Bubble Talk

If you live in Manhattan you talk about real estate, especially over the last ten years....double especially over the last two years!! Cyclical market booms are an interesting phenomena to watch, though unless you are quite insightful, very difficult to spot while in its midst(or acknowledge). Nobody wants to be a party pooper, so while our common sense may be telling us that prices have escalated at an unsustainable pace. Our desire to win, as well as our greed, over shadows our sense of equilibrium. Some of us believe the hype; "Oh this is different this time, job growth, a new world economy etc...". Even though we have seen it all before, fairly recently with the "dot com" collapse, many people were wiped out, I had friends that lost hundreds of thousands of dollars! Well that's alright, if you missed that calamity of "irrational exuberance" you had the real estate bubble to take the piss out of you.

I would love to examine the reasons we have "bubbles" in the first place, why we can't just have slow steady growth. But that we'll save for another blog. What I find interesting and a bit curious is how many otherwise highly intelligent people missed all the warning signs. Many did not even want to consider that the market could actually go in an inverse direction, perhaps as rapidly and as far as it rose? I remember standing outside my office speaking with a client I had done some business with. Very smart, successful guy, when I mentioned that perhaps we had come to far, that it may be time to consider not to buy, he laughed. This was the attitude of many buyers, otherwise smart, level headed folk. However they were in the eye of the storm, and the sky's looked blue and crystal clear...but not for long.

I had my first realization that the real estate party was ending when in 2007 we were out in New Jersey looking at homes. Property was not moving very quickly, what a change from what was happening in Manhattan just about 14 miles East. Prices were still near peak, but inventory was rising, month after month we saw the same homes listed, with prices slowly falling. As time went on a few brokers fessed up it was god awful slow and thank heavens their spouse had a job! We actually got as far as placing a bid(not accepted) on a cute craftsman style cottage, we also had a mortgage pre-approval, credit was still flowing..though there were signs of tightening, according to my mortgage guy. A few of the brokers were telling me that this was a lull in activity and I should not expect prices to fall much lower. About six to eight months into our hunt I pulled the plug, my gut told me it would get much worse. The rising inventory alone would slowly but surely put downward pressure on prices, the collapse of our banking system was a wild-card I for one was not smart enough to see. I read enough to know that people were concerned about the financial markets and in January 2008 we were in all cash, smart or just damn lucky?

Well the brokers I had met in Jersey told me I was crazy, the price declines I had mentioned would never come to fruition. Well I must admit they were correct...prices are now 25% lower than my guess at the time, boy did we dodge a bullet! $600,000 dollar houses are now asking $400,000 dollars, that's a lot of lost equity to make up! Even with the collapse of our revered banking institutions, rising unemployment, massive foreclosures, short-sales and frozen credit markets, Manhattan had held up better than others. But with inventory at 11,000, how much longer can sellers hold out? I was ridiculed by a seller on streeteasy for suggesting his apartment, with a monthly maintenance of over $1600(64%td) would trade at $650 dollars a square foot..I thought I was being generous, I now say it doesn't trade.

We, I mean the world here are experiencing a once in a very long life time phenomena that will take years to understand and longer to recover from. I say that with the personal belief we are only rounding second base. I don't think you need an MBA to come to that conclusion! I am not a "doomsdayer", I look forward to our recovery, and hopefully an improved market place based on sound fundamentals, not wild speculation driven by greed. Our President and his team have their work cut out for them, and for the sake of our country let's hope they get it right. Though ten+ years of rapid credit expansion will not be fixed easily or quickly...if it can can be fixed at all.

In my opinion it's not time to buy yet in Manhattan, although prices have fallen, credit(if you can get it!) is still cheap and there's a lot of choices. The smart money waits at least six months to maybe a year. The real estate market will not explode upward out of nowhere, like the stock market can. First it will stabilize and perhaps remain flat for a time, but along with that we need to see employment and credit markets to start showing some signs of life. The overall economy is still in the midst of a serious recession, no one will argue with that. In some parts of the country prices may have fallen enough to justify a purchase, especially if you plan on owning for at least 10 years. Many home owners outside of the cities will own for much longer than that, and a home is just that; a place to set down roots and raise a family, perhaps. In the city most have a much shorter time frame, maybe 5-7 years, catch the wrong end of the curve and it could spell serious trouble. So be patient, I say we get down another 15-20%, and I don't think anyone believes interest rates will rise significantly in that time period. As I have said before, I would rather pay less for my home than worry what a 1 or 2 percent increase in rates does to my purchasing power. You can overcome the additional interest by paying a little extra each month, making up a 17% loss of equity, that ain't so easy!

At the end of the day no one has a looking glass into the future, but our present situation is pretty clear, ah nothing like the present! It stinks out there! My thoughts are with all the people who have been caught up in this financial tsunami, regardless of how they got there. For many this is not just a theoretical conversation about macroeconomics...but a terrible realization of a dream postponed...or destroyed! These are tough times for many people as they struggle to make ends meet and so much stress on their children and marriages. My prayers and best wishes go out to all of them!