June 30, 2008
Podcast: the risks of ignoring risk
Wharton finance professor Jeremy Siegel says in this podcast titled "Ignoring risks", that the subprime crisis was both predictable and grossly underestimated at first. He also says that bubbles are something which cannot be easily avoided from time to time in a free market economy; and that we are nowhere in the kind of free fall which produced the Great Depression. Greed and poor leadership contributed to many of the key players ignoring the inherent risks. It perpetuated a sort of Ponzi scheme which was ultimately doomed to fail. National home prices were being fueled by low mortgage rates, relaxed underwriting standards, and easy availability of credit to speculators and people whom were not traditionally qualified. When national home prices reached a peak, it became impossible to sell off the properties for more, to pay off the debt; and the national bubble started to pop.
comitini.commentary: why has Manhattan remained so strong, so far?
From a local broker's perspective, I think that it's important to note that what caused the pop nationally, did not happen here. Manhattan real estate has remained remarkably insulated to this dynamic, largely because of the dominance of cooperative housing as a form of ownership (80% to 85% of market). It has provided an additional layer of fiscal oversight provided by co-ops' Boards of Directors, which demand full disclosure of an applicant's financial profile, and insure sufficient liquidity to protect the existing shareholders of the co-ops. Owner occupancy is a requirement in almost all cases, so speculative investment is virtually nonexistent.
"Anyone thinking of buying a Manhattan apartment or townhouse that they plan on living in for five years or more, should remain exceedingly optimistic. As a matter of fact, it may just be the right moment to buy"
Condos represent a much smaller (15% to 20% of market) part of the Manhattan market, and are mostly new developments. This segment may experience some short term volatility, as a wave of new inventory hits the market over the coming year or two. Developers are scrambling to meet a deadline for the 421-A tax abatement program that takes effect on July 1st. After that, developers will face stricter guidelines to receive benefits, if foundations for multi-unit buildings aren't started by then. Some of them, unable to meet the deadline, have begun to sell off the sites rather than move forward with building. The pipeline of new developments will start to narrow, and the current inventory will be absorbed. That's the marketplace operating to balance itself. It is interesting to note that were it not for the tremendous amount of new development over the past five years, we'd have a severe housing shortage in Manhattan, and our pricing would have gone much higher. Our population is still growing.
Real estate markets by nature are highly localized ones— even if somewhat influenced by national and global market forces. Mortgage rates are trending upward and consumer confidence in the overall economy is low. People are being careful; but I'd predict that any slowdown in Manhattan would look more like a normal market response, rather than a bubble popping. Anyone thinking of buying a Manhattan apartment or townhouse that they plan on living in for five years or more, should remain exceedingly optimistic. As a matter of fact, it may just be the right moment to buy.
The Manhattan real estate market's exposure to the credit crisis is from a lack of confidence in the overall economy by the threat of a recession, and the loss of jobs in the financial sector— a primary driver of our co-op and condo market. I can't say that I've personally seen the market visibly softening on price that much yet here, although people are being a bit more cautious in their decision making. I noted back in April, in this post when first quarter numbers were released, that it is a more balanced environment, where having the most informed perspective on value, and solid negotiating is critical to closing deals. Sellers need to be realistic, overreaching on price and second rate marketing will kill their chances for a deal. I've been involved in two bidding wars on apartments in 2008. This far from a quiet market. A short list of related entries we've posted on comitini.com follows, as does an edited transcript of professor Siegal's podcast on "Ignoring risks"
related entries:
Is it a good time to buy in Tribeca?
video: How risky mortgages and exotic securities, brought us to brink of recession, while no one looked too closely
video: Todd Sinai on home values
video: Inside the credit crisis
Podcast: Mortgage Crisis Bailout: Relief for Some, Risk for Others
Podcast: Bear Stearns, Rate Cuts and the Threat of Inflation
Podcast: Is the Fed too slow on cutting interest rates?
An edited transcript of the conversation follows, after the jump.
Real estate professor Susan Wachter discusses how the drive to securitize mortgages, combined with deregulation, and catalyzed with a little bit of greed, were key triggers of the credit crisis. She explains how complex securities products with a lack of standardization, and where the profits were based on fees rather than trading on the inherent risk in the products themselves, has put the health of the global economy at risk. 
