True Gotham

I'm back from vacation and here to report that I and my team have experienced our first "casualty" as a result of tightening lending standards.  The bad news is that the buyer who has decided not to sign the contract for one of our exclusive properties has backed out because her interest rate is going to be more than a point higher than she originally anticipated.  It seems that her retired status and lack of income is negatively impacting her financial picture despite her asset rich portfolio.  The good news is that another qualified buyer was waiting in the wings to snap up the property.  The key word here is "qualified" as that definition has changed dramatically over the past 30 days. Many who were considered qualified buyers just one month ago are finding that their monthly payments at current interest rates are making ownership less attainable.

So what are these people to do?  Rent?  With rental vacancy rates in the city reported to be less than 1%, that isn't necessarily the answer.  Are these "marginal" borrowers going to be forced to leave the city?  For many who don't the option to stay where they are, I think that will be the unfortunate reality.  I have always maintained that Manhattan is moving toward being an exclusive island for the wealthy and as the wealthy are being less affected by tightening lending standards and high rents, the trend towards an ultra-lux Manhattan continues.

Having said that, let's not count out the middle class just yet.  The largest percentage of these buyers still qualify for mortgages at competitive interest rates.  Those "marginal" buyers who don't will have to stay put or consider leaving the city.  Don't feel too badly about those 2 options though.  It could be much worse.  Just ask those struggling right now to avoid foreclosure.

" I have always maintained that Manhattan is moving toward being an exclusive island for the wealthy and as the wealthy are being less affected by tightening lending standards and high rents, the trend towards an ultra-lux Manhattan continues."
Doug you may be right. But, I think you may change your mind in a years time if the global credit bubble crashes.
If this happens many wall street jobs will be lost, bonuses cut, and related industries will suffer as well.
All negatives for NYC real estate.
Also keep in mind that credit as we knew it has changed. I believe low mortgage rates are gone for a long time.
Maybe someone who is buying a 5 million + apt is not affected by higher rates. But for the vast majority of buyers higher rates mean they can buy only at a lower price.
If this trend of higher lending costs continues I expect sales prices to decrease.

MK,

I think we're on the same page here. Particularly concerning what may happen if the "global credit bubble" pops. That said, despite a decrease in prices, tight lending standards will still effect the middle income (laughable as that means the $200k/year earner in NYC) borrower more than it will the ultra-lux buyer. Only time will tell but I'm in agreement with you that we could see fewer ultra lux buyers if the credit crunch continues.

Lastly, I'm not sold yet that we aren't going to see lower interest rates for a "long time." "Long time" is relative and I suspect that great efforts will be made by the fed to stave off additional damage to our economy. Not suggesting that their efforts will be effective just that they will be. It's an interesting (and manipulative) world we live in today and ultimately none of us knows what will happen as so many factors come in to play to determine the direction of our economy.

"I have always maintained that Manhattan is moving toward being an exclusive island for the wealthy and as the wealthy are being less affected by tightening lending standards and high rents, the trend towards an ultra-lux Manhattan continues."

Great post presenting the change in what is going on in real time. Either what you say will occur OR what I have been stating for 18 months now:

Tighter Lending Standards + credit crunch ---> slowing of us economy ---> buyer pool shrinks ---> jobs/salaries/bonuses are ALL effected ---> stocks lose ground resulting in negative wealth effect and buyers losing confidence ---> inventory reverses course ---> cyclical market is just that; cycles!

There is a chain reaction of events that will occur. Lets also not forget that we are NOT YET SEEING THE CONSUMER IMPACT FROM THIS CREDIT/LIQUIDITY SQUEEZE! Higher rates are just the immediate side effect. What about credit defaults? Shrinking MEW? Shrinking Equity? Result from job cuts or bonuses cuts? Result from stock losses should recession hit? Corporate changes if slowdown hits?

Problem is we STILL do not know who holds what or how deep this credit problem gets and with a record # of ARM's to reset in 2008, all of a sudden the national housing problem becomes a NYC problem!

Subprime is clearly NOT a NYC problem, BUT its side effects ARE as NYC buyers now have less loan options, higher rates, tighter lending/underwriting standards.

Its all connected, and hence the importance to analyze macro economic conditions to be ahead of the curve. If the fed cuts rates, its because economy is slowing and risk of recession is rising. NOT GOOD!

Doug, Welcome back from vacation (you picked a great week to go away!). Like you I lost a buyer right after the market started it's tailspin, he happens to work for a rather large financial institution and got cold feet (not a good sign).

I understand that Manhattan is an island of the wealthy, but there are thousands of studios and one bedrooms that don't cater to that level of client. What is going to happen to all those $500,000-$800,000 apartments that have been purchased with 90% financing or may now be on the market?

As always your insights have always been appreciated. Ed.

Noah,

Thanks for commenting. I always appreciate your intelligent financial perspective. I, like you, am not so naive as to think NYC is immune to what is happening across the country. Curious to know what your thoughts are regarding fed activities preventing the economy from going into a "tailspin" as Ed suggests?

Ed,

"Tailspin" is such a scarey adjective no? I'm not seeing evidence of that locally as there are currently plenty of "qualified" buyers still in the mix. If Noah's scenario plays out though, we will be talking about an entirely different ballgame. Also, I think many of those $500-800K properties will continue to trade locally as long as all other economic factors remain stable...big IF!!!

Sure Doug..Welcome back!

As far as fed activities preventing us from going into a recession, I dont think its possible. Historically, the fed is behind the curve and begins to act with their largest weapon (cutting fed funds target), only when data proves that economy is slowing and inflation is not of concern. Usually they are too late.

Add in the fact that cutting fed funds target is not an instant fix. It takes time for the full effects of change in monetary policy to funnel through the economic system to the consumer; although there may be an instant positive knee jerk reaction in equities. First cut will prob be a 1/2 point, 50 basis points, with more calculated movements thereafter.

However, I just dont see a rate cut in September yet; unless things are real bad and we dont know it yet. For me, I think jobs data is the telltale sign. When that shows weakness the fed will open the gates, but as of now, jobs seem to be weakening slowly, but nothing drastic that the fed seems to be concerned about.

Its tough. Bernankes toughest challenge yet. I think Im voting for another cut in discount window BEFORE and target cut. Lets see how it happens.

The fed isn't limited to rate cuts though as evidenced by their call to pump more money into economy to aid the struggling mortgage markets. I just wonder how much they will "help" and how effective their help will be. Some of their actions will likely be unprecedented moves with unprecedented outcomes.

well any move in fed funds target is quite expected at this time. In fact, it was Ed Hyman's remarks today of a 4% fed funds target by years end that got stocks flying. So they are expecting it. Exactly why I dont expect as aggressive a move by years end.

bernanke is acting quite admirably and the move in discount window was great targeted medicine for the specific ailment. Again, if they do cut, its because there are more serious longer term underlying problems with economy. These things take time to reverse course and we havent had recession since the small one after 9/11...if another hits, we may be in for a little bit of downtime.

Too early too tell. Credit concerns could, and I stress could, be way more far reaching than some people think.

Thanks for the response. At the time I lost my customer the market had lost almost 1000 points, hence my use of the word "tailspin". I think wild swings is more appropriate since the market was down 280 yesterday and up almost 250 today. My concern now is the large numbers of companies that are beginning to downsize especially in credit sensitive areas such as M&A's. Like Noah, I hope the Fed acts quickly and decisively in dealing with the current credit crunch.

Absolutes never last for long. If you asked someone in the late 1970s whether they could imagine a Manhattan of low crime and high property values, they would have laughed in your face (and mugged you out of spite).

Now people cannot imagine a Manhattan that is not populated by the wealthy and those who derive hubris and a pseudo-jetsetting lifestyle from their parents' cashflow, heavily policed and increasingly defined by bank branches and chain stores.

This too, as they say, shall pass...

Back in 1989 NYC real estate industry was still whistling past the graveyard --everyone claimed that real estate never went down -- factually, according to the NY Times, the 1988-1994 peak-to-bottom coop price decline was an astounding 48.2% -- given the current insolvency of everyone in this country, and throughout much of the world, the 2006-2010 peak-to-bottom coop-condo decline will exceed 60% -- problem today is not liquidity, it's solvency -- in other words, there's not enough money in the world to pay off current debts -- a massive number of mortgages will default and prices will collapse -- neither Fannie, Freddie, FHA, FED, ECB nor any other worldwide financial agency can stop this collapse.

I hate to say this but RETIRED IN BIG APPLE is dead on with the insolvency crisis that is embedded under the surface here and that no one wants to discuss!

People hate doomsday scenarios. I found it very strange that 6-7 weeks ago when this credit/liquidity squeeze started to come to the surface in tradable markets, there was little surge in the price of gold? Usually a safe haven. Fact is, there is a solvency issue and there has been a liquidation of assets among ALL asset classes in the past month or so to both reduce risk and meet demand for $$$ due. The consumer insolvency/debt crisis that resulted from the past boom is YET TO HIT!

Not just consumers, but lenders, homebuilders, hedge funds, corporations, etc. have an insolvency problem too. So many red flags. Any liquidity added by fed or other agency (IMF?) will present a moral hazard for future investors. Unfortunately, add it all together (consumer, lenders, builders, hedgies, etc..) and I just dont see how a slowdown in spending that will be forced, will not ultimately trickle down the economic system to cause some type of distress.

I dont see how recent fed action OR future rate cuts will stop this insolvency crisis that was built from 5 years of ultra cheap money and lax lending/investing standards.