Looking Ahead: More Upside or Downside Risk?
Both Noah and I have been involved in several conversations about a current market outlook with readers on this site, Streeteasy and amongst ourselves. I therefore thought I would pose the question of: are people seeing more upside or more downside risk in this market? … and for those quant fans among you, how much on either end in terms of percentages?
Arguments for further downside risk:
- The Fed stopping its MBS purchases means rates will spike and prices will have to decrease to maintain current affordability levels.
- The rent / buy equation in NYC is still largely out of whack, even if it has come down from its previously astronomical levels … with rents continuing to fall, it makes no sense to purchase right now.
- The very slow NYC foreclosure process means we are not truly seeing the real distress in the city’s boroughs; Manhattan is not isolated enough to not feel the consequences this distress
- Unemployment is not expected to fall any time soon; its ripple effects will continue to be felt, and then some, as existing owners see no need to move and all potential first-time home buyers purchased during the last 6 months, benefitting from the tax credit.
- Banks can only continue their extend and pretend game for so long before the delinquency backlog catches up with them and us; home prices will then have to be written down to reflect book valuations.
- Nation-wide, housing starts are down; little real recovery can take place without new household creation and this is not on the horizon any time soon.
- The stage is set for a double-dip housing price downturn scenario; the past six months or so was a head-fake before the second phase of this downturn kicks in.
Arguments for upside risk:
- Unemployment is a lagging indicator – the economy always gets well into a recovery when unemployment finally starts dropping (average of about 1 year after the bottom).
- Housing starts are down and excess housing inventory is being absorbed; this is an absolutely necessary step for both housing and the economy to recover.
- Rates will definitely increase and there are plenty of buyers wanting to get in before they reach 7% or 8%. This thinking has already served to decrease inventory and stabilize prices [Each 1% (100 bps) increase roughly equates to a 10% decrease in the price of the home.] Unless you see property prices dropping more than 20%, wouldn't it be worth it to lock in now?
- Manhattan’s rent/buy equation can never be compared to that of the rest of the nation; it’s a unique place that keeps attracting businesses, students and investors, alike. There will always be a premium for living and owning here.
- The weaker dollar is bringing international investors back into the NYC market, the momentum of which is only likely to continue.
- The fact that bonuses were back with a vengeance this year, while not providing a massive cash infusion, has certainly served to boost morale and confidence for sellers and buyers, alike.
- Lastly, the worst is behind us (and, frankly, it was nowhere near as bad as people expected); no longer do we have significant downside potential that would justify material discounts from sellers; we have turned the corner, as evidenced by an uptick in prices and activity at the low-end of the market which will only spread to the higher end.
Given that this market did have an adjustment already, the general consensus that I’m gathering from numerous conversations is that in a worst case scenario, we have another 15% left in terms of decreasing home values, and that’s NOT in the sub-$700k segment. The best-case scenario I hear is a flat to low single digit increases 2010, with low single digit improvements in 2011.
So … what say you, UD readers? First, does this cover both sets of arguments? Second, which side are you leaning towards and how are you quantifying your thinking?
Posted by Noah
Mon Mar 22nd, 2010 12:03 PM
It is an interesting question Ana when considering the extreme moves this market went through in the last 3 years.
My answer to the question, in hindsight of course, would be something like this:
2007 --> more downside risk
2008 --> more downside risk
2009 --> with fierce adjustment, more upside risk
2010 --> with reflation from fierce adjustment, xxxxx
aha, so what is it? Now I did NOT call the bottom in March 2009 and was part of the crowd that thought the fear would lead to sustained depressed sales volume for many months more - something that reality disproved. Honestly, Im confused as hell right now considering the sustained improvement from exactly one year ago and shift of extremes and not afraid to admit it.
This market is clearly still trading at an adjusted lower level and we clearly are in very interesting times. I saw a mini euphoria for certain products where bids came in well over ask and then the buyer could NOT close..telling us what? Perhaps the market got ahead of itself and the tighter underwriting environment actually kicked into play and did its job of adding sanity to an otherwise emotional bid from a buyer that simply wanted one specific property?
While buyers dont seem to be paying peak prices, future forces of the anticipated higher cost of money + higher taxes may crimp affordability and therefore, sales volume...then again, markets are irrational, emotional, and tends to be susceptible to herd like behaviors by consumers/investors interested in the asset class. With that said, certainly this market may continue to reflate if all asset classes continue to do so over the next 8-12 months. Why not? if there is one thing I learned, is that markets can and sometimes do things that fundamentally dont make sense, and it can last much longer than the smartest people in the world think.
Given that we had an adjustment already with a slight improvement from the extreme a year ago, this question gets very confusing. I simply do not see any shock adjustment like we had with Lehman, but I also do not see sustainable 5-7% appreciation year in and year out over the near term from current levels due to bigger picture concerns.
I would add that it seems perhaps the market is quite balanced right now..That is, adjusted lower in response to the greatest credit shock/deflation we had in 100 years and slightly improved from the height of fear one year ago. If that means properties trade on average down 15-30%, rather than 25-40% one year ago, so be it..The best thing that happened is that this market adjusted lower.
I dont know how to answer this question more specifically. I guess for every individual, its different depending on their unique situation and therefore you will get multiple answers with varying justifcations.
Posted by Ana Maria
Mon Mar 22nd, 2010 01:18 PM
Thank you, Noah. I will keep my response short: I hear you on all fronts. Further, I will doubly agree the market can be irrational in the short term, but longer-term rationality tends to prevail. (not to say we're in an irrational time, either.)
I'm curious to gauge others' personal calculations / perception of upside vs downside, as a soft and mushy indicator of sentiment versus any die-hard predictions, per se.
Posted by rootless cosmopolitan
Mon Mar 22nd, 2010 02:35 PM
First of all, I noticed that the type of arguments for the upside and the downside risks are different in quality.
The downside risk list is more based on an evaluation of the actual, general economic environment, in which we are currently. The upside risk list looks more like trying to rationalize why Manhattan was different and prices would go up despite the general economic environment and a probable further downtrend in home prices nationwide.
I also have an issue with the first entry in the upside risk list, where it is asserted that unemployment was always a lagging variable with a lag of about 1 year, implying high unemployment is of less importance. This is a meme that has been widely spread during the Great Recession by various pundits, which, however, is not really true. Except for the previous two recessions, the unemployment rate peaked about with the end of the recessions every time after WWII. See:
http://research.stlouisfed.org/fred2/series/UNRATE?cid=12
No substantial lag in the unemployment rate, except for the previous two recessions. And this makes sense, since unemployment isn't just a passive variable, it feeds back into the economy via income and demand, instead. Increasing unemployment lowers demand supporting a recession, decreasing unemployment increases demand supporting a recovery. So, the question rather is why did the previous two recessions were different to the ones before and showed this lag. My hypothesis is that the effect of rising unemployment acting in favor of income and demand contraction was counteracted by an expansion of demand by an expansion of credit during the credit bubble years. However, in an deflationary environment like now, this counteracting by credit expansion likely won't happen.
So I guess it comes down to following alternatives: Does one believe Manhattan is so different that it has mostly decoupled from the state of the real estate market and price trend in the rest of the country, or even the one in the other boroughs and suburbs of New York, or does one believe Manhattan isn't different (or not sufficiently different) so that it matters after all what is generally going on?
I think, yes there is a premium for living in Manhattan, so that prices in Manhattan will stay higher than in the other boroughs and suburbs. However, this premium will still be constraint by
1. Affordability. Also people living in Manhattan must be able to afford their apartments. Whether they can do it doesn't just depend on the interest rates and income, it also depends on the already existing debt load on their balance sheets. One way this price premium materializes is certainly a price difference between Manhattan and surrounding areas up to a certain degree, but the other way this premium materializes is that people living in Manhattan accept smaller living spaces compared to surrounding areas.
2. The prices in the other boroughs and suburbs. I expect that price differences will always exist between Manhattan in the surrounding areas, but if the gradient between the price differences becomes larger and larger, then more and more people will decide to live in the other boroughs and in the suburbs lowering demand in Manhattan. So, if the prices go further down in the surrounding areas, it will put additional pressure on prices also in Manhattan.
An economic environment with debt deflation pressure, which I expect for the following years to come is not an environment in favor of inflating asset bubbles, whether in equities or in real estate. I rather expect that real estate prices relative to income will further normalize over the next years, also in Manhattan. Currently, the median price to median household income ratio is about 11 to 13 for Manhattan. In the year 2000 this ratio was about 6 to 8. Since house prices were somewhat depressed in the 90s, it is plausible to assume 6 to 8 is about the historically normal value for the price-income ratio for Manhattan. It's not 3 to 4, like for the national average, or perhaps even for the other boroughs. This is the premium for Manhattan! But despite this premium, the price-income ratio implies that it will have to come down about 30 to 50% from here over the next years to get back to a historically normal values. Since nominal incomes will increase over the years, it doesn't mean that prices themselves will come down as much. It will depend over how many years the adjustment stretches out. The longer it stretches out the less the nominal price decline to get to the historically normal price-income ratio.
rc
Posted by Ana Maria
Mon Mar 22nd, 2010 02:52 PM
Fantastic and balanced points, rootless. Thank you.
Further, yes - what you gauged in terms of the difference in the bearish and bullish arguments is my own bias :) I was trying to adequately represent the upside risk points of view ... clearly my own feelings on the matter came through. I believe the underlying economics, much to your and Noah's points, are not yet supporting a rationale for a sustainable upturn. That said, we are definitely seeing strength out there.
Posted by rootless cosmopolitan
Mon Mar 22nd, 2010 03:08 PM
Ana Maria,
Thanks. And also thanks for generously overlooking the grammatical lapses in my comment, which I, as usual, only noticed after sending it out. :)
rc
Posted by rootless cosmopolitan
Mon Mar 22nd, 2010 03:40 PM
Oh, I just have noticed that there aren't only grammatical lapses in my first comment. Regarding the price differences between Manhattan and surrounding areas, it is NOT supposed to say:
"but if the gradient between the price differences becomes larger and larger"
Instead, it must say either:
"but if the gradient between the prices becomes larger and larger"
or
"but if the price differences become larger and larger"
rc
Posted by MeekSheep
Mon Mar 22nd, 2010 09:54 PM
What about the very real possibilities of statewide budget cuts, additional taxes, and such in your downside scenario? That surely will impact quality of life issues in unexpected ways.
rootless, that was a great comment.
Posted by First time buyer
Mon Mar 22nd, 2010 10:24 PM
I've been following the 1bd/2bd market for the last few months, thinking: "this is a good time to buy". However I noticed a few worrying trends that I'd like to highlight:
a) I noticed how availability of financing seems to be key in some products. i.e. apts in the conforming loan range (under $729k + ~$150k in downpayment) seem to be moving and even prompting mini bidding wars if it is a good property/priced right. On the other end, apartments in the $1mm+ range and in particular new construction, are suffering from lack of financing with low downpayments. This trend does not seem to be improving anytime soon given the problems in the banks and the GSEs and a rise in interest rates will only exacerbate this problem.
b) New construction and new rentals are still coming to the market in a scenario where I don't see the bigger industries in the city adding employees. This particularly pushed me out of Williamsburg where not only The Edge and other new building are having problems selling, but you also see lots of other buildings still being developed. What's going to happen when all those properties hit the market? More price adjustments?
c) The shift in bonuses from cash to stock and the continued pressure from the government/public opinion to reign in excessive compensation are not changing anytime soon and will put a brake to a significant segment of the market.
d) On the optimist side, I noticed the scarcity value that good properties have on this island. This could make a case for resistance to the downside that you see in the rest of the country or the boroughs.
Just some thoughts that are making me very cautious and I can't still make up my mind if "this is REALLY a good time to buy".
Posted by Val Che
Tue Mar 23rd, 2010 08:44 AM
Hey man!
I think its upside actually... we will see it very soon :-) too overbought market
Posted by Andrew Fine
Tue Mar 23rd, 2010 09:27 AM
Noah, Ana-
I personally believe that there is upward pressure on prices as we speak. With a number of good clients in the $1.5Mil-$4Mil category, I am finding myself a bit frustrated by the speed at which quality inventory is getting snapped up. The velocity is at a rate that I haven't seen in a few years. Sellers are getting much closer to (revised and realistic) asking prices and in many cases getting full ask or slightly more. From what I am seeing on the street, I think we are setting up for a solid 7% increase in prices this year (a guess, granted).
I also believe that there is significant room for improvement on the psychological/emotional standpoint. The stock market and GDP have been improving. We all know that comps vs. last year are going to sound great (cue the NYT headlines)- although they are vs. the worst period in decades. And, I do think the jobs numbers (aided by census worker and stimulus funds finally turning into real projects) will be better than expected. So, these are all positives. The one thing that scares me on the downside is rates. If we really pop over 6%-6.5% on a 30 year conforming, that will act to deflate the market (although you will probably have a surge of buyers trying to lock in on the way up).
Posted by Noah
Tue Mar 23rd, 2010 09:41 AM
Andrew - I agree and been trying to discuss that early on here on this site. I think the next 2-3 quarters will in fact show the improvement that we had since 12 months ago and the reports will be mis interpreted as an improvement that occurred when the report is released, rather than 3-6 months prior!
So what we are seeing out there is yet to come through the reports, and we both think its coming.
Which is strange, because when the reports do catch up the markets may in fact start to slow again and a disconnect between buyer and seller occur again..time will tell.
Posted by Andrew Fine
Tue Mar 23rd, 2010 10:29 AM
Yes, it will be interesting! Wondering how much impact the bullish reports will have and if they will create another mini-peak (that i wouldn'y buy into).
Posted by Andrew Fine
Tue Mar 23rd, 2010 10:31 AM
Arrgghh, sorry for the typos!
Posted by Marshall
Tue Mar 23rd, 2010 12:19 PM
I think I have to agree with Andrew and Noah We seem to be selling condos. Our broker who I met with todays is selling 1 million 2.9 million, 2.5 million , 5.8 million jumbos loosening up a bit . I think when ever you have an inflection point you get a bounce. The fear thing I believe pushed things to be excessively negative. Once buyers realize things arent going up any more and they are not faced with multiple bids best and final type deals the price falls off then throw in the extreme fear and the buyers or the pendulum swings to far to the other side I think both of those have happened. I think buyers will soon realize that we probably have reached another inflection point so expect a little bounce forward.
Posted by Ana Maria
Tue Mar 23rd, 2010 03:22 PM
Meeksheep - great point! real estate taxes are on their way up, as are labor costs, both of which will push carrying costs up.
First time buyer - your observations (particularly on the scarcity end) hit home and seem to corroborate Andrew's, Noah's and my sense that quality inventory is truly moving quickly now.
Andrew - wouldn't that be something? actual price increases. This is the piece that I've personally struggled with: are actual CS prices higher now than 6-9 months ago? (And I don't mean average or median, but like on like; difficult to tell, I know). My theory until now has been: "yes, list-to-closed spreads are tighter; of course. Sellers are more realistic in pricing so discounts are shrinking. But the absolute pricing for similar/same properties is still lover." After longer discussions with Noah and others, coupled with comments like yours, I am slowly, very slooowly taking baby steps in coming to terms with the possiblity that prices may be on their way up - at least for now.
I actually just went to the NAI global market conference this morning, and although focusing on the commercial space predominantely, Dr. Linneman made a compelling case for a solid economic and local recovery ... baby steps ...
Question for all: I hear the "buyers will want to get in before interest rates spike" akin to your "surge of buyers" comment, Andrew - and there's some debate on the following: will prices then decrease to make up for the rate increases, respectively? If not, then this could be the most compelling "should buy within 12 months" pitch yet. If so, then why a surge? I would think then you'd buy when rates reach their peak (not before) and housing prices are at their lowest, lock that in, and then you only have to refinance on the way down.
I've heard opposing views on this ... any thoughts?
Posted by anonymous
Tue Mar 23rd, 2010 03:45 PM
Jeff showed an interesting chart in a previous post showing that the interest rate cycle taking over a decade to play out. So if you are deciding on interest rates only, I guess you might need to wait until retirement. I see the situation to be complex because there are so many other factors that are important like income growth, population/demand, etc. However, in a period where rates increase quickly, it would seem to take very strong opposing forces to offset.
Posted by Marshall
Tue Mar 23rd, 2010 03:51 PM
People have to and want to get on with their lives and live in ny. The inventory of the condos you want to live in , in the locations you want are limited. The banks are not giving construction loans for the most part and the pricing of the condominiums are not high enough and the risk is to high for developers to get real excited abut building new condominiums. so if their is any absorption of the existing inventory the market can react positively. Prices are determined at the margin. As soon as purchases start loosing out on a property they really want they will adjust their pricing upward. Sellers a soon as they sense a change in the market they will react and be more resistive tio lower pricing.
Posted by saudoso
Tue Mar 23rd, 2010 04:19 PM
On the downside risk, is anybody concerned with the stories about China's real estate bubble? I imagine a burst there would have global repercussions, even in the far off neverland of Manhattan.
Posted by Ana Maria
Tue Mar 23rd, 2010 04:45 PM
Actually, according to the conference I attended, China's coming out of the bubble fast and furious ...
Posted by anon
Tue Mar 23rd, 2010 06:34 PM
Buy now or be priced out forever!!!
Posted by Noah
Tue Mar 23rd, 2010 07:00 PM
well anon, that is not exactly what Ana Maria was saying.
Posted by anon
Tue Mar 23rd, 2010 07:04 PM
where are all the perma-bears???? dow 11,000 here we come....wall st will be paid this year...
Posted by anonymous
Tue Mar 23rd, 2010 08:55 PM
great post rootless!
Almost all the arguments for upside risk is a joke. Only the point about rates made some sense, and that assume rates would jump up quickly, which IMO is unlikely after an initial 0.5% or so jump when the gov stop buying mbs.
Posted by Fred
Tue Mar 23rd, 2010 10:04 PM
The main driver for NYC is employment growth. Nobody has visibility on this one and at best we are going to be flat until we know what the new wall street may (or may not) look like. One unintended consequence of chronically low interest rates is less profit for wall street once the new rate regime becomes entrenched. Low rates are seductive but the tenuous nature of the job market is what will keep everyone on their toes.
as far as i can tell, most folks here don't get that NYC is frakked on the jobs front until wall street can redefine what it does and that is a big fat regulatory issue that won't go away for another year or two, at best. i mean, what's the big driver for employment growth here? fashion? culinary arts? advertising? publishing?
you know what would be a good topic is the impact of soft costs associated with buying into a flat market. when the asset has a built in 7% on the front end and another 7% on the back end plus a 2% annual carry, it doesn't take much to convince someone who can afford a $1.5mm or $2mm home to rent.
someone said real estate is going to appreciate 7% this year. i'd love to know where that number comes from? there, that's my bearish cross for the night!
Posted by Mario M
Wed Mar 24th, 2010 10:00 AM
Anyone who says "the supply of condos is limited" has to be joking or, worse, lying through his teeth. "Limited" like in Williamsburg and Downtown Brooklyn? or like the Lucida, Rushmore, Georgica and dozens more that have been sitting in the market without selling for years? "Limited" like in all of those projects that broke ground just before the expiration of the tax abatements and are currently in the pipeline? I'm not going to claim any specific number for "shadow inventory" but the thought that the supply of new development condos, many of them unable to get FHA approval or to get appraisals high enough to sell their units, is anything but enormous and the biggest downside pressure of all is... ludicrous.
Posted by anonymous
Wed Mar 24th, 2010 10:04 AM
Ana,
China is coming out fast and furious, but the government is taking measures to thwart further speculation. My impression from my contacts in China is that when the government decides to do something, it gets done. So I'm guessing that the government will continue to pressure banks, SOEs, or anyone else until speculation is subdued.
Posted by Marshall
Wed Mar 24th, 2010 11:06 AM
I agree there is a lot of supply in williamsburg and along Flatbush ave in downtown brooklyn
it's limited if your looking in noho les soho
tribeca or if your in the townhouse market
but that supply is not a real substitute product
for some of the other areas there are plenty
of rentals available in the bronx that don't compete
or have a substantial impact on renting in soho
or brownstone brooklyn
Posted by Marshall
Wed Mar 24th, 2010 11:08 AM
I agree there is a lot of supply in williamsburg and along Flatbush ave in downtown brooklyn
it's limited if your looking in noho les soho
tribeca or if your in the townhouse market
but that supply is not a real substitute product
for some of the other areas there are plenty
of rentals available in the bronx that don't compete
or have a substantial impact on renting in soho
or brownstone brooklyn
Posted by Fred
Wed Mar 24th, 2010 02:59 PM
btw, anyone see what happened to all those 2yr T-bill bidders who bought at 1.000% yesterday? crushed is a reasonable assessment. imagine buying a bond that promptly sells off 10% the very next day.....that's a pretty steep price to pay for so-called safe haven investing. next stop - no bid auction???
Posted by saudoso
Wed Mar 24th, 2010 06:08 PM
Sorry for the beginner's question, but can someone explain what happens when inflation seriously kicks in?
on a basic level: if I'm lock in a fixed low rate 30y mortgage, won't that protect me from unpredictably higher costs of living?
Even if my property depreciates and doesn't keep pace with inflation, at some point my monthly payments could turn out to be a bargain in inflation adjusted dollars. Or not?
Posted by Fred
Wed Mar 24th, 2010 06:48 PM
Saudoso - no, locking in on a low rate today only locks you in on a low rate today. if inflation spikes, energy, insurance etc will increase. and when rates go up, it's a guess at to how pricing gets affected. but the point that many here will make is if you plan on dying in your home, you will weather the marginal increases in operating expense over time and the fact that your mortgage is your biggest cost, you will have fixed it at a low rate. bonus: you will already have a place to die (at a fixed rate to boot!)
Posted by anonymous
Thu Mar 25th, 2010 09:54 AM
high inflation tends to destroy hard asset values as it bring alot of additional uncertainty into long term projections, and therefore drives up lending rates and the general cost of capital more than the increase in inflation. However, whether that would be offset by the effect inflation will have on your loan principal/payments is a tricky question. Additionally, high inflation tends have a negative economic impact too, and it is not guaranteed that wages will rise as quickly as inflation. The question is complex, but I would err on the side of not wanting to own long-term, hard assets if inflation spiked drastically.
Posted by Marshall
Thu Mar 25th, 2010 10:16 AM
If your looking to buy a home and you intend to be here for a while 5 years plus Assuming there is inflation and you buy at a fixed rate. I believe there is a high probability that you will make out pretty well. Everything everyone said has some truth to it and is logical. But for you not to make out you need the world or at least nyc to go to hell in a handbasket. All is possible what do you really believe is probable ? A lawyer will always advise you when you enter into a business transaction as to the all kinds of possibilities that could result in your being financially harmed. Many times a lawyer will advise against the transaction. Does that mean he is giving you good business advice. Not necessarily . You have to look at the possibilities and also look at the probabilities of an event occurring. A business person tries to evaluate the probabilities and the possibilities pros and cons risk vs reward A business person
will take a chance on a high probability of the reward against a low probability of failure. Generally that makes sense in the business world and many people who do that make out very well. There are people who can not risk even the slightest possibility of failure even if the reward is great and of high probability. These people genrally are not well suited for business imho. You have to decide who you are.
Posted by anonymous
Thu Mar 25th, 2010 11:54 AM
Marshall,
I agree that there is higher, but moderate inflation, fixed rate borrowers will probably do well all things held equal. However, I don't think it takes a disaster scenario to hurt real estate values. If inflation does spike high and quickly, there would be a significant impact on both buyers and banks without the world coming to an end.
On the business end, I see the logic to your comment, but I have two counter points. One, a home is usually the dominating asset in one's wealth, unlike a business investment, which often times is a smaller part of a business asset portfolio. It would be natural for most people to be risk adverse when it comes to a home purchase. Besides, most business people are putting their firm's, not their own capital at risk. Secondly, my opinion is that you have a reasonable probability of slow appreciation in NY housing, while there is a significant probability of a large drop due to macro conditions. It's a debatable point, but the disagreement may not be on how to manage risk, but the opinion of what the risk profile actually is.
Posted by Marshall
Thu Mar 25th, 2010 01:19 PM
Ok lets assume no disasters but a spike in inflation. The buyer has a low fixed rate mtge.
Im assuming the buyer will live in the house for five plus years. So the buyer should not have to sell into the spike but pays the same monthly payment eventually the market recovers as it always seems to over time. Of course there risks you loose your job, insufficient savings .........
I know real estate has become a dirty word maybe as bad as banker or wall street but in the last twenty years for a host of different reasons real estate has done pretty well by most of the buyers. Ok there was a bubble that burst and some of the buyers got caught as the music stopped. And a lot of the same factors are still there going forward long term. What do they say you got to be in it to win.
Posted by saudoso
Thu Mar 25th, 2010 01:52 PM
Was anyone around or studied how buyers came out in the late 70's-early 80's with high inflation?
I grew up in Brasil during a period of ridiculous inflation, and my understanding was that homeowners came out fine. The significant difference is that no one had mortgages in Brasil back then and owned their homes outright, so we didn't experience this mess of millions of homeowners underwater, and homes were actual assets as opposed to just investments.
It does seem like inflation should be accounted for in one's risk management-- the question is whether it's in the upside or downside column.
In my very uneducated guess, I'd imagine inflation kicking in a few years from now and then lasting for a while. There's just too much debt and unfunded entitlements in this country. I can no longer imagine Americans actually paying their way out of it with significantly higher taxes, so it would seem that the other choice is to inflate our way out of this mess.
Posted by Fred
Thu Mar 25th, 2010 03:06 PM
Saudoso - Interesting points you bring up. Brasil and most EM countries fared well in terms of housing because of low leverage but also because demand far outstrips supply in EMs in general and Brasil/Mexico especially. Furthermore, Brasil's CAIXA program virtually manages the velocity of new construction (i.e. supply never outstrips demand because developers only build what the CAIXA program will finance). The fundamentals here are very different. We don't know what the medium term impact of higher unemployment is going to do to demand for NYC housing. Ten is the new five when thinking about how many years out you need to project. I think five years is way optimistic. Hell, current inventory is double what is was at the peak which means the velocity of sales is lower and any long run price appreciation projections need to be adjusted accordingly.
Posted by N_R
Fri Mar 26th, 2010 04:20 PM
>> Fred said: [March 23, 2010 10:04 PM] "as far as i can tell, most folks here don't get that NYC is frakked on the jobs front until wall street can redefine what it does and that is a big fat regulatory issue that won't go away for another year or two, at best." <<
This is just an isolated, anecdotal point, but I work on wall street (equities) and we just laid off 5 people last week. (Out of a group of about 40, down from 55 at its peak in 2008.) Business is better than it was a year ago, for sure, but we still have more people than we need to cover all we have to do now, plus whatever growth in business we see this year.
We're all busy on a daily basis, but business will have to get much, much, much, much better before we get to the point where we feel like we're missing out on business because we have too much to handle. And we won't start hiring until we reach that point.
I'll let you know when that happens!
Posted by S_U
Sun Mar 28th, 2010 07:52 PM
Not sure where you're working N_R but most shops have had an amazing YEAR - amazing. Hiring is way up and especially at hedge funds and investment banks. Obama is screwing things up but he'll be gone by 2012.
Posted by N_R
Mon Mar 29th, 2010 02:38 AM
re: S_U's comment immediately above about Wall Street firms doing better:
Oh, don't get me wrong - things are a LOT better now than a year ago. Late 2009 (say, Sept-Dec) was way better than late 2008 (remember Sept 2008 when Congress at first voted down the Paulson/Bernanke life-or-death legislation to bail out the banks, create TARP, etc.? It looked like the world was falling apart.)
Did we have a good 2009 compared to THAT horror show of late 2008? You betcha.
But our firm's employment is still way down from where it was in our early-2008 peak. Probably the most bullish shift is that we've actually had a few people leave voluntarily to get new jobs. But we are absolutely not refilling their slots in any hurry. We're very careful about our overhead. And the only rumblings of even thinking about hiring I've heard about are at the very junior levels - - nobody making big money.
In addition, in mid-2009, we did re-fill a number of slots that were emptied by our 2008 layoffs. However, all those new people were hired under eat-what-you-kill contracts, with very little base salary but generous cuts of whatever business they brought in.
Now, about 9 months later, we've laid off all but 2 of those people because their production wasn't terrific. We probably did them a favor, because they'll hopefully be able to get jobs with an actual base salary now.
So, I guess my general points are (and forgive me if I'm belaboring these): 1) the number of bodies we have is still way below the peak, 2) those bodies are all making lower salaries (salary deflation), 3) the hiring we're doing is merely revolving-door hiring - - trying to fill the same slots we've laid off (some now twice) with hopefully better talent for the same money.
So, the upshot is that we are having little net growth in terms of compensation and no net growth in terms of employee count. The deal and trading volume we have is rising (thank god), but it is going toward repairing our balance sheet (which hopefully will eventually help us through incentive comp and options someday), and not getting passed through in cash compensation or in new hires.
And as little fun as this all sounds, as best I can tell, we're still doing better than a number of the other midsize firms where I have friends working. To the degree that firms are re-strategizing and figuring out how best to go forward, I still am hearing about a lot more shuffling (laying off here, in order to hire there) within the organizations I'm most familiar with, than I'm hearing about net employee growth.
Again, this is just anecdotal, so we really need to hear from a variety of people at a wider set of firms of differing sizes and specialities, before we can get a more authoritative sense of the trends out there. I'm just saying that I'm happily employed, and the deterioration in overall job security has slowed, but it has not turned around for us. That's how it looks from where I stand. And, as my original post stated, we have laid people off very recently.
We'll know a lot more a quarter or two from now. I'll perk up if I hear about some friend of mine who's still looking for a job getting into a bidding war by different banks, hungry for his services. That would be nice.
Posted by anonymous
Mon Mar 29th, 2010 09:46 AM
Much of they hype about Wall Street last year doesn't translate directly into jobs and compensation. I've been looking into switching jobs and the feedback has been consistent. "It's better than 2008, but that's not saying much." and "There's so many highly qualified people looking right now." Remember that many hedge funds were under their high water marks, so the performance doesn't necessarily create incentive fees which is where the big money is.
This is just my speculative opinion, but I think much of the gains from last year are just a dead cat bounce. The likelihood of such performance continuing is bleak. It only takes a minor market correction to send things in the other direction. Only time will tell if the federal funny money continues the bull run.
Posted by drtomaso
Mon Mar 29th, 2010 12:36 PM
in re: home ownership vis a vis inflation
I have a theory on inflation that goes like this: In a market like Manhattan, where the affordability of residential real estate is at one extreme (ie: high ratio of median price to median income), rates act as a drag on prices. Inflation acts as a drag in two ways- by raising rates, and by increasing other monthlies (condo/coop maintenance charges, taxes). As the monthly expenses raise, in order for the property to maintain the same ratio of price to income, price must drop.
Now, I can't tell you where employment in NYC is headed, but I am reasonably confident that rates are headed up, and if my theory is true, it means prices are coming down.
Posted by Eddie
Wed Mar 31st, 2010 10:22 PM
That upside risk list is REALLY damn thin.
Hell, even the big one, is pretty much wrong. The claims that bonuses would be back were WRONG>
The bonuses were supposed to hit back hard because of the cheap money and they were STILL down major from peak (30% or so)... and next year doesn't look any better with less cheap money.
"Rates will definitely increase and there are plenty of buyers wanting to get in before they reach 7% or 8%"
How is that any different from the fear years ago? If anything, folks have gotten used to low rates and might not fear them going up. This is one is REALLY stretching.
"Lastly, the worst is behind us (and, frankly, it was nowhere near as bad as people expected); "
Really? People were expecting worse than the longest and deepest recession since the great depression? People were expecting a 60% drop int he stock market? People were expecting MORE than 20-30% drops in Manhattan RE?
Gotta say COMPLETE BS there... folks were fighting tooth and nail that there wouldn't be a decline at all!
"Unemployment is a lagging indicator "
Yes, unemployment is normally a lagging indicator but that it started early doesn't mean it ends early... hell it might mean we have even more. This is just lousy logic.
Try again, toots.
Posted by Eastvillboy
Thu Apr 1st, 2010 10:18 PM
This is a great thread going and there are lots of good points being made. I'm going to post a question on the latest thread so I get some responses, but the main question I have is:
WHY OWN A HOME IF THERE IS NO PRICE APPRECIATION IN THE NEAR FUTURE???
Posted by Neophiliac
Tue Apr 6th, 2010 04:43 AM
A comment on inflation:
We have to be careful in understanding exactly what goes into the inflation metrics. For CPI, the largest component is rents, so if you have a large CPI number it probably means that rents are going up pretty rapidly as well. This likely means that nominal wages are going up too in a lockstep inflationary spiral.
In this kind of environment, the fundamentals of real estate prices start to look a lot better very quickly - even in Manhattan where these fundamentals are out of whack even after last year's adjustment. The rising financing rates will put a dampener on things, sure, but the effect should be offset from an investor's perspective by decreasing price/rent ratios. What this means - and this is a bit of a guessing game - is that prices probably stay roughly steady in real terms (maybe a slight decline in markets heavily dependent on financing). Nominal prices, however, will definitely rise.
That's good news for all those with low fixed rate debt (mortgage or otherwise). Consider also, that even if you can't sell, you should be able to rent your place out to a third party at a price that will more than cover your mortgage payments. And when the country exists the inflationary episode (all things have an end), and rates come down, owners should be in a really, really good position - because rents will be higher and stay higher, ditto for wages. Pretty sure that everyone who bought before 1970 and sold after 1980 has done quite well for themselves.
Having said that, people have started to throw the term "inflation" around while referring to phenomena that have nothing to do with CPI. Like relatively isolated energy price inflation (circa 2007). Or gold price inflation. Sometimes just to an increase in monetary base (which may cause inflation, but doesn't necessarily do so). For these events, I don't have an answer. Maybe, if energy begins to consume an ever larger portion of people's budgets, real estate affordability metrics start to shift enough to put a dampener on prices. But it's hard to tell.
Posted by Neophiliac
Tue Apr 6th, 2010 05:18 AM
Just wrote a longish response only to have it disappear into nothingness... arghh.
Will keep it short this time - on the topic of inflation vs. RE prices.
Why do so many people only look at the effect of inflation on interest rates? That's a secondary phenomenon. Let's keep in mind that by far the largest component of CPI is rents (43%). So it's highly unlikely that we could have a large CPI without having large rent increases. And if rents increase, wages probably do too (whichever way the causation goes, correlation is gonna be there). With that on every funamental metric, real estate prices will start getting back to normal very quickly, even in such out-of-whack place as Manhattan. This argues for (probably) steady to slighly lower RE prices in real terms and (definitely) higher prices in nominal terms. Good news for all those with a fixed low-rate mortgage! And when the country does exit the inflationary period and rates come down RE should start performing better in real terms too.
So unless you envision high inflation due to rapid increases in food, transportation and medical costs while rents are steady (this is a tough case to make), real estate is not a bad asset to hold.
But then again, people have started using the term inflation to refer to anything but CPI - from oil prices or gold prices down to (this one makes me mad) mere expansion in M1 money supply. These days, some of the stuff you read and hear boils down to this idiotic argument: "Deficit! Therefore, high inflation!" And if that's what one has in mind, then it's indeed hard to predict where RE prices will end up going.
Anyway - inflation is not something that RE buyers in Manhattan or elsewhere should worry about too much. There are plenty of worries out there of much, much bigger magnitude, like (for Manhattan) price/rent, income/rent, falling rents, long term uncertainty over wall street as a place where everybody makes a ton of dough, rising interest rates (with or without inflation). Inflation should not be on that list.
Posted by Noah
Tue Apr 6th, 2010 07:29 AM
found it in junk folder neo, published it!
Posted by Neophiliac
Tue Apr 6th, 2010 10:02 AM
Well, that wasn't any shorter at all! Thanks Noah - but feel free to delete either one, as it's basically duplicative.
Posted by rodrigo
Fri Apr 23rd, 2010 04:49 PM
I don't understand why the rent/buy equation in Manhattan would differ from the rest of the country. It's clear why people would pay a premium to live in Manhattan, but that should affect both sale prices and rents, shouldn't it? I would expect both prices and rents to be proportionally higher, and for the price/rent ratio to be the same. If the price/rent ratio is is higher in Manhattan, doesn't that mean Manhattan sales prices are too high, or rents are too low, or both?
Posted by coach handbags
Thu Aug 12th, 2010 10:03 PM
a worst case scenario, we have another 15% left in terms of decreasing home values, and that’s NOT in the sub-$700k segment. The best-case scenario I hear is a flat to low single digit increases 2010, with low single digit improvements in 2011.