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“NEWS FLASH – There was a bubble in real estate, especially residential. It popped. Some day…not today….prices will stop falling. There is very little reason to believe that they will then have a big move upwards (in some circumstances there may be a bounce from well below long-term trend levels, but you can’t play bounces in real estate). In fact, history indicates that it is more likely that prices will malinger near the lows for years.”
Noah Rosenblatt is one of the most highly respected and recognized real estate bloggers in the US, and has been writing about Manhattan real estate for several years. He always calls it as he sees it – even if it might hurt. One of Noah’s best points is that once it hits front page, Real Estate Section on the Times, it’s already old news.
Of course, the question is “What happens in the Hamptons and isn’t this market inextricably tied to the Manhattan market?” The answer is both yes and no. We saw our downturn before Manhattan started theirs and while many Manhattanites do own properties here, the Hamptons have become a respit for those wanting a different, more relaxed world, ever since 9/11. There was a major shift then, we may be experiencing another shift as those leaving careers in the big city seek out a place to re-evaluate their future plans.
After all, while the Hamptons are not cheap by any means, it is sure less expensive to live here than Manhattan. The Ross School is half the cost of many Manhattan private schools and the public schools here are quite good too. Unless you own a 8,000 sqft home, monthly maintainence cost are probably lower than a Manhattan condo or co-op and you don’t have to pay $1k a month to park in your own driveway.
Here’s an excerpt from Noah’s post on the NYTimes article this weekend about the real estate downturn finally hitting Manhattan. You can see the entire post by clicking on the link at the end.
“For any broker that is just now realizing that this market has some upcoming problems and that prices are only now starting to turn, you are ridiculously behind the curve! Denial is a powerful force and it’s understandable that brokers do not want to hear any negative news, data, trends, or near term predictions for fear it may bring down their business. Brokers get paid on commission and have a vested interest in you buying or selling. As such, trust, honesty, and unbiased consulting from the client’s point of view must be earned. Falling for broker babble in times like these is what the greater fool theory is all about. Lets be real here. The market is adjusting to an unsustainable appreciation in housing prices resulting from:
a) boom on wall street; jobs and equity markets providing positive paper wealth effect
b) parabolic credit boom
c) easy money & exotic loans
d) cheap money & artificially low rates
e) strong local economy
f) weaker dollar brought in outside investors
g) tight supply
h) 70% co-op housing stock limiting speculators
i) new dev building boom promising that the sky is the limit with potential profit
j) higher quality of life, cleaner city
k) trend to live closer to where you work etc..
With the exception of ‘h’, ‘j’ and maybe even ‘k’ still, all of these fundamentals have reversed course with great speed and depth. Housing & credit deflation has murdered wall street and we are in the early phases of the job loss cycle in the financial sector that will ultimately lead to slower consumption, conservative behaviors that will exacerbate the problems to retail as time goes on. The job losses that start on wall street will eventually lead to the restaurants, real estate sector, gov’t jobs, retail jobs, and on and on. As with most cycles, the process feeds on itself. Manhattan is not immune, and we are in the first phase of the downturn right now where the initial jerk downwards from the peak reveals itself. As time goes on we will see who must sell and who overexposed themselves. That is when things get hairy. My concern is that the media will enhance the decline of buyer confidence to the downside, just as it enhanced confidence on the upside during the boom.
Most brokers would have you believe that there is ‘sideline money’ waiting for a 5-10% drop to swoop in. This can NOT be further from the truth! Humans generally react with a herd like mentality and when the reports start to come out that a housing market downturn begins, buyers usually back off for fear of catching a falling knife. If you believe brokers, a report like this will bring in droves of buyers seeking a bargain. If you believe what I am saying, reports like this will result in further declines of buyer confidence, weaker bids placed, and the backing away of buyers who weren’t sure if now is the right time to jump in. As I said in December 2007, “Who Wants A Depreciating Asset?“.
The good news, if any, is that this has to happen when you take into account the national housing downturn, severe credit deflation, elimination of wall street, and the negative wealth effect and jobs effect that comes with it. Real estate is illiquid so it takes time for things I say here to come out in public reports. You can’t day trade real estate. As real estate prices correct, the process of finding value begins and the sooner it starts the sooner we can cleanse the market. The bad news is, we are likely early in the cycle and yet to see the full effects of job losses, negative wealth effect, budget issues, and how quality of life is affected. “