Wednesday, August 6, 2008
The chorus is growing louder, "the dollar has bottomed". Many of my trusted advisors on Wall Street seem to be in agreement. So, if the dollar has indeed hit a bottom, what is the impact on Manhattan real estate prices? While a huge rally would probably be counter-productive in the long run, a gradual move off the bottom could be quite beneficial.
Over the past couple of years, a larger and larger portion of apartments that I have sold have been to foreign interests. Whether it's folks from Dubai, Mumbai, London, or South America, I have found foreign purchasers grow from 10% of my business to nearly 50% over the past year. However, one comment from a group of Irish investors just after the Bear Stearns debacle has stuck with me. The investor, explaining how he was taking a break said "yes, the dollar is cheap, and we've been buying on that basis for the past year, we are just afraid that it is about to get a whole lot cheaper". From that day in mid-March until just a few weeks ago, I heard the same sentiment from numerous others.
Fast forward to today, and the picture looks far brighter. It's apparent that the fed rate cuts are more or less over, and the next move is a trend of increasing rates beginning at the end of this year or the early next year. Beneficial to the dollar, no doubt. Our economy, despite all of our issues has yet to fall into recession and the odds of that happening are now less than 25%. Even if we were to experience 2 consecutive quarters of negative growth, the fed doesn't have many bullets left (with the funds rate at 2%) and would be unlikely to use them. A thriving export market and higher yields on fixed income securities has and will continue to bolster the dollar.
Here's where my theory comes into play. If foreigners, who have cooled to our markets a bit recently out of fear, lose the fear, sense stabilization, and see hope of a dollar rally, I believe this will result in a surge of foreign buying in Manhattan. A dollar rally clearly gives buying Manhattan real estate twice the potential for appreciation.
Manhattan is a blue chip market which has held very well through a challenging national economic and credit environment. So, capital appreciation would be one objective, but a dollar rally brings the bonus of currency appreciation as well. So, if the belief that the dollar has bottomed grows widespread, expect another surge of foreign buying and perhaps a better market than many expect.
This is just my theory, I may have studied economics, but an economist I am not. Make of it what you like.