A: Got some great press today and wanted to share the articles with you in NY Mag. There were two, but for this post I'll focus on the story about best & worst case scenario's hitting Manhattan real estate over the next few years.
Neigborhood Watch: How Vulnerable Are You? A Risk Analysis.
EAST VILLAGE & LOWER EAST SIDE: These neighborhoods are no longer "emerging" - they have emerged, and we are not going back to dodging crack dealers on Avenue A. That said, a big market swing could certainly hit here, because these areas are still most attractive to the young, and young buyers can be fearless.
"They take more chances and they're more aggressive, the kind of people who put more of their assets into living where they want to live," says Citi Habitats agent Noah Rosenblatt, a former Wall Street trader who now blogs about the market on Urbandigs .com. "They haven't seen a major crash and don't know that they may get salary restrictions or that their bonuses may not go up as much. No good time lasts forever"
Real Estate Report 2007
A look into what the best case and worst case scenarios might be from the minds of Professor Ed Glaeser, Brad Inman, Professor Nouriel Roubini, Tim Harford, Professor Tyler Cowen, and yours truly! I am honored to be considered in the same group as these guys, let alone have the opportunity to speak my opinion on such an exciting topic!
The article is a great read and incorporates the thoughts of all the above mentioned names. It doesn't give specific predictions by each person though, so for those that are interested in what I thought and submitted, here are some excerpts copied exactly from what I handed in:
WORST CASE SCENARIO
2008 - Consumer spending & Labor market will weaken as the economy enters a recession towards years end and into early 2008. Fed cuts rates to cushion the blow but that won't help lending rates that much as the re-pricing of risk and drying up of secondary mortgage markets result in a disconnect between falling bond yields and lending rates. Re-pricing of risk is evident in the rising LIBOR rate to highest level in 8 ½ years, even as bond yields fall, which results in serious pain for debtors; especially for those with resetting adjustable rate mortgages (ARM's) and with credit debt tied to this rate. This becomes third leg in nationwide housing downturn and starts to hit Manhattan at a lag. Tightening of lending underwriting standards and rising rates on Jumbo loans hit affordability & buyer psychology which reduces size of the qualified buyer pool. Buy side demand weakens.
Correction: 3-5% as fundamental shift takes time to work through; pockets of distress experience 5-7% downside risk
2009 - Insolvency crisis may reveal itself as consumer/corporate debt can't be paid off. Democrats take over and alter tax friendly laws effecting wall street. Any further correction in stocks as a result will contribute to a deeper negative wealth effect and deteriorating psychology amongst buyers. Again, bonuses are hit and jobs as well. Labor market woes reduce buyer pool further. Credit crunch continues to limit availability of leveraging and affordability. Rental prices come down at a lag to stock declines.
Correction: 4-6%; correction tends to be faster once fundamentals reverse course and favor downside.
2010 - Not worried about new mayor. Changes already in place for 421A tax abatement for developers so any further change is likely to reverse these changes to re-instate tax friendly programs to encourage development. After effects to US economy from the 2007-2008 liquidity/credit squeeze still being felt in wall street and main street. Consumer psychology still effected as conservatism sets in. Unless inventory trends completely reverse course, any correction into 2010 is likely to begin triggering demand on buy side from those waiting on the sidelines; especially from longer term investors and those that survived the downturn in the economy unscathed.
Correction: 1-2% as buying gets more attractive to those waiting for downturn.
BEST CASE SCENARIO
2008 - Liquidity squeeze proves to be short lived. The bad bets were weeded out, corporations and hedge funds book their bad assets to market and take tax friendly loss, restructuring takes place and transparency returns to free markets. Global growth continues and is evident by lagging inflation and high commodity prices; necessary side effects of strong growth. Fed maintains rates as there is no need to pump liquidity into financial system to help cushion blow to US economy. Wall Street cheers the return of certainty with continuing gains. Wealth effect in place and little ultimate effect on jobs, bonuses, and salaries here in NYC. As a result, fundamentals powering Manhattan real estate for past 3-4 years remain intact. Inventory stays tight as demand never wanes.
Appreciation: 3-4%
2009 - Insolvency crisis proves to be under control; assistance for debtors from gov't or outside agency? Temporary higher rates (2007-2008) for debtors prove to be absorbed by strong jobs market and US economy. Lending rates start to return to normal association with bond market and specifically 10YR yields; predictability returns and volatility is low again. Lenders gain confidence in housing's future nationwide and as a result, tighter lending standards that have been in place for past year and half are loosened a bit; but not anywhere near as loose as they used to be. Manhattan remains a desirable place to live and the trend of living closer to workplace strengthens further. Inventory has no chance to reverse course from any economic slowdown, rental inventory remains tight and expensive, and buyers still compete for well priced properties. Should Dems win presidency, they maintain current tax laws for capital gains/carried interest and wall street applauds with continued gains and interest from hedge funds.
Appreciation: 3-4%
2010 - Global growth experiences NO slowdown after years of worry. With globalization comes a more consistent and resilient US economy; and therefore stock market. Bull run is sustainable, but with pockets of healthy 2-3 month corrections here and there. Jobs, bonuses, salaries here in NYC (specifically in financial sector) remain intact continuing to power the sustainable boom in local housing. Fed maintains fed funds rate in the 5-6% range even as global growth, inflation, and high commodity prices still exist. As long as we are below 6% in fed funds target, I don't see it being restrictive to future economic growth potential.
Appreciation: 3-5%
You can read the full article here and compare what I said with what the group consensus was.
A: Inman Real Estate Connect conference is back in New York City starting tomorrow. The event takes place January 9th-11th at Marriott Marquis in Times Square. I will be on a BULL vs BEAR economics panel with some of the great scholars/minds out there. I hope you can register and make it to the conference and this panel.
