Bonuses vs. Prices: Correlation or Causation
This graph of Wall Street Bonuses vs. Manhattan Apartment Prices was done by Matthew Kelley, a bank stock analyst at Sterne Agee, which is a brokerage firm that has a strong focus on analyzing banks and financial services firms as well as a couple of other industry groups. The data on bonuses comes from the New York Comptroller's office and Manhattan apartment price data comes from Miller Samuel. I wish I had thought of doing this analysis myself. The chart is a beaut. Matt lags the Wall Street bonus data by a year to reflect when the funds actually get paid out. The implications here are both intuitive and a bit scary, which taken together likely describes the nature of this high end recession. Here is another previous discussion on why 2009 bonuses will hurt more.
Thanks Matt!
Posted by anonymous
Tue Feb 24th, 2009 04:45 PM
Just because everyone repeats it, does not make it true.
I, too, can graph two potentially unrelated items, adjust the axis, and voila.... I have correlation and/or causation.
Problems:
1) The crack econometrician missed the simple fact that the macro relationship is logrithmic, not arithmetic.
2) The Comptroller only reports what the firms paid, not where it went. News flash! Bonus dollars actually get paid to employees outside of NYC. And more so in recent years.
3) How would the argument work for cities that had experienced much greater growth that have no discernible bonus pool allocations? Did those markets go down because the wall streeters didn't spend their bonus pools there? Miami, Vegas, LA, Phoenix, etc.
Simplistic analysis makes the author feel like they found Ockham's Razor, but in reality, it illustrates the need for better education in this country.
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Posted by Foolish Jordan
Tue Feb 24th, 2009 04:47 PM
Although the two graphs do seem to correlate nicely, it strikes me that in both previous cases where bonuses dropped (1999 and 2003/4) the housing prices kept on going up.
Posted by Jonathan J. Miller
Tue Feb 24th, 2009 05:01 PM
Hey anon 1 - lighten up. Of course the bonus pool is not contained in NYC. Give the guy a break.
Jeff - too funny. I posted an updated chart today on this same matter: http://tinyurl.com/bnegry
Posted by Noah
Tue Feb 24th, 2009 05:11 PM
Its ok to get criticism here, all opinions are welcomed!
Certainly there will be some relationship between the two, because of the desire for wall street bonus recipients, especially super high ones, to put that money into trophy properties in Manhattan; status symbol property is a culture phenomenon with the uber wealthy wall streeters, M&A attorneys, IBs, etc.. and that includes properties ranging from 2.5M and up! Maybe a bit lower. It affects a good group of price points.
My critique of the chart comparison would be a very simple concept of 'looking where we came from', to gather a useful interpretation from this dynamic; given the nature of this current recession.
The fallout, of bonuses which we know hurts the high end, is coming at a time when Manhattan media price data rose aprox 300% in 10yrs time. The fact that it is happening after an unsustainable, parabolic credit powered housing boom, makes the dynamic a bit more interesting. If prices only rose 10% when this fallout occurred, I think any connection between the two would be more muted; dont you?
Knowing how Jeff writes, this piece is clearly void of any comments, opinions, or predictions on just how the two factors will hit this market in the future; probably for reasons similar to what ANON comment #1 made.
Posted by jeff
Tue Feb 24th, 2009 05:18 PM
When I write titles that rhyme I take heat for my bad puns, when I don't, people don't read them. Clearly as my title implies, these charts need to be taken with a few grains of statistical salt. However, when piled onto the data we have shown on Urban Digs before regarding land price appreciation, the surge in residential unit values above owner equivalent rents and the qualitative information on the quality of life in New York likely peaking, I'm sure everyone can understand why we have been so circumspect about the NYC market for so long....and as it appears today, rightly so.
Posted by cfranch
Tue Feb 24th, 2009 05:20 PM
Anon:
I think Jeff is being implicit not explicit in his analysis. Your over the top reaction might be due to the fact that you are a recent purchaser of a condo. Maybe we can all agree to end our posts with our real estate status i.e. owner or renter.
Me: renter
Posted by cthulhu fhtagn
Tue Feb 24th, 2009 05:53 PM
Here's a question:
1. Bronfman brother buys townhouse $3 million in 1994, sells to Madoff beneficiary for $33 million in 2007.
2. College classmate buys East Village studio for $75k in '94, sells for $225k in 2000 (the point cited by many jejune commentators as the beginning of the bubble); comps now offered at $600+ (after a supposed "decline")
Why should Manhattan resi not fall 90% peak to trough? Does anyone think that with no investment banks left, world's largest insurance co. now apparently going to announce $60 billion loss, BofA, C, WFC on life support- that Manhattan's main industry is going to be expanding?!
Posted by the skeptic
Tue Feb 24th, 2009 05:59 PM
anoymous works in my office, and trust me, he's belligerent on all matters. However, what I believe everyone here has failed to recognize is that he is requesting precision of analysis, nothing else. In the case of the graph, it should be logorithmic so that the scales on the left and right properly reveal correlations. It also would prevent the latter years from looking like a bubble when it might not be. His points 2 and 3 are also revealing. We all just assume causation here because the real estate bubble happened at the same time that bonuses peaked. It's worth pointing out that causation is only an hypothesis. Finally, he's a renter.
Posted by condo_shmondo
Tue Feb 24th, 2009 06:25 PM
Do we really, really think that all these new build glass $1 million condos that have popped up all over NYC over the past 3 years will sell for anything more than $250,000 by the middle of next year?
I've got my 250k ready and waiting. I have my eye on two particular buildings just waiting to pounce. I'm salivating at the prospect of it!!!
Posted by Fred
Tue Feb 24th, 2009 06:49 PM
actually, it should be semi-logarithmic because the time scale is the same for both. 99 - bonuses recovered fast and remember the market didn't bottom until 9/02 bu by that time jumbo financing was in full swing. Point is wall street bonuses bounced back fast and there was continuity in debt financing. Plus, NYC was pushing new development hard. It's more apropos to focus on 94/95 where there was clear correlation. Fact still stands that with the dow off 50%, why in the heck won't the average sales price be back at 2003 levels? or worse.......
Posted by LovinIt
Tue Feb 24th, 2009 08:02 PM
You said it shmondo- no bonuses = no bottom for prime manhattan. the data proves it. this summer we will see that suckers who bought in 2007 will weep when they can't sell for even $500 psf and the bank comes knocking at the door. we will live large from their loss because of they were greedy idiots. they will probably cry about paying 6% to find a buyer too but they will need every slimy broker trick in the bag to unload their POS condo.
Posted by lars
Tue Feb 24th, 2009 08:28 PM
My guess is that the level of bonuses paid on Wall Street is a very good proxy for the economic health/wealth of NYC in general.
So as bonuses go down, so does the overall prosperity of NYC; and therefore, with the wealth/income of NYC residents declining (sharply) the economic spending in NYC will decline (sharply), which means the price of real estate will decline (sharply).
Simple economics: fewer dollars chasing greater number of apartments for sale leads to lower prices. Pretty basis stuff.
Posted by lars
Tue Feb 24th, 2009 08:31 PM
Opps... should have been "pretty basic stuff".
My bad...
Posted by Bill
Tue Feb 24th, 2009 10:45 PM
I have no qualms with the post's intent. You'd be hard-pressed to find anyone disagreeing that expanding B/D and bank balance sheets over the last twenty years drove bonuses up and real estate prices, too.
What galls me is the fact that bonuses this year were THE SAME as those paid in 2000, the height of the Internet bubble. That's insane.
Posted by truthteller
Tue Feb 24th, 2009 11:40 PM
It's not all that complicated.
Mortgages should be no more than 3 times income. Manhattan real estate was so overvalued that mortgages were running at huge multiples of the 3 times income level which is safe and appropriate.
So, everyone just take a deep breath, you'll be buying trophy properties for pennies on the dollar in another few months.
Now I know a bunch of people around here don't like me using the "M" word (moron) or the "I" word (idiot), but as the truthteller, I must say that people who bought into this insane bubble were morons and idiots and I'll give you one more word some may not like, the "G" word--GREEDY.
Posted by OT
Tue Feb 24th, 2009 11:49 PM
TT - do you have any data to back your claim that people were levered at greater than 3 times income. I know no co-op will allow this, and they make up 80% of housing stock. Very curious to know your source. I don't know a single person that borrowed greater than 2 X income and most of my friends own.
Posted by brenda
Wed Feb 25th, 2009 05:50 AM
OT - new development, many people bought with 10% down, HELOC, no PMI, at mortgages of 3X income (or greater). 3X may work if your income is fairly high, but at the $500K income, depending on children, expenses, etc, it can be a killer.
New development wasn't the only cause of the bubble, obviously, but the hype associated with these buildings certainly promoted it, and the money was easy.
I don't think coops are 80% of the housing stock any longer. And remember, just because someone's financial condition was stable when they closed on the coop, doesn't mean that they didn't go out the next day, week, month or year and purchase that place in the Hamptons.
Posted by Fred
Wed Feb 25th, 2009 09:49 AM
the comparison is just median price to median income, all of which is readily available. i think NYC hit like 9x to 10x and the national long term average is 3x. secondly, the denominator effect pushes the multiples higher even as prices come down.
Posted by LovinIt
Wed Feb 25th, 2009 11:44 AM
people should listen to brokers like truthteller instead of question him. the rest are delusunal idiots and the owners who listen to them are now all desparate idiots. what more do you need to see? noah's data is PROVES that prices in prime manhattan will go below 500psf whether you like it or not. renters get your down payment ready, our time is almost here, justice will be served.
Posted by brenda
Wed Feb 25th, 2009 02:44 PM
Fred, those numbers don't quite work for NYC as the market is so heavily rent-based. Still, the leverage was excessive.
Posted by OT
Wed Feb 25th, 2009 04:36 PM
Fred - you are mixing metrics. The metric I question is the mortgage to income ratio. So if you make 250K per year and have a 500K mortgage, the ratio is 2 to 1. The median price to median income ratio is a little misleading in my opinion, as it includes rent-stabilized tenants which make up a significant percentage of NYC's population (1.6 million units) and typically act as a drag on median income numbers.
To illustrate further, cops/firemen/etc. are required to live in the borough they serve. Let's assume their take home pay is $100K, they can't really dream of raising a family in Manhattan, but since they receive subsidized housing, they are including in Manhattan stats.
I think a more telling stat would be median income of property owners to median price, which I suspect will be much lower than 9 or 10 X.
Now of course, all of these numbers will be turned upside down for the next several years as NYC turned out not to be insulated from the general economic malaise, and may in fact be hit harder than some other areas (although I think TARP and other government programs will prop up NYC better than other areas).
I am still curious to hear where TT gets his numbers from. Maybe his alternate screen name, LovinIt may respond.
Brenda: I hear you on the new dev buyers, but this is a specific scenario and I am curious what the total numbers are. I just don't think there was the type of risky activity in NYC we saw elsewhere - of course there was some degree of it, but nothing like Miami, LV, SD, etc. I know that several years ago housing stock was approximately 85% co-op so I adjusted down to 80% due to the new devs - I expect this is pretty accurate, if not conservative.
TT/LovitIt - I hope you find a home you like at a price you like. I have a feeling you are going to miss the bottom, stay on the sidelines, and continue to be bitter through the next up cycle.
Posted by samfoster
Mon Mar 2nd, 2009 04:53 PM
fascinating blog. But if the S&P 500 can go to a 12 year low, why on earth won't Manhattan real estate go to a 12 year low at some point soon? It must.
The only thing that keeps Manhattan prices at ridiculous levels is Wall Street money and egos.
But Wall Street funny (and fraudulent) money is finally over and with it goes Manhattan real estate, which remains the most overvalued asset worldwide.
Better to sell here and buy an apt. in Washington D.C., the new center for funny money.
Posted by Kourtney
Fri Apr 8th, 2011 09:20 PM
8SyWHf I'm not easily impressed. . . but that's impressing me! :)