Here's a post from our friends at the Wharton School of Business that takes a look at the economy globally, with some cautious optimism. I believe that in our local New York City housing market we've clearly seen some stability and even modest appreciation off the lows. Yet nationally, housing and unemployment are still putting a drag on the economy. Read on to see the perspective of some Wharton faculty on how that may look in the year to come.

The Global Economy in 2011, A Rocky Ride or Smoother Sailing Ahead?

In the United States, most experts are betting that the economy will grow stronger this year, but they warn that high unemployment, a depressed housing industry and other problems could dampen growth. Meanwhile, the fate of the euro is still in question, and the specter of inflation looms large in China, Latin America and India despite their resilience to the recent global downturn. In the Middle East, observers expect renewed growth, but they note that resource constraints will become an increasing problem for the region. Knowledge@Wharton spoke with Wharton faculty and other experts to get their views on what's ahead for the world economy in 2011.

The United States: Housing and Unemployment Risks

In the U.S., "the threat of a double dip [recession] has passed," says Wharton finance professor Richard Marston. The congressional compromise to extend the Bush-era tax cuts for two years should help the country's recovery, he predicts. "With the added stimulus of the tax bill, we will have continued growth in 2011."

Still, "there are some very severe downside risks," says Wharton finance professor Franklin Allen. One main concern is housing: Allen, Marston and other experts agree that the uncertain housing market will continue to be a drag on the economy.

"In the housing market, the data is going in different directions," Wharton real estate professor Susan M. Wachter notes. Some reports show sales picking up, while others show prices continuing to stagnate. "The bottom line is that we're bouncing along the bottom.... We're likely to be in a holding pattern." Fortunately, Wachter says, the weak housing market probably will not do too much additional damage to the economy, as most of the harm has already been done. New-home construction is not likely to go lower, for example.

According to Wachter, the housing market has enjoyed some stability because many lenders have been reluctant to foreclose and sell homes at fire-sale prices. A lender is typically willing to sell when a foreclosed property can fetch as much as the appraisers say it is worth, she says, but appraisers rely on backward-looking data that is quickly out of date in a volatile market, making it hard for the lender to know what a property is really worth.

Another problem, Wachter notes, is the recent rise in mortgage rates, which increases payments, makes homes less affordable and undermines sales. In addition, high unemployment reduces the number of potential buyers, she adds.

"The unemployment situation is still not good, and that's going to take a long time to change," Allen agrees. "There's been some upturn in consumer spending, but until things start looking better on the housing and unemployment fronts, I think [consumer spending] won't drive things forward."

While many U.S. retailers reported a good holiday season, it is not certain that consumers, who are the most important force in the economy, will continue to reverse the tight-fisted habits developed in the past few years, Allen says. Whether they have really loosened their purse strings or did so only for the holidays is unclear.

U.S. economic growth also could be hampered by ripple effects from the continuing debt problems in a number of European countries, Allen notes. In addition, economies are starting to overheat in some developing countries, especially China, he says. China has started to raise interest rates to curb inflation, but that could draw more foreign money into China, possibly depriving other countries of capital they need to speed growth while worsening China's inflation problems.

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» download snapshot (544kb) I'm presenting some data published here by Corcoran based on November contracts signed, which leads the sold and closed metrics by 60 to 90 days. This is telling if you are thinking about bringing a home onto the market, or buying one in the first half of 2010. I've met several new customers who will be spending bonus money in the first quarter, but others have been sitting on the sidelines waiting to see what was going to happen before plunking down hard earned, and recently recovered savings. I can feel the momentum to a busy first quarter of the year starting already. It was not unusual to see multiple bids on properly priced homes this December.

In truth, we've seen good activity in the final quarter of 2009. A year ago, amid the uncertainty of the financial crisis, sales activity had slowed to a trickle. This chart shows the number of Manhattan contracts signed market-wide since November of 2007 for some context. Today they are up 193% since January, largely because of improved opportunities for buyers, and consumer sentiment generally feeling better.

click on the chart to enlarge

The sales activity has a roughly inverse relationship to the chart below, which shows the supply side. A year ago we began to see peaking inventories of apartments. It has today decreased by 25% since November 2008. While there is some "shadow inventory" of new developments (unlisted/unsold) unaccounted for in these metrics; the pipeline of newly developed units, has virtually been turned off. Developers accepted the new market reality and began improving prices as the year continued.

click on the chart to enlarge

november 2009 manhattan condo and coop prices

Condos gained in pricing in November compared to a month earlier, amidst strengthening demand for larger homes. The number of contracts signed was roughly consistent with October and about double a year earlier. Coops sales activity was also up a significant 173% over November 2008. Median sale prices increased 18% over the month prior and 12% year over year. They are selling quicker too. The increased activity is due to pent up demand from people needing to trade up to larger units and improved pricing that brings them in line with demand.

If we continue to see the inventory of available apartments going down, and buyer activity remain as strong, I believe that we will be hitting real price equilibrium soon. On a micro scale I know that I've seen pricing in some larger coop buildings actually increasing already off their lows of the year.

click on the charts below to enlarge

» download the manhattan november real estate market snapshot (544 kb)
» download the Q3 2009 manhattan market report (3.9 mb)

The NY Times ran an article on the market downturn in Manhattan real estate. Looking for Bottom in N.Y. Real Estate reminded me of conversations I've had recently with buyers, and it gets to the crux of the slowdown. Sellers and buyers simply are entrenched in their mindsets. Buyers are being cautious of paying too much, and sellers are in denial that their values have dropped. The result is that fewer deals are being done. They call this a buyer's market, yet the irony is that fewer people seem to be actually buying.

“What we’re seeing is a big disconnect — sellers need to get more realistic, but buyers don’t even think it’s enough. Buyers are not hesitating to walk in and bid 40 percent off the price, but sellers aren’t taking it.”

It's not like the phones aren't ringing, and properties aren't being shown. Traffic at open houses has been both decent and steady, but when one gets down to bargaining, it is harder to close the gap. The number of transactions taking place are off by 55% since last year by some reports. Values have dropped, and there is a lot of wild speculation at this point about how far. The correction is real, but in the downtown neighborhoods like Tribeca, the Village and Soho where I work, the anecdotal evidence would indicate that the deals are happening well above 40% off asking. It pains me as I read anonymous comments on blogs from people gleefully looking forward to an economic meltdown in which they can profit. No one likes a bottom feeder, and they rarely close a deal since greed gets the better of them. The market is pricing fear into its bidding and it is as hard to justify it, as it is difficult for sellers to accept that they have lost value.

how does a listing broker respond to the new market?

It is painful to see some sellers making decisions which will hurt them in the short run. Pricing their homes too high, in a declining market, and not closing the deal, means that you are going to be chasing the market down and quite possibly selling even lower in a few months. I wouldn't be the first agent who lost an exclusive to another firm that pitched an unrealistically high selling price to get the business. Agents get to meet buyers by "buying" listings this way. It is a huge disservice to their clients, who will sit and watch their values decline, and reduce their price eventually to a level that they will be pitched on later. The real rub is that level may be lower than it would have sold for if they had listed at a proper go to market price in the first place. I had an unusual year in 2008 in that almost all the properties I listed were taken over from other agents after their exclusives expired, then turned around and closed by me.

A good broker will lay out the hard and soft data that supports asking price, and will actually want to get paid for representing you. The one who walks in with inflated figures, and sells a discounted commission is often someone to be wary of. If you can't sell the property, you'll try to sell the fee, and get the customers. It's the oldest trick in the book. We will have real 1Q/2009 data next month, and while I don't expect it to be pretty, it will be better for the marketplace to know where it stands.

can sellers be successful in this market?

Her line of questioning was actually going to "did you have a fire sale?". We did not. It was sold within 5% of asking. Within that conversation are mentioned each of market forces that every real estate deal has in common. Pricing, promotion, and negotiation; subject to the environment of the marketplace. The first three being the levers which a broker can use skillfully to produce results. When your broker gets them right, you will get a closed deal. They work in every market. In this one in particular they are of more value than ever.

From our friends at Wharton comes this interview with professor Richard Herring who serves as a co-chair on the Shadow Financial Regulatory Committee, a group of economists, former regulators and lawyers. It contains astute observations about the problems with transparency among the financial institutions that have failed, had shotgun marriages, or are teetering on the brink.

On the eve of Barack Obama's inauguration as president of the United States, Wharton finance professor Richard J. Herring discussed some of the advice offered to the new chief executive by the Shadow Financial Regulatory Committee. In an open letter (pdf) to Barack Obama, the committee suggested that the government should quickly extract itself from the investments it made to rescue the financial system and devise a new regulatory framework for preventing future crises. He also assessed the deepening woes at Citigroup.

"Morgan Stanley...was trying to sell itself to a bankrupt institution two weeks before it went under— which suggests that we really do not have sufficient disclosure"

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Wall Street is just about to finish the worst year since 1931. American housing markets are finishing their worst year in recorded history. New York’s economy is highly dependent on Wall Street...These three facts should have created the mother of all price crashes in New York City real estate...Yet New York’s housing prices are doing remarkably well relative to elsewhere in America.

A little light shone through the bleak economic news that I've been reading and posting to Newsreal lately. I ran across New York, New York: America’s Resilient City on the New York Times' Economix Blog, when it was tagged by a member on StreetEasy. Their commenters had a predictably negative take on it, since it points out that the name your own price Manhattan marketplace, is probably not anywhere close to a reality. In it, Harvard economist Edward Glaeser focuses on the historic resiliency of New York City in hard economic times, which he attributes to its ability to attract talented people, and the density in which we live. He puts his faith into the free exchange of ideas and the process of reinvention through innovation.

I hope that in the coming new year, economic stimulus and innovation go hand in hand. From the car manufacturers, to financial services and the oil companies, in 2008 we saw a business culture that fell asleep at the wheel because of entrenched market positions, hubris, and manipulation, rather than the creation of real value in their products. How could that not crash and burn eventually?

It took a national economic crisis to take the wind out of the sails of the Manhattan real estate market, even as the rest of the country was correcting for two years. I don't think that people should confuse that with a sinking ship. The wind eventually picks up again. Glaeser notes that Case-Schiller housing prices indicate a 7.5% drop in New York City prices compared with an 18% drop nationwide last year, faring much better than the rest of the country. Note that Case-Schiller tracks a more regional average of housing prices based on single family homes; so Manhattan coop/condo pricing may not be accurately reflected as a submarket. It would not surprise me if when our local market reports are released in January, the year over year picture is better than that. It is feeling pressure in 4Q 2008, but after looking at my year end bank statements, my money would have been better off being tied up in Manhattan properties rather than in stocks and bonds. The numbers indicate that Manhattan is still a place where people want to live, and unless that changes, housing will be in demand. Buyers looking for the "right" moment, should consider the favorable interest rates right now, the ample supply of apartments, the return of incentives and negotiating to our marketplace, and step boldly ahead.

New York, New York: America’s Resilient City »

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