Bring on the Auction Hammer

I've been contemplating Obama's new budget (at 50,000 feet) and I do not see how it will be good for real estate medium term.

Either we get out of this mess, in which case with having to fund a $1.75 trillion deficit (followed by equally large ones in later years) interest rates (and therefore mortgage rates) will go through the roof, killing the real estate market. Or, all the spending did not work and we are still in a depression, and no one has a job, killing the real estate market.

Either way real estate (or any other assets that relies on leverage) is screwed.

Hey Lars don't forget the lowering of the mortgage interest exemption. That cannot be good for overpriced urban real estate.

Another great job Noah. You came to mind this morning when I read the NY times piece. You must have been chomping at the bit after reading it yourself. Surprised it took you so long to post something!
Hope all is well with Stella. Going through health issues with my senior Miniature pinscher.

I thought the sidebar figures in the nytimes article were interesting. $198/ft auction prices from $388/ft peak prices in the florida condo look like a good deal, and people were probably happy to get such a deal, but the auction was in 2008 and now, the 2009 prices are down to $185/ft.

If I were a developer, I'd have my auction sooner than later!!

I'm in the money, hello my honey. I've got $100,000 tucked away under my matress and that new build condo that was listed for $1million in 2008 ... its finally mine !!!!!!!!!!!!!!!!!!

Believe it. We're on the verge. I predict bread lines and soup kitchens all the way up 5th Avenue by the middle of next year.

This denial isn't always so apparent. One of my coworkers just the other day mentioned how they were thinking of selling their house so that they could swoop in on some of the "deals" that are happening now. He argued he could buy more space with less money. I argued with what? His pad hadn't declined? Guess he didn't think that one through...

The end of denial is about to come crashing down on the commercial side as well....and it will certainly be driven in part by the new equilibrium level for housing units. As rent vs. buy tilts towards buy you will see more pressure on rents and of course the many units going rental if/when they fail to sell at auction.

Allentown, $100k downpayment on an apartment that was $1mil and maybe now is $800k is stretching it especially if you think a soup kitchen situation is close at hand. $250k is more like it. The old days of 20-40% downpayment are going to come back.

Anon 3:15PM - Awww, good luck my friend! Our prayers go out to you. Send me a picture if you can.

Noah, Renata, Stella & Gracie

Yes, as you can see even $500 psf is overpriced for trophy apartments. renters, we will be able to buy them for not a penny over $250 psf and move in next door to greedy idiots in denial who paid many times more, that is if they haven't foreclosed yet. it is inevitable and Noah agrees with us. no more rent increases by greedy landlords, justice will finally be served.

Apartments will find equilibrium at the 9 to 10% cap rates that the big Apartment REITs are trading at (EQR owns 180 RSB, and several buildings on the UWS.).

A typical apartment is now offered at a 2.5 to 3.5% cap rate (on rents less maintenance) with typical 1100 psf pricing. They need to fall by 2/3rds to find financial equilibrium.

Be assured that the first auction will be heavily marketed (note the placement in the NY Times article) and heavily overbid, perhaps with shills. It will take several such auctions to bring true pricing to the market.

-Bear

"renters, we will be able to buy them for not a penny over $250 psf and move in next door to greedy idiots in denial who paid many times more,"

Sure you will. And I'm going to become the first Jewish Pope and live in the Vatican!

LovitIt = Truthteller

Bitter renter who has watched opportunities pass him by while he sat on the sidelines and watched his friends move on. He will miss the bottom and continue to post bitter rants on blogs.

What will happen is that even if prices approach 250 psft, cowards like him will sit around talking about how it will go down to 125 psft. I will happily collect their rent.

So sorry, BigBadPropertyOwner, so sorry that the truth hurts.

I'm beginning to think $500psf is a tad on the bullish side.

Yeah,the truth hurts, but we have had a recklessly unsustainable bubble and prices must and will collapse under the wieight of the greed that kept this nonsense going for all these years.

What's the big deal, so you were a jerk and bought because you thought there would always be a bigger jerk on line behind you.

So that ridiculous million dollar one bedroom condo is only worth say $300,000, don't you understand it was never worth a million, it was all an illusion.

Did all of you who think truthteller is too grim happen to see this in the NY Times? I suggest you read it and embrace the new realit

Apartment Buyers Abandoning 6-Figure Deposits

http://www.nytimes.com/2009/03/01/realestate/01walk.html?_r=1&hp

Addressing yourself in the third person now, TT? You reinforce BBPO's point - you will always think prices are too high because you're gutless. I have moved 3 properties in the last decade and pocketed in the high 6 figures. Where has your rental strategy gotten you? Or do your parents not charge you rent to crash on the couch? Doesn't matter where prices go, you will never sign on the dotted line.

Next time remember whether you are writing as TT or LovinIt, tool...

"renters, we will be able to buy them for not a penny over $250 psf and move in next door to greedy idiots in denial who paid many times more, that is if they haven't foreclosed yet. it is inevitable and Noah agrees with us."

As a renter, I guess I have to disagree somewhat with this wildly optimistic (and oddly vindictive) scenario.

My husband and I have been renting for several years, while saving up for a downpayment, and we're just about ready to buy (but now that we have the money, we're of course worried about buying something today that's going to greatly decline in value over the next few years). Do we think current prices are still too high? Of course we do. Do we want to see the prices come down? Of course we do!

Problem is, if prices/values decline too steeply, that decline will stem from larger economic forces, from the effects of which we renters are of course not at all immune. Declining wages/salaries, for example, and increased unemployment, and so on and so forth. That's going to hit renters as well as sellers/owners, no question. Yes, if prices drop to $250 psf, some renters will finally be able to buy. But at that point, some renters will be struggling just to make the monthly rent, never mind buying. Some renters will surely be unemployed (some owners will be unemployed too), their savings wiped out by the need to pay the bills just to get by.

Don't get me wrong. I think NYC real estate prices increased at a ridiculous rate over the past decade or so due to a bubble economy. I welcome the deflation of that bubble, to a certain extent, but to a certain extent and no more. I think it's naive to imagine we're going to see some sort of nice and neat inversion, where renters just change places with owners or something. In bad economic times, the bad stuff hits just about everyone, and in really bad economic times, there's more than enough bad stuff to go around.

Sorry if this was already posted:

"Apartment Buyers Abandoning 6-Figure Deposits"

http://tinyurl.com/cg34st

$250 psf??? Isn't this forum supposed to contain rational discussion? It's not even a sure thing we'll see $500 psf but this nonsense merits a response? It's one thing to say there's a real chance it may happen and explain why but it's quite another to take any news snippet, random article -or another person's post- and conflate it into a new low water mark as if it represents an informed consensus. These postings offer no rationale other than a bitter desire to 'get even' with people who happen to own their home instead of rent it.

I'd love- just for once- to see one of these assertions backed up with a realistic, plausible explanation instead of just a flimsy reference to anecdotal data.

I think we can all agree that prices will continue to fall. Predicting a bottom is simply wishful thinking. Noah and Jeff have written about the psychological states markets go through when finding a bottom. I suggest everyone print that out. I day trade for a living and can tell you psychological factors play an enormous part in price movement. Fear and greed abound in the stock market as well as real estate. Prices tend to overshoot on the way up and on the way down but eventually find equilibrium. I don't worry about catching the exact bottom but look for signs of capitulation for a good entry. Volume tends to be highest at tops and bottoms so with real estate I would expect to see an unprecedented amount of units on the market near the bottom. Also price tends to fall dramatically at a bottom and the media are predicting disaster. I would look for panic selling by individual owners as a sign of a bottom(seems like some developers are already there). Let me make one prediction. Today we have some more clarity on the bank bailout of Citigroup. The stock is down 40% premarket on enormous volume. I will look to go long Citi as a day trade. This looks like classic capitulation.

FS & CF - agreed on all counts.

Truthteller/LovinIt is a troll who thinks that by posting baseless drivel about market mayhem, he will drive NYC real estate prices to a level where his broke @ss can afford a studio and move out of his parents' basement. I usually ignore trolls but I really like this site and have lost patience with his short-seller attitude that has no foundation.

99% of the posts here are well-though out, informative, enlightening and regardless of whether or not I agree, I generally respect the poster's opinion and appreciate the food for thought.

TT: you have every right to believe and post about how prices will reach $50 per sq. ft. or whatever arbitrary number you come up with - just back it up with more than a link to a NY Times article.

there's an interesting argument being made out there that the new tax increases are going to make blue states even more expensive to live and this will bolster the incentive to relocate to less expensive domiciles (i.e. CT) in order to offset the higher tax on upper middle income earners. Granted, if you are employed in Manhattan, you are going to pay NY but at a minimum it will make folks think twice about housing affordability.

OT - the NYT's article on down payments is actually pretty extraordinary. one thing is undeniable, the pace at which asking prices are coming down is something we've not seen in a very long time here. how long the stampede lasts will determine the true bottom but man, if you have to sell, this is a horrible time to be doing so. the conspicuous absence of optimists calling a bottom is very telling.

Fred - I agree the article is extraordinary, but it is easy to find anecdote to express any point of view. Just because a handful of people are trying to time the market, and a spoiled heiress doesn't like a layout, doesn't mean we can draw a trend or conclusion. Even the broker saying this is the largest volume of buyers she has seen walk away from deposits is anecdote. As long as there are no hard numbers to track trends on this, I don't see it as conclusive or indicative of a broader trend.

I have always been a fan of the NY Times, but have realized more recently that they, like all media, are ultimately trying to push product - they just have a much better command of the English language.

Again, not saying that prices haven't or won't go down. I just think it has happened fast, will level out at around 25% down (for co-ops, probably closer to 35% for condos), and will waver around that number for several years. There will be individual cases where prices go down 40% or greater for some new dev, or even co-ops that people paid too much for. But I think the only way to intelligently discuss the market is at a macro level.

Bear (or anyone else) - could you please explain what the 'cap rate' is and how it is calculated? Sorry if this has been covered before, but I appreciate the insight!

OT - kudos. there are so many variables out there that we just can't know right now. i tend to track employment and believe that it is becoming the issue in all of this as it relates to manhattan. i keep coming back to the price to median income metric which is frankly the only thing that makes any sense. in the 10023 zip code, median income is like 92k which implies that the upper range for the median price should be around 450k. problem is reconciling that low of a number is almost counter intuitive, until you start to see our quality life changing (i.e. retail shutting down, friends laid off, no bonuses, higher taxes & OPEX, etc.). perhaps the only thing i tend to agree with out of Roubini's mouth is that Manhattan's RE recovery will be a very fat U and will lag the country by at least a year if not longer since all of the stimulus right now is focused on middle america. i keep looking out of our window for Snake Plissken and his roving band of futuristic marauders....haven't seen them yet!

OT wrote: "Again, not saying that prices haven't or won't go down."

That has to be the understatement of the year!!!!! Damn near spewed coffee all over my keyboard when I read that gem.

Me thinks thou dost protest too much… to paraphrase old William.

For 'correct' pricing the NYC RE market just assume that the DOW will hit 5000 in this cycle which should come to 500 for the SP500

OT, just keep in mind, shooting the messenger doesn't change reality.

To continue to harp on whether or not truthteller rents or owns, is nonsensical.

Here's reality, OT:

House prices will keep falling because those prices are still too high compared to incomes and rents. A safe mortgage is a maximum of 3 times the buyer's yearly income, yet mortgages have been 10 to 15 times incomes in the last few years. A landlords' rule of thumb is that a house should cost a maximum of 15 times the annual rent it can bring in, yet in coastal areas, sellers are still asking 30 times annual rent, even after recent price declines. Anyone who bought a "bargain" this time last year is already sitting on a very painful loss.

A return to traditional lending standards means a return to traditional prices, which are far,far below current prices. The only reason we had such an insane run up in prices in Manhattan is because banks were giving away money and you know this.

So again, I ask you to please stop shooting the messenger, yes, OT, prices must and will fall in Manhattan to unprecedented low levels and will remain at these levels for many,many years.

You, my friend, are grappling with the emotions which come when an illusion disappears.

JP - as wikipedia describes:

Capitalization rate (or "cap rate") is a measure of the ratio between the net operating income produced by an asset (usually real estate) and its capital cost (the original price paid to buy the asset) or alternatively its current market value. The rate is calculated in a simple fashion as follows:

* annual net operating income / cost (or value) = Capitalization Rate

Its a way of figuring out, using generated income, how much an investment property should trade for on the open market. Its useful when used in reverse, to get an idea of where an asset should trade.

Lets assume a 6% cap rate for an investment property in prime SoHo that is for sale. Lets also say we know the size of the space (2,500 sft), and we have an idea of what rents psf ($50/psf) are going for. We can do this analysis using the following formula and get rough idea of value on open market:

(50 x 2,500)/ 0.06 = $2,083,333

So, the place should be roughly valued at or around $2M, based on a cap rate analysis. Feel free to explain if I am wrong here, or should tweak this for better estimate?

Help?

Fred - I don't see median income to median price as a particularly telling metric for NYC. There are a lot of rent stabilized tenants (1.6 Million units in all NYC) who aren't interested in buying and who will tend to skew median incomes down. I think a more telling metric is median income of home owners to median price. I would posit that this number is much lower, although I have nothing to back this up.

SSTitanic - sorry to comprise the well-being of your keyboard. However, the only true macro data we have at this point on sales prices is Q4 data which showed an uptick in median sales price year on year for Manhattan. Now, we have all read about the morbidly dismal December where there were crazy fire sales, and there are people whom I respect tremendously (Noah, JM, JB, etc.) telling us that anecdotally, contracts were going in at 20 - 25% below peak. But I think the Q1 numbers for this year are not going to be earth-shattering because they will reflect closings for properties that went into contract over the past 12 months, not just December.

Q2 will be weaker still, but will begin to reflect some of the pick up in activity we have been reading about. A long-time reader on this site recently posted about how he was outbid on 2 properties in the past month (at prices 10% below peak).

Things are in terrible shape, we are all aware of that, and the numbers for 2009/10/11 are going to be anywhere from blah to dismal. But this is still a safe city, there are a lot of jobs, and I disagree that Fed money is not going to find its way here. Where do you think the TARP funds have been going? They have been a huge factor in layoffs not being worse than they already are.

TT - I will ask you one last time to back up your claim that New Yorkers took out mortgages that were 10 - 15 times their incomes. This is an OUTRAGEOUS claim. I have served on 2 co-op boards over the past 10 years and while we didn't specifically discuss this as a metric, we made sure that a buyer's total monthly cost was no more than 25-30% of their BASE salary. And I was in lax co-ops. I don't think we approved a single buyer whose mortgage was greater than 2.5 times income. Please back up your statements or stop making them - they add no value to an otherwise intelligent discussion.

OT - it would be interesting to see the medians for home owners alone. agreed that it would probably bring the current multiple down a bit. another quick way to measure where prices should be is from the perspective of affordability. let's assume that incomes for your typical 2 bed owner have not changed. in 2007 they could afford to buy a 1.2mm or 1.4mm unit with as little as 150k down (condos, not co-ops obviously). that same dwnpmt will get you at most 500k to 600k today just because of the underwriting getting stricter. so that's one major change to availability of financing. secondly, banks just aren't valuing real estate at $1000 psf. ask around, and my sense is appraisals are sinking into the 700s psf, fast. what these two major changes mean is that the real market is a cash market and i can tell you the cash that is sitting on the sidelines is either monopoly money or waiting for the liquid markets to rebound before they do anything. all of this of course, doesn't even begin to address the fact that income is coming down in NYC. the overall bonus pool could shrink by half again for 2009 (earned in 2009, paid in 2010), which says that we've got another full year before folks who should be able to afford the 1mm+ homes can even begin to project what they may be taking home in 2011. the beauty of median income as a metric is that it does in fact tell you a lot about what is happening in the zip code. i asked a cabbie the other day how much his business was off and he floored me when he said 40%. let's assume he's just a crappy cab driver - if 25% is the system-wide pullback, that's huge.

OT - it would be interesting to see the medians for home owners alone. agreed that it would probably bring the current multiple down a bit. another quick way to measure where prices should be is from the perspective of affordability. let's assume that incomes for your typical 2 bed owner have not changed. in 2007 they could afford to buy a 1.2mm or 1.4mm unit with as little as 150k down (condos, not co-ops obviously). that same dwnpmt will get you at most 500k to 600k today just because of the underwriting getting stricter. so that's one major change to availability of financing. secondly, banks just aren't valuing real estate at $1000 psf. ask around, and my sense is appraisals are sinking into the 700s psf, fast. what these two major changes mean is that the real market is a cash market and i can tell you the cash that is sitting on the sidelines is either monopoly money or waiting for the liquid markets to rebound before they do anything. all of this of course, doesn't even begin to address the fact that income is coming down in NYC. the overall bonus pool could shrink by half again for 2009 (earned in 2009, paid in 2010), which says that we've got another full year before folks who should be able to afford the 1mm+ homes can even begin to project what they may be taking home in 2011. the beauty of median income as a metric is that it does in fact tell you a lot about what is happening in the zip code. i asked a cabbie the other day how much his business was off and he floored me when he said 40%. let's assume he's just a crappy cab driver - if 25% is the system-wide pullback, that's huge.

truthteller, aka lovinit,

how's the view of Manhattan from your Jersey City rental? Just a little FYI: I know of several forums where people spend hours convincing themselves that NJ is better than Manhattan. I will gladly send you the links. Sorry, but posting here is not going to have any impact whatsoever on the market. Just sit tight on UD while Obama and Barney Frank continue pricing you out of the market. Yup, interest rates are going to be 2%, but only for people who bought too much house, not for renters like you.

As a more or less neutral observer (no desire to buy/sell ever), it certainly strikes me that the reaction to TT and others is overly defensive. Both sides are making claims that are no more than speculation. I see a lot of personal attacks on those predicting a severe downturn. Obviously they are striking a nerve.

OT - You were just critical of someone else using anecdote to make a point (NYT), and then you do the same thing 2 posts later with your story about the chap who got outbid after bidding 10% lower. Do you see the irony?

You do realize that if NY real estate only goes down peak to trough by 20-25%, it would have outperformed every other asset class in the world except for precious metals and treasuries? It would have to go down by probably about 50% to keep pace with more comparable assets/measures like stocks, income, other real estate markets, historical cap rates, etc.

You claim that macroeconomics is the only way to debate NYC prices, and yet if you studied what's going on in the macroeconomy and looked at the data of relative pricing and what's happened, 90% of the data would tell you NYC real estate is falling much more that 20-25%.

You have a right to hope for or believe in whatever you want, but it is a little disingenuous to say your claims are based on a balanced assessment of macroeconomic factors.

So your saying that apartment prices are going to go down more than 25% because stocks have done the same? That makes no sense. There is no direct correlation between the housing and stock markets. During the Great Depression and the market crash back in the 80s, real estate significantly outperformed the stock market.

well, the stock market crashed 89% during the 32 month bear market that came with the great depression. hard to see real estate falling that much.

But certainly, that will play a role in the correction of real estate prices as we overshoot to the downside. Im telling you, in 12-24 months, everybody will be so sick of the phrase 'real estate'.

Donald - My point is not that stocks exactly follow real estate. My point is, though, if you were to line up stocks versus real estate values over a very long period of time, stocks have always been an asset that appreciates much much faster than real estate. In fact real estate values do not historically grow much faster than infflation. Now you have an environment where we are getting deflation and the relative value of Manhattan real estate down only 25% relative to other asset classes (for those that believe down 25% is a reasonable bottom) would still put NY real estate so far off the map relative to value elsewhere in the world it is nonsensical.

You might not think that the stock market is correlated to real estate, but surely over the long run all investments have a correlation. If I can buy a stock that is generating 10% FCF and NY real estate can only earn 3% rent to value, I guarantee you that over time capital will flow to the better yield (risk adjusted). The only asset yielding lower than NYC real estate at current prices is probably treasuries, and that's because they're safe and liquid. Clearly NYC real estate is massively mispriced at 25% down from peak in the world we now live in.

Donald,

Let me guess, you also think there is no correlation to the price of real estate and net worth or income.

Be that as it may, if you are correct that the correction we are currently experiencing will mimic the quick return of stock levels as occurred after 1987 crash, then your conclusion may very well be accurate. However, the likelihood of the stock market retracing anything close to its highs any time soon is highly suspect. The ability to “goose” the markets through monetary policy as practiced by Greenspan after the ’87 crash is impossible today. You cannot look to recent corrections and draw any worthwhile conclusions about the current situation.

What I find most amazing about so many of the comments I read on Noah’s blog is the lack of appreciation/understanding of the extraordinary worldwide nature of the correction we are currently experiencing. There is a fundamental paradigm shift occurring. To not understand this, is to be incapable of understanding the likely outcomes.

In Bull Markets One Can Only Be Long or
Neutral, and in Bear Markets, one can only be Short or Neutral. This may seem self-evident; few understand it however, and fewer still embrace it.

Blackstone’s Steve Schwarzman from his earnings conference call for the beleaguered private equity shop:
Our view is the economy will continue to deteriorate sharply this quarter and next quarter and be pretty weak second quarter and maybe sort of see stability fourth quarter, and then I think you will have a pretty, and a weak 2010 although I don’t think it will keep declining…I think 2011 will show some growth but still be well below the levels of 2006 and 2007. My own view is you may not get back to 2006 and 2007 a long time because we have sort of an emotional and psychic shift going on in America which is back to basics don’t live on leverage, live within your means, more humble life styles, less extravagant consumption, savings and all of that sort of stuff.I believe that a lot of people in America are legitimately scared and have seen their life savings or what they perceived as their net worth largely either wiped out or cut in half. That’s going to forge fundamental behavioral differences and that will retard the growth.”

This is the famous birthday party man who also screwed a lot of similiar greedy investors with his BS IPO.

Have these auctions taken place yet?