The Meier Team includes many seasoned professionals that have been involved in the market cycles of New York City real estate. A recurring question in the office over the last couple of weeks is “Doesn’t this market act and feel like it did in 2008?” For this month’s newsletter, we decided to analyze and provide our clients our collective thoughts.
Clearly, 2008 was a difficult time for a majority of New Yorkers with the stock market losing 34% of its value, the national unemployment rate went from 4.9% to 7.2% and real estate values held steady but it was clear the next couple of years were going to be very soft. Real estate lags the more liquid markets and unemployment since it has a built-in lag because most closings take three to four months once the contract is signed and a signed contract can be upwards of 4 weeks. So while it was evident to many that the real estate market was weakening, prices stayed about the same or slightly higher y-o-y because of the lag. At that time, Pam Liebman, CEO of the Corcoran Group, relayed to a reporter that Corcoran sold fewer than 3,000 properties in the 3rd Q 2008 which was down 45% from the nearly 5,500 properties Corcoran sold in the 3rd Q 2007. In addition to the deteriorating net worth of the consumer, mortgage rates were moving higher reducing purchasing power and banks significantly cut back on the credit spigot as they looked to deleverage their balance sheets.
Fast forward to the 2nd Q 2017: Should the market be concerned if our senior agent’s instincts are sensing 2008 all over again? The Manhattan real estate market inventory continues to move higher with 5,320 properties currently on the market which is up 7.5% from the prior month and up 6% from a year ago. The combination of soft pricing and increasing inventory may be a couple of the triggers for the 2008 comparison. That said, mortgage rates continue to be historically low with 30-year fixed rate loans right around 4%. Banks are in great financial shape with strong balance sheets and are eager to lend to consumers, especially as credit scores were repaired post-recession. Furthermore, we believe the biggest difference is that the underlying economic institutions are in a lot better shape than they were in 2007, 2008 and 2009.
Dodd-Frank managed to stifle credit lending and require financial institutions to act like grownups when lending to the consumer. As a result, consumer credit is in far better shape today than in 2008 and the associated securitization of credit instruments is real this time versus the fictitious leverage that was created a decade ago. The two credit verticals currently under negative pressure are student loans and car loans and they are significantly smaller than the housing bubble in 2007 and 2008.
So, although we see signs of 2008 the reality is that this is a 2017 market with the consumer a little more reticent to purchase if the property isn’t quite right and agonizing a little more over the small things. We still believe we are in a sideways market and that the market will break to the downside when interest rates materially push higher.