What Today's Stock Collapse Means for NYC Housing
I just sent out an email to two big shots in the financial world asking them "what does today's plummeting stock market all mean?"
Equity Trader-Managing Director says:
Was driven by China price action overnight and Greenspan speech Sunday. What it means is if China gets rocked again overnight, it spills into our market. This is all good for real estate in NYC. Guys are long cash and when they look at their personal accounts at the end of the month and realize how smoked they got, they will come to the realization that you want to own real estate. You are going to be busy bro! Plus treasuries rates went down a lot today with the 10 yr at 4.5%, and durable good orders fell almost 8%! So what this all means is growth will probably be sluggish but the stage seems set for a gradual acceleration toward normalcy if the consumer keeps spending given they their spending accounts for 2/3 of GDP.
tomorrow am will be interesting....
Head Of Major Investment Fund:
Means the Fed probably reduces rates at the next meeting. Their intention was to break the housing market and slow things down. Mission accomplished. Risk markets have caught a cold.
Treasury market rallied...Goldman down 8%+.
Volatility baby. Woo hoo.
If these guys are correct, I'm going to be even more busy than I have been since January. Hard to believe, but bring it!
Very interesting perspectives. I would have thought that with your real estate market being so tied to the stock market (e.g. last year's large Wall Street bonuses fueled another surge in demand), a sustained drop in the stock market would lead to skittishness in the real estate market as well.
I hear you Kevin and that is precisely why I emailed these guys for their take. Most of those that I know in big positions in banking or on Wall Street continue to be bullish on real estate. I must say that in my 15 years in the industry, every time their is a blip like this in the stock market, the phones quiet down for a few days and then things usually return to normal. Only time will tell.
Being an ex equities trader, its hard to take what these guys say because the amount of money that they deal with, or at least what I remember from being in the game, is so high that sometimes you lose base of other more fundamental things that affect real estate.
Putting NYC aside for a moment, the stock market is a LEADING INDICATOR of the economy and reacts to geopolitical tensions and other scenarios, natural or unnatural as they occur.
With that said, if the stock markets fall it is a good indication that the economy is getting weaker and the chain reaction will be job losses, lower corporate profits, lower cap spending, etc.. That will lead to lower rates by the fed to try to ease the pain and put a floor to how low it will go.
NOT a good situation for housing. If you do an anaylsis on a weaker economy and housing, even with rates going lower, you will find that housing tends to fall as the economy gets weaker and jobs are lost.
Right now, the economy seems very healthy and the jobs market is very strong. Hence, housing expecially in NYC is hot. Question is, what happens next!
But I strongly believe that a falling stock market, less paper worth, could have a negative ripple effect. We do NOT want lower rates because that comes at a more fundamental price.
I hear you Noah but explain why the internet bubble bursting had no negative effect on housing here in NYC? In fact, the housing market picked up after that and although many of us were waiting for the 18 month lag to see a dip in housing, it never came to fruition.
I respect your background and it's helpful that you also are in the trenches of our real estate market. That said, the last time we saw a mojor impact on housing as a result of a stock market collapse was late 80's, early 90's. I started in 1992 when sellers begged you to represent their property exclusively and we often tried to talk them out of it. Property languished on the market for 2 years. Today's fundamentals seem to be different but again, I'm not a financial expert...not even close.
Your background in real estate gives you a BIG advantage to me in this case; and I respect it tremendously!
With the dot com burst in March 2000, in hindsight, a recession wasnt clear until later. However, I think that was a very abnormal situation that did create alot of wealth for many people. Although much was lost as well, trust me, many people in the know held onto a lot of wealth leaving more out of touch investors to get killed.
Rates went SO low (6.5% to 1% in 1 yrs time) as a result of this crash, that housing never followed suit. The dramatic change in lending rates, which I hate to say seems like a distant memory right now, combined with shell shock from what happened with stocks, led to more investment in real estate and the subsequent boom in housing that started when the economy started to pickup again. Not a normal situation.
9/11 was another abnormal situation which in essence, provided for a HUGE short term correction in NYC housing leading to a better scenario for longer term sustainable growth.
I recall wanting to invest in NYC housing in early 2000, when I was making more money than I knew what to do with. Ahh, the good times.
Anyway, I was priced out of NYC housing until 9/11 came in and provided a huge correction, and temporary buying opportunity. That perhaps 15% correction in 1 day's time, coupled with the future significant drop in rates, allowed housing to grow at a more healthy and sustainable clip, until growth became unsustainable in the past year or so.
I just feel like JOBS are a key to housing's continued sustainable growth, and if the economy is weakening I worry that job losses might extend the correction. We are spoiled and live in a market that is unlike any other nationally. But, its naive to think that NYC will never have a housing correction even when we are experiencing such activity right now. Im a contrarian, and if there is one thing I know, its that good times NEVER last!
I worry that policy change (tighter lending standards or tax changes now that DEMS control house) combined with a weaker economy and potential weakening in jobs market are the biggest threats. I hope it doesnt happen though!
Love it by the way!
Since doug quoted me (mine was the second one), let me offer a couple of observations -- the thrust of my comment was oriented toward a view on rates and Fed behavior. I didn't actually make any comment on real estate.
Bubbles are funny things. People use and misuse the term liberally, and seem inclined to use it for dramatic affect. But financial bubbles tend to reflect completely irrational valuations applied to a narrow class of assets -- tulips and internet stocks come to mind. Sometimes bubbles expand from overvaluation of truly silly assets like those above to real assets -- but that's pretty rare. IMHO, we ain't there, and we ain't close to there.
Perceptions of value tend to change because something consequential economic changes that impacts value directly. While you could attribute the decline of New York Real Estate values between 1987 (when it seemed to peak) and 1993 (when it began to rebound) to stock market performance, I wouldn't.
There was a very significant tax law change in 1986 that took back some very significant benefits for real estate that had been put in place earlier in the decade. The result of both changes had diametrically opposed impacts -- the first stimulated the creation of tremendous supply, the second suppressed demand.
So you had tremendous new building during the 1980s which needed growing demand for absorption. Then the new tax policy happens. Oops. See-through buildings. Then throw on top of that a recession in the middle and the period required to absorb all of that excess supply took a few years.
None of those specific tax policy changes happened which dramatically altered supply and demand for real estate in NY during the most recent economic cycle. Instead, supply and demand were impacted only be macroeconomic issues -- the price of money, employment, etc -- and briefly by the shock of 9/11. So real estate performance didn't suffer as it did in the prior period. Perversely, 9/11 took a lot of square footage off the market (tragic and unpleasant to say, but an economic truth).
That's a long winded way of saying don't get too myopic about day to day stock market movements in thinking about real estate -- or any specific asset class.
FWIW, currency and oil price movements might be having more impact on NY real estate these days than the stock market, with the dollar perceived as relatively weak against the euro and other significant currencies. Good for all the Russians, Arabs and Europeans buying things in NY. But that's Doug's gig, not mine.
One additional element that no one, including me, has mentioned is those who lose significant liquidity when something like this happens. I have personally had clients pull out of deals because they felt uncomfortable liquidating a portfolio that had taken such a hit. I also know that some people after March 2000 stoick market correction received Board turndowns because their portfolios had decreased significantly.
That said, doesn't seem like it matters as much as it could have as we've seen a slight rebound today.
On a humorous note... my colleague asked her father about investing in the stock market Tuesday evening and he told her to hang in until Friday and she could buy China.
