Warburg Blog

Here’s a preview of my column for the May issue of Mann Report.  Happy Passover & Easter!

I’ve taken liberties with a line from Alexander Pope’s philosophical poem “The Essay on Man” for my title.  This spring, we’ve witnessed a new bounce in our residential marketplace along with a renewed buzz, increased activity and stabilizing prices.  As of this writing, roughly 18 month’s after banking institutions failed on Wall Street, Manhattan real estate is recovering.  An improved momentum is expected to be sustained this quarter resulting in strong April to May stats for contracts signed. 

Nationwide, we’re in the early stages of a very slow economic recovery, and in New York there are reports of continuing job losses.  Nevertheless, stronger than expected corporate earnings and significant bonus payments have contributed to Wall Street’s rebound.  With our local industry on the mend, consumer confidence has returned, high end retail is improving, and residential transactions for the ultimate luxury purchase of a New York apartment are on the rise. 

There is general agreement among professionals and economists that mortgage rates will creep up as the recovery proceeds.  That, plus the recognition that we have passed the market’s bottom, plus a low threshold for delayed gratification have awakened our area’s purchasers.  Additionally, foreign buyers are back because the Euro is declining as the dollar rises.  Buyer confidence is further buoyed by the government’s incentive for first time purchasers.  Though the award doesn’t add actual dollars to the pockets of Manhattanites who exceed income limits, the incentive has led to a growing enthusiasm. 

Since mid February, transaction volume has been accelerating steadily, and prices in nearly all segments have been leveling.  In some categories, particularly the overactive $2-5 million market, prices have even been inching up.  With extremely thin inventory in this real estate sector, well priced, well located 6-10 room resale offerings in good condition have been flying off the shelves. 

Cash has never counted for more 

Competitive bidding and overbidding have returned as increasing multiple demand meets limited flat supply, and time on the market for these specialty products has decreased.  Not everyone is choosing to go with the highest bidder.  Because the financing climate is so radically altered, sellers are recognizing that it’s often worth more to take less from an all cash buyer.

Aside from the delays involved with financing—it’s taking an average 45 days to get a commitment—those seeking financing today have to sidestep a veritable minefield of uncharted obstacles.  Not only do buyers have to show 45% debt to income ratio, stellar credit scores and unblemished credit histories, but buildings also have to pass muster with Freddie Mae’s tighter lending guidelines.  Some banks simply won’t lend in some buildings, and that’s rarely been the case before. 

Among other things, to be considered credit worthy, a building must show that  10% of its total budget is available for future mechanical system breakdowns; in the past, it was enough to show a line of credit or healthy reserve fund.  Additionally, no single entity can own more than 10% of the co-op or condo according to Freddie Mae.  Adequate insurance, including fidelity bond insurance which protects against employee theft and hazard must also be documented.  

A credit worthy borrower in an equally credit worthy property, however, can still be tripped up by a low appraisal.  The new Home Valuation Code of Conduct (HVCC) has turned the appraisal process upside down, and lowball appraisals are occurring with greater frequency.  With no recent closings in many buildings as empirical evidence, there’s no way to anticipate how a property will be evaluated. 

While buyers are demonstrating an increasing willingness to spend money on housing, they are not overspending.  On the contrary, they are taking on less debt, unlike their predecessors who overextended and overleveraged.  Irrational exuberance along with froth and excess are gone.  Today’s buyers are more conservative, more cautious, and armed with knowledge of past and current sales prices readily gleaned from the Internet, they are seeking value.   

Not all sellers are rushing to contract.  Fueled by the current wave of optimism, and believing that the market is on rise, some are still holding on to inappropriate expectations.  Homeowners are cautioned to use discipline to set realistic prices.  Testing the market with an inflated asking price wastes precious time and risks missing a market wave.  Buyers are responding best to properties in mint condition, and they are ignoring overpriced properties especially those requiring renovation. 

As we move from a declining market to a stabilizing market, the future looks promising.  Our market is faring much better than expected.  “Hope springs eternal in the human breast…”

I tried vermicomposting in my apartment many years ago.  Let’s just say the worms didn’t love the ambiance.  But never say die and thanks to the Lower East Side Ecology Center, my guilt is assuaged as I tote my fruit and vegetable scraps to the bins at the northeast corner of the Green Market, Monday, Wednesday, Friday and Saturday (8am -5pm) Check this link about what’s compostable: (http://www.lesecologycenter.org/index.php?option=com_content&view=article&id=11&Itemid=36 )  Outside of Manhattan, here is a link to alternate composting sites: http://www.nyc.gov/html/nycwasteless/html/recycling/compost-project.shtml  

To keep everything in the apartment smelling sweet I freeze my scraps until the next market day.  Granted sometimes things get a little tight in the freezer, but it’s worth the crush. 

If you want to try composting at home the center has instructions on their website. http://www.lesecologycenter.org/index.php?option=com_content&view=section&id=3&Itemid=6. Or http://www.nyccompost.org.  

Composting is great fun.  Let me know if you are brave enough to try.  Otherwise, try composting with the LESEC. The matter that you deposit there today in a couple of months can be purchased as rich organic soil for your houseplants.

Yes, that’s right.  I have the best apartment pet possible. She’s quiet except when she hisses. She doesn’t move from her chosen station.  She’s green but black and white all over and provides my family with unlimited amounts of sustenance in the form of seltzer.  She’s an elegant Penguin and makes (so far) up to 70 liters of seltzer water from filtered tap water on just one CO² canister.  Why is she green?  She’s cheaper (once you ignore her initial cost (I admit there are cheaper models, but non as cute-:)) than store bought seltzer we are addicted to. We don’t have to drag home and return a case or 2 of Seltzer in plastic bottles which then head for recycling or the dump and the glass bottles are recyclable even if they break, which so far they have not. http://www.williams-sonoma.com/products/sodastream-penguin-water-carbonator/?pkey=x%7C4%7C1%7C%7C4%7CSeltzer%20makers%7C%7C0&cm_src=SCH

With spring in full bloom, I am happy to share this wonderful article about Carl Schurz Park. Enjoy the article and the spring weather!

http://www.themorningnews.org/archives/new_york_new_york/persephone_in_the_park.php

Has the Internet made searching for property more efficient? A few years ago, I would have argued that the answer was yes. But now I am not so sure.

One thing the Internet has certainly done is make it easier for buyers to search for property on their own. That, the theory goes, leads to greater efficiency. But increasingly it seems to me that the opposite may be true. Buyers surf the net looking at property day and night. They e-mail their agents about the properties they have found, wanting to see them. And increasingly those searches, which are so easy to do, lead buyers further and further afield. They see something in THIS neighborhood, then in THAT neighborhood, then in THIS borough, then in THAT borough, and they want to see them all. Every neighborhood, even those they would never really consider living in, suddenly seems interesting and worth a look.

This is not a complaint. We are real estate agents, and showing property is part of what we do. But our core function is to advise people and help them make better decisions. We don’t want to see them lose the property which is right for them because they find so many distracting alternatives on line (alternatives we, as professionals, often know will not be right for them) that the right thing gets sold to someone else while they are making sure something better isn’t coming along. According to my agents, that is happening more and more often.

Caveat emptor – the age old real estate phrase means “Let the buyer beware.” So buyers, by all means search on line to your hearts content. But caveat emptor.  Don’t lose that beautiful bird in the hand while desperately searching those Internet bushes!

Lucky us! Cooper Union is only a few blocks away.  Saturday evening, damp but enthusiastic, we arrived at the Great Hall (where Lincoln gave his speech opposing Stephen Douglas on the question of federal power to regulate and limit the spread of slavery) to hear Idith Meshulam and Ensemble Pi’s  exciting Concert for Peace and Civil Rights. Ensemble Π is a socially conscious new music group dedicated to performing the music of living and undiscovered composers (http://ensemble-pi.org/).  Their concerts feature composers whose works seek a dialogue between music and ideas about the world’s current issues and stretch the imagination by offering new ways to experience music. For example, included in this concert was ­­­­­­­­­­­­­­­­­–Sofia Gubaidulina’s Dancer on a Tight Rope in which the pianist strums the strings with a filled water glass balanced on the strings, accompanied by Airi Yoshioka, violinist. Ensemble Pi’s next performance will be March 21 and 22 at the World Financial Center’s Winter Garden. 8pm

Biking throughout the city, Idith has been a model of the”green” New Yorker for years- well before Mayor Blumberg’s expanded bike lanes. Should you like to consider biking in the city, here is a current map of the dedicated bike lanes http://www.nyc.gov/html/dcp/pdf/bike/mapfront.pdf .

     Renovating my kitchen, I am determined to make it as green as possible. I fantasize that all my appliances will be paid for in one year with the money I will save on electric consumption by buying Energy Star rated appliances.   On the road to “greenhood” this morning I found myself at Green Depot, the green Mecca, at 222 Bowery. It’s a revelation!   Among thousands of household and building products GD has lo/no VOC paints at prices that seem cheaper than other brands as well as green countertop materials like Caesar Stone or Cambria. Naturally, they have long lasting, energy conserving, money saving CFL light bulbs. Browsing, I found a dispenser which lets you re-fill your old, empty name-brand bottles with Green Depot’s non-toxic products thereby depriving the dumps as well as the water supply of the poisonous petroleum distillates in bottles and products sent down the drain or into landfill.  Browse their website or check out their cleaning products sold by the bottle or $.12/ ounce at http://www.greendepot.com/greendepot.   They will deliver orders over $20 but do go down and discover the green world of Green Depot.

So Sally goes to Peru and has an amazing time, Shaman ceremonies, meditation, yoga, hiking to the top of Machu Picchu.  She had plenty of time to contemplate and while she was gone the property even had a price drop to $790,000, but regardless of that price drop things were basically at a stand still.  Sally felt strongly since nothing had changed with reference to the mechanics lien and other issues, she wanted to hold firm at her $625K.  Neither side was moving.  Sally continues to look around at other properties, but nothing quite grabs her like this one.  So she sits and waits and has me keep track of any movement on the property.  It is now March of 2008, April, May – the summer arrives and the unit Sally likes is still there.  Fall approaches and it seems that a new agency has changed hands and the property coincidentially comes over to Warburg Realty.  This is good news for Sally or so she thinks since her broker (that would be me) is also with Warburg……………

I feel it in my bones.  Looking out of my window at the vibrant city scene and my empty wooden flower box, I have happy thoughts of the herbs and flowers that will be filling those boxes in just a few weeks. What an easy way to help green the city, take a little pollution out of the air and add to my culinary creativity-home grown herbs and fresh flowers for the table. No room or ledge to grow flowers or herbs? Check out what a group of women in Brooklyn are doing with a couple of recycled plastic soda bottles and a window http://www.onearth.org/node/1339  to grow herbs and vegetable plants year-round with a hydroponic drip system which they suspend like photosynthesizing curtains in their apartment windows.

It’s an interesting time out there for co-op boards, to be sure.  While some are loosening their standards to attract more suitors, others are tightening them … the topic of this post.   

What does tightening actually look like?

Some are discounting buyer liquid assets based on market volatility and uncertainty.  This translates into shaving an existing equity portfolio down by 20-30%, and a bond portfolio by 10-15%.  For many Boards, cash has never been more important, with special attention being paid to income and truly liquid assets.   

In addition, if Boards are in any way uncomfortable with the financial profile of an applicant, some are now asking for up to 1 year of maintenance costs as a security deposit (versus merely in the bank).  Two years ago, these same applicants would have been accepted without this request. 

Why would co-ops tighten their acceptance criteria at this time?

1.      Many Boards are looking to their condo brethren who have had their share of troubles with people losing their jobs then becoming unable to pay their common charges.  They are seeking to avoid this fate.

2.      Carrying costs are increasing at a significant clip.  These are made up of real estate taxes, operating costs, mortgage interest and capital improvements.  Let’s see what’s happening to each:

a.      Due to N.Y. City revenue shortfalls, real estate taxes have gone up significantly for the 2009-2010 year, to the tune of 8-12%. 

b.      Operating costs are made of up labor, building maintenance/repairs, fuel, and insurance costs.  The latter two were skyrocketing in 2008 and 2009, and are now slightly lower.  That said, labor costs are anticipated to more than make up for that good news, based on current  early union negotiations.  The existing      4-year labor contract is coming up for termination this April 21st, city-wide for all co-ops and condos.  (Interesting fact:  the current union contract is valued at $70k per  union worker and the contract price per union worker goes up a preset amount each of the contract’s four years, which includes healthcare, salary and pension expenses.)  Boards are therefore “pricing in” a 4-5% increase in their labor budget, accordingly. (In anticipation of  year one of the expected new  four year contract.)

c.       Mortgage interest and capital improvements vary on a building by building basis, so there are no overarching trends to cite here. 

What should you take away from these trends? 

First, know what you’re getting into.  This means understanding that no two co-op Boards are alike.  While one might be getting stricter, another may be loosening its reins.   

Second, talk to your broker and make sure you have more than a “checklist conversation”.  Particularly when dealing with co-ops, it helps to have an agent who is adept with financials and can portray you in the best possible  financial light.  Does (s)he know what a front-end versus a back-end ratio is?*  Has (s)he asked more open ended question about your financial situation to fully understand it and potentially uncover non-obvious assets?  Lastly, now is not the time to get coy or tight-lipped.  Your agent is your partner and, as such, it is in your best interest to leverage this relationship to your advantage.    

If you walk in with your eyes wide open, realistic expectations and a good agent partnership, you should be able to navigate these ever-changing waters successfully.  Now let’s focus on the more fun question:  “china white or lily cream for the walls?”. 

*Front end ratio:  (maintenance + mortgage)/monthly income; 28% threshold.  Back end ratio:  (maintenance + mortgage + long term debt (s) )/monthly income; 35%% threshold.