How recessions impact Manhattan property
Posted by Wei Min Tan on April 28, 2020
How does a recession impact Manhattan property? The current Great Lockdown Recession due to the coronavirus is creating fears and uncertainty in the Manhattan property market. The New York City property market has been in lockdown since March 15. New leasing activity dropped 80 percent in April, and I am expecting sales volume in Q2 to drop 60 percent. Goldman Sachs predicts Q2 GDP to fall 34 percent and unemployment to hit 15 percent.
The U.S. had the largest economic expansion in history from 2008 to 2020. Although we seldom think about it, recessions are quite common. In my lifetime, since the 1970s until now, there has been 7 recessions ranging from the 1973-75 Oil Embargo Recession to the current Great Lockdown Recession. To answer how Manhattan property may be affected by the Great Lockdown, we can look at how Manhattan and the U.S. housing markets performed after the Dot-com/Sept 11 recession of 2001 and the Great Recession of 2007 – 2009.
U.S. property prices only fell twice during past 5 recessions
ATTOM Data Solutions, a real estate data provider, looked at U.S. housing prices during the last five recessions before the Great Lockdown. This includes the 1980 Recession (GDP down 2.2%, housing prices up 4.5%), Energy Crisis Recession of 1981 (GDP down 2.7%, housing prices up 1.9%), Gulf War Recession of 1990 (GDP down 1.4%, housing prices down 0.9%), Dot-com Recession of 2001 (GDP down 0.3%, housing prices up 4.8%), Great Recession of 2007 (GDP down 5.1%, housing prices down 13.9%).
The two times that housing prices fell were during the Great Recession and the Gulf War Recession, the latter was only a decline of 0.9 percent. Apart from those two, housing prices increased during recessions and is often the catalyst to the economic recovery post recession.
This begs the question of why housing prices fell 13.9% during the Great Recession of 2007?
Deal Example: 200 Chambers Street, Tribeca. Top quality building in Tribeca. Convenient location next to Whole Foods. Building is priced at premium but rents are also at a premium. This corner unit has dual exposures, maximizing sunlight. Purchased at around $1 million and has appreciated substantially since then.
Read Weimin’s article, Benefits and Risks of Investing in Manhattan Property
The Great Recession started with subprime real estate
The Great Recession impacted real estate so much because it was started by housing in the first place. Leading up to this recession, there was an explosion of housing being built by national home builders, hence creating an oversupply. There was a frenzy mentality among people on getting rich through buying property. Real estate seminars were everywhere about how to get rich quick from property through leveraging and creative financing. Californians and people from expensive cities went to less expensive cities like Las Vegas, Phoenix, Orlando, and drove up property prices there.
This activity was fueled by banks extending credit recklessly, giving people who otherwise would not qualify zero down payment and 0% teaser rate mortgages without even checking income! The speculative activity resulted in prices going up and up. Once the 0% teaser rate ended in 1-3 years, the borrower was faced with a much higher interest rate and was not able to service the mortgage anymore. These mortgages were known as subprime mortgages.
Toxic subprime mortgages
The subprime mortgages were packaged into mortgage-backed-securities and sold by the originating banks to investors throughout the global financial system. As the teaser rates ended and subprime borrowers could not afford to pay the new higher rate, they defaulted. There was little skin in the game for these borrowers because of the very low down payment.
The financial industry collapsed because the mortgage-backed securities that institutional investors all over the world invested in, speculated in, created derivatives from, leveraged from, suddenly became worthless. The U.S. government had to bail out the financial industry with a $700 billion rescue package known as TARP. Banks didn’t even know their exposure during the collapse because balance sheets were so interlinked with derivatives that could not be valued properly.
The Great Recession resulted in a 13 percent housing price decline because it was started by an oversupply of housing. The demand for this housing was not true demand but rather fueled by reckless bank lending. Naturally, when the bubble burst, there was an even larger oversupply of real estate that nobody wanted. Foreclosures went through the roof, and banks had to hold onto foreclosed properties that were worth way below the mortgages on them.
How could prices not come down?
Read Weimin’s article, Manhattan property investment performance
Deal example: Client purchased at 111 Murray in Tribeca at pre-construction stage. The top quality amenities and location opposite Goldman Sachs headquarters (the green building) were key decisioning factors. After completion, prices increased 20 percent compared to what client paid at booking time.
The Great Recession and Manhattan property
In Manhattan, the Great Recession is commonly referred to as “Lehman” because this was when Lehman Brothers, one of the world’s largest investment banks, collapsed in September 2008. While the Great Recession started in Dec 2007, we thought Manhattan was immune to it because prices in Manhattan didn’t drop until 2 years later, in 2009. That was the year I became a real estate broker.
In 2009, Manhattan condominium sales volume dropped 30 percent to 4,029 transactions, from 5,713 transactions in 2008. Sales activity peaked in 2007 when there were 6,969 transactions. In 2009, price per square foot of a Manhattan condo dropped 12 percent to $1,210. Median price dropped a commensurate 13 percent to $1.05 million. In 2010, Manhattan condo price per square foot dropped another 4 percent. Price recovery started two years later in 2011 when prices were up 5%. That was also the beginning of the boom cycle which lasted from 2011 to 2017. Prices reached $2,149 per square foot in 2017.
Lehman had a major impact on Manhattan because it affected a lot of high paying finance jobs. Bear Stearns, also a major investment bank, failed. The insurance giant AIG had to be bailed out. Manhattan is home to many financial services professionals affected by Lehman. Unlike rest of the U.S., Manhattan didn’t see many subprime defaults and foreclosures because homeowners in Manhattan have higher income and credit, not the subprime category of homeowners. Also, the nature of Cooperatives, representing 75 percent of apartments in Manhattan, require substantial financial liquidity from buyers. This played a big role in ensuring Manhattan home buyers were not over-leveraged.
Read Weimin’s article, How to buy Manhattan property to rent out
Deal Example: The Sutton, Turtle Bay, Midtown East. This Toll Brothers development only required 10 percent reservation deposit. Represented multiple buyers at the $2 million price point. Location, classic style windows and luxury finishes make this a good investment. Close to United Nations, Citigroup Center, Blackstone, Blackrock. Rented to quality tenants from the beginning.
Dot-com / Sept 11 impact to U.S. and Manhattan property
Impact to U.S. housing
This recession lasted 8 months, from March 2001 to November 2001. GDP declined by 0.3 percent and unemployment reached 6.3 percent. At the U.S. level, home prices, referring to the prior ATTOM research, actually went up by 4.8 percent. Despite the recession, real estate fundamentals of supply and demand was properly aligned. People still needed a place to live. As with the other recessions, housing actually lifted the economy from the recession.
Impact of Sept 11 to Manhattan property
Right after September 11, the Manhattan property market froze. Nobody wanted to be downtown because of the 3 months of smoke/haze continually coming out of the World Trade Center site. Neighborhoods like Battery Park, Tribeca and Soho had zero activity.
By the way, Tribeca in 2001 was nowhere like today’s Tribeca. Miller Samuel’s Jonathan Miller, the data guru of New York property, said that after the Federal Reserve decreased interest rates and mortgage rates fell, the surge in demand came back, 5 weeks after the attacks. The Manhattan recovery post 9/11 was driven by entry level home buyers. Miller mentioned that in one example, a one-bedroom in midtown had a five-way bidding war!
Manhattan condo prices were up 13 percent from 2000 ($613 per square foot) to 2001 ($691 per square foot). In 2002, prices went up another 7 percent to $741 per square foot. Median prices of a Manhattan condo showed a similar trend, increasing 9 percent and 5 percent in 2001 and 2002 respectively.
How may the Great Lockdown impact Manhattan property?
We have seen that at the U.S. level, real estate prices usually continue appreciating during a recession. In fact, real estate often aids economic recoveries, simple reason being people will need a place to live.
For Manhattan, the September 11 attacks only halted the property market by a few weeks. Prices went up in 2001 and 2002, after 9/11. Lehman affected Manhattan more as it took 2 years of price declines before the Manhattan market picked up again. This is because Lehman affected a lot of financial services jobs which are drivers of the Manhattan property market.
Pent Up demand and supply
Sales activity in Manhattan through March 15 was quite robust, leading most brokers to think we were recovering from the slowdown of 2017 to 2019. For example, Manhattan condo sales increased 19 percent from Jan to March 15. Then everything stopped on March 15 due to the lockdown. The pre-lockdown activity shows that demand is there and strong.
On the sale side, listing inventory decreased by 8 percent in Q1 as sellers held back on listing their properties for fear of strangers entering their homes and depressed prices. In Q1, properties for sale historically increased by 10 percent. Hence there was a large contraction of inventory of Manhattan property for sale.
After the pandemic, perhaps starting Q3, the pent up demand and supply will come back into the market.
Jobs impacted by Great Lockdown
Streetasy predicts that the outer boroughs (Queens, Brooklyn, Bronx, Staten Island) face the largest impact from the Great Lockdown job losses. This is because most job losses from the lockdown are in the restaurant, retail, personal services industries. Manhattan is home to 83 percent of office jobs, and these jobs have not experienced significant losses because most people could work from home.
Goldman Sachs predicts Q3 GDP to surge 19 percent, this after a Q2 contraction of 34 percent. Reason a V-shaped recovery is possible is that the Q2 GDP contraction is due to a virus that resulted in shutdowns. It is not driven by business supply and demand fundamentals. In addition, the $2 trillion CARES Act, representing 10 percent of GDP, is expected to stimulate the economy after the shutdown of Q2.
Mortgage rates have been pushed to 50-year lows. This should prompt millennials, mostly first time homebuyers, into the market to explore opportunities. Millennials are less exposed to the stock market (which took a hit during the Great Lockdown) and could be the saviors of this recession.
Manhattan property price prediction
This is the most difficult question. I expect buying opportunities in Q3 and Q4. But note that the world’s investors are all thinking the same, that Manhattan will be a bargain post pandemic. Manhattan condos could be bought at between 10 to 20 percent discount for the mass market, under $3 million segment. Higher price points will see even larger discounts as there are less buyers. This is provided the buyer acts in the target window of Q3 and perhaps as late as Q4. The opportunity is when fear is still in the market.
What We Do
We focus on global investors buying Manhattan condos for portfolio diversification and long term return-on-investment.
1) Identify the right buy based on objectives
2) Manage the buy process
3) Rent out the property
4) Manage tenants
5) Market the property at the eventual sale
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