Residential Realities February 2011
February 24, 2011: Good Cop Bad Cop Via Case Shiller
In a Sense It's Comic Relief
An article yesterday in the Times by David Streitfeld, reviews the nationwide slide of real estate prices in December. What’s amusing is the breach in perspective by half by the authors of the Case-Shiller index. Robert Shiller, on the one hand, is quoted as saying there is a “substantial risk” of the market continuing to fall by as much as twenty-five percent. His partner, Karl Case, a retired economics professor from Wellesley, is much more upbeat. He thinks things were only at “a rocky bottom with a down trend.” Not exactly, the glass is half full.
It’s a powerful calculation cocktail that’s not so easy to digest: From Fannie and Freddie, to reducing or eliminating the mortgage interest deduction and possible exaggerations by the National Association of Realtors about the actual number of homes sold over the past three years. And don’t forget those hesitant sellers, waiting and waiting for that brighter day.
What Does Hollywood Have In Common with the Real Estate Market?
Many years ago, William Goldman, the author of Marathon Man, Princess Bride, and many other well known books and movie scripts, had a great line about the folks running Hollywood…”nobody knows anything”. And in many ways, the same rule applies to predicting real estate trends. There are so many things in play right now, is it possible to predict where things are going with any degree of certainty? I don’t think so.
February 19, 2011: Doing Deals in the Digital Age
As reported by C. J. Hughes in the Times a couple of days ago, Naldi v. Grunberg, a case appealed to New York’s highest court, will determine whether a disappointed purchaser was wrongfully denied a right of first refusal to purchase two commercial buildings. The right of first refusal was allegedly offered to the purchaser in an E-mail from a real estate broker involved in the transaction. The lower court allowed the case to continue, but the Appellate Division dismissed the complaint because the purchaser never replied to the E-mail in which the right of first refusal was extended. The Court of Appeals will now decide whether the electronic paper trail was sufficient to create a binding agreement in which the purchaser had a right to continue bidding on a property before the seller accepted a higher offer.
Why It’s Important
Although the case could go either way, as it a question of fact as to whether there was a binding agreement, as the article points out, the Appellate Division affirmed that “e-mails are binding in real estate transactions.” Brokers beware: as a matter of law, E-mail appears to have the same binding effect as the written word. So watch what you send, receive and reply to…
February 14, 2011: The Real Estate Economy as Greek Mythology
Jason and the Argonauts
Those of us of a certain age, loved that 1963 film based on the Greek myth of Jason, who searches for the Golden Fleece. Along with his mighty crew (including Hercules), he overcomes many challenges and demons to accomplish his goal. I grant that it's a bit of a stretch, but those in the real estate industry find themselves on such a journey, with new challenges to a recovery presenting themselves daily.
The Challenge du Jour
This week interest rates ticked above five percent for the first time since last Spring. One of the endearing rationalizations for continuing to buy real estate in a market with a bottomless bottom is that interest rates have been remarkably low for a very long time. So now the jitters begin that the low interest rate party is over and one of the good reasons to buy into this market is going away. At a minimum the refinancing market is about to get wacked. True Story: My client has a 4.5% interest rate and was refinancing into a 4% rate. For various reasons, his rate lock expired, and as you might expect, despite begging and pleading, the bank would not extend the interest rate. About a week later, he was able to lock in to a 4 1/8 interest rate and the "refi" still made sense. Had the new rate increased to 4.25%, my client would have passed on the refi and stuck with his original rate (still a very good one). So extrapolate that nationwide to thousands of borrowers who are already in the 4 percent rate range, and basically, if rates stay above 5 percent, the refi market will shut down.
And Then There's the End of Fannie and Freddie
Many would argue, rightfully so, that there would not be a viable real estate industry without the government run Fannie Mae and Freddie Mac entities. By purchasing most of the home loans that are consummated today and by securitizing those loans in the secondary mortgage market, these agencies have kept residential real estate on life support over the past two years. Although it may not be the right time to pull the plug on this mortgage safety net, by all accounts, the writing is on the wall and significant and painful changes will be made to these programs over the next ten years.
The Thirty-Year Fixed as the Golden Fleece
Let face it, home ownership, particularly for first time buyers, would not be possible without the thirty-year fixed rate loan. Without question, this loan program is the bedrock of the home loan financing industry and has made home ownership possible for many on their Jason-like journey for a piece of what's left of "The American Dream". But some see the 30-year fixed rate loan as a fleece of another kind. For the naysayers, it was a major contributor to the housing bubble, allowing folks to purchase homes, who would otherwise not qualify if a thirty-year product was not available. But the 30-year fixed has become a part of the fabric of the country that has made a better life possible for many. And when you start tearing at the national fabric, proceed with caution, as there will always be unintended consequences. So now the Administration and the Congress, pulling on that fabric in many different directions, will try to figure out what to do with this massive mortgage bureaucracy. Politics aside, few in the residential real estate business would disagree that this government created creature is the real estate economy's life line and is keeping the mortgage industry alive.
Residential Reality: The Journey Continues...
The one-two punch of higher interest rates and the inevitability of changes coming to Fannie and Freddie only further slow the process of the elusive real estate recovery. For those of us on the ground, getting the deals done seems to get more difficult every day. But there are much bigger challenges at stake. As the policy makers poke and prod the creature and try to manage the government's role in the residential real estate market, who gets to own a home appears to be on the table.
February 9, 2011: Bottom Feeders Get Hungry
Here’s a fun fact: According to an article by Mitra Kalita in the Wall Street Journal yesterday, 42% of all deals in Phoenix in 2010 were all cash transactions. It was 50% in the Miami-Fort Lauderdale area, pushing prices up 15% over the previous year. When the cash comes out, that’s usually a good sign that prices are so low, it’s finally time to start buying again. In other words, the bottom has arrived. But has the moment we’ve been waiting for actually occurred?
There’s no question that part of the cash movement is an underlying frustration with the lending industry that not only is ridiculously tight with money, but is also imposing lending conditions that literally make no sense. Exhibit A: I recently received a letter from the buyer’s attorney in a co-op transaction asking for an addendum to the contract to be prepared at the request of the bank because the zip code on the property was incorrect. In short, hurdle after hurdle to jump over before a deal gets to the closing table.
The Market Shifts
Notwithstanding the bank’s bi-polar lending policies that have driven buyers to avoid the underwriting process completely, these cash deals at deeply discounted pricing is a healthy sign for the real estate market in general. We’re not at “the future’s so bright you have to wear sunglasses” stage just yet, but buyers finally breaking out the cash is the first step in the market going in another direction—up.
February 5, 2011: View From London
Congrats. New York is the most “expensive place” in the U.S. So says a February 4th article by Emma Mahony in FT.com. Looking at year-end data prepared by Prudential Douglas Elliman, there has been a significant uptick in the luxury real estate market in New York. From co-ops and condos to commercial properties to hotel residences, things are looking up for those rarified “luxury real estate vendors” (apparently, a new job classification).
And of course, what would an article about luxury New York real estate be without the obligatory mentions of celebrity sightings (P. Diddy, Janet Jackson and Goldie Hawn, to be exact). But as my friend Paul Zweben likes to say, “that’s what it’s all about.”
Those of us on the ground, dealing with day-to-day issues, pushing deals forward against the wind of a slowly recovering real estate economy, don’t spend too much time thinking about Ivanka’s decorating techniques. That being said, it seems clear both from a perspective of optics and from the actual economic reality, New York real estate is doing better locally and globally than most other places on the planet.
Trickle Down New York Style
It wouldn’t be the first time that action at the top of the pyramid spurs economic growth for those below. If movement in the luxury market helps the entire New York economy, at the end of the day, it's a good thing.
February 4, 2011: The End of 421-a for the Time Being
The Expiration of a Key Benefit
As I will discuss in greater detail in a post to be uploaded shortly, the tax abatement program known as "421-a" expired in December 2010. This city and state legislative initiative allowed real estate developers to obtain real estate tax abatement benefits for residential developments that significantly reduced taxes of condo purchasers for as long as 25 years. Thousands of luxury residential units were constructed under this program since 1971, and both developers and purchasers benefited from the program. One of the major goals of the 421-a program, however, to create affordable housing units in addition to upscale apartments, has not been realized in any meaningful way. Taking current economic conditions into consideration, the idea of continuing benefits that help the luxury residential real estate market flourish at the expense of affordable housing is a bitter pill to swallow for those formulating government policy.
So it turns out that the rent stabilization program, that covers about 1,000,000 apartments, expires in June 2011. Although many in the real estate community look forward to the sunset of these tenant protections, the timing is not right to deregulate all rent protected apartments. But some see the expiration of the rent stabilization program and the need to renew the 421-a program as an opportunity to insure that rent protections remain.
The Battle Lines are Drawn
As outlined by Eliot Brown in yesterday's Wall Street Journal, Democrats in the State legislature want to tie renewal of the 421-a program to an extension of the rent regulation program. Although many in the real estate lobby are offering tepid objections to linkage between tax benefits to developers and rent protections under stabilization, based upon current economic conditions, it's highly unlikely that developers would be given a tax break, while renters would be subject to complete deregulation of rent.
The Horns of a Dilemma
It certainly isn't a reboot of the 70's in New York, but you could make the argument that there is a need for incentives to keep construction going as the city slowly exits a very scary two-year period in New York's real estate economy. Although some version of 421-a will probably be brought back, look for tenant protections to remain in place long after June 2011.
For more on the New York City's tax abatement program, see my comments in "Tax Abatements Help Out Buyers of New Properties" on NY1 with Jill Urban.
For a fascinating review of the housing stock of New York City, take a look at the 2010 Housing Supply Report, prepared by the New York City Rent Guidelines Board.
Febuary 3, 2011: Private Transfer Fees
Yesterday, I alerted my facebook readers to a proposed rule of the Federal Housing Finance Agency that would exlude New York from the private transfer fee prohibition that is being considered by that agency. Until yesterday, New York co-op and condo attorneys were concerned that when a "flip tax" had been imposed, Fannie Mae would not purchase a mortgage in that building. Not a good result for the New York real estate market. Initially, I was under the impression that the proposed rule only exluded New York from the ban on private transfer fees. The proposed rule actually exludes all private transfer fees that benefit the property receiving the flip tax proceeds and not the developer. It's nationwide. For more on the proposed rule, visit the website of the Federal Housing Finance Agency.