Robert Knakal, Chairman and Founding Partner of Massey Knakal, has been kind enough to share his insight on the market with A. Fine Blog's readers. Massey Knakal is a leader in the industry, having closed over $8 Billion in sales since 2001. In this interview Mr. Knakal tackles issues ranging from the state of the market, the 421-a program, the impact of the Second Avenue subway and more...
1- If you were in charge of the Stimulus Package, what would you enact to stop the hemorrhaging in the national housing market?
I think the initial framework of the stimulus plan was well intended and was to be based upon an economic perspective. Unfortunately, as often happens in Washington, the stimulus plan has turned from an economic package into a political package. I believe that the short term stimulus from this legislation will be smaller per dollar spent than expected by many economists, simply because the package is combining short term stimulus with long term benefits for the economy. Unfortunately, short term and long term benefits are in considerable conflict with each other. Additionally, it is very hard to wisely spend such large sums of money in such short periods of time. Presently, I don’t see much in the stimulus package to benefit the housing market other than the thought that it is projected to create approximately 4,000,000 jobs. If this is the case, that means the government is spending $200k per job in a society where the average salary is approximately $40k. To the extent jobs are created it would have a positive effect on the housing market. However, I believe that a better way to stimulate the housing market is through the use of the second half the TARP money to provide a backstop and credit enhancer for the secondary market so that mortgages will start to flow more freely to qualified home buyers. For the housing market to correct it must first hit bottom and a viable credit market is critical to allowing this turnaround to occur.
2- I have suggested a program to offer 4% mortgages through government agencies to all that qualify for both new purchases and refinancing. The agencies would offer a 5.25% rate (pegged to the 10 year treasury), and a tax credit would be offered to buy down the rate to 4%. This could be phased out as the housing market recovers. What do you think?
I think this is an interesting idea and certainly low mortgage rates would help the housing market correct as it will encourage buyers sitting on the sidelines to buy. The average 30 year fixed rate conforming loan is presently under 5% but I think in order for a long term correction to the housing market to occur, these mortgages must be made on a fixed rate basis. Pegging the rate to the 10 year Treasury poses some risks. Today, the 10 year opened at slightly above 3%, it’s highest rate in quite a while. As the Government is forced to sell more T-Bills to raise much needed cash, the over supply will drop the price of the Treasuries which will put upward pressure on the rate. Any mortgage rates that are linked to the 10 year Treasury will likely see an increase over the short term as the market gets flooded with Treasuries. Additionally, history has shown us that coming out of a deflationary period with low interest rates will lead to above trend inflation. In an inflationary cycle interest rates rise. So I believe a more important aspect of this issue is to provide low rate, long term, fixed rate financing to be available to the housing market.
3- If you were forced to guess, when would you say that the national economy will hit bottom?
The most optimistic economists believe that the economy will bottom out in the second or third quarter of 2009, while the most pessimistic believe it will bottom out in the second quarter of 2010. I tend to be more optimistic in my perspective but would not venture a guess as to when a bottoming out would happen. Key indicators to watch that will be a sign that the market might be bottoming out is when we see a few months pass when banks are not forced to raise capital, leveraged loan spreads regulate (these spreads are indicative of banks willingness to lend) and more reasonable credit default swap premiums (these premiums are indicative of the perceived credit-worthiness of ones peers) Unfortunately, unemployment is a lagging indicator and will probably not spike until sometime after the economy hits bottom and unemployment is the economic metric that has the most profound effect on the fundamentals of our real estate market.
4- The local real estate community is hurting. Brokers are closing branches and some are closing up shop altogether. Do you see a long term shift in how brokers will do business in the future?
I do not think there will be a long term shift in how brokers do business in the future. During any up cycle marginal players come into the market and can do fairly well and in a down market the marginal players evaporate. The same thing happened in the early 90’s but this time it will be a little harder for people to hold on. I firmly believe that specialization is a way to differentiate oneself and provide a tangible value-added service to the client. We are telling our agents that they must remember the fundamental “blocking and tackling” approach to the business and take each day as it comes.
5- If you were forced to invest in real estate right now, where would you put your money (locally)?
I would look for properties which had rent levels well below market. This could be in the form of retail or office properties or, most commonly, rent regulated multi-family buildings. I believe, given the uncertainty in the rental markets for all property types today and given the expected increase in the unemployment rate from the present 7.6% to 9%, it is very likely there will be significant downward pressure on rental rates. Therefore, the extent to which existing rent levels are below market levels, it will be a tremendous benefit to the performance of that property over the long term.
6- Outside of Manhattan, but in the 5 boroughs, which emerging neighborhoods do you see as most promising?
I believe that the Bloomberg administration has come up with a very fundamentally sound long range plan for the city. This program calls for increasing development density around transportation hubs throughout the boroughs. This is a common sense approach to development and will enhance the efficiency of those living and working in the City. Given this long term perspective, I would be inclined to invest in areas immediately surrounding mass transportation hubs such as Jamaica in Queens.
7- Would you favor re-enacting the old 421-a program (which expired last year) as a means to encourage development?
When politicians voted to abolish the 421-A program they created a consequence which will have the opposite effect that was intended. For some reason they believed that the elimination of this program would create more affordable housing units and that was why it was enacted. I believe that we will look back on the period of time during which there was no 421-A benefits and see a significant drop in the number of affordable housing units created. There is no doubt that we need a replacement program for the 421-A program. As it has become such a political hot button, I do not think it will be called “421-A” but a similar replacement program needs to come back to provide stimulus for the affordable housing that is so desperately needed in the City.
8- Do you believe that the 2nd Avenue subway will ever be completed? If so, how great of an impact do you believe it will have on property values East of Third Avenue on the Upper East Side and East Harlem?
“Ever” is a long time. Certainly, at some point the Second Avenue subway will be completed, but I guess people have been saying that for the last 50 years. I believe it will have an impact on property values as, anytime convenience is added to a location, that location becomes more desirable. Because the areas that the Second Avenue subway will service are already mostly developed, I do not think the tangential benefit the City will receive from the completion of this project will be as significant as would be received from other projects. For instance, the extension of the number 7 train will open up the west side and create tremendous opportunities for massive amounts of private capital to finance new development which will create economic activity to a significantly greater extent than presently exists in that area. Those are the types of infrastructure developments that I would support more vigorously at the present time.
9- When the market does finally turn around, which segment do you think will turn first: residential below $1 Mil, residential between $1 Mil and $5 mil, residential over $5 mil., or townhouses?
I am not an expert on the coop and condo markets but, intuitively, believe that the answer to this question really depends upon which tax policies the state and city government adopt. To the extent that the massive tax increases on people earning over $250K per year are adopted, I believe that many people will leave the city which will have a disproportionately negative impact on the high-end market. It’s tough to find an economist that believes increasing taxes in the current environment is a positive strategy. It is, however, politically very easy. Cutting spending the correct response but it is a tough thing and these moves jeopardize a public official’s re-election probability.
10- New York is chock full of real estate industry titans. If you had to chose just one, who do you look up to the most?
This is a very difficult question to answer because there are many different segments of the real estate industry consisting of investors, developers, property managers, appraisers and brokers representing many different disciplines. Many people in each of these segments have taught me so many lessons and I have learned tremendously from so many whom have shared such invaluable advice with me. Given that I am a broker, one of the people who I look up to significantly is Steve Siegel, Global Chairman of Brokerage for CBRE. Steve is the consummate professional, is a tremendous family man, is philanthropic and, most importantly, it is nearly impossible to find anyone in the industry who does not like him. I think he is a great role model for people who want to excel in their career and, most importantly, have a well balanced life.
Thanks Bob! We really appreciate you taking the time out for A. Fine Blog.