Property Grunt

Sunday, December 31, 2006

Of Things To Come.

Very shortly it will be next year and I would like to take this moment to reflect and to see what awaits all of us in 2007 in the real estate world.

Home Sales

Obviously on people's minds is the recent report that housing sales have jumped up.

The report showed that sales of new single-family homes rose 3.4 percent in November, seasonally adjusted, to an annual rate of 1.05 million. That followed a 3.8 percent decline in October. The news helped propel stocks on Wall Street to another record high — its 22nd so far this year — with the Dow Jones industrial average rising more than 100 points to finish the day above 12,500 for the first time.

Of course there are others who think it is still premature to think that the worst is over.

Despite the November advance, sales of new homes are off 15.3 percent compared with a year earlier.
“Although the rebound in sales is consistent with the housing slowdown bottoming out, it seems too early to rejoice,” said Dimitry Fleming, an economist with ING Financial Markets. “Supply is still high.”

Let's not forget that perhaps this jump in sales is due to price reductions.

Housing and the Economy

The term "Goldilocks" is being bandied about as economists are trying to determine whether the economy is too cold or hot.

The economy looks very different depending on whether you are inside or outside the housing market. Consider Andrew Palau, who runs Premier Homes and Additions of River Edge, N.J. Business has dried up as the collapse of the housing market has slashed demand for new master bathrooms and refurbished kitchens across Bergen County in the northeast corner of the state.
“Homeowners don’t have a clear view in front of them so they are not investing because they want to hold on to the money,” Mr. Palau said.
He managed to hold on to his staff of 10 this year, but thinks he is probably going to have to let people go next year. “Everything is telling me that next year will be worse,” he said. “I don’t see how I can keep everyone.”

So one guy looks as if he is about to lose his shirt.

“Our market is as close to capacity as you can get,” said Michael D. Bolen, chairman and chief executive of McCarthy Building Companies in St. Louis, a commercial builder of everything from schools and hospitals to casinos and parking lots.
To hear Mr. Bolen speak, the job market has the go-go feel of the Internet-driven boom of the late 1990s. “It’s as goofy as it’s ever been,” he said. “We’re offering signing bonuses and guaranteed locations to people coming straight out of school.”

And there is another guy who doesn’t have enough warm bodies to give shirts out to. Confused? Don't worry. It gets better.

Economists were taken by surprise by the speed at which the housing market morphed from a surging bubble to a sinking stone. Today, there are some signs that the worst has passed: mortgage applications seem to be bottoming out, for instance.
But the number of permits issued to build new houses fell for the 10th straight month in November, and they are down about a third since November of last year. Residential investment plummeted in the second and third quarters of the year.
Employment in construction has fallen; so has the production of construction materials and other items related to housing. In the third quarter, the slowdown in homebuilding subtracted more than one percentage point from economic growth.
But for all the damage done by the deflating housing balloon, it has so far been narrowly circumscribed.

Today, virtually every economist agrees that the housing recession is likely to continue weighing on economic growth. But the consensus breaks up over how bad that damage will be.

The most important disagreement is over how intensely the housing recession will ricochet through the rest of the economy and how it will affect consumer spending, which accounts for more than 70 percent of the nation’s economic activity.
“I find it very hard to believe that what started in housing ends in housing,” said Jan Hatzius, chief United States economist at Goldman Sachs. “That you are not going to get any spillovers from a major recession in a sector that accounts for 6 percent of the economy.”

Many economists argue that the decline in housing prices experienced so far must inevitably deliver a big blow to consumer spending. Bluntly put, Americans who spent more than they earned as the price of homes soared cannot possibly go on spending as avidly now that the value of homes is tumbling. And if consumers spend less, businesses will stop investing.

Homeowners are certainly extracting less money from their homes to spend. Mortgage equity withdrawals, net of commissions and taxes, fell in the third quarter for the fourth time in a row, to about $380 billion at an annual rate, the lowest level in almost three years.

So it appears they are all in agreement that there will be a housing recession. Question is that how painful will it be for the rest of the economy? But are there degrees of pain when it comes to recessions? As far as I am concerned all recessions suck ass.

Bonus time

Then we have the Wall Street Bonuses which have brokers creaming in their jeans as they envision the obscene amounts of money that seem to be drenching in every corner of Wall Street.

At this point the impact of bonus season is speculation at best. As I stated before in previous entries Wall Street people are not stupid. They are not like lottery winners who blow their first million as soon as they get it. Those who are granted bonus status are going to pay for the operating costs of life, e.g school loans or into an asset class that will give them more bang for their buck. If they decide to buy, they will be looking for the best deal they can get. Even if they are willing to pay top dollar for a home, they will demand and expect their requirements be fulfilled for the premium they are paying.

Of course my brethern beg to differ

“Almost all of us make more money when they make more money,” said Jeffrey Appell, a senior vice president at the Preferred Empire Mortgage Company, who moderated the panel, to laughter and applause.

Brokers are, by nature or training, cheerful and optimistic, and in a show of hands, most brokers in the room indicated that the market had picked up steam last month. Many of the speakers attributed this to the trickle-down influence of the expected supersize bonuses on Wall Street this season and their effect on the rest of the market. (Of course, a 10 percent rise in the Dow Jones industrial average since August may have provided a little juice to the real estate market, too.)

“Bonuses have a psychological effect; there is a very good vibe in the market,” said Jacky Teplitzky, a vice president at Prudential Douglas Elliman. Or as Ernie Goldberg, a vice president at the Corcoran Group, put it, the bonus buyers are getting other buyers to “step up to the plate.”

They further enforce the perception that buyers are now freaking out that they could be priced out with the onslaught of barbarians from Wall Street armed with their enormous checks.

Many brokers noticed not just the bonus effect, but the bonus-anticipation effect. Buyers who sat on the sidelines in 2006, waiting for real estate prices to come down, saw news of outsized bonuses and started signing deals to pre-empt any price increase driven by new Wall Street payouts.

“Part of our recent increase in sales activity has been buyers not in financial services trying to beat the bonus rush,” said James Lansill, senior managing director at the Corcoran Sunshine Marketing Group.

However from the perspective of some wall street tribe members, things are not so rosy.

Not everyone on Wall Street is getting multimillion-dollar bonuses. The average managing director — who stands at the top of Wall Street’s hierarchical food chain, but far from rock-star status — will be getting $1 million to $3 million, which will likely be stashed in savings as memories of the 2001 bear market remain fresh.

“I’m putting it in the bank because I know next year I could be out of a job,” said one managing director at a leading bank.

For hedge fund traders and managers, markets were rough in the spring and summer, and some did not make gains until stocks rallied this fall.

“It was a terrible year,” said one young hedge fund professional. “I am going to the movies with my bonus. By myself."

If this indictative of the current mindset in Wall Street then all this talk about bonuses might just be all hype.

Honestly, I am sick and tired of brokers putting their eggs in one basket as they start screaming and raving how bonus season is going to pull a mighty mouse and save the day. How all the buyers who are sitting on the sidelines better jump in or else they will be crushed by bonus. Because bonus is the viagra of the residential market and there is no way to tell how long it will maintain it's potency and continue to thrust itself into rising prices.

But then again does it really matter?

Tom Acitelli of the NY Observer made these observations.

Otherwise, the Manhattan housing market over the year that’s about to end has remained fairly strong indeed, though the pessimistic storyline sounds loudly still.

Blame the media, brokers tell The Lab. Others cite an entire category of real-estate blogs devoted to the bubble theory, relying heavily—even gleefully—on the pessimism from 2005 going into 2006.

Ironically, many of these so-called bubble-burst blogs went bust as the wider storyline of a total national housing-market collapse lost steam.

And perhaps that’s just it: The Manhattan housing market is … normal. Boringly, stoically normal.
Any ups and downs that might plague other metropolises simply don’t penetrate Manhattan housing, where $400,000 for a decent studio (four walls, a floor and a ceiling) is considered, without irony, a steal.

The last major dip in the Manhattan housing market, in the late 1980’s, was spurred more by changes in the tax codes than by anything else. Even the recession of the early 1990’s—even the terrorist attacks of 2001—couldn’t truly wallop this market. In 2002, the number of Manhattan apartment sales hit a now-six-year high of more than 9,500.

Steady. Even. Normal. These are adjectives, too, for the Manhattan housing market. They’re just not that cool.

I have seen the same numbers that Jonathan Miller has presented and it does look like the market in New York is holding its mud while the rest of the country is crashing and burning. In fact Tom recently pointed out that Manhattan doesn't seem to give a damn what is happening on the national front. Therefore, I would my perspetive is in align with Tom's.

Please hold the collective gasps after I finish, I will make it clear that I still believe that we were in a bubble which has popped. I still maintain the stance that all of us need to be more cautious for a variety of reasons.

Democrats are in control of the House and Senate and we have a President who is struggling to revoke his lame duck status by making some decision that are highly questionable.

Saddam Hussein has recently been executed and even though he hasn't been in power for awhile it will definitely serve as a catalyst for more violence in the region. Even though Bush was given a get out of free jail card by his father he has decided to opt for a course of action that most likely does not bode well for young men who have reached their 18 year old birthdays.

With the current state of the real estate market, flipping is out of touch as speculators have either left by force or by their own free will. Distressed properties will become the real estate product of choice as investors swoop to bag as many of those bankrupt developments as they can.

The Euro is putting foot to ass to the Dollar which is brings another flight to quality on the horizon as Europeans and other foreign investors look for places to put their money in America. Considering the returns that are coming out of the stock market, it may lay the smackdown on real estate.

Here's my final assessment folks.

Those of you need to buy, make sure you can afford the payments and stay the hell away from interest only or exotic mortgages. Stick to the tried and true fixed rate. Those of you who wish to invest, remember to do your due diligence and if the deal doesn't make sense. Walk away. The cashflow has to make sense or you are going to royally screw yourself over.

If you are a seller, exercise common sense and consider reducing your prices if you are not generating interest.

Happy New Year!