Manhattan Bears: Beware What You Wish For

Noah - how did your OH go this past weekend? Anything you can share?

45 people, offer accepted

I don't know Noah, Manhattan was a great place to live in 1997, I can say that with no doubt. I really don't see why the next time we see $300 psf on the UES for a 1 br it will be all Mad Max.

I see what you are saying and you are right to a certain extent. But so VERY much of the wealth out there is fake. It is on paper and nowhere else. Just because the value of that imaginary fantasy paper wealth evaporates, and it will, it doesn't mean the quality of life will suffer the same losses percentage-wise. Sure, there are some lean years to come following the orgy of fat years we have just experienced, but I don't think all the changes will be as drastic and unwelcomed as you think.

Oh, and by the way, anyone buying 50% off the peak and calling themselves a vulture is sadly mistaken. There will be a lot of blood in the streets for those buying that 1 br UES condo for $600 psf on the way down. Vulture? 'Roadkill' is more like it.

JKD

I just lost a deal in a brooklyn because the building is experiencing defaults from residents. Painful. It's hard enough to earn a living as a broker these days without having things like these to deal with too. That is why buyers have attorney's working for them! I would have walked too if it was me

JKD - well, its because of where we came from. All the lost wealth, the rise in taxes, the city budget shortfalls, the blood in the streets..etc. It just has an effect on people.

What I noted there are risks, that are not currently all here today. So its just talk about what may be possible if this slowdown proves as severe as some think.

If it does, how will buyer confidence adjust?

I HOPE YOU ARE RIGHT because I love living here. but already I see more and more empty retail and rising homelessness. change like that takes time to hit home, but when it does, it sticks for a while. My biggest fear is to undo the improvements this city has seen over the past 15-20 years or so

I feel for honest brokers out there working hard trying to get buyers and sellers together. But the sad truth is, every transaction taking place today is is a bust waiting to happen if it is not an all cash deal.

Prices are just too high. I am frankly surprised that any bank in the world is still offering mortgages in NYC (that can't be pawned off on the Feds).

It was a bubble, a fantasy. Not everyone has woken up from the dream yet, but for all intents and purposes, it is over. There is an echo effect in real estate due to the low price transparency and very strong psychological anchoring. But this will only last so long.

Every day is a good day to sell, in most cases the first bid is going to be the highest one your seller will ever see. Close as quickly as possible, before the buyer wakes up.

John

Interesting post. Noah - when do you plan on looking to get back into the market for yourself? Is there a target ppsf you are looking for?

BTW, went to an open house over the weekend, the realtor said that they are probably no longer having open houses bc the traffic has been slow. And this was a desirable apt in a prime downtown location!

"My biggest fear is to undo the improvements this city has seen over the past 15-20 years or so"

I'm afraid there is no way to avoid the budget disaster that is on the way. There will be service cutbacks and benefit cutbacks to city workers/retirees, it is inevitable.

There will be a cutback in the number of coffee shops (is this a bad thing?), clubs (how many bottles of 500% marked-up booze can you drink in a week?) and restaurants (how many $60 steaks can you eat in a week?). There were plenty of choices before the bubble and there will be plenty after.

Family life? Well, as far as I can tell you need to be a Rockefeller to support a family in Manhattan as it stands. If this changes, I'm sorry, but I do not shed too many tears for that. For those that stick around, the kindergarten wait lists will be shorter. For those that don't, the Museum of Natural History is just a train ride away.

Crime is really the biggest issue I'm sure you are concerned with. But this isn't a matter of what we want or don't want, it is going to go up. It is not a function of the real estate market going down, it is coincident at best. It is more about job losses and general economic deterioration, something that is happening in advance of the real estate downturn. And something that will continue independent of it.

Some argue (not me) that massive inflation will keep a bid under real estate prices while driving unemployment much higher. If this happened, we would see a dramatic affect on NYC crime rates and the general standard of living in NYC, all while real estate prices did not go down.

I am not trying to be a gadfly. I honestly believe that this real estate crash is a GOOD thing in the long term and I don't think anyone needs to be careful what they are wishing for.

John

I hear what you are saying Noah, to some extent.

But I think you are missing the fact that tenants will be much better able to pay their maintenance if they aren't being crushed by their mortgage.

a 750k mtg at 6% costs roughly $4500 a month. If you knock that down to a $500k mortgage, you are now only paying ~$3k month. Who is in a better position to pay their maintenance?

If there wasn't a bubble, these places wouldn't be dealing with these defaults. I am not too worried about Manhattan, there are still hordes of refugees in the outer boroughs and Hoboken/Jersey City that would love to move in if the price wasn't unreasonable.

-Kevin

Noah wrote:
"In the end, buyers who want this market down much further should wonder how the forces that could do so may affect their willingness to live in this great city"

Noah,

You surprise me with this statement. I thought you of all people understood the price adjustment affecting Manhattan real estate market (and the rest of the country as well) has nothing to do with WANT and all to do with FACTS.

Your comment suggests otherwise. No matter how much I may WANT prices to go up or down it is irrelevant. Fundamentals are driving this bus.

lars - I dont think that statement overrides general macro fundamentals?

the point of the discussion, although its nice to spark some debate and liveliness here, is that with a severe economic slowdown more and more buildings will show deteriorating financials, as opposed to being in better shape than during boom times.

I lost two deals because of this in past 2 weeks. It doesnt matter that both deals represent this market down 20% - 25%, the buyers walked without considering a renegotiation. Its telling. I want to pass on this info to you guys.

Those who I talk to and I consider sharp bears who expect this market to fall 70%, must understand that what I noted above are the forces that likely would contribute to a market falling that severely, and in the end, they may choose not to live here if they get their 70% off with those circumstances.

I do not see 70% adjustment though.

Hi Noah! I love your blog. I have been looking to buy since 2006. I am glad that I did not buy in the past when you had to make a decision on the spot and brokers were too busy to call you back. Realistically, what do you think price per square foot is going to look like in Manhattan in 6 months? In 1 year? Prices still seem high based on their listing prices. Thank you!

Market price manipulation is the true CRIME this city needs to be mindful of. This place suffer from too many white collar criminals robbing working families of all hope of a sustainable future. In good times we methaphorically "hold the purse" and in bad times we drive the getaway car. This city is worthless without the working class who's back this city was built on. California, Florida, even Syracuse NY are looking awfully cheap right about now.

I have been writing for almost 4 years now, prob over 1,100 posts. Its perfectly fine for you guys to disagree with me or a post I write. Im not perfect and not right all the time!

This is more of a sign of the times piece. I think buyers need to be cushioned that they should expect slightly more negative discoveries during diligence phase than during the boom times. Thats all. It should be expected.

Things like, dwindling reserves, rising defaults, loans coming due, etc.. should to an extent be expected if an economy experiences a severe slowdown and consumers feel big time pressure and a negative wealth effect. While its highly individualized, you have to expect some infestation even in the best buildings.

Its what the $$$ were used for, what is the plan going forward, how properly was the bldg managed up to that point, etc.. that mean everything. Uncertainty is a DEAL KILLER! Thats the point here.

Lars - you know what I should have clarified. When I made the statement at the very end of the piece:

"In the end, buyers who want this market down much further should wonder how the forces that could do so may affect their willingness to live in this great city"

...I thought it was clear I meant the buyers who expect prices to fall 60% to 70% as I stated earlier in the piece. In this context, the statement was meant to explain that those forces play a big role in getting a market trading down 40% or 45% to start trading down 60% to 70%...thats when you cant give a property away. I believe early 90s, even though I was HS then, was a period that saw such illiquidity, but for varying reasons.

@ Noah

Point taken. You can't have it both ways, sort of pick your poison at this point. Don't take offense and keep up the good work.

Regarding the issues that came up with the co-op.

Now that you are aware of the issues, in hindsight do you think they were issues that could have been 'spotted' or researched on-line before having to go to contract to find the issues?

uwsider - no, because there is no place online that has this information.

perhaps the buyer could go to the management company, buy two years financials and request to see the board minutes, but the way its done here is that you get a offer accepted first, and then atty gets involved and runs diligence.

Great post Noah. For those who want prices in NYC to decline by 50% or more, please take a look at the cites where this has already occurred and tell me if you want to live there: Detroit: Anyone want to live here? Phoenix: Anyone want to live in the kidnapping capital of the country? I didn't think so. Stockton, California: Anyone want to live in a city being patrolled by an armed militia? I also did not think so.

Noah, do you think NYC is headed for a return to the rent control/stabilization days?

For the bears wishing for a 50% + decline in prices, here is a preview of what you can expect. ENJOY! http://www.nypost.com/seven/05192009/news/regionalnews/manhattan/violent_crime_wave_jolts_trendy_downtown_170010.htm

IDWT - there are currently 1.5 million rent regulated units in NYC (all 5 boros, includes rent stabilized & rent controlled). Not sure what you mean by return to.

Donald - saw that article and it is basically useless. It didn't give any clarification on data source, data range or methodology. More garbage reporting from the Post.

Noah - congrats on the successful OH this past weekend. Suckers rally or not, seems like there is definitely a pickup in activity, and I hope you benefit from that.

I lived through the 70's recession; actually I loved it as I was young and things were cheap. The late 80's--mid 90's one? I lived in the same apartment i had been living in, in the 70's--a large studio off Fifth in the 60's

Only ownership had changed and the new owners rented apartments to undesirables--I don't think anybody wants to live next to cheap hookers on one side and truly bad dealers on the other as it was a way of getting me out

I worked for SSI in the Bronx so I went from one depressing place to another. I would count the Olde English bottles on the street on the way to the subway at Lex & 60th. I stopped asking if kids had friends as the mothers would detail their days spent away from windows and drive by shootings. Kids played nintendo instead of doing "kid things."

My best friend's building on the UWS--a doctor's widow had her apartment "invaded" by crack dealers (it was a New York Magazine cover story) and they "took over" the building for awhile until the residents and the police got the dealers out. It was a building filled with young children, pregnant women and crack vials.

I don't think NY will return to those days. The buildings have become too good; the residents whether coop owner or rent stabilized too active. That is in established neighborhoods and buildings. I'm not sure what will happen in less established places

I sold my coop last fall and got out of Dodge. Though it will always have my heart I wanted to live like a person. Here I could afford a house and amenities. In Manhattan I lived like a perpetual grad student long after those days were over

I truly hope apartment prices don't fall much further and the stock market continues its march back. Only fools and people who have never had resources would wish for a repeat of the 70's or late 80's--mid 90's.

pia - well said! Thanks for comment

Fundamentals may determine an asset's price in the long term but emotions often rule in the short term. Right now sellers emotions range from disbelief to fear. Too many are holding on to yesterday's prices. They will relent at some point and this market will find it's bottom. RE bears, myself included, just need to be patient. Too many of my ursine friends vilify the bulls(owners, brokers) when they offer up their green shoots. The longer they hold out the harder the fall.

Noah, the force that will drive down the prices from 40% off the peak to 50% off (or more) is the extra risk of default from your neighbors. Not only default on their mortgages, as a foreclosure next door will hurt your comps, but also a default on the maintenance.
As you and others are starting to realize you can no longer see a $1,500/month maintenance and assume that amount will stay constant. Buyers will need to price in the fact that their maintenance may actually be $3K or $4K for a while until defaulting buyers are evicted and new tenants who will have a lower cost basis move in. This added risk will force apartment buyers to offer less.
Eventually we will see investors jumping back into the market. We won't be able to sell 11,000 units one at a time so we'll need investors to buy all 10 units in one building. But these buyers won't come in until monthly mortgage and maintenance expenses are near projected rental income.
I predict we come off 50% from the top. (But that only puts us back to about 2002 prices meaning lots of people won't be underwater and NYC won't revert back to the 70s.)

Noah
I am very sorry you lost the sale.
Inventory is going down, so your return to optimism is well founded.
However, prices need to go down quite a bit further as you yourself were proclaiming for all the reasons you were listing. Nothing substantial has changed there.
This will happen and the buyer who will do it will be the one you are guiding. Thx for steering the vultures. A well placed piece of meat will always do it.
As to the impact, it will be interesting to see the distribution of NYC's income in 1997, 2003, and 2008 from different sources.
I suspect that the large losses of Wall Street and Legal jobs will have a larger impact given the city tax rate, than will the reduction in income from property taxes -- recall that property taxes are probably lower in NYC than in the burbs, and the income tax is supposed to offset that.

Since I'm Noah's buyer who bailed yesterday, I figured I could chime in!
We are in an unusual position---very cheap rent in a great place, so the plunge to buy has been long in the planning/dreaming (looking for 2.5 years). It seems that all the stars aligned this month: interest rates are very low and we found something we liked in our price range. All too good to be true...until our attorney did her diligence and found a multitude of problems. Maybe we could have gambled, maybe we could have renegotiated a big price break, but the whole situation just wreaked of trouble (for all the reasons Noah mentions above, and more).
We've been on the sidelines for a long time and it seems that it is worth waiting longer. I can't believe every co-op in NYC is in financial dire straights because the economy as a whole is a mess. Of course, I might be wrong!

Along with the other posters, this post does seem contradictory to your usual skeptical self!
Thanks, Noah, for the post.

Noah,

I was just keeping you honest :-).

The major point of your piece, which I took to be, price of coop/condo is only one piece of the puzzle and overlook the financial condition of the underlying building at buyer's peril, was SPOT ON and EXCELLENT advice, as always.

Noah, great piece and great discussion. I love the way you underscore the fact that people psychologically want to be vulture buyers, but when they see what's crawling around in the dead meat, they often lose their appetite. This is the natural way of things in the psychology of markets. People don't just rush in, buy foreclosures and get rich. Oh if it only worked that way, we would all be rich and not just on paper. Declining prices beget declining prices, just as rising prices beget rising prices and there are real world issues that drive both. I continue to contend that apathy towards real estate will characterize the true bottom of the market and the best buying opportunity from a timing standpoint (and financial return standpoint). Of course if you need new shelter, you can afford to be early.....but be prepared to hold your nose and your property for a while. Unfortunately, by the time we hit a solid bottom...our Urban Digs audience may have shrunk to nothing.

A little late to this, but isn't it time to back off of the speculative nature of owner-occupancy and focus more on the consumption value?

We have enough liquidity and credit to be able to afford the purchase an apartment similar to our current rental. Still, after factoring in the mortgage tax deduction, maintenance and property taxes, it still doesn't make sense to buy; the annual cost of renting is still much lower than the annual cost of owning would be. Until prices drop to the point where the difference is much smaller, we'll be here waiting patiently.

It may be the case that prices never drop that far. If so, then I'm better off renting and investing my funds somewhere other than in the NY housing market.

Trying to time markets is a tricky business, even in an asset class as inefficient as residential real estate. Look at the Case-Shiller index for the NY MSA around the time of the 1987 market crash: 25% appreciation in 87, 15% in 88, then at least five consecutive years of non-positive returns. If you consider inflation over that time, that's five years of declining real returns corresponding to an event that was relatively small and short-lived compared to what is going on today. I am certain that in 1989 or 90, there was a chorus telling people to buy now or miss the train forever.

I sincerely appreciate the "cut through the usual broker crap" perspective presented here, but the emphasis on investment value over consumption value still smells like a broker come-on to me.

Noah - good post as usual. I have to admit I am in the vulture camp, and I agree that there is the "be careful what you wish for" comment. That said, prices got so ridiculous in recent years that people who would be considered well off in 98% of the rest of the country couldn't buy a decent-sized place in a nice neighborhood. Now that the marvelous securitization machine has broken down and real jobs / real salaries count, prices need to adjust to come back in line with the fundamentals that the 99% of us who weren't structuring ABS live by. I agree with you that all of the above factors (rising unemployment, crime, etc) might make the city less appealing to live in, but given that many of these gains were underwritten by Wall Street profits that proved ephemeral, I wonder if we aren't just going back to a less bubblelicious time - a "new normal". I happen to be an optimist and think this will not be like the 1970's, but rather the mid-late 1990's...

I'm unclear which points on your list haven't happened yet...As fas as I see, you can check each one off, but hold judgment on severity for another few years. This is fait accompli, the game HAS changed and all these factors will conspire to put an extended down cycle into NYC and NYC real estate for a few years (hopefully only a few). Unemployment is rising, taxes will be going up, and up a lot- think 60% marginal tax rates in 2011 for $200k+ earners. Quality of life will decline in this city..Accept that it may not revert to 70's depravity, but it will be evident to every resident and visitor for a long while..

wow, this discussion really did trigger some response both here and on streeteasy. Im glad it caused a reaction, and started people talking, but I also learned that my writings can be interpreted in various ways.

The purpose of this post, a daily thought in my head triggers most posts here, was:

1) to describe that more buildings are finding themselves seeing weakening financial stability as this severe economic slowdown hits our local economy. Buyers should be at least aware of this trend as I lost 2 deals in 2 weeks after atty read board minutes and issues discovered - a nice piece of real time information I thought to pass on to you guys

and...

2) that the biggest bears on manhattan re see this market falling 60-70% peak to trough. Well, if that happens, and a $2M pad sells for 600K, the socio-economic forces AT THAT TIME is probably what will drive a market already down 40% or 50%, to start trading down 60% or 70%. Its hard for local housing markets in general to trade down 70%, but yet some bear see this here via an overshoot to the downside that is common in boom/bust cycles.

Well if that happens, I think some of the forces I noted above would occur (and that is not good) to make that happen.

This post was not a bottom call. This post was not a bullish call for sustainable recovery. This post was not a call for a 70% drop. This post does not call a 50% buyer a vulture buyer, although I can see that interpretation easily from rereading the piece (media does need good titles to catch the eye!). In this case, when I said the term VULTURE BUYER, it really was meant to the biggest bears that see this market falling 60% to 70% peak to trough, and my point was that the eats at that time may not be too yummy!

But I can see how its interpreted differently.

Noah, no need for an explanation, your post was very clear. Essentially, if prices due fall 70% from their peak, that reduction will most certainly reflect all of the negative realities you list in your post (how could it not with such a drain on tax revenues and flight from the city by the wealthy who won't want to live in a hell-hole).
My sense is that we are on the path (early on, to be sure) toward seeing a reduction in the stellar quality of life we have all enjoyed for the past several years. This will lead to those families who can leaving the city, making Manhattan more affordable, more gritty, more oriented toward the young, the poor, the "artistic" and the eccentric. This will be both good and bad, but it will certainly be a different product than the one for sale in 2005.

did someone say inventory is going down??? do they know how many units are being held back at this point. yikes

Prices down 50% does NOT equal disaster. I have seen many cities such as Tokyo, Singapore, Hong Kong which also had large prices rises over 10yrs and afterwords declined 50-75%. You are taking the froth off the market. If people are priced out of NYC then lifestyle also deteriorates as things will turn into a utopian elite city.

Problems occur and wash themselves out. The problem with us in America is we wish for there to be no problems. Boom and bust is normal and likely the bust doesnt take things away 100%, its just a correction.

NYC real residential estate is still completely overpriced.

Modest 2-bedroom, 2-bathroom apartments are over $1mm. That's still way too expensive for the regular working professionals who typically live in these units.

We are in deflation. Finance/banking jobs paying $300k+ have been eliminated. Law firms are laying off 10% - 45% of their associates (these are jobs that were paying $200k+), and cutting salaries 10-20% for the survivors. Non-equity partners and counsel are being forced out.

In other words, the jobs that provided the structural support for previous bids are being eliminated.

Even if you have a stable job, you have to factor in the likelihood of increased maintenance, increased taxes (on everything), elimination of mortgage deductibility, etc.

I predict another 50% decline from *here*. At $500k, those 2-bedroom units are a value-buy. If I had a way to be writing puts on these units, I would do it!

Noah, I remember expressing a closely related sentiment on this topic back in Feb. ('DIC Q4 2008 Headlines')

"I'll be the first to agree that it makes sense for housing prices to be in line with median incomes- but if you want a steep, precipitous decline because you embrace this point of view, be careful what you wish for. We're already seeing small businesses and restaurants closing all over the city. It won't be so nice to live in your trophy apartment if you have to worry about getting mugged- on the way to a subway station much further away because service was cut to the closest one. Or if your employer's retail division can't generate enough revenue to keep jobs on the payroll- leading to yours eventually."

This is the kind of discussion I've been hoping to see on UD for a while now, many great comments. I especially like seeing accounts of those like pia, that have been around much longer than myself.

I'm late to the discussion here, but:

lars- "I thought you of all people understood the price adjustment affecting Manhattan real estate market (and the rest of the country as well) has nothing to do with WANT and all to do with FACTS."

Ultimately this may be true but if we saw nothing on UD but RE stastics, macro analysis and dry discussion, I think most (but not all) of us would lose interest eventually. Buyer and seller sentiment is very relevant here, and it's nice to see that it's been mature for an unmoderated blog. I feel much more informed when I can see a cross section of buyer, broker and seller opinions. I can judge for myself whether they make sense or are emotionally charged. As Noah has indicated in recent topics both sides of the market (not just sellers) can rationalize prices and trends emotionally- to their detriment.

My opinion is that the rate of unemployment in NYC will be the number one metric that RE prices will track to; if it reverses, or at least levels off it will have a large buffering effect regardless of macros / credit. If it continues rising we'll see prices go down at the same rate and some degree of deterioration to follow. Just my opinion.

I remember FormerSeller! Great to keep seeing your comments here, and its nice to see that expanding the content covered is what you guys want.

UD 2.0 involves expanding it even further, but that will be later in year.

I think all these factors are going to converge in a new economic reality where almost everyone makes less and almost everything costs less.

I don't think NYC needs to approach crack/den prices for it to be a nice, affordable place to live.

The cost of everything has been bid up with the easy money and I see prices collapsing in the near future. Deflation is coming.

When 2-bedroom, 2-bathroom apartments are priced at $600k or less we'll be where we need to be.

Thisson, why does a 2BR have to be priced at $600k or less for everything to be where it 'needs' to be? Why not throw in parking, storage and a private garden plot? Seems rather arbitrary.

It assumes that prices won't be 'right' until every qualified buyer is able to afford a comfortable space with enough trimmings to keep them from commuting from the burbs instead- on their current income. We may have recently experienced a bubble caused by an influx of fake wealth and now the rules have changed- but that doesn't mean demand will drop in the same proportions. I doubt that's ever been true in Manhattan at any point in the past.