Where’s that bottom everyone is talking about?

Buyers seem not only to be looking again, but they are starting to make offers.  And the offers are less likely to be insulting than they were just a couple of months ago.  Much of the activity appears to be centered on properties listed below $1 million, though buyers at higher levels clearly are less gun-shy than they were in the recent past.

If you doubt the foregoing information, have a look at Sunday’s New York Times, which leads the Real Estate section with a long piece that has the following headline:

Bidding Wars Resume

Regular readers of this blog and my e-newsletter won’t be surprised by the news: I have been warning that such wars would reappear once there occurred a perception that the bottom was here or approaching.  (However, my timing was a bit off; I didn’t expect that change until sometime next year. In any case, I doubt the trend is widespread yet.)

Ask buyers about their renewed interest, and the answers are almost the same:

  • “I’ve been looking a long time, and I’m tired.”
  • “I really need to make a change.”
  • “I know the market may go down a bit, but I’m not buying as an investment.”
  • “If mortgage rates go up, as I think they will, it won’t cost me any more each month to buy now.”
  • “When everyone thinks we’ve hit bottom, I’ll be competing against them.”

Whether you believe that the market in Manhattan already has hit bottom depends on who you read and how good are both your powers of analysis and the clarity of your crystal ball.  The variables are many:

  • The state of the U.S. economy
  • The strength of the local economy
  • Consumer confidence
  • The unemployment rate
  • The Dow-Jones Average
  • Wall Street bonuses
  • The value of the dollar
  • Monetary policy

It could take a book to explore all the variables, of which there are more.  So let’s focus on one: Bonuses. Before the collapse of Lehman Brothers on Sept.15, 2008 and the thousands of layoffs that had blood running in the Street, Wall Street money evidently fueled the New York housing market, especially luxury properties.  At the time, it was said that 7 percent of the city’s payrolls were linked to financial services and produced 23 percent of the employment income.

The conventional wisdom has been that the tribulations of the stock market would profoundly affect not only home prices in Manhattan but also stifle their recovery.  True, in the fourth quarter of 2008 and into the first quarter of this year, the Big Apple’s housing market was moribund and Wall Street’s woes indubitably were a root cause.  Now, however, the market is showing signs of life.  (Actually, as you know, so are both markets.)

The question, then, is what will be the affect of the mind-boggling bonuses that once more are now expected on Wall Street.

Only an ostrich would fail to know that Goldman Sachs is on pace to pay bonuses that will rival the records set in 2007, when the housing bubble continued to inflate.  The bank already has set aside $16.7 billion for compensation, enough to pay each of its 31,700 employees an average of $700,000.  Those at the top will receive millions, even hundreds of millions, of dollars, and those toiling in open cubicles will collect impressive sums as well.

Morgan Stanley and JPMorgan Chase together also are expected to pay out close to a total of $30 billion – with a “B” – in bonuses as well, and the amount won’t drop just because the Obama administration is seeking to cut executive pay at the highest levels.  Credit Suisse, which posted a $2.4 billion profit in the third quarter, is on track to award nice bonuses as well.

There are three unknowns related to such bonuses:

  1. How much will be in cash?
  2. How confident will the recipients be of retaining their jobs and thus free with their cash?
  3. Will the recipients think it’s the right time to buy real estate?

In the New York Times, Andrew Ross Sorkin notes that Goldman’s executives are paid mostly in stock, which vests over three years beginning at the end of 2010.

In addition, the bonuses have yet to be given out. Goldman may impose a clawback provision that would require employees to give up some of their compensation if trades go the wrong way, similar to ones that Morgan Stanley and several others have already proposed, Sorkin writes.

Credit Suisse subsequently made a splash by announcing an overhaul of its system as well.  Some 2,000 U.S. employees will receive a greater portion of their total compensation in the form of monthly cash salaries, while bonuses will be split evenly between cash and stock.  And that stock will vest over four years, while the cash portion of the bonuses will pay out in three; each portion will be adjusted based on the bank’s performance over those periods.

All things considered, it is hard to make the argument that housing prices and sales activity will surge in any amounts like 2007.

Whether the economic recovery is V-shaped, W-shaped, U-shaped or L-shaped, as various experts have postulated, the likeliest scenario is for a year in which the metrics are generally flat but gently rising.

Or not.

Are we there yet?  You’ll have to decide for yourself whether the bottom is fast approaching or whether it’s even arrived.

To help draw your own conclusions, consider subscribing to the free e-newsletter that I write every two weeks.  You’ll find in Realty Digest news about the U.S. and New York housing markets, mortgage rates, the prognostications of various soothsayers (including those who do not support my views), the real estate activities of celebrities, household information and summaries of research reports.
Subscribe by Email

Malcolm Carter
Licensed Associate Real Estate Broker
Senior Vice President
Charles Rutenberg Realty
127 E. 56th Street
New York, NY 10022

M: 347-886-0248
F: 347-438-3201

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