Could it be that it’s déjà vu, all over again? A little over two years ago, in October 2005, I titled this column “Coasting Sideways This Fall.” At the time, there was a deluge of press ink focused on the housing bubble debate. Since early 2004, skeptics have been predicting that our market will tank. Despite all the gloomy talk about boom and bust, however, prices have been rising steadily. Buyers in all categories have been making deals for their homes at good prices, encouraged by continued historically low interest rates and short inventory. In October 2005 in an atmosphere of intense negative media attention, I wrote: “If anything, Manhattan prices are moving sideways, not down.”
Fast forward two years, past this year’s subprime meltdown, and it feels again like our market will rise above the doom and gloom naysayers. While it’s still too early at this writing to predict fourth quarter performance or to forecast just how the credit and financial markets will stabilize, there are strong indicators that Manhattan real estate will continue to outperform national averages and, at the very least, remain level with last year’s figures.
Faith in the economy was boosted significantly when on September 18th, for the first time since 2003, the Federal Reserve lowered short term fed fund rates by half a point, from 5.25 to 4.75. Before the end of the year, economists predict that the Fed may again cut the rates that banks charge each other for overnight borrowing. Though the decrease doesn’t apply to long-term interest rates like mortgages, the dramatic drop greatly influences other short-term rates for business and consumer loans alike.
Equally encouraging, particularly for the Manhattan marketplace, is the news from the big investment banks regarding bonuses for next year. Despite losses from bad loans caused by turbulent credit markets this summer, reports from Wall Street, while mixed, were stronger than expected. According to Reuters, although Bear Stearns posted losses of more than 50%, Goldman Sachs reported that 3rd quarter revenues were up over 60%; Lehman Brothers anticipated that bonuses could be up by 14%; and Morgan Stanley indicated that bonus compensation would probably be equal to last year’s at the very least. Actual bonus amounts, however, won’t be announced until mid December to mid January, and they won’t be paid until January or early spring.
Other good news comes from the lending industry. According to Melissa Cohn, President of The Manhattan Mortgage Company, “We’ve gone back to doing business the old fashioned way—where you actually have to qualify for a loan.” Acknowledging that some 120 banks have gone out of business, she observes, “Today’s preferred lenders seem to be the small thrift institutions who will lend off their own portfolios.”
While moving away from reckless lending and excessive spending is a good thing, it has its casualties. Because of changes in lending practices, it’s now more difficult to qualify for interest only loans, no income verification loans and 90-100% financing. Hardest hit by the tightening of lending standards are first time borrowers with limited credit histories and those with low credit scores. Repairing bad credit and getting pre-approval is a must today for buyers, as is shopping for the best rates with a savvy professional. A mortgage specialist is not only able to anticipate problems and find solutions, but is in the best position to find alternatives should a lender go out of business unexpectedly.
Manhattan is decidedly not a subprime market. Buffered by its position as a global power, our city continues to attract foreign buyers. Despite the changing financial landscape and on-going concerns about inflation and a weakening dollar, big swings in real estate prices are unlikely to occur in our market. Chicken Little, the sky is not falling. In fact, there are scores of examples of apartments trading at asking price or better in competitive bidding. When realistic prices translate to perceived value, buyers are stepping up and rushing to contract. Recognizing the challenges, and at the same time, looking forward to the opportunities, buyers and sellers of Manhattan real estate should expect a balanced season ahead.
A very personal note of thanks: As we approach Thanksgiving, I’d like to thank my readers. I look forward to your comments always, and I invite you to send me your suggestions for topics I might explore in future issues. May you and your loved ones be blessed with good health, prosperity, and the bounties of this season.