It’s tough to be writing on a hazy, hot and humid day in the last week in August for an October publication date.  By Fall, an unusually damp summer will have morphed into cooler, drier crisp autumnal air.  If we’re lucky, we’ll experience an Indian summer, and soggy greens will explode into vibrant foliage of reds and oranges.  Though I’m not in the business of forecasting weather or market trends, I do declare I’m optimistic about residential real estate for the last quarter of 2009.  But I also have some worries.


It’s been a challenging year to say the least.  But the summer months have been especially busy, and that bodes well for the future.  We’ve not experienced a typical seasonal lull.  On the contrary, marketing activity and deal flow have been steady since the end of the 1st quarter.  July was unusually strong, and even the ever-pessimistic Case Schiller Home Price Index was up for the first time in 34 months.  In brokerages across Manhattan, the number of signed contracts rose steadily in the 2nd and 3rd quarters in all price ranges.  Purchase volume increased, prices stabilized, and interest rates remained historically low.


Headlines have proclaimed that the recession is over in much of Europe, particularly Germany and France, and recovery is well underway in Asia, especially in China and India.  In the U.S., hopefully the worst is behind us too.  In Manhattan, if we’re not at the bottom of the curve now, we’re very close.


This summer, the supply of re-sale apartments decreased (as opposed to a surplus of overbuilt new developments) as some owners temporarily removed their properties from the market.  After Labor Day, inventory is expected to pick up and increase into the 4th quarter.  Curiously, the anticipated flood of apartments never materialized from Bear Stearns and Lehman professionals or Madoff victims.


The fact that new housing starts are low and new construction is stalled is actually helping to rebalance the gap between supply and demand.  Because homeowners tend to hold onto what they have in down markets, there are fewer listings this year than in 2008 (of re-sale apartments again, not new development units).  As a result, brokers have been selling largely from a backlog of inventory. 


Then again…


Optimism, however, is tempered by what’s occurring in the commercial real estate arena and the credit markets.  Even as residential real estate recovers, the commercial field is hurting.  According to reports from Cushman Wakefield, commercial sales are down 55% from a year ago.  Moreover, commercial real estate loans reportedly totaling $2.6 trillion are expected to come due for refinancing by 2010.  With values down, even credit worthy owners will have difficulties refinancing at their existing mortgage levels.  If and when this next shoe drops, one wonders how that will impact apartment sales. 


Mortgage financing continues to be the thorny wild card.  Although buyers and sellers are more in sync, the pendulum has swung widely from reckless lending with lax borrower reviews to overly-cautious lending with arduous assessment standards not only for the borrower but for the building too which must meet Freddies Mae and Mac guidelines for adequate reserve funds and insurance coverage.  Though credit has eased, and lenders are no longer hoarding their cash, a new regulatory environment is making decision makers skittish and creating additional delays for a loan approval process already slowed by increased scrutiny.  


A new code of conduct for appraisers initiated by NY Attorney General Andrew Cuomo became effective May 1, 2009.  Home Valuation Code of Conduct, or HVCC, is a joint agreement between Freddie Mac, New York State and the Federal Housing Finance Agency.  Although intended to protect the homebuyer—“to enhance appraiser independence and accuracy”—it’s actually creating some new concerns.  As of this writing, a bill is before Congress calling for an 18 month moratorium so that code guidelines can be readdressed.  A July 8th report on NAR’s website says a flawed HVCC is slowing home sales and holding back the recovery.  Refinancing is also being affected. 


HVCC prohibits mortgage brokers and real estate brokers from recommending or selecting appraisers.  As a consequence, more out of town and inexperienced appraisers are being hired who may be unfamiliar with an area and may miss nuances that affect value.  In addition, appraisal costs have risen in order to compensate “authorized third parties” or appraisal management companies who choose appraisers.  The time it takes to obtain an appraisal has increased as well, but even more troublesome, are the lowball appraisals that are occurring with greater frequency.  In difficult markets such as the one in which we find ourselves where current closed sales data is limited, it’s essential for brokers to provide as much evidence as possible to support sales prices, including comparable sales with notes on condition, pricing changes and days on the market, plus any evidence of competitive bidding—though appraisers may choose to disregard the latter. 


This summer, buyers and sellers have been coming together in increasing numbers as brokers bring about a meeting of the minds.  This 4th quarter, we’re looking forward to more of the same as we sidestep the obstacles to move ahead, however sideways for the moment.