Getting a Jump on the Q1 Post-Mortems

I see the bottom in real estate coming soon — foreclosure prices in Bushwick, Bed Stuy, East New York, etc. are in the 300s and inventory is clearing out.

Meanwhile, prices in Carroll Gardens (what about Park Slope???) and other areas still *increasing.*

I would say that prices will stay flat for a while and Miss Muffet, BHO, Hannible, Corner et al will not get their big bargains.

However, true economic collapse and inflation could be looming around the corner because our government is deep in debt and printing money. I don’t know what will happen then. Maybe the looting in the streets The What desires. Maybe the rich will move to Switzerland and leave us Carroll Gardens. (Kidding.)

Check out the excellent — and really scary — article in The Atlantic by a former exec at the IMF about how our country is just like a corrupt banana republic and in just as much trouble.

Also check out the NYT article The What pasted about banks screwing up everything by not taking care of its houses and then leaving the already screwed-over owners to pick up the pieces.

We’re living in dramatic times.

Where’s the Case-Killa thread? New numbers out today.

Yeah baby!!!

***Bid half off peak comps***

they sure do dibs…. I just don’t get it. It’s like waiting for the terminator to die in “terminator”. I mean, who has 2.5MM to just plunk down right now? everyone’s seen their total assets get cut in half… anyone even near the financial industry wouldn’t sign up for a big mortgage even if they could get one….but still it happens. there sure is a lot of money in this city.

Contrary to DIBS’s version of “Econ 101”, no economic theory suggests that a decline in sales volume due to sellers asking bubble prices will lead to prices “strengthening”.

The end game in bubbles is a pop. We aren’t there yet.

Real estate prices reach equilibrium when investors — not homeowners — are indifferent between buying to hold-and-rent or selling to homeowners (rental values equal ownership price). Brooklyn prices are still far above anything a rational buy-and-hold rental investor would be willing to pay. Even if rents don’t drop further — which seems highly unlikely — sales prices need to drop 1/3 to 1/2 in most neighborhoods to reach equilibrium. (More in Brooklyn Heights if yesterday’s house of the day reflects the current sale market.)

But bubbles don’t often end at equilibrium. The manic going up is replaced by depressive going down. Prices typically drop until buy-and-hold rental investors see screaming buys, so dramatic that they are willing to take the risk of still more price drops.

And this bubble is likely to be worse than average for Brooklyn. On top of the usual debt-fueled speculation and speculation-fueled faith that prices will always go up that characterizes every bubble, we had an enormous growth in Wall Street related money that is now going into reverse.

Wall Street/finance firms accounted for less than 10% of corporate profits a decade ago and 40% at the peak. Our crony capitalists will fight hard for government welfare to keep on going, but in the end even the US Treasury won’t be big enough to fund them. Wall Street is going to shrink back to 10% or, if the politicians can buck their masters before we are all pulled into a major collapse, even less.

And so NY real estate needs to adjust not only to the collapse of the real estate bubble, but also to the collapse of the industry that supplied whatever real money and real demand underpinned it. That’s why rents are dropping — real demand is dropping even as real supply keeps increasing (due to new construction, conversions from stabilization to market, renovations, expansions of the areas middle class people will live in, etc).

Demand is down. Supply is up. Inventory has doubled in Manhattan, but the shadow inventory is up far more. Tax collection is dropping and will drop far more next year as bonuses dry up and the real estate transfer tax fades away — so the City is going to have to cut services and, therefore, quality of life. Salaries and rents are dropping as the highest-paid sectors shrink, in the case of Wall St perhaps for a long time. Construction costs will drop as the economy slows. Case-Shiller, out today, shows NY metro area one-families accelerating in price decline and still wildly too high. All the trend lines are heading in the same direction with no inflection points visible.

Expect further price declines. Expect declines to make further declines more likely. Don’t expect any reversal of direction in NYC until it is clear what form the financial industries will take after recovery and whether the new institutions will be in NY.

Expect a bottom at rational pricing: when you can buy a house for cash, rent it out, and earn significantly more from rents (after deducting all costs, including your own labor and real maintenance/repair costs, and assuming that the price of land remains stable) than the bank expects to make on a mortgage where it — not the government — is taking the risk of default (look at the rates they charge for unsecuritized jumbos, not the rate for FNMA loans). The homeowner’s risk is higher than the bank’s and homeowners aren’t going to be bailed out, so in rational markets, homeowners should earn more than the bank. If that price is higher than the cost of renovation, new construction or evicting rent stabilized tenants, assume that the market will stabilize at the lowest number (and that land prices will drop as much as necessary).

But don’t count on rational pricing: there is no guarantee prices won’t go lower still, especially if investors are worried about future rent decreases, slower subways, Wall Street’s short-termers overpowering Washington, or other investors losing heart.