What Letter is Your Recovery?

Is it a “V”? A “U”? An “L”? A “W”? Economists are weighing in on what happens next. I am no economist, but I have been on the ground in the New York real estate business for nigh on 30 years and here’s what I think:

1) Our market has been less seasonal than ever before in recent years. So I don’t believe our busy spring is busy just because it’s spring. UBS just revised its forecast of the overall drop in real estate values in New York to 40% (it had been closer to 50%). In some of our market segments we are already there. In others, I don’t believe it will go quite that low. Even the rent/buy ratio is back close to where economists say it should be.  Buyers are buying because they see value. And with these price reductions, so do we. That’s why our gross contract signed numbers for May 2009 were actually a little BETTER than those for May 2008.

2) Prices are not rising anytime soon. It is value which is driving buyers back into the market, and only value will keep them there. If they sense that the market is increasing, they will return to the sidelines. And nothing in the overall economic picture suggests prices should be going UP!

3) Ongoing credit issues, including commercial loan defaults and credit card debt, will keep bank balance sheets toxic for a while yet. So lending standards and availability to funds may not loosen up any time soon. We are beginning to see a market in which people want to buy but are unable to get the financing they need. We can probably expect to see more of that in the months ahead.

4) What letter is my recovery? It depends on if you are talking short term or long term. Short term I think we are looking at a “U”. We are now down at the bottom, where we will probably be for a little while. Then, over time, a modest rise in prices will begin. Longer term, I agree with those economists who see a “W.” A few years out, the huge infusion of debt incurred by the government to fund the TARP and TALF programs will probably mean that money will have to be tightened to control inflation. That is likely to cause the economy, and our market, to dip again.

But for now, all of us here at Warburg are just glad to be busy again.