Thursday, October 4, 2007

A Recipe For Higher Prices?

It was a long, shaky summer for the credit markets. The media seized on a crisis and redundantly played the story over and over and over as if smelling and selling to fear. The National market has hit the skids in a big way. New home sales numbers are dismal, so dismal in fact, some on Wall Street are calling it a bottom, just because they cannot conceive of any numbers that could be worse. Mortgage rates popped, especially for jumbo loans, only exacerbating the problem. Many have begun using the "R" word in reference to the national economy, many blaming the housing market as it's eventual cause. All the while, the New York, specifically the Manhattan market has held up, virtually untouched. For the past year many have wondered, can the New York market possibly weather this incredible national storm? Thus far it has. Not only has the NY market held up, in many ways it has gone in the complete opposite direction. Inventory, as tracked by Johnathan Miller Associates (quoted on has dropped 31% year over year, while average prices in Manhattan have leaped to an all-time record $1,370,000.. Can we weather this storm? We have so far, and indications are getting clearer that we will. Here is part of my reasoning:
1- I might as well start with my whopper- Wall Street bonuses will be higher this year than last. This may go against conventional wisdom, but here is my thinking. Last year, Goldman Sachs accounted for 60% of all Wall Street bonuses ($16.5 Billion of the $23.9Billion total). Goldman Sachs is having a terrific year, above estimates every quarter, and year end earnings are expected to grow by at least 22%. Add 22% to last year's bonuses and you have over $20 Billion in bonuses for 2007 from Goldman alone. Therefore, if all four of the rest of the big 5 Wall Street firms were to cut bonuses in half, you still come up with a number over $24 Billion, higher than last year. I believe that there is upside to that number. As we all learned as 2006 turned to 2007, Wall Street bonus money is a huge stimulus to the real estate market, and I would expect little difference this time around.
2- The 30 year jumbo mortgage rate is trending down. After a pop to 7.25% in August, the average rate now stands at 6.875%. While the spread between jumbo rates and the 10 year t-bill has narrowed, there is still a long way to go. The Libor rate has dropped by 1/2 of a point in the same time frame, and commercial paper yields backed by mortgages have dropped 1%. With another fed cut likely before the end of the year, and a slowing national economy, it looks like this trend will hold, and 30 year Jumbo rates should drop to 6.5% and possibly less by January.
3- The dollar is still at historic lows and continues to draw overseas investors to NY real estate.
4- Inventory, as mentioned before, is very low, so there will be more money chasing fewer apartments.
So there you have it. Barring some extraordinary event or crisis, you have a solid recipe for price appreciation in the near term.


  1. Dude you know nada, zilch, zip, about the way bonuses are calculated, the time period upon which they're *really* based, and the "emotion of the moment" mentality that kicks in during calendar Q4 on Wall St. every year.

    Here's the emotion that will govern 2007's "moment":

    -Larger debt financing deals (which include a multitude of stripes) have all but ground to a halt

    -While the spigot has squeaked back open, it's mostly in the form of repriced deals with much harsher terms (i.e. not new-new business, but old-new business, stuff that was already in the pipeline

    -The pipeline for the next two quarters is looking pretty dismal, for goldman included

    -The "bank across the street" is in more or less the exact same position, which means you can't just stroll out and "name your price" this year

    The net result? Bonuses will NOT be up this year.

  2. First, I'll wager a burger and cottage fries from J.G. Melon's that you are wrong. Total bonuses will exceed the $23.9 Billion of last year, actually I'll take a beer with that too.
    I worked on "The Street" for 8 years, so I have some familiarity with the subject.
    I agree that some debt deals are in trouble and being priced on less favorable terms. You are right to assert that the spigot is squeaking open, and it's in every Wall Street firms interest that it is open full throttle yet again. Remember, the market is back at a record high and stock as currency in takeovers and aquisitions is at an all time high.
    As for Goldman, a majority of the money that they make is from trading operations that have excelled. Yes, there will be short term impact from the lack of deals, but they have already put in a year that they did last in just 3 Q's.
    My message is really that the sky is not falling and that we have held up very well despite the turmoil.

  3. Wager a burger? That's putting your money where your mouth is!!

    You're a joke. I'll tell you what, I'll wager you $10,000.

    $10,000. Not a joke.

  4. Hey, I said a burger, and cottage fries and a beer! Check back with me in January and then you can admit that you were wrong and come up with the excuse that it was nearly all GS, blah, blah,blah.
    Anyway, I'm glad that I have come up with a topic that stirs discussion..thanks for posting!

  5. Reason #1 is brilliant.
    Bill Gates is the richest American. If he were given (just given) $1 trillion, real estate prices would increase... huh? If a SMALL group of people make more money, wonderful, maybe a small group of apartments in the high end of real estate increase, but there's plenty of stuff that won't.

  6. Last year, after the 3rd quarter, goldman had put $13 Billion away for bonuses. This year they put $16 BILLION. Bonus will be up for the people that still have jobs.

  7. And with today's employment numbers and Aug revised numbers, rate cut this year becomes less likely. And even if there is, 30 yr rate will not decrease any more than it is now because market has to factor in much larger risk of inflation from this past cut so a rate cut will not help the 30 year loan. NYC housing will take a hit. And GS profits were largely up because of trading. Trading from volatility of markets in July and Aug. The Vix is back under 20. Trading is probably not going to save them Q4.

  8. I'm with the haters. The key isn't so much the total pool, and your math here looks sensible, but how it's spread around. What the wider NY real estate markets want are lots of rich people at second-tier institutions spreading it about. These second tier banks are having a rotten year. I think you'd be better off saying a combination of Goldman executives and bottom-fishing Euros will save us all....