All’s not quite right with the world. As the credit squeeze deepens, financial insiders tell us that there is more bad news to come with more write downs at banks before things get better. The work out period, they acknowledge, will be longer than previously expected or hoped for. What began as a subprime U.S. real estate debacle turned quickly into a complex tangle of interconnected crises at financial institutions around the world.
The collapse of Bears Stearns, once the 5th largest U.S. investment bank, jolted New Yorkers especially, and sent shockwaves through the nation. The emergency takeover by JP Morgan Chase, backed by the Federal Reserve with a $30 billion loan, averted a near bankruptcy for the failed bank. A year ago, Bear Stearns stock was trading for $170 a share. On March 14, just before the bombshell news of the pending purchase for $2—which days later was upped to $10—the book value was $80 and shares were selling for $30.
For Manhattan real estate, the Bear Stearns bust triggered a decided week long pause. For several days, activity came to a near halt before resuming. On the Monday following the shocking takeover news, three of my active buyers called to say that now was not the right time to be looking to make a purchase. Ten days later, two called back to ask what they had missed. Meanwhile, my Bear Stearns buyer and I worried whether he would be approved by the co-op board. After a week-long cliffhanger, he was.
For Wall Street, the economic slowdown caused the worst first quarter in 5½ years, as the Dow slid 7% and NASDAQ plunged 14%. Yet, on April 1st at the start of the 2nd quarter, the Dow jumped 391 points. As Wall Street reacts to daily news events, wild stock price swings have become a regular occurrence.
For Manhattan real estate, first quarter figures show that while the volume oftransactions was down, prices climbed. The averages, however, continue to be skewed by closings at The Plaza and 15 CPW. Between January and March 2008, 71 apartments sold for more than $10 million—close to half of them condominiums whose purchasers went to contract as many as 12-18 months earlier.
First quarter statistics coming from the Bureau of Labor nationally and from New York City’s Independent Budget Office locally are sobering. Nationwide, job losses totaled 207,000: 26,000 in January; followed by 101,000 in February and 80,000 in March. According to economists, such a severe three month contraction in the absence of a recession has not occurred since the 1950’s. The biggest job losers were in construction, with more than 50,000 jobs disappearing in residential building.
In New York, the City’s Independent Budget office forecast that layoffs in the financial sector alone would approach 12,600 in 2008 and 7,600 in 2009, revising an earlier estimate of 2,000. According to Bloomberg.com, more than 34,000 jobs have been cut already on Wall Street since July 2007. Among them are 6,200 layoffs at Citigroup; 4,990 at Lehman; 3,650 at Bank of America; 2,940 at Morgan Stanley; 2,600 at Washington Mutual and 1,500 at UBS. Approximately half of Bear Stearns 14,000 employees are expected to receive pink slips.
What does this mean for Manhattan real estate?
As the pressures mount for Wall Street professionals, the economic meltdown weighs heavily on market psychology. Uncertainty has stalled action, and many apartments are taking longer to sell. Sellers are anxious, and buyers are skittish. This is a market that requires patience and broker expertise. It’s also a market whose success depends on brokers and co-brokers working together to make deals happen.
Are property values diminishing? Maybe, for some, and no for others. The properties that are selling are priced just right or have sellers who are willing to negotiate. The buyer pool has shrunk, as more purchasers sidetracked by bad news have moved to the sidelines. Fears of recession are making many wary. Despite the challenges, however, the current market offers substantial opportunities—especially for the strong buyer who can shave dollars off the asking price for an all cash, unencumbered deal.
Inventory of quality resales remains low—which will help the city to withstand the problem of a housing stock surplus that’s plaguing the rest of the country. The credit squeeze has made it nearly impossible for developers to secure conventional financing unless a project is in part presold. With permits down by 38% this past quarter, there will be less new construction, so there will be time for the older projects and those just coming to market to be absorbed. To compete with the huge inventory of new developments, some sponsors are cutting prices, and many more are more willing today to make concessions in the form of upgrades or to pay a portion of closing costs.
Whether or not the U.S. enters a recession, as many economists think, 2008 continues to be a complicated year with challenging 2nd and 3rd quarters ahead. Despite the difficult times we find ourselves in, real estate continues to be the most outperforming asset. If your perspective is long-term, the glass will soon be full again.