Heck if I know. Interest rates are higher than they were although, at 6.5%, I find it hard to be too sympathetic toward buyers - when I graduated and bought my first house, my mortgage was 14% and that "special" rate was granted only because my new law firm represented the bank. But credit remains elusive, and the only two players in the mortgage market, Freddie Mac and Fannie Mae, don't lend in amounts that will do Greenwich buyers much good. I don't see that changing in the near future. In fact,Freddie Mac just announced dismal financials for the last quarter and sees no turn around in sight. Pakistan is impeaching Musharraf, which won't do much for stability in that region and Israel appears to be readying a nuclear strike against Iran. Add the possibility of a veto-proof Democratic majority in the Senate and House, plus Obama, and things don't look all that swell.
But despite all this, it might still be a reasonable time to buy. No one, particularly me, can predict the future, and it's not entirely irrational, I hope, for you to expect that you'll hold onto your job, that income will keep flowing in and that you'll continue to have a family who you want to house. So should you wait for what you think will be the bottom of the market? Here's a little financial exercise that might give you perspective.
Suppose that last year you found a house that you liked for $500,000 (feel free to add zeros to these sums until you've reached Greenwich pricing). Interest rates were 5.5%, and assuming an 80/20 loan to value ratio, your monthly payment, principal and interest, would have been $3,406.73. This year, that house has dropped 10% to $450,000 but interest rates have climbed to 6.5%, yielding a P&I payment of $3,237.57. You've stayed in a house that you didn't want to own (or rent) and saved $169 a month. If that sum is enough to make or break you, you probably have no business buying this house to begin with.
So buy now or not? Prices may continue to drop, and my personal suspicion is that they will, but I don't anticipate a free-fall. And remember, while the price of the house you want to buy may be dropping, so is the price of the current house you want to sell. Interest rates and property values may go up or down - you won't get a sure-proof guarantee from me or any real economist but it's often the case that the two move in opposite directions. Over the long run, Greenwich real estate has always held its value and I don't see that changing. I might not rush out to buy a condominium in Las Vegas or Naples, Florida right now, but if I were looking to raise a family here and planned on staying put for 5-15 years, I'd buy here again.
1 year ago
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7 comments:
I continue to enjoy your insights, keep up the good work.
As to whither or wither, I hate to repeat myself, but no question the answer is wither!
What you must keep reminding yourself is that this cycle's unravelling is not like any thing remotely experienced in our generation. To expect the market to retain outside gains as the market corrects is unrealistic in the extreme.
Easy financing caused the gains and contracting financing will bring on the declines. It's all about the exploding credit bubble. And even when the credit markets return to stability (in the distant future) the lax lending that caused real estate price levels to elevate are gone forever (at least a generation or two).
The party is just getting started, especially in the NY metro area.
Retired IB'er
Just one story (worth a read) from the headline's today:
Economic Slowdown Just Getting Started, Says Credit Crisis 'Prophet'
Posted Aug 07, 2008 11:29am EDT by Aaron Task
Disappointing July same-store sales figures from Wal-Mart and Target today point not just to the struggling consumer, but why this economic slowdown is just getting started, says Joshua Rosner, managing director at Graham Fisher & Co.
Recent slowdowns have been corporate driven, which Rosner notes are typically short and sharp as CEOs seek to slash costs (and jobs) in order to quickly "rightsize" their businesses.
In a consumer-led slowdown, like the one underway, slowing consumer spending first hit retailers, then manufacturing, then warehouse space, he explains. In such a scenario, rising unemployment is a lagging indicator, meaning the recent four-year high 5.7% unemployment rate is highly unlikely to be the peak.
As unemployment keeps rising, consumer spending will slow further, putting more pressure on corporate balance sheets, leading to more jobs losses (repeat ad nauseum).
That, in turn, will lead to defaults on commercial mortgage-backed securities (and related losses for their holders) on par with what's occurred in residential MBS, says Rosner, one of the first on Wall Street to warn of the looming crisis.
The timing remains uncertain but Rosner says it will come only after "capitulation" by the rating agencies and corporate executives, who he says are still playing "accounting games" and not really owing up to the severity of losses.
My father was born in 1905 and was issued a newly minted MBA from Columbia in 1929, just in time to look for a job on Wall Street. he succeeded, but the ensuing years brought a pretty good insight into the risks of the world, an insight he passed on to me.
But he especially distrusted "investing" in real estate. I once asked him why he'd sold his four-story brownstone on West 11th Street when he moved us here in 1954 and he replied, "who wants to be a landlord in Manhattan?" I was enough of a wise guy at 15 to suggest that it was that kind of thinking that kept my Huguenot ancestors poor even though they'd landed with the Dutch in 1628.
I do find it ironic that, although my father did well on Wall Street, it's the real estate he and various family members bought over the years that has produced the best increase in value. Not income - we all have always treated homes as places to raise families, not investments - but decent appreciation. I share your concerns about what's in store for our economy (in fact, I'm even more alarmed by the anti-capitalist mania sweeping the world) but I do think we've seen this before, and I'm fairly confident that Greenwich will suffer least and rebound fastest. If I were absolutely certain that we are in for disaster, I'd sell my house now and rent for the next decade. I hope I've made the right decision not to do that.
Chris,
I am certainly not arguing against the wisdom of real estate as a long term investment. But I would caution you as JM Keynes said, "we are all dead in the long run".
The key to making money in investments is, of course, obvious; and, that is to buy low and sell high. We are much closer (even with the declines) to the high than we are to the low.
The point I am really making is that if you don't need to buy now, real estate in the near term (next several years) will only get cheaper.
One humble man's opinion,
Retired IB'er
All true but, until I join Mr Keynes, I'll need a place to live!
I side with the bears. The bursting credit bubble has caused a permanent reduction in the potential pool of buyers, while inflation is rising and unemployment is up. And although Greenwich is a coveted area, in my opinion it is not immune from these influences as well as the unique characteristics of the NYC metro area that may make it even more vulnerable. With the average price of a home in Greenwich at $2MM++ the natural buyers are mostly Wall Street types that earn 7 figures. Consider that if you put 25% down on a $2mm house you need to carry a $1.5MM mortgage. At an interest rate of 7% this comes out to $10 thousand per month. So you need an income of about $40 thousand per month or $480 thousand per year. The problem is that these jobs seem to be going away for good. Investment banks are going through a major transformation that will likely result in fewer jobs and a dim near term profit picture. In the end, I think that Greenwich market will remain flat to down for the next 3 to 5 years. But I must admit with an Irish heritage I am a born pessimist.
As for investing in real estate - a very smart investor once told me - the problem with inveting in real estate is that it takes time and (a lot) of money to sell it.
In the market one can sell $3 million dollars of Microsoft stock in about 15 seconds for the low cost of $9.95 with Ameritrade or its like. To sell $3M of real estate in Greenwich today takes weeks if not months, and costs 6%.
Now, purchasing a home to lay your head a night - different calculation.
I agree absolutely.
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