Thursday, August 16, 2007

Not as bad as it looks...for New Yorkers

Well it has been a tumultuous few weeks in both the stock market and credit markets, and if you watch CNBC 24 hours a day, you've probably already had a nervous breakdown, but not all is lost.
I'm not going to break out the crying towel because Wall Street has undergone a correction which hasn't even reached 10% since it's peak in mid-July. One thing that nobody mentions is that prior to it's peak, the Dow had it's longest rally without a correction since 1926. The historical return on the Dow is 10% annually, and if you look back with a long term perspective, at least the past several years, the Dow is doing just fine. There is no doubt that highly leveraged lenders are getting killed. Many of these lenders either lent with no collateral, or received higher ratings on mortgage loans because they lent 80%, then did an equity loan for 20%. Since they were reselling the 80%, and not disclosing the fact that the other 20% was not in fact collateral, the lenders were getting much higher ratings, all the way up to prime, when in fact the loan was far below prime, and precarious at best. In short, the mortgage industry has been allowed to run amok. The leverage allowed on repackaged mortgage securities is ridiculous and ought to be seriously looked at and reformed. When all of the short term panic, largely fueled by the media shakes out, the mortgage market will likely revert to the way it used to and should be done. Banks are now and will continue, in the short term, actually act responsibly. What a concept! Well qualified buyers that are willing to put 20% or better down on a property, seem to be having little difficulty obtaining loans. This brings me to the NYC real estate market.
First, let me say, that thus far, I have seen no impact on the Manhattan market with the exception of buyers and mortgage brokers having to make a few more phone calls to secure a reasonable mortgage. I have seen zero price erosion. There are several positive factors for the Manhattan market to consider. Most important is the cheap dollar. Foreign buying in New York should remain strong, as the New York market is still a bargain compared to markets like London and Tokyo. Second, global growth is, arguably at an all-time record at 5.2%, so foreign money should continue to flow. Third, condo construction projects are slowing down. There is a surge underway, but with the 421-a tax abatement only in effect for projects that have a finished foundation by June 2008, that is short lived. Since supply of new condos will likely dry up, demand does not have to increase in the near term. The biggest negative for the New York market is the Wall Street bonus picture, which is cloudy at best. For me, it all hinges on Goldman Sachs, which was responsible for 60% of all bonuses on Wall Street last year. Up until the last 3 weeks, Goldman had been having an exceptional year, well ahead of last. Three weeks does not a year make, so we'll see how the rest of the year shakes out. I would argue that the cheap dollar and foreign buying is a much larger influence, and has kept the NY market strong year round. You also have to consider the the Manhattan market is much more haves than have-nots. Qualified buyers spending $3 Million for a 2 bedroom apartment are generally much better insulated than a speculator in the Midwest with a 105% adjustable rate mortgage. Additionally, I would figure that the federal reserve, under pressure, will likely drop rates by at least 1/2 of a point between now and the end of the year to bail out both banks and the consumer. After this all shakes out, looks like New Yorkers will be getting a boost from lower rates. Just my opinion, time will tell.


  1. I think you're leaving out of the picture the issue of buyers who don't have 20% down, and the impact on affordability (how much people can afford at higher rates) for those who do.

    If the global confidence in RE values in New York becomes even a little bit shaky, it would seem that overseas investors could stop buying here pretty abruptly. I don't think it would take a big downturn in values to freeze up the transaction volume. IMHO.

  2. Yes, agreed, those who do not have 20% down will be affected. However, in NY condos usually require at least 10% down and coops 20%-50%. These downpayments are one big reason that we haven't seen widespread foreclosures in Manhattan.
    I think the argument about higher rates is absolutely valid, however, with real rates (10 year and 30 year t's) actually falling, I think the bump in jumbo rates will be short-lived when all the dust settles.