Still doing 1400+ deals a month..but for how long?

Noah Rosenblatt

Talking Manhattan on UrbanDigs.com
Staff member
This stat is incredible considering what is going on with rates, equities, and other risk assets. Sugar high, then sugar low? Sellers, take advantage of this gift of liquidity.

Bookmarking now so we can revisit in 4-6 months and see how this market handles the macro changes that are happening

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David Goldsmith

All Powerful Moderator
Staff member
I'm quite surprised at how quickly some of the high end listings have been going into contract because even at the high volume over the last 18 months, the average days on market I've seen stated for newly in contract high end have been rather long.

I can't wait to see how Bitcoin plays out and how it affects some newly minted rich folks. Also how stock options for tech bros work out.

As far as macro effects on the Real Estate market, they usually are slow in coming. I remember after Black Monday in 1987 lots of people said it wouldn't bang on to NYC Real Estate. Well, first volume slowed but prices didn't crack much till 1989. But three year after that in 1992 there were segments down 75%. And even the stuff that was faring well was down 1/3. (NB don't try and read the reports from Manhattan Residential Brokers from that time period because they were mostly for show and the data was pretty sloppy).
 

Noah Rosenblatt

Talking Manhattan on UrbanDigs.com
Staff member
I'm quite surprised at how quickly some of the high end listings have been going into contract because even at the high volume over the last 18 months, the average days on market I've seen stated for newly in contract high end have been rather long.

I can't wait to see how Bitcoin plays out and how it affects some newly minted rich folks. Also how stock options for tech bros work out.

As far as macro effects on the Real Estate market, they usually are slow in coming. I remember after Black Monday in 1987 lots of people said it wouldn't bang on to NYC Real Estate. Well, first volume slowed but prices didn't crack much till 1989. But three year after that in 1992 there were segments down 75%. And even the stuff that was faring well was down 1/3. (NB don't try and read the reports from Manhattan Residential Brokers from that time period because they were mostly for show and the data was pretty sloppy).
Yeah I cant believe it either - i think this could be the last gasp before a summer lull

Agreed on final points - takes time to funnel through to real estate - lots of variables at play right now with equities so volatile, credit spreads rising, rents surging, stocks falling, wealth destruction in some assets, etc
 

inonada

Well-known member
There might be an interesting dynamic that will take a while to work through:

1) People are flush with income & wealth at the moment.

2) There seems to be nowhere to hide. Stocks have been heading down. Bonds have been heading down. Cash has been heading down (in real terms).

3) Rents are up.

So for some, RE seems like a good place to hide. Sure, financing is at 5% on an illiquid asset that only yields 1-3%, with 10% transaction costs. That is not usually a winning formula long-term. But, people can convince themselves that rent inflation will be high / scary. And the losses from RE, which tend to be slow and hidden, are more palatable to the psyche of a lot of people.
 

David Goldsmith

All Powerful Moderator
Staff member
People are used to "risk free returns" being close to zero under ZIRP. That's why they have been willing to buy Real Estate at close to zero returns. What will be interesting to see is what happens to Real Estate "cap rates" as Alternatives like CDs, bonds, etc start showing actual returns as interest rates rise. Because even as rents go up, increasing cap rates lever values downwards rapidly.
 

inonada

Well-known member
Rationally, I agree. But I’ve learned that people do not necessarily behave in ways I consider rational.

It’s also going to be interesting to see the effect on people who levered themselves up on RE to deploy cash elsewhere. E.g., borrow via a mortgage at 2.x% to buy stocks, bonds, etc. at anemic yields. People seemed to like the margin-call-free nature of mortgages as a source of leverage, paying an extra 2.x% for it relative to proper margin rates.
 

woodside

Member
Well, I am giving my own story here. Last year I bought a three bed two bath (about 900K) coop intended for my family's whole life unless we have to change jobs. We had the minimum 20% downpayment with 3% 30-year fixed. If using the comparable rent of a similar size apartment (very hard to find a large apartment for rent in this neighborhood with this price range), I am assuming the rental is $3500/month, the CAP rate after subtracting the maintenance fee (3500-1400)*12/900000=2.8%

This year, I sold my previous smaller coop for almost twice the price that I bought about less than 10 years ago. After the sale, we had cash of about $400K (some are from the profit and some are from the initial downpayment and also reduction of principal from the monthly mortgage payment). I put the money into the stock and bond at about 5% just below the peak. I was thinking that stock/bond will beat the mortgage interest rate (10 years long term) and the inflation rate is running high

Hindsight, I should have used the $400K to pay down my mortgage to guarantee a 3% post-tax return (4% pre-tax return). I never got the chance to deduct any mortgage interest rate due to the 10K SALT limit and higher standard deduction after Trump's TAX change.

With the market downturn, it was a pain to see the loss of the investment day by day. Right now I am starting to get used to seeing the loss. I guess I will have to wait for several years to have the stock/bond have a 4% return, then I will decide either to cash out to pay down the mortgage or to leave it alone.

The twist of this story is that I also have an employer 401K accounts, which suffers the same percentage of loss (but bigger in absolute number), but I don't feel any pain at all. I guess the reason was that the 401K was invested for many years so the total return is still significantly positive.

Long story short, I have already completely exited the real estate market (no more buy or sell), whatever happened to my stock/bond investment is not going to affect the real estate market per se.

The stock/bond market downturn will definitely cut down my spending on other discretionary stuff (vacation, kid's college's choice will be shifted from private to public,etc). If I had paid down the mortgage (recast the loan to a much lower monthly), I would be much happier.
 
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inonada

Well-known member
I’ll do you one better. I put a slug of cash (~1/6th of net worth) into a few value stocks ~2% below the peak in Jan, as an inflation hedge against holding an equal amount in cash. I still like the stocks at the prices I bought them, but clearly the market disagrees to the tune of ~25%. And unlike you, I didn’t have any stock holdings sitting on prior gains.

Do I feel pain? Not particularly, just wistfulness about having made a call that turned out wrong. I take the losses in stride and context. I left just as much in cash as I had deployed, should valuations become more attractive. They have. And the ~4x I’ve had invested elsewhere have net after-tax gains that are (in aggregate) ~4x the after-tax losses on the stocks (which I’ll tax loss harvest). Year-to-date income has been even more implausibly gangbusters, amounting to ~7x what I’ve lost in the stocks. All told, I wouldn’t mind if assets dropped further: for me, it makes decisions to deploy cash (old and fresh) easier.

RE has been easy for me. My pandemic-era rent is at a cap rate of 1.0-1.2%. I locked in for 3 years, but even with a (say) 50% increase the cap rate becomes 1.6-2.0% assuming prices remain flat. Purchasing just didn’t make sense for me, even with cheap money, even with the benefit of hindsight.

My spending tends to be counter-cyclical. I’ve got enough to spend whatever / whenever I want, but when prices are bid I kinda lose interest.
 

inonada

Well-known member
Hindsight, I should have used the $400K to pay down my mortgage to guarantee a 3% post-tax return (4% pre-tax return).
Are you sure? In my experience, had you done that your hindsight would now be saying “Damn, I should have kept my cheap 3% loan and the $400K in cash, to deploy at these cheaper prices!”

FWIW, on StreetEasy I made a case for why I could see myself doing just that last year (had I been a buyer). That ran very counter to the prevailing sentiment. In a world of ZIRP and meager stock / bond yields, 3% guaranteed after-tax seemed attractive IMO. But for the most part, people seemed to think that leveraging the cheap money into stocks, junk munis at 4%, etc. was the better way to go.
 

woodside

Member
Are you sure? In my experience, had you done that your hindsight would now be saying “Damn, I should have kept my cheap 3% loan and the $400K in cash, to deploy at these cheaper prices!”

FWIW, on StreetEasy I made a case for why I could see myself doing just that last year (had I been a buyer). That ran very counter to the prevailing sentiment. In a world of ZIRP and meager stock / bond yields, 3% guaranteed after-tax seemed attractive IMO. But for the most part, people seemed to think that leveraging the cheap money into stocks, junk munis at 4%, etc. was the better way to go.

Yes, this strategy of holding the cash to buy the stock/bond at a cheaper price (say 16% off from the peak rather than 5% off from the peak) as of today.

We can not predict the future of the stock market. If the market has a quick rebound like in 2020 and I don't buy the stock/bond now or early this year, then I may have to buy the stock/bond at a higher price at a later time as I may not be able to monitor the price of the stock every day when my work is getting too busy.

On the other hand, the stock/bond may keep going down for several years (like the dot-com bear markets of 2000-2002), but buying the stock/bond as of today will still keep my money locked for many years, with a little bit shorter than what I had done (buying the stock/bond right after the sale of the apartment)

Yes, I am also following your thread on the streeteasy, but it is very difficult for me to participate over there as my post still needs to be approved and it took probably one week or more to show up. Yes, I was somehow subscribed to the thinking "In the world of ZIRP and meager stock/bond yields, 3% guaranteed after-tax return is too little". I was very worried about bonds and I also had a discussion on the bond in streeteasy, so my asset is changed to 80% stock and %20 bond rather than 65% stock and 35%bond. The high inflation reduces the purchasing power of the cash, the only safe place right now is in I-bond, but we can only buy $20K each year.
 

woodside

Member
And unlike you, I didn’t have any stock holdings sitting on prior gains.
Not sure I am understanding this, I thought you have been long on stocks after the bear markets of 2009-2009 and you should have a lot of prior gains from the long bull market. I guess you always keep a high percentage of net worth in cash, while I have been fully invested after one or two years of cash for the emergency.
 

woodside

Member
so my asset is changed to 80% stock and %20 bond rather than 65% stock and 35%bond.
This asset allocation change is purely due to the sale of the stock/bond last year for the down payment of the new apartment and renovations of two apartments. It didn't make much difference anyway as both stock and bond went down and also there is not much money left in the taxable account before the selling of my prior apartment early this year. The asset allocation for the new $400K will stay 80/20 for many years to come.
 

inonada

Well-known member
Not sure I am understanding this, I thought you have been long on stocks after the bear markets of 2009-2009 and you should have a lot of prior gains from the long bull market. I guess you always keep a high percentage of net worth in cash, while I have been fully invested after one or two years of cash for the emergency.
I sold my long-held stocks in 2018, rotating the money (in a tax-efficient transfer) into other investments. The valuations had become less attractive over the years, and attractiveness / availability of the other investments had increased. My average stock dollar was up ~3x (didn’t buy it all in 2009), so I missed the additional 50% (including dividends) cumulative over the past 4 years. OTOH, my other investments have been up 100% over the same period so it turned out fine. Nevertheless, my accumulating cash “missed out”.

My cash position has fluctuated over the years. I was 0-10% through 2018, at rare times even modestly levered (something like 20% in 2009?). Since 2018, my cash position increased via income accrual I did not fully deploy to other investments. Valuations in traditional markets were not attractive enough for me, and increasing my concentration in the other investments any more seemed imprudent.

Like you, I cannot say whether stocks/bonds are headed up or down. All I can control is my allocation in response to valuations markets present at any given moment. To me, cash is not necessarily a 4-letter word. E.g., I was happy to let my cash earn 0% at the bank rather and a 1-2% yield in a primary residence, as it enables risk appetite elsewhere and potentially in the future.
 

inonada

Well-known member
This asset allocation change is purely due to the sale of the stock/bond last year for the down payment of the new apartment and renovations of two apartments. It didn't make much difference anyway as both stock and bond went down and also there is not much money left in the taxable account before the selling of my prior apartment early this year. The asset allocation for the new $400K will stay 80/20 for many years to come.
IMO, the ~16% drop in stocks seems more palatable than the ~16% drop in bonds. Losses of that magnitude, and more, are par for the course in stocks. OTOH, bonds are often touted as “safe” and a hedge during periods of market turmoil.

How much does income savings add to your net worth annually in expectation? For me, it used to be as high as 30-40%, which increased my appetite for holding zero-ish cash: potential future opportunities could always be met with a chunk of fresh cash. Nowadays, it’s dropped to 10%, which makes me more inclined to hold cash for potential future opportunities if current ones look less attractive.
 

inonada

Well-known member
BTW, I thought you had been renting the last year and looking to buy in the UES. I guess you’ve already bought, then? Was it in UES or Woodside?
 

woodside

Member
BTW, I thought you had been renting the last year and looking to buy in the UES. I guess you’ve already bought, then? Was it in UES or Woodside?
I only rented in UES more than 20 years ago for one year when I first moved to NYC, then I moved to Queens living in different neighborhoods. I first rented in Woodside, Sunnyside, and Forest Hills, and then bought a coop a little bit less than 10 years ago in Jackson Heigths. Last year, I upgraded the coop to the forever home, still in Jackson Heights.

How much does income savings add to your net worth annually in expectation? For me, it used to be as high as 30-40%, which increased my appetite for holding zero-ish cash: potential future opportunities could always be met with a chunk of fresh cash. Nowadays, it’s dropped to 10%, which makes me more inclined to hold cash for potential future opportunities if current ones look less attractive.
The household savings from W2 income to net worth ratio moved from 10% to 4% during the last 10 years.

The decrease in the ratio is primarily due to the accumulation of net worth. The net worth is about 4X compared with 10 years ago, which is due to the long bull stock market and constantly piling money into the investments (401K, backdoor Roth, 529, and taxable)

My future plan is to have 5X to 10X of household living expenses deposited into the I-bond and cash and laddered termed bond or CD (no more than 5 years). At that time, I will probably reduce the bond fund components to a very minimal % from all investment accounts.
 

woodside

Member
For me, it used to be as high as 30-40%, which increased my appetite for holding zero-ish cash: potential future opportunities could always be met with a chunk of fresh cash.
I was not realizing how the household savings to net worth ratio impact the investment strategy. The high ratio can always give fresh cash to the investment.

I guess the ratio for mine will go down to 2-3% in ten years, it can not be more than 5% even if I could put every cent of the W2 into savings. At that point, the investment needs to be more defensive, stock going more towards the boring value or utilities or consumer staples, to have the mortgage paid off and also have a higher % of cash.
 

David Goldsmith

All Powerful Moderator
Staff member
Rationally, I agree. But I’ve learned that people do not necessarily behave in ways I consider rational.

It’s also going to be interesting to see the effect on people who levered themselves up on RE to deploy cash elsewhere. E.g., borrow via a mortgage at 2.x% to buy stocks, bonds, etc. at anemic yields. People seemed to like the margin-call-free nature of mortgages as a source of leverage, paying an extra 2.x% for it relative to proper margin rates.
I remember when the Dot Com bubble burst and Greenspan testified before Congress. Someone asked him if it would crash the economy because the Wealth Effect would disappear. He answered that they had researched and discovered people weren't spending their stock market gains, but instead were doing cash-out refis on their homes and spending that money. Ran a chill up my spine because my experience told me where that would lead.

And wouldn't you know it, although the GFC was blamed on Subprime mortgages (and at least one study claims it was actually rampant house flipping gone wrong https://qz.com/1064061/house-flippe...ot-poor-subprime-borrowers-a-new-study-shows/) the foreclosure crisis which followed was much more prime mortgages which strategically defaulted because they had effectively sold it their houses at a profit to the banks by cashing out and walking away. https://www.nber.org/digest/aug15/us-foreclosure-crisis-was-not-just-subprime-event#:~:text=The crisis began in the,over the full sample period.
So what does that say for the potential of what could happen for those who recently maxed out financing to play the markets if they both lose that money in the market and the value of the Real Estate drops below the amount of the debt? My 40 years experience with such situations says that psychologically those who play that game will have a high likelihood of walking away singing "it's the bank's problem now." Unfortunately if that group is as large as I think you are implying it is, that could cause a sharp downward pressure on a market which (again big if) would already be in not great shape.
 

woodside

Member
My 40 years experience with such situations says that psychologically those who play that game will have a high likelihood of walking away singing "it's the bank's problem now." Unfortunately if that group is as large as I think you are implying it is, that could cause a sharp downward pressure on a market which (again big if) would already be in not great shape.
I think what you said is probably applicable to other states. The crash of real estates crash in other states will have some impact on New York.

I believe that New York is a recourse state where a bank can go after the owner for the difference between the mortgage and the final selling price from the foreclosure, so very few people in New York want to strategically default on the home mortgage. You guys know much better than me. Was there a very high percentage of strategical default in NYC during the last crash (2008-2010)?

It is very difficult to flip for the coop in NYC, flipping a condo is much easier. Is there a high % of condo flippers in NYC?

If many people can not pay the mortgage due to the loss of their job and with very little savings due to the recession, the price of real estate will come down. significantly.
 

David Goldsmith

All Powerful Moderator
Staff member
I'm not looking to be purely argumentative, but:
1) New York is for all intents and purposes a non-recourse state because of the hoops lenders need to jump through in the foreclosure process to perfect them as recourse sales. In the last 40 years I'm unaware of a single case on a simple residential property where a lender sought a deficiency judgement where there wasn't an allegation of fraud in the initial loan.

There have been plenty of people who have walked away from NYC properties without concern of deficiency judgements. It was rampant in the 1990s.

2) We were involved in flipping over 100 deals. The majority were Coops. When the market crashes you'd be surprised at how much more willing smart Coop Boards are to work with people who are cleaning up messy situations.

3) Absolutely agreed that a recession will make things messy. I'm already seeing articles about tech firm's plans for seriously trimming staff. Yes, right now it generally seems that job seekers are having little trouble finding openings at very good compensation. But if we see a combination of recession and tech pullback I'm not sure what the result will be.

4) As with most Real Estate downturns, they tend to hit outside NYC first and hardest. Take a look at this recent report of newly booming towns which are now claimed to be extremely overvalued.
However, Real Estate - even in NYC - tends to be very much more an emotional than a rational purchase, so the numbers rarely make sense. Either people are paying way over what makes sense economically on the way up, or refuse to buy what are obviously good deals on the way down .

So if the Real Estate market falls apart nationwide, there is a good chance sentiment will shift in NYC as well. I think we had an unusual event after the GFC because of the $780 billion bailout an unusually high proportion went to NYC. So the post GFC Real Estate crash only lasted a hot NY minute here, but in much of the country prices didn't rebound to pre-crash levels until 2 or 3 years ago.
 
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