If you were unable to attend the real estate panel at the Yale Club last night, you missed out on some great news and views. But have no fear, while Christine & Noah were working (Christine doing the introductions and setting up and overseeing the whole gathering through the auspices of the University of Virginia Club, and Noah playing panel bad boy) I was scribbling away in the audience trying to capture as many of the juicy tidbits for you as possible.
First off, all of us at Urban Digs would like to thank Melissa Cohn (MC) Founder and President of Manhattan Mortgage Company, the number one mortgage brokerage in the country (if I got that statistic right) and Jonathan Miller (JM), President and CEO of the well known appraisal firm Miller Samuel, for serving on the panel with Noah (NR). We also want to thank one of the deans of New York City Real Estate, Michael Stoler (MS), Senior Principal at Apollo Real Estate Advisors and host of the Stoler Report television show for playing host and trying to maintain some semblance of decorum despite Noah's efforts to cause a rumble.
Secondly, I'm not the fastest writer in the world so I can't claim 100% accuracy and what follows are my interpretations of what I heard, actual quotes are marked. I know I definitely missed some points here and there, but I think I have captured most of the informational content. If anyone was there and wants to add their comments, or correct/embellish my re-telling please feel free.
Here is a list of the data points and comments that caught my attention and that I was able to get down on paper....I couldn't get the questions, but the answers are what mattered, so here they are:
MC - June, July, August mortgage apps were in line year-to-year. In October mortgage apps fell about 15% year-to-year. Last 4 weeks we have seen a lower pace of sales, but not seeing price declines. "People willing to pay the price are the people buying the properties".
NR - Sellers are anchoring to peak 2007 types of prices of $1,400 per square foot. They have not yet faced the reality that to move their properties they will have to compete with other listings and offer buyers a margin of safety. I think forces are conspiring for a significant break in prices, it hasn't happened yet, but buyers are going to be in charge soon.
JM - "Properties that are selling are selling in a reasonable amount of time because they are priced correctly." Because of the reporting lag sellers in New York City are usually three quarters behind the market in terms of their price expectations. Inventory is now greater than last year, but lower than 2 years ago.
MS - With all the cranes operating around town now we will be at peak inventory levels soon.
MC - Foreign purchases of NYC properties are down 50% year-to-date. A number of foreigners bought downtown and now need to sell as a result of the world financial crisis. Banks are pulling back from lending to foreigners. There used to be ten that were active, that number is down to four.
JM - A third of buyers in new developments were foreigners, which is double the historical numbers, but new developments are only 20% of sales in the city so the overall impact of foreign buyers has been greatly exaggerated.
MS - Several new buildings were sold 100% to Irish investors through syndicated deals. One building at 23rd St and 3rd Ave ended up being sold by the developer as a college dorm (for NYU?), after the Irish investors who were supposed to take the units pulled out. The building was made for foreign investors, with units that were more like hotels rooms.
MC - People buying today need a place to live or a place to go and that's why they are buying. There will always be people who have some kind of change in their life and need new shelter. Market volumes won't go to zero.
NR - The Hamptons are going down! (repeatedly)
JM - Coops and condos have been about 50/50 in terms of volumes. Coops didn't have speculation. In Q3, there was a 7.9 months inventory absorption rate in New York City, vs. 60 months in Miami and 40 months in the Washington D.C. condo market. There is still a surprising drive to purchase property, but the amounts people are qualified for is way lower than it was.
MC - Jumbo mortgages start at $417,000 and will go up to $625,000 by year-end. With the average apartment costing $2 million in New York, it's a jumbo market and you are losing a whole segment of first time home buyers who just don't have 20% to put down.
JM - Funny thing, banks all of a sudden have questions about appraisals now.
MC - Banks are still relying on closed comps, we have not seen low appraisals yet (where appraisals reflect lower market prices and impact what sellers can realistically list their apartments for).
JM - Tomorrow I am putting out the latest statistics on Brooklyn. (He gave some numbers, but we won't break that news here on Urban Digs). Nothing much has changed from last quarter, but in East New York where there was sub prime credit being used and speculation, prices are down significantly. In contrast to "brownstone Brooklyn" in the northwest has held up much better.
MC - Underwriting standards are now limiting total debt payments to 38 - 40% of monthly gross income and requiring 20% down. Post closing reserves of 3 - 36 months of debt service are required. A credit score of a minimum of 720, up from 660. If your credit score is lower, you may still get a loan, but your rate will be higher. There are no interest only loans available if you have a lower credit score. Probably one of the biggest changes is that there are no case-by-case exceptions made anymore. "New York City is a city of exceptions". Many people work for themselves or are business owners, etc.
NR - "Buyers want to get downturn risks priced into their purchase." Most of my buyers have moved to the sidelines and are waiting for those discounted prices. I am advising them to do so. I would expect the Upper East Side and Upper West side to hold their values the best. I think areas where there has been lots of new supply added like Downtown, Midtown West and the West Village will get hurt more than other areas.
MC - Families want to be in those neighborhoods. Thank god for all the private schools on the Upper East and Upper West sides.
JM - I am not yet seeing a big difference in price changes among Manhattan markets, based on contracts being signed now.
MC - 30 years fixed rate mortgages are 6 7/8 - 7 1/4% vs. 6% pre crunch. Every 1/2% increase cuts buying power by 10%. Things have gotten worse since the bailout was announced, rates have gone up not down.
NR - A lot of investors are seriously looking at curve steepening trades. As a result of all these bailouts, the government is going to be printing, printing printing. With massive treasury issuance upcoming to fund these rescue packages/bailouts, debasing the currency, we could be setting ourselves up where long-term rates are eventually going to go up substantially. The fed can control the short end, but not the long end. Should the credit quality of the USA come into question, should the foreign funders become unfriendly or sell their holdings, the long end will see rising rates and that will affect borrowing costs for everyone. This could be the 5th or 6th chapter of the housing slowdown in the years to come.
MS - 5-15% of all buyers are walking away from contracts on new developments.
JM - I don't see a significant improvement in the market until 2012.
MC - It will take more than a year until there is positive movement in the credit market.
NR - I see a 2 - 4 year downturn in the New York City market. Did I mention that the Hamptons are going down! Manhattan is still considered a 'sexy' investment, as opposed to other markets that are completely hated and filled with fierce sell side competition. We are not there yet here, although the ingredients for the recipe are setting up. The correction is likely to be an 'L' shaped adjustment.
MS - In many cases developers are going to be the ones who break on price. In many cases its no longer in their hands. The banks are now in charge. The projects are costing more than they were supposed to and are selling out more slowly and the banks are starting to call the shots. The big European banks were a significant factor in financing and they are in trouble and are no longer lending for development in New York.
JM - We are not yet seeing any trend to seller financing.
JM - There are serious city financing problems due to the shortfalls from real estate transfer taxes and the city will likely raise property taxes to cover it.
JM - I have not seen appreciable softening in the luxury market. I consider the luxury market to be the top 10% in price or $2.8 million and above. I am more worried about the bottom end of the top 10% bracket or the $3 - $8 million market. This was the everyday Wall Streeter market and is the area that many developers targeted. I am less concerned about the market for apartments worth north of $8MM.
NR - One silver lining from the busting of the commodity bubble (signaling the slowdown in global economies) is fast falling energy prices. While maintenance costs are highly correlated to the management of any one individual building, if the building was well managed and finances in order, you might get some relief in maintenance as energy prices continue to fall. Property taxes are another story. With the city facing serious budget issues now that wall street is done, I would expect property taxes to rise to make up for the shortfall. Collected revenues from wall street were down a staggering 96% last quarter, and this story is not going to change; in fact, the city might owe some refunds to financial firms.
MS - As far as the commercial real estate market goes, commercial office rents are falling and commercial office building prices are down 15 - 25%. Land prices are down 20 - 40% from the bubble like $400 per FAR level.
