Warburg Blog

One of the most interesting phenomena in the real estate market correction currently underway is that of relative weakness at the top.  In recent history (the last decade or two) the conventional wisdom has been that the rich are always rich, so the part of the market best protected against price attrition will always be the upper end. Not so. Of course no-one could have anticipated that the financial crisis would leave so many Wall Streeters shaken to the core of their faith, but even so, we have noted a few interesting facts:

* most buyers at the upper end of the market do not need to buy. They usually already live somewhere quite comfortable. So if they don’t feel compelled, they don’t act.

* prices probably expanded most at the upper end of the market. So there is more room for contraction.

* Financial professionals have always mistrusted real estate. Even in the giddiest markets they have been warning sternly about the oncoming crisis. Now that a contraction is here, many want to wait for the “bottom” to save every last dollar they can.

For these and no doubt other reasons, we are seeing a greater loss in value for ultra luxury apartments (probably closer to 20% over the past 6 months to a year) than we see in small apartments (more like 10% to 12% over the last six months to a year.) That said, waiting for the bottom is always a dangerous game. You can only see it in hindsight. In this market buyers should be making offers based on analysis, not asking price. Feel free to e-mail me if you want my opinion on what the components of that analysis are.

Some say “The devil is in the details,” meaning solutions break down when you examine them closely enough. Some say “God is in the details,” meaning opportunities for discovery and creativity come from digging into the details. Both are true, and need to be considered when buying and selling.

Buyers, the devil’s perspective—it is easy for your heart to start pumping when you see the “reduced by $1M” or “2 bedroom with a 1 bedroom price-tag.” Trace the true meaning of the price with your broker. Was it just very overpriced to begin with? Sometimes that is the case—and alas, the devil has reared its head. Keep that devil down armed with facts so you can get the best price possible.  

Buyers, God’s perspective—while the credit market has tightened and it is harder to get loan, it isn’t impossible. If you are a buyer, particularly a first time buyer, who never considered a co-op before, think about it. Co-ops are becoming more popular to purchase in as they are hovering around $1,000/square foot versus condos which are closer to $1,300/square foot and since many banks want buyers to put more money down in condos, the percentage down is most likely the same. And many condos are now requiring 20 percent down, just like a co-op would. While co-ops may have higher monthly charges than condos, part of that maintenance is tax-deductible. And don’t forget, co-ops still comprise about 70% of the market—hallelujah, let’s hear it for opportunity!

Sellers, the devil’s perspective—You have staged your home, invested in a new bathroom, negotiated like mad and you are finally in contract. Something terrible happens in the market and now your buyer wants to renegotiate.  What do you do?? To start, keep a cool head. It is easy to get frustrated and want to walk away from this buyer. But we are in a market of having to expect the unexpected from a buyer. Next, start doing some math. Yes, it seems outrageous to knock off another $10K but how will that cost play out if you were to put it back on the market? Take that, devil!

Sellers, God’s perspective—Look, we are in a downturn overall. But it is important to know your ‘hood to really grasp your home’s value. Take the Bowery for example. I had dinner at DoubleCrown earlier this month (a new restaurant on Bowery and Bleeker) and it was packed to the gills on a Tuesday night. The Bowery Hotel’s rates have not gone down (unique for boutique hotels right now–bear in mind we are talking about $700-$900/a night for a suite) and its vacancy rate continues to stay low. Additionally, a few of the bars on the Bowery have changed over from being dive-y to chic in the last 6 months (as north as Great Jones and as south as Spring). The neighborhood is still changing and is on an upswing (in terms of value) despite the market. Amen.

Warburg’s Tribeca Open Haunted House on Halloween – click below for photos:

http://warburgrealtytribeca.smugmug.com/photos/swfpopup.mg?AlbumID=6590176&AlbumKey=tjMiV

Every day we are having the same conversations with sellers. Yes, you should respond to that offer. Yes you should lower your price. Unfortunately, it is not April of 2007 anymore.

Yes, it is painful to have missed the peak of the market. On the other hand, your real estate has been a terrific investment. It has devalued much less than the stock market. There is not a glut of units on the market, although inventory is rising. Your property is still desirable if you will accept that it has lost some value since the peak. Not too much: 10%, in some cases 15% in the past six months. But it needs to be priced to sell to make value conscious buyers to pay attention to it.  And when they offer, even if it is 20% or 25% below the asking price, you have to respond if you want to sell.

This market is not for everyone. But if you want to sell today it can be done, and done well, if you can acknowledge the changes which the market forces have wrought and work within the new paradigm.

Day two of the NAR Conference and lot’s of new information to digest.  I am here in an effort to continue Warburg’s loyalty to our customers and supply our agents with the best tools.  There will be much to share when I return home.  It is clear to me that Social Networking has only just begun! And no matter what you do for a living there is a wealth of tools available to you to help you manage and multi-task your valuable time…………..

Warburg celebrated in Haunted House style our Third Annual Halloween Event, with our brokers playing along for the fun!  Our Egyptian Mummy, Medusa, Vampire, Hunchback, Wednesday Adams and the Wicked Witch of Tribeca amoung some very shady characters.  With great joy we passed out over 300 bags of candy, took photos with the kids and had a contest to guess how many creepy crawlers were in the jar for a $100 gift certificate at “Color Me Mine”.  Winner will be announced this coming Monday so be on the look out.  We look forward to an even bigger event next year. 

The long campaign is over and we have a new President-elect whose promises of “change” for our country signal a new era for our country. For now, the eyes of the nation will be focused on Washington, where the Democrats have strengthened their majority in the House and Senate, and a new adminstration takes over after 8 years of Republican rule. However, President-elect Obama’s 2 to 1 victory in electoral votes also signals significant changes for many State governments, with Democrats taking control of the govenorship in a number of key states, and control of State and local governments passing from Republican to Democrat control.

In New York, Democrats – who controlled the State Assembly for years – finally captured the New York State senate. Over the years, N.Y.’s Democrat-controlled state assembly introduced and even passed numerous bills designed to provide tenants with more rights. However, companion legislation has never gotten out of committee in the republican-controlled state senate, therefore no new laws made it to the governor for his signature. Over the years, under existing laws, the number of rent regulated apartments in New York City has been substantially reduced. Conversions of rental buildings has brought new co-op and condo apartments into the market, and vacancy decontrol has allowed the number of free market rental apartments to increase, or sold by Sponsors in buildings they converted. The value of rental properties, especially those with large number of non-regulated tenants, has increased dramatically.

With Governor Patterson’s outspoken concern about preserving and strengthening tenants’ rights, as the supply of rent regulated housing continues to drop, and democrats now firmly in control of both houses in the State legislature, pro-tenant legislation has a real possibility of being enacted. There are already reports, for example, that legislation will be introduced that will bring major changes to the Martin Act, which governs the conversion process for rental properties. If this happens, landlords will find it more difficult, if not impossible, to convert rental buildings to condos with both regulated and non-regulated, market-rate tenants having a greater control over the process. Legislation is also expected that, if enacted, would provide lifetime protection for market rate tenants, especially if the legislature decides to incorporate them into rent stabilization or enacts regulations limiting rent increases. Luxury and vacancy decontrol would also likely be restricted or eliminated.

These changes, if enacted, will have an important impact on New York City’s real estate market. For example, new restrictions on conversions may result in a drop in the number of buildings converting to condominium or cooperative ownership. the gradually diminishing number of pre-war rental buildings which would be expected to convert in future years under existing regulations, will be difficult to convert if new laws are enacted. Fewer rental apartments being converted, and greater protection for tenants, will also affect the inventory of available rental apartments: if market-rate tenants achieve the same lifetime rights and protections now afforded to rent stabilized tenants, the turnover of apartments and inventory of vacant rental apartments can be expected to decrease.

With ever-tightening credit expected to reduce the number of new condominium buildings being developed, changes in rent regulations could mean a significant reduction in new rental and condominium units being introduced into the marketplace. This, in turn, could result in a paradigm shift in the current supply/demand equations affecting prices for coops and condominiums, and the rents charged for rental apartments. Fears of reduced demand could be met by reduced inventory. The resulting affect on the value of cooperative and condominium apartments will be interesting to monitor.

Stay tuned. Things are going to get interesting!

Whatever your politics, there is no doubt that the election of an African American to the Presidency of the United States represents a turning point in our country’s history. He faces huge challenges, not least among them a housing market struggling from coast to coast.

We in New York are fortunate that our market is anchored by the twin gods of real estate stability: residency and equity. The majority of our homes are owner occupied; we are fundamentally a user marketplace. And in most parts of Manhattan, brownstone Brooklyn, western Queens, and Riverdale, owners are not terribly overleveraged. The strict rules of co-op Boards had much to do with this, as did the strong financial position of many of our buyers.

So even in this environment in which absorption has slowed down and there are price reductions flashing across our computer screens (many of these reductions representing changes from the clearly unrealistic down into the realm of possibility) our inventory, though rising, remains at manageable historic levels.  No doubt it will rise some more, as seious buyers take a while to absorb the new financial realities, and the new President, before moving forward. But the flood of discounted apartments so many seem to be awaiting will, in my opinion, never show up. Our market just isn’t built that way.

Following are excerpts from my “Manhattan Market Watch” to appear in the December issue of Mann Report Residential.  You’ll find the column in its entirety at  http://www.warburgrealty.com/about/press/353.

From “Manhattan Market Watch” for December 2008 Mann Report Residential

Year End Musings

By Shirley Hackel, Senior Managing Director, Warburg Realty Partnership

The world is not coming to an end, and we are not headed to the final Armageddon, but the mood going into 2009 is sober. . . .  If excess, greed and folly brought us to this place, then moderation, reason and old fashioned common sense will guide us into the New Year. . . .

For the moment . . . consumers will tighten their belts, halt leveraging to the max, stop using mortgage and equity lines of credit like ATM machines, and live within their means.  It’s been a tough year of painful declines in stocks, jobs, retirement portfolios and home values. . . .

Nonetheless, Manhattan real estate continues to fare better than the rest of the nation.  Thankfully, foreclosures are few in Manhattan, though they are on the rise in the other boroughs.  The predominance of co-ops in our marketplace with their restrictive financing limits turns out to be a built-in protective blessing. . . .

. . . there’s real worry concerning Manhattan’s new condo projects that have yet to finish construction, where buyers went to contract as many as two years ago.  Lenders today are taking another, more stringent look at these new developments, and they are scrutinizing the merits of both the projects and the borrowers before making loan commitments. 

During the record breaking years of 2006 and 2007, rapidly escalating prices were fueled largely by spectacular though false Wall Street profits, by remarkable though obscene bonus awards, and by easy though risky credit.  As it turns out, the overheated, runaway market of our recent past sat on a precarious foundation.  Today’s market is correcting itself, not crashing. 

The stats of 2008’s fourth quarter will not dazzle.  Volume is down, but sales are not eroding.  However, we are seeing some new buyer and seller behaviors.  Sidelined purchasers are keeping watchful eyes on prices, but so far bargain basement deals are few and far between.  Those who had been priced out of the market before are wondering whether new entry points will appear.  We’ve seen a fair amount of buyers walk away from 10% deposits, and others who have successfully renegotiated with sellers up to 10% off deals already in contract. . . . Some sellers are offering to provide financing; others are considering rental options, offering to apply rental expenses to a future purchase.  A handful of Internet companies have sprung up trumpeting to “sell and rent back your house.”  Attorneys for buyers are beginning to insist on contractual financing contingencies—which for years have been crossed out of standard contracts–and a couple have added a clause to insure that the lender brings the committed funds to the closing table.

For real estate, it’s important to take a long term view.  Unlike stocks, bricks and mortar don’t lend themselves to panic selling, and most sellers are not motivated by fear to take action. . . .

I’d love to hear your thoughts.  Click below to comment.