are property professionals and are already aware of the intricate details involved in the downdraft.

Prices for high end apartments are going to plummet 99% in the coming months as more and more properties are sold for $100, Dick Fuld style.

Noah - I agree with the conclusion that the high end is going to be (already is) being hit. I wonder if the wedge properties (call it $1-2mm) will be hit as well. These, I think, were taken by younger Wall Streeters and other professionals (lawyers, doctors, accountants). While the non-Wall Street contingent is not experiencing the same bonus / job insecurity as young Wall Streeters in this market segment, they have been no less severely impacted by the drop in paper wealth. The question is, how many of them got in over the last 3 years and would therefore have a pain point past 25-30% declines? Any thoughts on the "mass-luxury" segment?

"Well ... there is some serious political opposition brewing to the Wall Street bonuses announced by the NY State Comptroller Thomas DiNapoli today"

Well...what took 'em so long?

I am seeing the high end getting hit, but there are segments of the market that are still rather competitive. It could be that the living large person withe the 3-5 million 3 br apt starts looking at the 1.5 -2 million 3br thereby slowing the fall in that category. Actually, even that category is seeing considerable downward movement but the 1.5 floor seems to be holding

I am currently spending some time in Hong Kong/China and notice a significant interest from Chinese people to buy property in the US (and especially New York). There are even agencies offering special "house-buying" trips for Chinese citizens: this means that there are customized trips to the US to go see apartements for sale. I believe this interest from Chinese investors in NY real estate will accelerate and might be putting a threshold under the price correction.
For what it is worth, there is a significant amount of wealth in China that is looking for the right investment opportunities....

Back in 94, when the market tanked, I remember an article, just like this one. It was either in NY Mag or the New Yorker. Talking about the compensation model on Wall Street and how people were totally SOL because had "counted" on their bonus.

I guess nobody is around to remember that lesson.

No pity here.

RR,
1994 is not 2009. The entire game has changed forever. The BS is gone, and real estate especially in NYC is only one thing that is going to be crucified. As it should be, everything over the past nine years is completely out of wack price wise. This fall is from a high cliff. TT

The Chinese will save NYC real estate!!!

Wait, the Chinese markets are getting crushed also...

Maybe they won't save us.

"Back in 94, when the market tanked"

The market tanked in 1994? Which market? I don't remember that.

"Back in 94, when the market tanked"

The market tanked in 1994?
Which market?
I don't remember the market tanking in 1994.

I really think that the Chinese buyer pool expecting to cushion the blow or put a floor in is quite silly. The market forces go way beyond any one demographic from stopping this trend

Wall St bonuses are widely misunderstood. For every investment banker or trader getting a six or seven figure bonus, there are probably a dozen IT, front/middle/back office support, etc people getting four or five figure bonuses. The bonuses may represent 10-50% of what the bank's call the person's "total comp". For people in these areas, it is unusual to take a significant cut from the previous year's total comp unless their ranking has dropped. This is why they treat their total comp as their expected annual income.

This year, a 30% bonus cut is considered VERY GOOD. The majority got little or no bonus this year. This is on top of the cuts most suffered last year. Many have also had their base salaries frozen for the last year or longer.

This all boils down to middle class/upper middle class bank employees feeling a lot less well off. I expect that it will directly translate into problems for the UNDER 1 million market throughout the tri-state area.

bfgross - you got it my friend!!

to Hong Kong:

The Chinese in Hong Kong would be the last people considering buying Manhattan at today's prices. Prices dropped 50-70% from the 1997 peak in HK... they know first hand how a RE bubble can pop and it was not that long ago..

To HK -
I also spend a fair amount of time in HK/China and HK in particular with its reliance on finance is definitely being hit by the current global crisis.

China is dealing with their own economic problems and although those problems deal primarily with slowed economic growth (not contraction) I don't see a "significant" interest in purchasing NYC property.

And to echo Noah's point, there are indeed wealthy Chinese with cash but not enough to put a floor on the entire Manhattan market.

To HK -
I also spend a fair amount of time in HK/China and HK in particular with its reliance on finance is definitely being hit by the current global crisis.

China is dealing with their own economic problems and although those problems deal primarily with slowed economic growth (not contraction) I don't see a "significant" interest in purchasing NYC property.

And to echo Noah's point, there are indeed wealthy Chinese with cash but not enough to put a floor on the entire Manhattan market.

@Anonymous,

When people are talking about investment banker compensation, generally they are not talking about the folks in IT, front/middle/back office support, and other people getting 4-5 figure bonuses.

They (we) are generally talking about people who are MBA graduates making big bucks as Associates, Directors, and Managing Directors.

This class of people also tend to migrate into other related areas: institutional sales, portfolio management, private wealth management, proprietary trading, hedge fundies, etc.

THESE are the people that get the big bonuses in the finance industry that bid up the prices of things in NYC.

And their days are numbered (at least in the short term). Long term I think it's only a matter of time before the next inflated asset bubble is exploited.

Thisson - I agree, as I posted on comment 10:53AM yesterday.

thisson - I'm well aware of that. My point was exactly that -- no one talks about the people who get four or five figure bonuses, but they should! These are the MAJORITY of people and will have a huge impact on the housing market below 1 million (which is a very large chunk of the market in NYC).

from Blockshopper today:

"Cheryl Edelman and husband, Dr. Elazer Edelman bought the two-bedroom, two-bath condo Unit #11D at 201 E. 80th St. on the Upper East Side from Constance Tubbs for $1.45 million on Dec. 11.

Tubbs paid $1.723 million for the property in Aug. 2007."

looks like an easy annualized 18% decline to me....similar properties will trade for 800k when it's all said and done.

Dear American War Criminals & Fraudsters; Simply whining about Wall St, the Fed, the government, etc is POINTLESS at this stage of the game. If complaints could ever resolve anything the world would have already wiped you oversexed American deadbeats off the map DECADES ago.

The TIME TO START BURNING, LYNCHING & SMASHING has arrived. Watch the Fallujah videos to see how its down.

Here's to seeing more American securities fraudsters hanging upside down from a bridge!

Dear American War Criminals & Fraudsters; Simply whining about Wall St, the Fed, the government, etc is POINTLESS at this stage of the game. If complaints could ever resolve anything the world would have already wiped you oversexed American deadbeats off the map DECADES ago.

The TIME TO START BURNING, LYNCHING & SMASHING has arrived. Watch the Fallujah videos to see how its done.

Here's to seeing more American securities fraudsters hanging upside down from a bridge!

Thanks for that example Fred. Cant get more clear than that.

Noah, What is your assessment of the market for co-ops in the $600K and under range?

Be - umm, pretty much the same as properties in the 800K range, 1M range, 1.5M range etc. If its priced aggressively, 10-15% below peak, it should get action and some bids. If not, it will sit. Too broad of a question to answer.

UBS Slashes Its Bonus Pool for 2008 by More Than 80%. Well, you could also write that they still
get 20 % bonuses despite the fact that last year
they had a record loss, nearly went bankrupt and had to be saved with massive government aid.
People in Switzerland are very angry about this transfer from state money to wall street sharks.
The public trust in the banks responsibility is plummeting and lots of people are moving their accounts to less greedy smaller companies.

I'm a buyer that has been looking since August. I go to open houses every Sunday. I have seen prices drift down gradually since then (say 10-15%). However, this weekend I saw some real distress out there-there was a 3600 square foot apartment on west 27th street that looked like it would be sold this weekend for $1.9mm (after the seller reportedly declined a $3mm offer for the same property last spring). Another very nice apartment on west 18th street looked like it was going to go for $2.2mm (down from an original ask of over $3mm). I saw other attractive properties starting to get real discounts from original asking (25-30%). The disconnect is that the price cuts are coming from sellers who have sat with these properties for 6 months or more. Sellers just listing their properties seem to still think it is 2007 and are unwilling to accept a significantly lower offer. I think the only way to get these properties at a realistic price is to just wait them out. Their brokers are doing them a terrible disservice by not advising them of the current market. Btw, you can always tell a banker's unit (flat screen tvs in every room, including the bathrooms!).

Noah, you wrote: "BofA insiders said the deferrals would be a particular problem for executives who had constructed a lifestyle around the near-certainty they would receive a bonus each February."

As a financial industry outsider, it makes me scratch my head every time I hear about "bonuses."

Bonuses, by definition, are something extra, something unexpected.

Now, if Wall Street bonuses are tied to something like performance, then if the performance is bad, then bonuses should not be "expected."

The reasoning that "we dole out the money to keep our top performing people from leaving" is not a good one, especially since performance has been so poor all-around.

Again, I'm a common joe, and an outsider to the financial industry, and just plain flabbergasted as to "historically 6th highest pool of bonus money."

One last thing: kudos to all the writers on Urban Digs for talking about both macro and front line issues as to how they related to Real Estate!

Bill wrote:

"Their brokers are doing them a terrible disservice by not advising them of the current market."

You are 100% correct sir. And all the while the Broker paints a false picture, the market moves against them even more.

Coming to grips with "where the market is" will be a Hallmark of this downturn in NYC.

You mentioned "the tide goes out", but you where is your ever-accompanying co-quote "we get to find out who was swimming naked." I know you love that quote, and when I saw you mention the tide going out, I was waiting for the punchline, to no avail. hah!