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August 19, 2009
Discuss: Headwinds & Tailwinds
Since there's such a strong discussion on the direction of the real estate market in Brooklyn, I thought I'd post up this for discussion. Everyone (myself in particular) offers opinions, anecdotes and theory, but what always seems to be missing is a simple Pros and Cons analysis.
When people make many other life decisions, they often make lists of pros and cons. So what say we collectively build one here and put this debate to a more objective test: potential headwinds and tailwinds for the NY RE market. Specifically the upper-end of the condo and brownstone market requiring jumbo loans.
Curious what people can add to this list, and their opinions.
For the record, I'm unabashedly bearish, and my list demonstrates this. But for the life of me, I can't see where the tailwinds to propel us forward are coming from even in the medium term.
HEADWINDS
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- Increasing NY unemployment
- Consumer deleveraging (saving vs spending)
- Credit Tightening; Unavailability of Jumbo Loans
- Long-term prospect of Raising Interest Rates
- Change in psychology of buyers (home no longer a great investment, buying more home than needed seen as wasteful)
- Significant loss of personal wealth by buyers and families who help them
- 25% - 30% down payment requirements
- Reversal of currency trade as RE vehicle (global recession, weaker euro)
- Loss of NY municpal income (property, sales, income taxes) leading to less services/quality
- Raising taxes to cover reduced local intake
- Potential (but unlikely) deflation
- Disconnect between Ask (Seller) & Bid (buyer) leading to stale market that drags down prices as economy slows
- Prolonged recession/double dip
- Increasing Unsold Invetory
TAILWINDS
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- Eventual economic recovery (when, how strong?)
- Inflation (kills mortgage rates, but hard assets are worth more. A curse in disguise).
This is literally all I can think of for tailwinds. Curious what others see.
I think this all paints a bleak picture where the only solution to bring buyers into the real estate market is to have prices continue to drop until prices make fiscal sense.
Based on my personal experience as a financially strong buyer tracking about 100 properties in Park Slope and BoCoCa, and seeing none that make financial sense,my conclusion is we're a far way off from bridging the disconnect between buyers and sellers.
Since buyers are unlikely to gain cash infusions anytime soon to meet elevated prices, there's only one thing that will open up the market —– a significant, prolonged price drop, which will take a long time.
Comments
going downwind with spinnaker is the time, which make me seasick most. Any advise on this?
Posted by: bobjohn at August 19, 2009 10:52 AM
Sorry, bobjohn, I'm a powerboat guy. Nothing like an inboard engine for torque.
Posted by: daveinbedstuy at August 19, 2009 10:56 AM
the issue is when will your list of pros/cons switch.
for instance, the ny unemployment story at some point changes. consumer deleveraging stops eventually. corporate/bank delevaraging stops eventually. credit tightening stops eventually. psychology changes. underwriting criteria weaken (even if we don't go back to 0-5% down IO liar loans). banks start making jumbo loans again.
if, as you believe, we are going from the Great Recession to the Great Depression, Part Deux then OF COURSE you are not a buyer nor should you be.
if on the other hand, you believe that we may have bottomed with respect to the economy and if you have a nice job and income and you'd like your own home, you might buy now or in the near future IFF you believe that owners/sellers can withstand (via accumulated liquidity) a slow/no growth economic environment longer than such period could last. You might not expect any imminent price appreciation but living in your home with possibility of long-term price appreciation is not an unreasonable position.
Factors that may play into that thinking:
1) long-term cycle of improving quality of life in NYC (which I realize for you does not apply as anyone who thinks we're living the early stages of the GDPD thinks NYC is going to hell in a hand-basket).
2) global concerns about the environment are likely driving a return to the cities from the ex-urbs.
3) there is a massive inter-generational transfer of wealth just starting, in my opinion. 50+ years of strong economic growth in the US will have to go to sons/daughters. perhaps this is starting already in the last 10 years (how else can 20 year olds buy condos in Wburg?)
4) empty nesters returning to the city.
5) global wealth migrates to the great cities. nyc qualifies as great.
My $0.02.
Posted by: antidope at August 19, 2009 1:10 PM
in case you missed.
http://blogs.wsj.com/developments/2009/08/19/timing-the-market-krugman-baker-buy-homes/
this is an example of why i don't believe anyone who tells me they know where the market is going.
Posted by: antidope at August 19, 2009 1:41 PM
Antidope:
You've painted long-term trends mostly, and opinions on societal issues.
Sure, we'll revert to better lending and people will have deleveraged. This takes years given the massive accumulation of personal/corporate/government debt. But near-term? Seems the cycle has a ways to go.
I agree, cities are the place to be generally, but by that argument, buying last year in August was a great time to buy as well. But the long-term price appreciation you see is directly tied to the price you pay for the asset.
But I'm trying to focus on price and value. So again what factors are going to influence today's prices in the near term? Anyone who wants to buy is thinking about this very seriously.
So, I've listed a lot of headwinds, which I assume you agree are all valid/real. No real tailwinds added here that will directly impact prices in 6-12 months.
To build the list, let me add one more significant headwind I forgot to mention:
-- Stimulus cash is spent, reversing short-term boost to economy.
Posted by: MoneyForNothing at August 19, 2009 1:59 PM
I'm not sure I get the point of this article.
Some people of prominence bought, others did not. Who knows what the reason they purchased was?
Again, headwinds, tailwinds. Let's discuss what's likely to impact prices.
Based on median income, NY is listed as the least affordable MSA in America--for New Yorkers, not Americans.
What's going to make the price of homes more affordable?
I don't see any tailwinds propelling prices forward, so I return to all the headwinds I cited leading towards bringing prices in line with people's ability to pay.
Posted by: MoneyForNothing at August 19, 2009 2:48 PM
Moneyfornothing,
There's a reason why successful traders get paid a lot of money. They have an ability to see through periods when there appear to be more headwinds than tailwinds. I'm not saying that's where we are right now, but in every cycle there is a time where everyone thinks things can only get worse, when in fact they are already getting better.
I started looking for a house in 2000-2001 before finally buying in early 2003. In late 2001 you had many of the headwinds that exist today including a weak eoconomy, rising unemployemnt, negative wealth efffect etc. On top of that you had to ask who wanted to buy a house in a City that had just been terrorized and was expected to be terrorized again. Put me in with the group that was surprised that NYC real estate proceed to go on a 5-year tear.
Posted by: Boerum Hill at August 19, 2009 3:08 PM
very few analysts, if any, called the collapse. and very few will call the bottom correctly with any real anticipation. two that did at least expect the crash (if not time it), are getting back in the ownership market when they don't have to. that's all. one happens to be in nyc, btw.
i don't know if you do it on purpose, probably not, but you seem to purposefully miss the point:
i have never said there is upward price pressure, especially in the next 6-12 months. you are free to fish around for deals in that time frame without much risk of missing the market. what i am saying is there are plenty of people who will buy despite your so-called headwinds and not just bc they think the headwinds turn to tailwinds imminently. despite the collapse of the stupid belief that RE can only go up in value, people will still want to own their own homes. and plenty will continue to buy even at a time that it appears to you that they are attempting to catch a falling knife (bc they have a different opinion than you and it doesn't even have to include price appreciation). dean baker himself says as much and he is closer to the negative/headwinds than you or I will ever be.
my point is that at some point if you are like 99/100 readers of this blog you are living in your investment, not merely buying another (illiquid) financial asset. As such, you have an opportunity to enjoy it along the way. And no one will buy or should buy the right to this enjoyment/ headache if they don't think prices are done collapsing.
btw, what do you think will happen to "liquidity" in prime Bkln as soon as the banks start making jumbo loans again? Right now, there are trades happening despite absolutely draconian underwriting criteria. This alone will change within 6-12 months.
Posted by: antidope at August 19, 2009 3:20 PM
better/more succint than i could do. thank you BH.
in that period i was waiting for the inevitable RE asset correction. it never happened. fortunately i was long RE(and unwilling to rent).
Posted by: antidope at August 19, 2009 3:29 PM
ANtidope:
If you'd like to see a bit more vibrant discussion on this topic, have a look at the same street easy post I put up.
Sure I'm trying to lean one way, b/c it seems inevitable. But at least I think there's a bit more varied discussion, w/ more posters here:
Posted by: MoneyForNothing at August 19, 2009 4:04 PM
"in that period i was waiting for the inevitable RE asset correction...In late 2001 you had many of the headwinds that exist today"
I mean, c'mon.
You didn't have the impolsion the largest RE bubble (and the only NATIONAL RE bubble crash in history, BTW), fueled my multiple financial speculative vehicles and parties, plus a 1% prime rate and liars loans, etc galore--things we all know the details of.
The Credit Derivatives Market was a mere fraction of what it was when it imploded--65 TRILLION dollars worldwide.
So, please. Don't try and say in 2001, b/c of the .com bust, things were similar. We reflated the dotcom bubble with a real estate bubble and delayed the pain, worsening it's effects.
But why are we having this boring discussion yet again? My only question: discuss and create a list of headwinds and tailwinds. You've provided none and turned it into opinion-standoff, offering arguments for why the long list of headwinds, none of which you've disputed, should be ignored.
And you've provided not one single near-term tailwind of consequence that seems to justify not waiting to buy.
For anyone who reads this thread, go to the street easy thread if you have any interest in a discussion on the subject.
Posted by: MoneyForNothing at August 19, 2009 5:37 PM
Moneyfornothing,
In Q4 2001 there were a lot fewer buyers in the market than there were today and it wasn't because of the dot com bust. It was because people were questioning whether or not to live in NYC. I had more second thoughts about buying then than I would today.
I don't know if you've ever bought a house before and I'm kind of wondering how long you've been living in NYC, but if you're looking for a risk free time to buy, there likely will never be one. Real estate is a long term investment and in NYC involves a ridiculous level of transactions costs at entry and exit.
I'm not going to talk about nationally, but for NYC, do you really think there are more headwinds now than there ever were before? There were other periods where the unemployment + inflation tandem was way worse. There was also a period where 2,500+ people per year were getting murdered.
Posted by: Boerum Hill at August 19, 2009 7:10 PM
TAILWIND.
There's going to be considerable fluctuation in the energy market with the price of oil quite volatile and ultimatly settling higher. That's assuming no war in the Middle East to precipitate a spike in prices. This will result in higher costs of commuting and more people returning to urban areas. Electric cars are some way off in the future.
Posted by: aktony at August 20, 2009 1:04 AM
if you were more than an armchair, newspaper reading, lay economist, you might take a hard look at each and every one of your headwinds. spend more time thinking about each one and try to decide if it's a permanent / secular change or a temporary / cyclical situation. a headwind today can be a tailwind tomorrow.
but as i have previously suspected, you do not seem like a serious home buyer (no matter how much you scream, rant and rave in response). perhaps you are a serious asset speculator, but i don't much care. online trading is not for me.
Posted by: antidope at August 20, 2009 10:13 AM
Of these 100 properties you're tracking -- have the prices gone down at all?
Posted by: mopar at August 20, 2009 6:04 PM
For people who want to buy in prime areas and are sitting on piles of cash, the only reason to buy now (other than individual circumstances such as the birth of a child, etc.) is if they fall in love with a place they won't find again.
For those who are borrowing, it might make sense to buy now while interest rates are still low. Rising interest rates may cause prices to fall further, or they may stagnate, but at least for us, the interest rate makes a much bigger difference than the price.
For example, a 1 percent difference in the rate means $200 more in monthly payments, whereas $50,000 off the price makes hardly any difference whatsoever.
Your mileage may vary, especially when you're buying multimillion dollar homes and price chops may be a half million.
Posted by: mopar at August 20, 2009 7:21 PM
Ahem, no comment on the interest rate tailwind??????????????????????? Blah blah blah blah blah blah blah.
Posted by: mopar at August 21, 2009 5:31 PM
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