A: I'm getting asked by so many buyers, readers, and colleagues if I think Manhattan real estate is in a bubble. Short answer: it's hard to be a bubble when mass lending is not occurring for the asset class and there is no major credit element at work. Instead, the buyer pool in general has grown substantially on the backs of 5+ year fed induced reflation surge that took equity markets up over 185%! With volatility non-existent and yields nowhere to be found, both consumers & investors are finding a haven in Manhattan real estate. Our new listings data shows that for years we have seen "less stuff" come onto the market, so the tight inventory we are experiencing today is a big piece of the foundation that has been causing this market do what it has been doing lately. Lets discuss.
I want to start out this discussion with some perspective. Take a look at this chart below that shows you the S&P 500 Since 1990 and take notice of the numbered items in the chart and the notes below:
First, let me say, wow. Definitely puts into perspective the central bank induced thrill ride over the past 15 years or so.
1. The dot com bubble & bust - The Greenspan era and his famous "irrational exuberence" speech. When the dot coms busted and the Nasdaq marketplace crashed, bringing everything else with it, Greenspan took the Fed Funds rate to 1% to stimulate an economic recovery.
2. The housing bubble & bust - Greenspan, along with wall street, deregulation and politicians, helped to create the housing bubble with their policies. Greenspan was at the helm until 2006, when Ben Bernanke took his place as the new fed chair. By that time the damage was in the system for years already and the wall street machine was about to break, causing the beginning phase of the largest credit crisis (UD writings here from 2007-2009) since the Great Depression.
3. ---The Next Bubble??--- This story remains unwritten at the moment. The carry trade continues as the EU is the latest to extend extremely accomodative policies to stimulate inflation. The result is a continuation of the carry trade that started with US central bank policies in 2008 to present.
4. So, How Much is S&P500 Up Since 2009 Bottom? - The answer is approximately 185%! Let me repeat that, since the height of fear in March of 2009 (which was the bottom of the Manhattan market as well), the S&P500 has risen 185% to get to where we are today. The Nasdaq is up over 210% from its March '09 lows. Translate that to Manhattan real estate over the last 4+ years.
The StreetEasy Index puts the bottom of the Manhattan market in early 2010 - which is expected with a sales based, lagging price action index. For the real time bottom for the Manhattan market we need to look at deal volume/contract activity trends. This data will show that those who signed a contract in Jan/Feb/March of 2009 are the ones to get the bottom; when deal volume was at its lowest & fear levels at their highest.
Which begs the question on all our minds -- How much has Manhattan risen since the bottom and where are we now?
The answer is not +185% like equities have seen. Rather, the avg price action trend is probably closer to this:
Since the March lows in 2009 -- prob up somewhere between 40%-50%
Since June 2010 (4yrs ago) -- prob up somewhere between 30%-35%
Since June 2011 (3yrs ago) -- prob up somewhere between 27%-30%
Since June 2012 (2yrs ago) -- prob up somewhere between 20%-25%
Since June 2013 (1yr ago) -- prob up somewhere between 12%-15%
**Always remember that Manhattan is highly segmented and each building is it's own little marketplace. When pricing a property its always best to stay in-building and focus on relative comps trends over time.
This is NOT really bubble territory considering the move in equities over the same periods of time - especially since the '09 lows!
Bottom line --> As long as volatility is non-existent, fear nowhere to be found, and equity/bond markets reacting accordingly to very accomodative central bank policies, the Manhattan up-trend will continue. I don't think it's a bubble because the masses are not involved and there is no explosion in new credit and new lending facilities/options -- those elements are critical when defining a bubble. Manhattan is tied to wall street right now and until some external force disrupts The Great Reflation, there will be little reasons for buyers to have fear. Until there is a reason for buyers to pause out of concern for something, Manhattan will likely continue to track annual gains seen in equity markets. That's the key point. In the end it's all about the buyers and their bids.
I hope the stock chart above helps to put where we are into perspective. It certainly has the makings of a 3rd mountain peak that is yet to see its fall from grace. But from this former trader's point of view, it seems that stock markets are about to "pop" one more time. Perhaps it will be the 'last hurrah'? I don't know. But it feels like a quick surge is coming. If it happens I think it may very well mark the end to the Great Reflation and give us that 20% correction that has not been seen in years. But that may be from notably higher levels than we see today. There are very few reasons to be short right now other than a 'its got to end soon' argument. Lets see how things play out.
For buyers of Manhattan real estate, its been long enough now that chances are high you will be buying a property from someone who bought it in the past 5 years or so. For many, seeing the profit that the seller is about to get can make your stomach turn. Well, try to get over that. The market is what it is and Im trying to report on it with a combination of local Manhattan real estate data and whats going on in the outer macro world.
If someone paid $2M for a high end classic 6 in 2009, you can expect them to ask at least 50% more in todays market and probably get very close to it! You can NOT compare todays market to that of 2009 or 2010 at all! These are completely different times with 180 degree moves in the perception of fear about investments and the banking system as a whole. So if you find it difficult to 'give a seller so much of an appreciation' over such short of a time, consider this:
-- Equities are up 185%+ over the past 5+ years since the '09 lows
-- Manhattan has become a utility driven marketplace with leverage strongly favoring sell side
-- The growth of the buyer pool has significantly outpaced supply trends over the past few years
-- With volatility and fear non-existent, buyers tend to be more euphoric/complacent about their investments/purchases.
-- Finally, it's not about your feelings on giving someone else profits for a nice trade! It's about the market, how the bldg and comps are trading, and most importantly what the market is able to produce right now!
My closing line should be that until things change, Manhattan continues to be very tough on buyers.