At this writing, nearly 6 weeks in advance of an October 1 publication date, with the debt markets in turmoil and the stock market zigging and zagging, it’s too soon to tell what effect the fallout will have on our real estate marketplace. It feels a little like 2005 when economists and pundits were speculating whether a real estate bubble would burst. Greenspan saw “froth” in the housing market and predicted that the “irrational exuberance” could not be sustained. Despite the dramatic headlines, however, 2005 turned out to be the year of the bubble that wasn’t. Manhattan real estate did not tank, and although we experienced a mild slump during part of 2006, we ended last year with unexpected vigor and strength.
Throughout the first half of 2007, the preceding year’s vitality continued. On July 23rd, uncertainty surfaced as the stock market plunged lower than it had in five years. With huge market swings occurring almost daily, the subprime fiasco unraveled. The liquidity squeeze spread quickly from subprime borrowers defaulting on home loans, to high net worth investors liquidating assets to meet margin calls, and to corporations looking to restructure risky debt. As the meltdown deepened from the securities backed mortgage markets, hedge funds closed shop and mortgage providers, like American Home Mortgage and New Century Financial, declared bankruptcy. Capital One Financial Corporation shut its entire wholesale mortgage division, laying off nearly 2000 employees.
Thus far, the Manhattan real estate market has been relatively immune to the housing slowdown that has stricken the nation. Our sales have been strong, and we hear of few, if any, homeowners defaulting on Manhattan properties. In sharp contrast, in the rest of the country, particularly in California and Florida, foreclosures are increasing, and they are expected to reach two million by the end of this year—according to RealtyTrac, a website that records this data. As of this writing in late August, the market is seasonally slow, and there is little evidence that sales prices have declined.
Two powerful postures shape our market: Manhattan’s position as a global “supercity” and Wall Street’s role as the city’s economic engine. In the last several years, record-breaking profits at financial institutions and hedge funds have translated into huge bonus earnings, driving the city’s real estate prices higher and higher. However, today we hear from a few real estate developers, investment bankers and lenders that a handful of their deals are being put on hold, restructured, or cancelled. At the same time, other professionals trading in equities, commodities and distressed debt, are reporting a banner year. While industry discussions about bonus amounts generally begin in October, bonuses are not paid until spring, and it remains to be seen how earning levels will be impacted.
Can We See Clearly Now?
Looking beyond the current storms, Bruce Wasserstein, CEO at Lazard and former M&A head at First Boston, observes in a recent Business Week, “The stock market has drifted down, but it’s still reasonably at a strong level because the world economy is reasonably strong….Globally, there is still a lot of liquidity.”
Nonetheless, it’s important to acknowledge some new lending realities. Banks have tightened standards for all borrowers, not just risky subprimers. Many have discontinued no income products, and all are requiring more exhaustive documentation and also scrutinizing loan to value ratios more closely. For too many years, it was too easy to obtain credit. Some irresponsible lenders were too quick to advance money. With flexible terms, low rates, and little or no money down, buyers leveraged to the max as they financed and refinanced with non traditional and exotic mortgages, using their homes as virtual ATM machines. A return to more responsible borrowing and lending is welcome and perhaps even overdue.
Industry veteran Sari Sardell Rosenberg, Managing Director at The Manhattan Mortgage Company, observes, “The dust will settle, and we will come out stronger.” Cautioning those who are self employed, she advises, “If you offset all your income with deductions, and your bottom line does not resemble your gross, then you could have a problem qualifying for a loan. However, if you can show a solid income and have good credit and savings, then there are plenty of lenders available out there.”
In the months ahead, as the mood shifts from excess to moderation, it’s logical to expect that the pace of trading may slow and that budgets may be adjusted downward. Sellers are advised to set realistic prices and to qualify bidders. Purchasers are cautioned to clean up any bad credit issues in order to demonstrate credit worthiness. Those with high credit scores will be able to shop for the most competitive interest rates, and also will be in the best position to seize the buying opportunities that surface.
Because supply continues to be limited, small market fluctuations should have little affect on long term values. Accordingly, buyers are advised to have a 5-7 year time horizon which excludes investors looking to flip for a quick profit. Today’s market sees interest rates still historically low, housing supply still tight, and demand high, though maybe hesitant.
A crystal ball? Don’t we wish we had one?