Option ARMs and Interest Only (IOs) loans scheduled to reset in the next few years will add more trouble. These loans represent about 15% of securitized loans and some have negatively amortized, increasing the payments and making refinancing more difficult. According to data from Barclay's, about $300 billion in option ARMs and $820 billion in IO's are set to recast. The results could be payment shocks over 80% for option ARMs and over 60% for IOs according to Barclay's.
Did co-op's change their rules over the past six years to approve as many financially unqualified people as possible? I wasn't aware of that, maybe steve has some data he can share with us on the subject?
JuiceMan: "Did co-op's change their rules over the past six years to approve as many financially unqualified people as possible?"
Did co-ops allow 10% down & 15% down. Yes. Did they allow interest-only jumbo ARMS? Yes. Did they approve loans for people who have lost their jobs or have seen their bonuses reduced drastically? Yes.
Because the co-op where I used to live allowed 15% down, which they have recently changed back to 20%. And I have an interest-only ARM (not jumbo) on my co-op on Fire Island.
That's how I know, JuiceMan.
You really have overdosed on the Real-Estate Kool-Aid.
steve, you are generalizing about all co-ops in Manhattan allowing 90% loans and IOs, because one co-op that you know allowed an 85% loan, and because you have an ARM on a co-op on Fire Island. And you wonder why people find you annoying.
You asked how I knew it was true. I told you. I don't need to prove anything other than that it happened, nor do I need to take a survey of the requirements of every building in Manhattan to prove that point.
It did happen.
"You ADD absolutely no value and people generally don't like you."
That's a very value-adding comment on your part, Riv_Drive.
"you are generalizing about all co-ops in Manhattan allowing 90% loans and IOs"
The vast, vast majority of coops in Manh have and still do require 20%+ down. This is such common knowledge it seems silly we're even discussing it. Better buildings even up the ante very often. For example, virtually no coops in the Gold Coast area of the central Village accept less than 25% down and many require more. A handful of coops in Manh may have got themselves into trouble with lax down payment requirements, liberal subletting policies, permitting people without adequate reserves/income to purchase using exotic financing vehicles...but that is a tiny minority. In the 80 open houses I've attended in the last 12 monthy not a single building would fall into such a minority. I bet you'd be hard-pressed to find a dozen coops that permit less than 20% down. If you bought in one of these odd-ball coops, good luck to you--you get what you paid for. If you are going to toss away the greatest benefit of cooperative living (that is, reducing the investment risk by insisting on solid finances/financing by purchasers) then why even bother living in a coop?
If you have 20+% down as a requirement, the type of financing matters less as the financial reserves of the individual increase. Obviously, someone of substantial means poses less risk with a 5/1 ARM than a first-year college grad working at Citibank.
I really don't understand the point of this thread.
Wachovia has the relative worst exposure to pick a pay and option arm resets heading into 2009-2011. I dont think they will survive in their current form as time goes on and we see who didnt make it; WaMu, GSE's too.
"In the 80 open houses I've attended in the last 12 monthly not a single building would fall into such a minority."
Should we believe kylewest who has recently bought a co-op and has done more research on the Manhattan market than anyone on this board or, should we believe:
"Because the co-op where I used to live allowed 15% down, which they have recently changed back to 20%. And I have an interest-only ARM (not jumbo) on my co-op on Fire Island."
…..a 15% down co-op (that you no longer live in) and an underwater co-op on Fire Island? LMAO!
Steve, who should we believe? What is the address of the co-op you used to live in?
My wife and I bought our apartment about 16 months ago and it is a coop. We looked at about 100 apartments over a 1 year period before purchsing our apartment. I beieve that we saw about 3 Coops that were less than 20% down and only about 4 apartments were condos. On top of this, it is pretty standard that buyers must have the income reserves. We also had to put 2 years of maintenance into escrow with the coop to give additional insurance against financial uncertainty in the future. Our coop has done this with most buyers and I am confident that other coops did this as well.
I am not suggesting that changes in ARMs or IO loans will not hurt some people, but I think it is disengenuous to start to a thread by saying that a tsunami is ahead when you have based it on 1 building in Manhattan and a coop on Fire Island. I guess I also find it interesting that Steve calls out people for buying into these 15% building and for getting IO loans, yet this is exactly what he has done. Are you worried about your own situation? From your posts, probably not. Why? because you didn't overreach on your purchase. To turn around and imply that everyone else in Manhattan has overreached is a straw-man argument and doesn't stand up to facts.
Christ people. I've never posted to Streeteasy before, but Steve's right. Maybe the word "tsunami" is a bit strong, but Steve's general point is good. I think anyone but the bully-bulls who pounced on him while providing no plausible counter-argument as far as I can see (JuiceMan, Riv_Drive and LICComment) realize that the market's down and going lower.
It's one layer after another, another set of bad assets and bad mortgage-types being unveiled every month. The rot is deep and if Steve wants to call attention to that, I think that's fair. Unless you can point to "data" pointing to a recovering market (whatever data really is in NYC real estate) then just admit the constant repetition of bad news isn't Steve beating a lonely drum, it's the way things actually are.
Oh, and Waverly, I certainly didn't mean to lump you in with others who disagreed with Steve. You make a good point, too. I will say I've seen plenty of co-ops that allow 10-15% financing, but probably not in "prime" buildings in sought-after areas (your experience seems extreme to me, but I suppose it depends where you're looking).
I agree that the income/financing requirements of many co-ops provides a layer of insulation against the mortgage crisis. Problem is most new development in Manhattan since 2000 has been condos ...
Thanks JKB for seeing the forest through the trees. Regardless of the effects option arms will have on co-op owners, or lack thereof, JKB and Steve are right in that these products are much more vicious and will have a greater fall out than IO-Arms or subprime. Once they were reserved for the banker that wanted to manage his payments and then the flood gates opened and unscrupulous brokers marketed these products to people with the tag line that they could them the a $1M house with 1,000 a month payments. Once these loans reset, and the poor bastard cannot refi out of it because his house is now at least 10% under water (some of these reset at 110%, others at 115%), we are going to have more foreclosures and downward pressure in the market.
"I think anyone but the bully-bulls who pounced on him while providing no plausible counter-argument as far as I can see "
JKB, The "counter-argument" that you are looking for is that the majority of the Manhattan market is co-op inventory which has much more stringent financing requirements than condo's. I didn't state it because I didn't have to. It is obvious to everyone that lives here. steve made the ridiculous comment that he knows one co-op in Manhattan (that he no longer lives in) that "used to have" a 15% down payment requirement (but is now 20%) and his current co-op on Fire Island allows it. An that was enough for him to claim that most co-ops in Manhattan had these same rules. We then heard very credible rebuttals from kylewest (80 units) and waverly (100 units) where not one had less than a 20% down requirement.
One more thing JKB since you are new to streeteasy, don’t feel too bad for steve. He loves to pounce on people and point out mistakes others have made, sometimes months after the fact. He dishes out far more than he gets, and this one was just too precious to let go.
So steve, what was the address of the co-op that changed from 15 to 20%?
JM- You and the "crew" are losing all sort of credibility. Truthfully, I like the banter and have learned from a lot of Bulls and Bears, however we are going to see 30-40% declines from 2005-2006 levels.
In the last 5 years all over this city, people were given mortgagesl, they never would have gotten 10 years ago. From the Financial District to Washington Heights and EVERYTHING in between, will be affected.
350 Bleecker is such a cheesy building, no wonder it allows lower financing, it's a bloody miracle they get anyone willing to live in the 60's disaster.
however, if i recall...they don't allow 15% financing or renting. i'll ask my property manager, but when we were looking for an investment place we stopped by and found the board fairly odd and stringent. i think the woman's name was Armanda or something.
I don't think anyone on here seriously argues that Manhattan differs in EVERY way from every other RE market in America and is immune to bad times. But that is the strawman set up and pointlessly torn down by some on these boards. In their rush to point out how Manhattan can indeed suffer declines in RE values, these same people tend to overlook the ways in which Manhattan is legitimately different than most markets. The number of people who over-extended themselves potentially to the breaking point with exotic or unusual financing products is I suspect much, much lower in Manhattan than in other markets. Yes, of course there will be some foreclosures, some price decreases, some people who are stuck with an ARM and can't refinance--but in Manhattan it's hard to see how this is a tsunami given the relative wealth of the population and strict requirements of coops which are most of the inventory.
JuiceMan- Your clear denial, that people were allowed to put 10-15% down on units. You refuse to accept, that coops acted just as recklessly, as condos. They are all in the same boat. If anything, condos may have acted worse by allowing only 5%, in some cases.
OK, uberbulls, then how do you explain this: Manhattan is a boro in a city whose median family income is on the neighborhood of 70K if that much. Manhattan is the most insanely expensive place to live regarding cost by psf. Not every family in Manhattan can have an income that is 4 times the city average, right? So, how could normal families buy condos and co-ops in Manhattan in the last 4 years. The answer: overextending themselves. Their may not be "the rule" but it would be amazing if it were such a small exception as to be irrelevant for the RE market. I mean, if people have been overextending themselves all across the country with the blessing of the banks and the innovative mortgage industry, how come they haven't in the most expensive place to buy? Oh, yes, how could I forget: the coop boards. They'll protect us from Global Warming too.
dco, read the thread again. The conversation states clearly that the majority of co-ops have and will continue to require 20%+ down. Co-op's are the majority of inventory in Manhattan. So far we have 180 co-op's that require 20% or more down, 1 that was 15% which is now 20%, and 1 on Fire Island that is 15%. What don't you understand? Find me data that says differently and I'm happy to consider. How is that denial? The data is right here. Can't you do some of your famous "analysis" to come up with the right answer?
petrfitz- With all the exotic loans over the years, it was very easy to give the impression that you were putting more down. And frankly, I dispute your claim.
Ok, lets say we use 70%. What about the other 30%. That is a very high number anyway. So just about, 99.9% of the condos and 30% of the coops, allowed less then 20% down. Ok, of you say so. I'll agree.
Trompiloco - actually according to the last census - white families now make up that largest percentage of families living in NY - about 53%. Their median income is around $320K per year.
some buyers sold smaller apts and used the tax-free profits for large downpayments on larger apartments - not every buyer of a Manhattan apartment bought since 2002 - it's the condo market that's going to be hit hardest first - I shopped for Manhattan coops and the only ones I saw demanded at least 30% downpayment and such substantial liquid cash reserves after closing that I could not qualify - nevertheless, people did qualify for those coops - since inventory has been low for many years, the qualified buyers and not-so-qualified buyers do not represent a huge proportion of New Yorkers or even Manhattanites - the coop boards will not prop up the market, necessarily, but don't look to see massive defaults in that sector
dco, with all the mistakes you make in your comments, you are not one to evaluate anyone else's credibility. What is your basis for saying that all these coops suddenly changed the standards they had in place for decades? Oh, you have no basis for the nonsense that you spew.
"Yes, of course there will be some foreclosures, some price decreases, some people who are stuck with an ARM and can't refinance--but in Manhattan it's hard to see how this is a tsunami given the relative wealth of the population and strict requirements of coops which are most of the inventory. "
Agreed, the sub-prime factors are less prevalent elsewhere, but NYC gets the bonus of being *much* more expensive to start, and then the reason it was expensive in the first place - Wall Street money - is going down the tubes. So, it might be less of a tsunami, but there is a bigger tsunami hitting in Dec....
"Manhattan is the most insanely expensive place to live regarding cost by psf."
Actually Trompiloco, Manhattan may no longer be in the top 10 most expensive places to live anymore. Compared to other large cities around the world, Manhattan is cheap. Hey, even Crusties can live here.
Steve has an interest only ARM on his codo in Fire ISland???? Holy crap someone with such a poor understanding of finance is trying to tell us what the RE market will do?
Steve why didnt you put your condo on a credit card?
mkratter, credibility on what issue? That most co-ops require 20% or more for a down payment? Indeed, he lived in a place (in 1999) that was 15% that moved to 20% but he is still completely wrong to apply that logic to the majority of the Manhattan market.
I think saying 30-40% declines from 2005 levels is a great soundbite, but not based on any sort of facts or data to support it. There are certainly going to be some people hurt by the economy, loss of jobs, loss of RE value and mortgage rates, but it is impossible to specualte where NYC RE is going to end up. It will probably not be as rosy as some people say and it will probably not be as dire as DCO and Steve say.
A few observations/thoughts...not everyone who bought a condo put 5% down; the ARM's that reset may not hurt as many people in NYC as in Miami or Las Vegas. Why not? Because it is quite likely that a lot of these buyers can afford the extra few hundred dollars/month on their mortgage better than the family in Nevada or Florida because their income is very high. They will have a bit more wiggle room with money that they spend "entertaining" or going out to dinner that they can use when they tighten their belts. I am not implying they will not suffer, just that they may be better suited to weathering the storm or at a minimum buying more time to see what happens.
There are way too many generalities thrown out here as facts that will affect everyone. Things are very rarely black or white. They are more often something muddled in the middle.
In the final analysis, regardless of anecdotal situations with one market or another or one co-op or another, I think we all agree that these specialized financing vehicles should only have been used by sophisticated individuals with cushion in their home purchase. In weak markets, those who purchased a home with these specialized mortgages are at higher risk than ordinary.
JuiceMan, thanks for your response. I still think Steve's original post - regardless of its style - makes a good and necessary point. I'm afraid we're losing the message because of the messenger.
The fact that the overall Manhattan market skews heavily toward co-ops seems less relevant to the discussion when you consider that these ARMs were mortgages entered into fairly recently (past 8 years or less) and that a lot of action in the market involved new condos. Given that, I'd bet a much greater percentage of these ARMS were taken on condos, condos are a larger percentage of available (and hidden) inventory right now, and we have no idea what the financing situation was (but I'd bet a fair number of them were 5-10% down).
Does anyone question that many expensive condos were bought by people who rushed to buy with small down payments convinced that they could sell at a profit or re-finance to a fixed-rate mortgage if they had to? Now that profits and re-financing are both in serious question, what are these people going to do? At the very least, there's gonna be some belt-tightening. At the other end, there'll be panic-selling at a loss. If the panic-selling occurs, it'll affect everything. Well-run, solid co-ops won't be to blame, but anyone trying to sell one will be a victim all the same. Needless to say, properties that AREN'T for sale (the vast majority) are irrelevant. I'd guess that condos represent a greater percentage in the "churn" than they do in the overall market which makes the ARM-financing issue salient.
Again, Steve often makes things seem worse than they are - granted - but this problem seems valid. In a market as big and talked-about as Manhattan, there are going to be quite a few bad apples and it won't take a lot to send things down, regardless of the percentage of the overall market these properties represent.
JKB, well said and I agree. There are certainly people that stretched themselves into condos and it will impact Manhattan to some extent. I also agree with mkratter's statement that "we all agree that these specialized financing vehicles should only have been used by sophisticated individuals with cushion in their home purchase". I just don't understand why a thread like this needs to start with "all is lost, Tsunami Ahead!" and proceed to make blanket statements that are overblown and completely wrong.
I think most are missing the point. It's the lending standards, that have changed overnight. Bank requirements are at it's toughest level, in decades. For years weak lending standards, propelled RE literally throughout the world. Now imagine, that you eliminate 50% of those buyers, in the future.
Do you guys get it, it was an artificial market. It had no basis. Just like the stock market, to a large extent. For years Banks have been showing these incredible profits, now we know how they were doing it. It was selling paper, that was artificial inflated, in the first place. That's the reason we will see such dramatic corrections in both RE and world markets.
Most of you, are not thinking of the future, some of you are assuming, that demand is currently at similar levels. How in the world can it be? With far less people being able to qualify for mortgages in the future, how is inventory going to move? Now add in additional inventory poised to hit and you have a classic supply and demand issue. Thinking of every excuse, to convince yourself, that you didn't buy at the height of the market, is not going to change market fundamentals.
I just can't understand why people just don't see the devastation on the horizon.
dco, do you even read the comments? Do you not understand the point? Banks around the country might have loosened lending standards the last few years, but Manhattan co-ops by and large did not. The financial status of buyers are the same now as the past few years, because these co-ops did not lessen their standards.
Mr Hanley and DCO you both have a limited knowledge of real estate. The majority of coops in Manhattan have had very strick standards in down payments and credit checks, having bought one coop I learned my lesson quickly. The board required my entire life history and bank records, something DCO will never have to worry about. When I sold, 2 buyers were rejected because of income verification.From that point on I only bought condos. In Mr. Hanleys case with respect to that rat infested tenement at 350 bleeker which in 1999 probably had no down payment requirement and no credit check, how you can use that as an example of coops taking less down payments. That says it all about Mr. Hanley, once again making comments that do not reflect the market conditions at all. DCO you post nothing of value except you plead with anyone who will listen that this catastrophic crash is coming and the market regardless of what neighborhood you own in will decrease fifty percent.
LICComment and zorter- So let me get this right. The two of you hold the position that, tightening credit on potential buyers will have, no affect on NYC RE. And the reason, is that coops were impervious to scrupulous lending over the years. Just so we understand for the future, is this your position on the matter?
Let me ask you two a question. What's going to happen to coop prices, when all these beautiful condos, with all their amenities, see huge price decreases? Because according to you two, it won't affect it at all.
Tightening lending standards benefited all RE, including coops. I'm beginning to see the pattern. As the news gets worse, so does the bullish excuses. What's next boys?
This out of the blue link posted here is rather interesting, stevejhx is Steve Hanley, and he is a crusader for higher standards:
According to the file, Steve proposed "Changes To Purchase, Sublet And Refinance Applications"
In order to ensure the financial integrity of the corporation and to safeguard what for most shareholders is their largest single investment, at Vice President Steve Hanley's suggestion, from now on the Board will request documentation for liquid assets reported as part of the application process, in addition to the customary tax returns. Life insurance will be evaluated at its cash value,
not the death benefit, and there will be some other refinements to the process to make it
clearer and easier to understand.
However, the building also had leaks and moisture seepage and excessive wall moisture and this postponed interior paint touchup work to the hallways, as well as certain hallway carpet replacement causing the building not to be as aesthetically pleasing as it could be, among other problems including that they could not fix temperature swings caused by flushing toilets. Part of this might be that it had of the original 137 apartments, 31 owned by the sponsor.
"Truthfully, I like the banter and have learned from a lot of Bulls and Bears, however we are going to see 30-40% declines from 2005-2006 levels."
"At the other end, there'll be panic-selling at a loss. If the panic-selling occurs, it'll affect everything. Well-run, solid co-ops won't be to blame, but anyone trying to sell one will be a victim all the same."
Talking about panic selling at a 30-40% loss off 2005-2006 prices here... Which means what, 50+% off today's prices? If I bought in 2006 with 5% down, how can sell at 50% loss? That's not a loss, that's a foreclosure.
Or do you think that what goes through the seller's mind is the following: "Yeah, I bought my place for 1 million with 50k down. My rate is about to adjust up, and there is no way I can afford the new monthly payment. So I am going to sell the place for 500k and I will just cut my lender a personal check for 450k"... Yep, likely scenario. I am sure sellers like that will be all over the place in the coming months.
Do you guys know of anyone, anywhere in the US, who sold a property for a 50% loss?
BGaria- How about New Construction? No I don't think people will be inclined to take a 50% lose. And if we see those levels, then those who are inclined to sell, at such a lose, would obviously be those who have no choice. However its the New Construction, with thousands of units poised to hit the market, that will see the biggest declines.
"No I don't think people will be inclined to take a 50% lose."
It's not that they wouldn't be inclined to take such a loss, they wouldn't be able to take such a loss.
"And if we see those levels, then those who are inclined to sell, at such a lose, would obviously be those who have no choice."
I don't understand how a desperate seller can possibly take a 50% loss. It's just not possible. He will foreclose, he won't take a 50% loss. Again, if I bought a million dollar place with 50k down, and I can't afford to keep it, then I can't sell it for 500k. To make good on the loan, I will have to take out 450k (or more) out of my pocket, but if I had that kind of money to begin with, then I can afford to keep the place, no? There is no such thing as 50% loss (at least not in 99.9% of the cases).
"However its the New Construction, with thousands of units poised to hit the market, that will see the biggest declines."
How can something see a decline in market price if it's not even on the market yet? Please name one building under costruction that will see 50% cuts (and please don't say "all of them will"). Cuts from what price level? Cuts from where it would have been priced today?
BGaria- Perhaps your not understanding my point. Actually I see the problem. I'm not saying that a particular unit that was bought in 2005-2006 will be the only ones to sell. My point is if you bought in say 1995 and saw your property increase over those years, you might have seen an increase of say 200% by 2005-2006. These are the people that will see decreases at those levels as well. You are just concentrating on the last 2 years. So you will make a profit, not just as large. Not to mention, if you bought a unit for cash or took out a small mortgage you wouldn't be "automatically" in foreclosure. What if you have no choice to sell. It could be for any reason. (ie Relocate)
BGaria - "How can something see a decline in market price if it's not even on the market yet? Please name one building under costruction that will see 50% cuts (and please don't say "all of them will"). Cuts from what price level? Cuts from where it would have been priced today?"
I think you know full well, that when talking about New Construction that I'm referring to current asking prices.
"I'm not saying that a particular unit that was bought in 2005-2006 will be the only ones to sell."
Of course not, but the implications on this board ar that people who bought in the last few years were given too much money and bought places they can't afford.... That they will be tomorrow's forced sellers... That they will be desperate flippers who are suddenly under-water, and will get out of their denial and start panicing and lowering their offers drastically... Nobody on this board has said that people with 60, 90, 100% equity in their homes will drive the prices down 50%, and, frankly, I don't think they will.
"What if you have no choice to sell. It could be for any reason. (ie Relocate)"
Honestly, now... How many people would lower their prices by 50% in the matter of months or a couple of years because they HAVE to relocate. Tell you one thing: If I bought a 3-BR co-op in 1995 and have 80+% equity in it today, there is absolutely no way I would lower my price from, say, 2 million to less than 1 million in a year because "I have to relocate." I mean, how many people would do that?
"I think you know full well, that when talking about New Construction that I'm referring to current asking prices."
I thought that's what you meant, but I would still like to see a concrete example. 5 Franklin? William Beaver? Something that just broke ground? What new construction are you referring to?
NEW CONOSTRUCTION: Over and over we discuss the same things about new construction. Those hardest hit and who will be in real jams are the people who bought in 2005 onward (maybe 2004) with only 5-7 year time horizons. Just as they are ready to sell oddly configured units with too-small rooms that they paid extraordinary premiums for because of fancy amenities and because they were new, it is doubtful the market will have increased from where it is now and may well drop. At the same time, the new construction finishes they were so drawn to and paid such a premium for--laquered this and that, granites and marbles and new stainless appliances--will have started to chip and stain and age and not look as great and construction flaws will be evident. Some units may even need a degree of renovation. And worse of all, any tax abatement will be close to expiring resulting in the monthlies rocketing upward making those fancy amenities increasingly difficult to support. To lessen the blow of a sudden 50% increase in monthlies the year tax abatements expire, many buildings will responsibly build a reserve fund by phasing in the increase in the years prior to the abatement's expiration. So even at 5-7 years post abatement, monthlies may be increasing. At the same time amenities may have to be cut to keep costs under control. That roof-top triple deck lounge, the three supervised children's playrooms, the "spa," the 24-hour concierge may become luxuries of the past in many of these buildings. Add all this up: ungenerous layouts, flat or down market, aging fixtures and emerging construction flaws, sharply higher monthly charges around the corner or already in place, reduced amenities and what do you get: a very bad prognosis for new construction re-sales in the coming 5 years.
Purchasing new construction today (and last year and the year before, frankly) carries a higher risk from an investment standpoint than purchases in established buildings with long-standing track records, and too many people have ignored that. Ignore risk and fail to consider your ability to assume risk is a recipe for financial disaster. I still have no idea why so many otherwise intelligent, educated, savvy people have ignored this in recent times in NYC.
Owners with significant equity in their apartment and who need to leave the city for some reason will simply rent out their place. This is what happened in the 70's and 80's during the "escape from New York" years. Owners without mortgages just rented or sublet their place or let their kids live in it. Certainly condo owners have a much easier time doing this than co-op owners but it's still possible.
As for new construction purchased within the past 5 years with 80%-95% financing, those properties still have significant mortgages and it's unlikely that the owners will be able to rent them out for enough to cover the mortgage, taxes and common charges. To use the stock market analogy new condo purchases are growth plays not value plays. With the costs, taxes and fees in and out and the carrying costs you need a 15% increase to break even and a lot more appreciation than that to make it a good investment.
dco, "Let me ask you two a question. What's going to happen to coop prices, when all these beautiful condos, with all their amenities, see huge price decreases?"
Coops are priced lower than condos. That differential will continue to exist, so logically as condo prices come down coop prices will go down as well. I don't think anyone has been arguing that coops would be immune to price decreases in a catastrophic scenario simply because they have tighter lending standards. The point is that you will not be seeing people default in droves on their coop loans. It's the "beautiful condos with all their condos" where you have more leverage and no one at the door holding their thumbs down when a buyer doesn't suit their arbitrary (usually very tough) reserve standards. And if buyers are confronted with shiny new condos with granite countertops and cold storage rooms at 30% off original price, of course they are not going to pay 100% of peak prices on the coops.
The coop prices would come down when condo prices come down, but by a smaller percentage than new construction condo. If buyers are willing to pay 30% more for condo vs. coop today I'd bet that percentage will be much lower if in 10 years the property taxes make the condo's monthly taxes & common charges double what they are today while the coops maintenance has increased at a much slower rate.
Also many co-op boards are sitting on massive amounts of equity and cash. Most also have a buy back priveledge or ability. Co-op board can buy units from owners to avoid precipitous drop sin their buildings and/or foreclosures.
"That differential will continue to exist, so logically as condo prices come down coop prices will go down as well."
Yes, and the differential between condo and co-op prices should narrow since one of the advantages to buying a condo (less than 20% down) may be history. This will be especially true in sub $1M markets where 20% down is harder to come by.
Didn't some natives in Southeast Asia have a "6th sense" regarding the tsunami and were able to get to safe high land before it began? Maybe that is Steve.
ranter - I've never posted under any name but mine own. So please....
petrfitz: "many co-op boards are sitting on massive amounts of equity and cash."
Proof? Most, in fact, do not, because most have underlying mortgages.
"Most also have a buy back priveledge or ability."
What? You claim to be a real-estate guru and you say this nonsense? You don't get warrants when you buy into a co-op; you get shares whose dividend is the right to live in a specific unit.
"Co-op board can buy units from owners to avoid precipitous drop sin their buildings and/or foreclosures."
That's absurd. Why would a co-op board buy an apartment for, say, $1 million, if the market price is just $800,000? They can't rent them out, they can't get a mortgage for them, and shareholders who don't have to sell would go CRAZY! What a waste of money! Could you imagine board president saying, "Okay, guys, everybody start chipping in, we need $3 million to buy 3 apartments worth only $2 million on the market."
How long will he last in office?
That is dumber than your "chauffeur-driven Prius" comment.
Condos have other perceived advantages over coops than smaller downpayment requirements. No board approval for resales or sublets. No requirement to escrow two years of maintenance charges at closing.
What affect does the coop qualifying process where young professionals transferred mommy and daddy's money into their account to qualify and then transferred it right back out have on this whole scenario?
Steve - coops do have underlying mortgages and they are still sitting on tons of equity and it is common for coops to have underlying rights to purchase units.
i guess that you think a co-op board that is sitting on cash and leverage would jsut let their units go into foreclosure?
Steve a prius and a driver is smart - an interest only ARM is moronic.
Re: coops purchasing units: that is more theoretical than practical. Only in dire circumstances. Not at all run of the mill. Very expensive use of coop resources. Won't be done unless something nuts is going to happen. Won't happen because someone is selling for 20% below market value. Maybe some Park Ave. coop I'm not familiar with does it, but I've never actually heard of a coop buying to prevent too low a sales price for a unit in my 19 years of NYC coop ownership and involvement in the market. I've seen coops buy units to upgrade the super's living conditions or to convert the unit to a gym or something, but not to protect values in the building. Possible, not it really just isn't done. (This idea is akin to the technically possible things you learn in law school Corporations class that shareholders can do but which in reality would garner laughs if tried because it isn't how the real world operates. Reading the instruction manual doesn't always tell you how things work in practice.)
Boss77: What does mom and dad transferring money into an account do to gum up the works? Not too much. If savings are out of whack with earnings, you can bet a coop board will request bank statements going back in time to see any odd influxes of cash that aren't explained. Already the buyer has to give 3 years of tax returns typically, and if the account in question is yielding interest or dividends, they should be reported in the tax returns. If not, clearly the money is "new" and will raise yellow flags. Boards will also ask outright where monies came from. Most boards aren't stupid. And while net worth in important, debt to EARNINGS ratios are the primary focus. If you are a student with $500,000 in the bank, you aren't going to impress anyone on a board. You will be rejected. The law is not an ass is a commonly taught adage in law school. Coop boards are not stupid might as well be another.
"coops do have underlying mortgages and they are still sitting on tons of equity"
Equity in what sense? Cash on hand? That's an asset, not equity, which is a liability. Unless you mean the increase in value of the unit, which is not really anything until it is realized.
"and it is common for coops to have underlying rights to purchase units"
Not only is it not common, it's not necessary. Units are not "purchased" in co-ops; shares are. Shareholders are granted a proprietary lease. The corporation has the right to cancel the lease under certain circumstances, though an eviction proceeding. The corporation DOES NOT have a right of first refusal as is the case with condominiums. However, all business companies in New York State - and co-ops are considered business companies - are protected by law against action for ultra vires. Look that up and get back to me when you find out what it is.
We just rewrote our proprietary lease, and I was the principal proponent of the project. I know quite a bit about the subject. No standard proprietary lease grants the corporation a right to "buy back" shares, though it is sometimes done in the case of a nuisance tenant.
"i guess that you think a co-op board that is sitting on cash and leverage would jsut let their units go into foreclosure?"
What "leverage"? If you ever looked at a co-op balance sheet you will see that they run an accumulated deficit because depreciation exceeds the operating cash on hand.
Just so you know, I just got out of a co-op shareholders meeting where the shareholders agreed to take on a short-term self-amortizing ground mortgage to finance major repairs. Once a co-op has an underlying mortgage, IT IS NEARLY IMPOSSIBLE for it to get further financing. The complex I live in is valued at about $30 million; we're getting a $3.2 million mortgage and a $500,000 line of credit. The mortgage broker made quite clear what I already knew: once you have that mortgage, on top of co-op loans, the risk is too high for most lenders to lend additional money. There are 3 layers of loans, and nobody wants to hold a 4th lien.
"an interest only ARM is moronic."
For some people it is; for others it provides flexibility. In any case I can pay down the balance in full, and pay it as if it were an amortizing mortgage. No risk.
It is quite apparent, petrfitz, that despite your real-estate puffery, you don't know the first thing about co-ops. No wonder you go by that handsome moniker, Sneaky Pete.
steve you are completely wrong once again. just because a coop has an underlying mortgage it does not mean that the mortgage is new and/or is for a majority of the buildings value. For example I am a sponsor on a coop building worth 4 million and has an underlying mortgage of 600K. This building is also sitting on cash of $200K. Are you saying that this building cannot get further financing?
and your interest only ARM on a condo unit is moronic.
For those that are not familiar with the billiards subculture, a Sneaky Pete is a high quality billiard cue made to look as much as possible like an inexpensive barroom cue.
A take on his handsome moniker could be that he is willfully misrepresenting his knowledge of real estate.
It's going to be a whole new ball game with if the FED takes over Fannie. More than half the mortgages are held by Fannie. The government will be handing all kinds of candy and free taxpayer money to it's new mortgage holding tapped out customers. Like reduce mortgage payments, extended terms going up to 45 years. New tax incentives for new home buyers and buyers of foreclosed property will also be a new gift I doubt foreclosures will continue to occur at the current rate now that the tax payers are footing the bill. Thanks to people like stevejhx and other taxpayers (tax paying renters included) for helping those who couldn't afford the monthly mortgage to begin with.
Steve, I have no idea what your use of ultra vires above is supposed to mean in the context in which you use it. For one, Mr. Smartypants, I didn't have to look it up (it is a concept taught in the first 2 weeks of law school). Second, following "however" as you used it above doesn't make sense.
"Ignore risk and fail to consider your ability to assume risk is a recipe for financial disaster. I still have no idea why so many otherwise intelligent, educated, savvy people have ignored this in recent times in NYC."
I recall a really smart, younger guy who sat near me at work, and in late 2006 he and his wife went through an elaborate financing to get their condo. I mean, the fact that none of their peers could put together similar terms today, if this guy wanted to get the condo off his hands, is a real problem.
Sorry if I'm belaboring the obvious, but I would word it this way: What none of us knows is where the psychological tipping point is. When does the fear that it'll get tougher to sell your condo/co-op six months from now, lead people to more aggressively cut their prices to get access to a larger pool of potential bidders.
"When does the fear that it'll get tougher to sell.."
Depends on whether the owner wants/needs to sell. It seems as though some assume that anyone who owns Manhattan real estate will sell it the moment its value decreases. That would be true if 100% of apartment owners only bought in order to make a quick profit and do not wish to live in their real estate. People looking for a precipitous crash need to see people experience sharp declines in incomes, loss of employment, and toxic mortgages/rising common charges. That's assuming many things.
I believe many people have taken an interest rate risk in order to be able to afford payments for a larger apartment by using ARMs. Whether that leads to actual losses or financial difficulies is unknown but that does not mean that the risk is not there.
lowery - I essentially agree, but aren't some of the people who lose their jobs current co-op owners? (as opposed to johnny-come-lately, overextended condo buyers, for example). how do those people behave, and what effect does that have?
Regarding Manhattan ARMS I asked the question on Urban Digs of their mortgage person in a thread.(Mortgage Market Update: Version 1
Posted by MortgageMan on August 22, 2008 at 3.02 PM)
See Link below.
I was surprise at how many ARMs this one mortgage broker had in his experience.
"What percentage of Manhattan buyers are getting ARMs? Is that percentage higher or lower than it has been over the last 2 years?
Are co-op boards still allowing new owners to finance with ARMS?"
He answered:
"I would say that about 85% of my buyers get ARM's on purchases over $1MM and about 60% on less than $1MM.
Jumbo 30 Year mortgage rates are extremley high at this time, somewhere in the area of 8.25%. So to keep a reasonable monthly payment, many buyers choose to opt for the ARM's; which generally carry lower rates.
CO-OP's are still allowing adjustable rate mortgages but generally require more for down payment.
Keep in mind that if a bank offers a ARM product, they still underwrite the loan using the fully amortizing rate. Which means that if you get a rate of 6.50% on a ARM, the bank will add the margin to the rate (about 2.25%) and will use it to calculate your debt to income ratio, should the rates adjust. A very smart move to reduce default or foreclosure risk down the line."
Pez, "Whether that leads to actual losses or financial difficulies is unknown but that does not mean that the risk is not there." I agree. The above post suggests the risk is higher than perhaps expected, and in a way belying the adage that conservative coop boards have nixed any possibility of a crash. Just to be plays devil's advocate here, assume hypothetically a couple bought a 3-brm coop in 2003 with an ARM. Assume their reset is +2.25%. Could their new payment be still lower than the initial payment on a 2007 ARM or fixed-rate on the same apartment at 2007's prices? Could their income not be higher t
ARM Resets: Tsunami Ahead
Option ARMs and Interest Only (IOs) loans scheduled to reset in the next few years will add more trouble. These loans represent about 15% of securitized loans and some have negatively amortized, increasing the payments and making refinancing more difficult. According to data from Barclay's, about $300 billion in option ARMs and $820 billion in IO's are set to recast. The results could be payment shocks over 80% for option ARMs and over 60% for IOs according to Barclay's.
http://www.cnbc.com/id/26529207
No effect on Manhattan, where no one has a jumbo interest-only ARM about to reset. Those people just don't exist.
You're being sarcastic about these people not existing in Manhattan right?
Did co-op's change their rules over the past six years to approve as many financially unqualified people as possible? I wasn't aware of that, maybe steve has some data he can share with us on the subject?
ah yes juice man, but what about all those new condos that flew off the shelves at $1400 psf?
JuiceMan: "Did co-op's change their rules over the past six years to approve as many financially unqualified people as possible?"
Did co-ops allow 10% down & 15% down. Yes. Did they allow interest-only jumbo ARMS? Yes. Did they approve loans for people who have lost their jobs or have seen their bonuses reduced drastically? Yes.
Come back into reality, JuiceMan.
"Did co-ops allow 10% down & 15% down. Yes. Did they allow interest-only jumbo ARMS? Yes."
Really? How do you know that steve?
Because the co-op where I used to live allowed 15% down, which they have recently changed back to 20%. And I have an interest-only ARM (not jumbo) on my co-op on Fire Island.
That's how I know, JuiceMan.
You really have overdosed on the Real-Estate Kool-Aid.
stevejhx - please stop posting here. You had absolutely no value and people generally don't like you.
stevejhx - please stop posting here. You ADD absolutely no value and people generally don't like you.
steve, you are generalizing about all co-ops in Manhattan allowing 90% loans and IOs, because one co-op that you know allowed an 85% loan, and because you have an ARM on a co-op on Fire Island. And you wonder why people find you annoying.
Kool Aid! Oh Yeah!
http://www.youtube.com/watch?v=nBeUGqeYsQg
steve, sample size = 2 = fact
"steve, sample size = 2 = fact"
You asked how I knew it was true. I told you. I don't need to prove anything other than that it happened, nor do I need to take a survey of the requirements of every building in Manhattan to prove that point.
It did happen.
"You ADD absolutely no value and people generally don't like you."
That's a very value-adding comment on your part, Riv_Drive.
"you are generalizing about all co-ops in Manhattan allowing 90% loans and IOs"
No I'm not - I said it happened.
Guys: denial is more than a river.
Steve, please go away.
The vast, vast majority of coops in Manh have and still do require 20%+ down. This is such common knowledge it seems silly we're even discussing it. Better buildings even up the ante very often. For example, virtually no coops in the Gold Coast area of the central Village accept less than 25% down and many require more. A handful of coops in Manh may have got themselves into trouble with lax down payment requirements, liberal subletting policies, permitting people without adequate reserves/income to purchase using exotic financing vehicles...but that is a tiny minority. In the 80 open houses I've attended in the last 12 monthy not a single building would fall into such a minority. I bet you'd be hard-pressed to find a dozen coops that permit less than 20% down. If you bought in one of these odd-ball coops, good luck to you--you get what you paid for. If you are going to toss away the greatest benefit of cooperative living (that is, reducing the investment risk by insisting on solid finances/financing by purchasers) then why even bother living in a coop?
If you have 20+% down as a requirement, the type of financing matters less as the financial reserves of the individual increase. Obviously, someone of substantial means poses less risk with a 5/1 ARM than a first-year college grad working at Citibank.
I really don't understand the point of this thread.
Wachovia has the relative worst exposure to pick a pay and option arm resets heading into 2009-2011. I dont think they will survive in their current form as time goes on and we see who didnt make it; WaMu, GSE's too.
Hmm, another post where steve's analysis and conclusions are shown to be flawed. Interesting . . .
"In the 80 open houses I've attended in the last 12 monthly not a single building would fall into such a minority."
Should we believe kylewest who has recently bought a co-op and has done more research on the Manhattan market than anyone on this board or, should we believe:
"Because the co-op where I used to live allowed 15% down, which they have recently changed back to 20%. And I have an interest-only ARM (not jumbo) on my co-op on Fire Island."
…..a 15% down co-op (that you no longer live in) and an underwater co-op on Fire Island? LMAO!
Steve, who should we believe? What is the address of the co-op you used to live in?
Steve, please please please please go away. You are more annoying each day.
sample size = 1.5 = fact
My wife and I bought our apartment about 16 months ago and it is a coop. We looked at about 100 apartments over a 1 year period before purchsing our apartment. I beieve that we saw about 3 Coops that were less than 20% down and only about 4 apartments were condos. On top of this, it is pretty standard that buyers must have the income reserves. We also had to put 2 years of maintenance into escrow with the coop to give additional insurance against financial uncertainty in the future. Our coop has done this with most buyers and I am confident that other coops did this as well.
I am not suggesting that changes in ARMs or IO loans will not hurt some people, but I think it is disengenuous to start to a thread by saying that a tsunami is ahead when you have based it on 1 building in Manhattan and a coop on Fire Island. I guess I also find it interesting that Steve calls out people for buying into these 15% building and for getting IO loans, yet this is exactly what he has done. Are you worried about your own situation? From your posts, probably not. Why? because you didn't overreach on your purchase. To turn around and imply that everyone else in Manhattan has overreached is a straw-man argument and doesn't stand up to facts.
Christ people. I've never posted to Streeteasy before, but Steve's right. Maybe the word "tsunami" is a bit strong, but Steve's general point is good. I think anyone but the bully-bulls who pounced on him while providing no plausible counter-argument as far as I can see (JuiceMan, Riv_Drive and LICComment) realize that the market's down and going lower.
It's one layer after another, another set of bad assets and bad mortgage-types being unveiled every month. The rot is deep and if Steve wants to call attention to that, I think that's fair. Unless you can point to "data" pointing to a recovering market (whatever data really is in NYC real estate) then just admit the constant repetition of bad news isn't Steve beating a lonely drum, it's the way things actually are.
Oh, and Waverly, I certainly didn't mean to lump you in with others who disagreed with Steve. You make a good point, too. I will say I've seen plenty of co-ops that allow 10-15% financing, but probably not in "prime" buildings in sought-after areas (your experience seems extreme to me, but I suppose it depends where you're looking).
I agree that the income/financing requirements of many co-ops provides a layer of insulation against the mortgage crisis. Problem is most new development in Manhattan since 2000 has been condos ...
Thanks JKB for seeing the forest through the trees. Regardless of the effects option arms will have on co-op owners, or lack thereof, JKB and Steve are right in that these products are much more vicious and will have a greater fall out than IO-Arms or subprime. Once they were reserved for the banker that wanted to manage his payments and then the flood gates opened and unscrupulous brokers marketed these products to people with the tag line that they could them the a $1M house with 1,000 a month payments. Once these loans reset, and the poor bastard cannot refi out of it because his house is now at least 10% under water (some of these reset at 110%, others at 115%), we are going to have more foreclosures and downward pressure in the market.
Hmmm..steve disappears and new people pop up to "defend" him.
"I think anyone but the bully-bulls who pounced on him while providing no plausible counter-argument as far as I can see "
JKB, The "counter-argument" that you are looking for is that the majority of the Manhattan market is co-op inventory which has much more stringent financing requirements than condo's. I didn't state it because I didn't have to. It is obvious to everyone that lives here. steve made the ridiculous comment that he knows one co-op in Manhattan (that he no longer lives in) that "used to have" a 15% down payment requirement (but is now 20%) and his current co-op on Fire Island allows it. An that was enough for him to claim that most co-ops in Manhattan had these same rules. We then heard very credible rebuttals from kylewest (80 units) and waverly (100 units) where not one had less than a 20% down requirement.
One more thing JKB since you are new to streeteasy, don’t feel too bad for steve. He loves to pounce on people and point out mistakes others have made, sometimes months after the fact. He dishes out far more than he gets, and this one was just too precious to let go.
So steve, what was the address of the co-op that changed from 15 to 20%?
350 Bleecker Street.
JM- You and the "crew" are losing all sort of credibility. Truthfully, I like the banter and have learned from a lot of Bulls and Bears, however we are going to see 30-40% declines from 2005-2006 levels.
In the last 5 years all over this city, people were given mortgagesl, they never would have gotten 10 years ago. From the Financial District to Washington Heights and EVERYTHING in between, will be affected.
350 Bleecker is such a cheesy building, no wonder it allows lower financing, it's a bloody miracle they get anyone willing to live in the 60's disaster.
however, if i recall...they don't allow 15% financing or renting. i'll ask my property manager, but when we were looking for an investment place we stopped by and found the board fairly odd and stringent. i think the woman's name was Armanda or something.
"JM- You and the "crew" are losing all sort of credibility."
Why am I losing credibility dco? What about the above posts was incorrect in your mind?
steve stated that it was 15% when he lived there but it has since changed to 20%.
I have heard no discussion as to what the ARM's reset to. I know some reset to +2 over the 1 year tBill.
over the past couple of months the 1 year tbill was sitting at @1.5 so many of these ARM resets are resetting DOWNWARD to cheaper rates.
I don't think anyone on here seriously argues that Manhattan differs in EVERY way from every other RE market in America and is immune to bad times. But that is the strawman set up and pointlessly torn down by some on these boards. In their rush to point out how Manhattan can indeed suffer declines in RE values, these same people tend to overlook the ways in which Manhattan is legitimately different than most markets. The number of people who over-extended themselves potentially to the breaking point with exotic or unusual financing products is I suspect much, much lower in Manhattan than in other markets. Yes, of course there will be some foreclosures, some price decreases, some people who are stuck with an ARM and can't refinance--but in Manhattan it's hard to see how this is a tsunami given the relative wealth of the population and strict requirements of coops which are most of the inventory.
JuiceMan- Your clear denial, that people were allowed to put 10-15% down on units. You refuse to accept, that coops acted just as recklessly, as condos. They are all in the same boat. If anything, condos may have acted worse by allowing only 5%, in some cases.
dco - you are wrong a majority of coops - i would guess well above 70% did not allow sales without 20% down.
OK, uberbulls, then how do you explain this: Manhattan is a boro in a city whose median family income is on the neighborhood of 70K if that much. Manhattan is the most insanely expensive place to live regarding cost by psf. Not every family in Manhattan can have an income that is 4 times the city average, right? So, how could normal families buy condos and co-ops in Manhattan in the last 4 years. The answer: overextending themselves. Their may not be "the rule" but it would be amazing if it were such a small exception as to be irrelevant for the RE market. I mean, if people have been overextending themselves all across the country with the blessing of the banks and the innovative mortgage industry, how come they haven't in the most expensive place to buy? Oh, yes, how could I forget: the coop boards. They'll protect us from Global Warming too.
dco, read the thread again. The conversation states clearly that the majority of co-ops have and will continue to require 20%+ down. Co-op's are the majority of inventory in Manhattan. So far we have 180 co-op's that require 20% or more down, 1 that was 15% which is now 20%, and 1 on Fire Island that is 15%. What don't you understand? Find me data that says differently and I'm happy to consider. How is that denial? The data is right here. Can't you do some of your famous "analysis" to come up with the right answer?
petrfitz- With all the exotic loans over the years, it was very easy to give the impression that you were putting more down. And frankly, I dispute your claim.
Ok, lets say we use 70%. What about the other 30%. That is a very high number anyway. So just about, 99.9% of the condos and 30% of the coops, allowed less then 20% down. Ok, of you say so. I'll agree.
Trompiloco - actually according to the last census - white families now make up that largest percentage of families living in NY - about 53%. Their median income is around $320K per year.
some buyers sold smaller apts and used the tax-free profits for large downpayments on larger apartments - not every buyer of a Manhattan apartment bought since 2002 - it's the condo market that's going to be hit hardest first - I shopped for Manhattan coops and the only ones I saw demanded at least 30% downpayment and such substantial liquid cash reserves after closing that I could not qualify - nevertheless, people did qualify for those coops - since inventory has been low for many years, the qualified buyers and not-so-qualified buyers do not represent a huge proportion of New Yorkers or even Manhattanites - the coop boards will not prop up the market, necessarily, but don't look to see massive defaults in that sector
sorry i said living in "NY" when I should have said living in Manhattan
dco, with all the mistakes you make in your comments, you are not one to evaluate anyone else's credibility. What is your basis for saying that all these coops suddenly changed the standards they had in place for decades? Oh, you have no basis for the nonsense that you spew.
"Yes, of course there will be some foreclosures, some price decreases, some people who are stuck with an ARM and can't refinance--but in Manhattan it's hard to see how this is a tsunami given the relative wealth of the population and strict requirements of coops which are most of the inventory. "
Agreed, the sub-prime factors are less prevalent elsewhere, but NYC gets the bonus of being *much* more expensive to start, and then the reason it was expensive in the first place - Wall Street money - is going down the tubes. So, it might be less of a tsunami, but there is a bigger tsunami hitting in Dec....
I agree with JKB - keep it coming Stevejhx - I rely on this board for views that challenge my own thinking.
"Manhattan is the most insanely expensive place to live regarding cost by psf."
Actually Trompiloco, Manhattan may no longer be in the top 10 most expensive places to live anymore. Compared to other large cities around the world, Manhattan is cheap. Hey, even Crusties can live here.
stevejhx does have credibility on this issue and he was the 2nd Vice President in the 350 Bleecker co-op around the Spring of 1999.
http://www.350bleecker.com/newsletters/pdf/116.pdf
Steve has an interest only ARM on his codo in Fire ISland???? Holy crap someone with such a poor understanding of finance is trying to tell us what the RE market will do?
Steve why didnt you put your condo on a credit card?
mkratter, credibility on what issue? That most co-ops require 20% or more for a down payment? Indeed, he lived in a place (in 1999) that was 15% that moved to 20% but he is still completely wrong to apply that logic to the majority of the Manhattan market.
I think saying 30-40% declines from 2005 levels is a great soundbite, but not based on any sort of facts or data to support it. There are certainly going to be some people hurt by the economy, loss of jobs, loss of RE value and mortgage rates, but it is impossible to specualte where NYC RE is going to end up. It will probably not be as rosy as some people say and it will probably not be as dire as DCO and Steve say.
A few observations/thoughts...not everyone who bought a condo put 5% down; the ARM's that reset may not hurt as many people in NYC as in Miami or Las Vegas. Why not? Because it is quite likely that a lot of these buyers can afford the extra few hundred dollars/month on their mortgage better than the family in Nevada or Florida because their income is very high. They will have a bit more wiggle room with money that they spend "entertaining" or going out to dinner that they can use when they tighten their belts. I am not implying they will not suffer, just that they may be better suited to weathering the storm or at a minimum buying more time to see what happens.
There are way too many generalities thrown out here as facts that will affect everyone. Things are very rarely black or white. They are more often something muddled in the middle.
In the final analysis, regardless of anecdotal situations with one market or another or one co-op or another, I think we all agree that these specialized financing vehicles should only have been used by sophisticated individuals with cushion in their home purchase. In weak markets, those who purchased a home with these specialized mortgages are at higher risk than ordinary.
My 2c
JuiceMan, thanks for your response. I still think Steve's original post - regardless of its style - makes a good and necessary point. I'm afraid we're losing the message because of the messenger.
The fact that the overall Manhattan market skews heavily toward co-ops seems less relevant to the discussion when you consider that these ARMs were mortgages entered into fairly recently (past 8 years or less) and that a lot of action in the market involved new condos. Given that, I'd bet a much greater percentage of these ARMS were taken on condos, condos are a larger percentage of available (and hidden) inventory right now, and we have no idea what the financing situation was (but I'd bet a fair number of them were 5-10% down).
Does anyone question that many expensive condos were bought by people who rushed to buy with small down payments convinced that they could sell at a profit or re-finance to a fixed-rate mortgage if they had to? Now that profits and re-financing are both in serious question, what are these people going to do? At the very least, there's gonna be some belt-tightening. At the other end, there'll be panic-selling at a loss. If the panic-selling occurs, it'll affect everything. Well-run, solid co-ops won't be to blame, but anyone trying to sell one will be a victim all the same. Needless to say, properties that AREN'T for sale (the vast majority) are irrelevant. I'd guess that condos represent a greater percentage in the "churn" than they do in the overall market which makes the ARM-financing issue salient.
Again, Steve often makes things seem worse than they are - granted - but this problem seems valid. In a market as big and talked-about as Manhattan, there are going to be quite a few bad apples and it won't take a lot to send things down, regardless of the percentage of the overall market these properties represent.
Again, happy to hear alternative theories.
JKB, well said and I agree. There are certainly people that stretched themselves into condos and it will impact Manhattan to some extent. I also agree with mkratter's statement that "we all agree that these specialized financing vehicles should only have been used by sophisticated individuals with cushion in their home purchase". I just don't understand why a thread like this needs to start with "all is lost, Tsunami Ahead!" and proceed to make blanket statements that are overblown and completely wrong.
I think most are missing the point. It's the lending standards, that have changed overnight. Bank requirements are at it's toughest level, in decades. For years weak lending standards, propelled RE literally throughout the world. Now imagine, that you eliminate 50% of those buyers, in the future.
Do you guys get it, it was an artificial market. It had no basis. Just like the stock market, to a large extent. For years Banks have been showing these incredible profits, now we know how they were doing it. It was selling paper, that was artificial inflated, in the first place. That's the reason we will see such dramatic corrections in both RE and world markets.
Most of you, are not thinking of the future, some of you are assuming, that demand is currently at similar levels. How in the world can it be? With far less people being able to qualify for mortgages in the future, how is inventory going to move? Now add in additional inventory poised to hit and you have a classic supply and demand issue. Thinking of every excuse, to convince yourself, that you didn't buy at the height of the market, is not going to change market fundamentals.
I just can't understand why people just don't see the devastation on the horizon.
dco, do you even read the comments? Do you not understand the point? Banks around the country might have loosened lending standards the last few years, but Manhattan co-ops by and large did not. The financial status of buyers are the same now as the past few years, because these co-ops did not lessen their standards.
So what is your next nonsense argument?
Mr Hanley and DCO you both have a limited knowledge of real estate. The majority of coops in Manhattan have had very strick standards in down payments and credit checks, having bought one coop I learned my lesson quickly. The board required my entire life history and bank records, something DCO will never have to worry about. When I sold, 2 buyers were rejected because of income verification.From that point on I only bought condos. In Mr. Hanleys case with respect to that rat infested tenement at 350 bleeker which in 1999 probably had no down payment requirement and no credit check, how you can use that as an example of coops taking less down payments. That says it all about Mr. Hanley, once again making comments that do not reflect the market conditions at all. DCO you post nothing of value except you plead with anyone who will listen that this catastrophic crash is coming and the market regardless of what neighborhood you own in will decrease fifty percent.
LICComment and zorter- So let me get this right. The two of you hold the position that, tightening credit on potential buyers will have, no affect on NYC RE. And the reason, is that coops were impervious to scrupulous lending over the years. Just so we understand for the future, is this your position on the matter?
Let me ask you two a question. What's going to happen to coop prices, when all these beautiful condos, with all their amenities, see huge price decreases? Because according to you two, it won't affect it at all.
Tightening lending standards benefited all RE, including coops. I'm beginning to see the pattern. As the news gets worse, so does the bullish excuses. What's next boys?
This out of the blue link posted here is rather interesting, stevejhx is Steve Hanley, and he is a crusader for higher standards:
According to the file, Steve proposed "Changes To Purchase, Sublet And Refinance Applications"
In order to ensure the financial integrity of the corporation and to safeguard what for most shareholders is their largest single investment, at Vice President Steve Hanley's suggestion, from now on the Board will request documentation for liquid assets reported as part of the application process, in addition to the customary tax returns. Life insurance will be evaluated at its cash value,
not the death benefit, and there will be some other refinements to the process to make it
clearer and easier to understand.
However, the building also had leaks and moisture seepage and excessive wall moisture and this postponed interior paint touchup work to the hallways, as well as certain hallway carpet replacement causing the building not to be as aesthetically pleasing as it could be, among other problems including that they could not fix temperature swings caused by flushing toilets. Part of this might be that it had of the original 137 apartments, 31 owned by the sponsor.
Good catch on the link Zorter
"Truthfully, I like the banter and have learned from a lot of Bulls and Bears, however we are going to see 30-40% declines from 2005-2006 levels."
"At the other end, there'll be panic-selling at a loss. If the panic-selling occurs, it'll affect everything. Well-run, solid co-ops won't be to blame, but anyone trying to sell one will be a victim all the same."
Talking about panic selling at a 30-40% loss off 2005-2006 prices here... Which means what, 50+% off today's prices? If I bought in 2006 with 5% down, how can sell at 50% loss? That's not a loss, that's a foreclosure.
Or do you think that what goes through the seller's mind is the following: "Yeah, I bought my place for 1 million with 50k down. My rate is about to adjust up, and there is no way I can afford the new monthly payment. So I am going to sell the place for 500k and I will just cut my lender a personal check for 450k"... Yep, likely scenario. I am sure sellers like that will be all over the place in the coming months.
Do you guys know of anyone, anywhere in the US, who sold a property for a 50% loss?
BGaria- How about New Construction? No I don't think people will be inclined to take a 50% lose. And if we see those levels, then those who are inclined to sell, at such a lose, would obviously be those who have no choice. However its the New Construction, with thousands of units poised to hit the market, that will see the biggest declines.
"No I don't think people will be inclined to take a 50% lose."
It's not that they wouldn't be inclined to take such a loss, they wouldn't be able to take such a loss.
"And if we see those levels, then those who are inclined to sell, at such a lose, would obviously be those who have no choice."
I don't understand how a desperate seller can possibly take a 50% loss. It's just not possible. He will foreclose, he won't take a 50% loss. Again, if I bought a million dollar place with 50k down, and I can't afford to keep it, then I can't sell it for 500k. To make good on the loan, I will have to take out 450k (or more) out of my pocket, but if I had that kind of money to begin with, then I can afford to keep the place, no? There is no such thing as 50% loss (at least not in 99.9% of the cases).
"However its the New Construction, with thousands of units poised to hit the market, that will see the biggest declines."
How can something see a decline in market price if it's not even on the market yet? Please name one building under costruction that will see 50% cuts (and please don't say "all of them will"). Cuts from what price level? Cuts from where it would have been priced today?
BGaria- Perhaps your not understanding my point. Actually I see the problem. I'm not saying that a particular unit that was bought in 2005-2006 will be the only ones to sell. My point is if you bought in say 1995 and saw your property increase over those years, you might have seen an increase of say 200% by 2005-2006. These are the people that will see decreases at those levels as well. You are just concentrating on the last 2 years. So you will make a profit, not just as large. Not to mention, if you bought a unit for cash or took out a small mortgage you wouldn't be "automatically" in foreclosure. What if you have no choice to sell. It could be for any reason. (ie Relocate)
BGaria - "How can something see a decline in market price if it's not even on the market yet? Please name one building under costruction that will see 50% cuts (and please don't say "all of them will"). Cuts from what price level? Cuts from where it would have been priced today?"
I think you know full well, that when talking about New Construction that I'm referring to current asking prices.
"I'm not saying that a particular unit that was bought in 2005-2006 will be the only ones to sell."
Of course not, but the implications on this board ar that people who bought in the last few years were given too much money and bought places they can't afford.... That they will be tomorrow's forced sellers... That they will be desperate flippers who are suddenly under-water, and will get out of their denial and start panicing and lowering their offers drastically... Nobody on this board has said that people with 60, 90, 100% equity in their homes will drive the prices down 50%, and, frankly, I don't think they will.
"What if you have no choice to sell. It could be for any reason. (ie Relocate)"
Honestly, now... How many people would lower their prices by 50% in the matter of months or a couple of years because they HAVE to relocate. Tell you one thing: If I bought a 3-BR co-op in 1995 and have 80+% equity in it today, there is absolutely no way I would lower my price from, say, 2 million to less than 1 million in a year because "I have to relocate." I mean, how many people would do that?
"I think you know full well, that when talking about New Construction that I'm referring to current asking prices."
I thought that's what you meant, but I would still like to see a concrete example. 5 Franklin? William Beaver? Something that just broke ground? What new construction are you referring to?
NEW CONOSTRUCTION: Over and over we discuss the same things about new construction. Those hardest hit and who will be in real jams are the people who bought in 2005 onward (maybe 2004) with only 5-7 year time horizons. Just as they are ready to sell oddly configured units with too-small rooms that they paid extraordinary premiums for because of fancy amenities and because they were new, it is doubtful the market will have increased from where it is now and may well drop. At the same time, the new construction finishes they were so drawn to and paid such a premium for--laquered this and that, granites and marbles and new stainless appliances--will have started to chip and stain and age and not look as great and construction flaws will be evident. Some units may even need a degree of renovation. And worse of all, any tax abatement will be close to expiring resulting in the monthlies rocketing upward making those fancy amenities increasingly difficult to support. To lessen the blow of a sudden 50% increase in monthlies the year tax abatements expire, many buildings will responsibly build a reserve fund by phasing in the increase in the years prior to the abatement's expiration. So even at 5-7 years post abatement, monthlies may be increasing. At the same time amenities may have to be cut to keep costs under control. That roof-top triple deck lounge, the three supervised children's playrooms, the "spa," the 24-hour concierge may become luxuries of the past in many of these buildings. Add all this up: ungenerous layouts, flat or down market, aging fixtures and emerging construction flaws, sharply higher monthly charges around the corner or already in place, reduced amenities and what do you get: a very bad prognosis for new construction re-sales in the coming 5 years.
Purchasing new construction today (and last year and the year before, frankly) carries a higher risk from an investment standpoint than purchases in established buildings with long-standing track records, and too many people have ignored that. Ignore risk and fail to consider your ability to assume risk is a recipe for financial disaster. I still have no idea why so many otherwise intelligent, educated, savvy people have ignored this in recent times in NYC.
Owners with significant equity in their apartment and who need to leave the city for some reason will simply rent out their place. This is what happened in the 70's and 80's during the "escape from New York" years. Owners without mortgages just rented or sublet their place or let their kids live in it. Certainly condo owners have a much easier time doing this than co-op owners but it's still possible.
As for new construction purchased within the past 5 years with 80%-95% financing, those properties still have significant mortgages and it's unlikely that the owners will be able to rent them out for enough to cover the mortgage, taxes and common charges. To use the stock market analogy new condo purchases are growth plays not value plays. With the costs, taxes and fees in and out and the carrying costs you need a 15% increase to break even and a lot more appreciation than that to make it a good investment.
Nationally, we seem to have hit record foreclosures...
http://news.yahoo.com/story//nm/20080905/bs_nm/usa_housing_foreclosures_dc_2
dco, "Let me ask you two a question. What's going to happen to coop prices, when all these beautiful condos, with all their amenities, see huge price decreases?"
Coops are priced lower than condos. That differential will continue to exist, so logically as condo prices come down coop prices will go down as well. I don't think anyone has been arguing that coops would be immune to price decreases in a catastrophic scenario simply because they have tighter lending standards. The point is that you will not be seeing people default in droves on their coop loans. It's the "beautiful condos with all their condos" where you have more leverage and no one at the door holding their thumbs down when a buyer doesn't suit their arbitrary (usually very tough) reserve standards. And if buyers are confronted with shiny new condos with granite countertops and cold storage rooms at 30% off original price, of course they are not going to pay 100% of peak prices on the coops.
The coop prices would come down when condo prices come down, but by a smaller percentage than new construction condo. If buyers are willing to pay 30% more for condo vs. coop today I'd bet that percentage will be much lower if in 10 years the property taxes make the condo's monthly taxes & common charges double what they are today while the coops maintenance has increased at a much slower rate.
Also many co-op boards are sitting on massive amounts of equity and cash. Most also have a buy back priveledge or ability. Co-op board can buy units from owners to avoid precipitous drop sin their buildings and/or foreclosures.
"That differential will continue to exist, so logically as condo prices come down coop prices will go down as well."
Yes, and the differential between condo and co-op prices should narrow since one of the advantages to buying a condo (less than 20% down) may be history. This will be especially true in sub $1M markets where 20% down is harder to come by.
Didn't some natives in Southeast Asia have a "6th sense" regarding the tsunami and were able to get to safe high land before it began? Maybe that is Steve.
ranter - I've never posted under any name but mine own. So please....
petrfitz: "many co-op boards are sitting on massive amounts of equity and cash."
Proof? Most, in fact, do not, because most have underlying mortgages.
"Most also have a buy back priveledge or ability."
What? You claim to be a real-estate guru and you say this nonsense? You don't get warrants when you buy into a co-op; you get shares whose dividend is the right to live in a specific unit.
"Co-op board can buy units from owners to avoid precipitous drop sin their buildings and/or foreclosures."
That's absurd. Why would a co-op board buy an apartment for, say, $1 million, if the market price is just $800,000? They can't rent them out, they can't get a mortgage for them, and shareholders who don't have to sell would go CRAZY! What a waste of money! Could you imagine board president saying, "Okay, guys, everybody start chipping in, we need $3 million to buy 3 apartments worth only $2 million on the market."
How long will he last in office?
That is dumber than your "chauffeur-driven Prius" comment.
huh?
sorry ranter - I misread your post.
My bad.
Condos have other perceived advantages over coops than smaller downpayment requirements. No board approval for resales or sublets. No requirement to escrow two years of maintenance charges at closing.
What affect does the coop qualifying process where young professionals transferred mommy and daddy's money into their account to qualify and then transferred it right back out have on this whole scenario?
Steve - coops do have underlying mortgages and they are still sitting on tons of equity and it is common for coops to have underlying rights to purchase units.
i guess that you think a co-op board that is sitting on cash and leverage would jsut let their units go into foreclosure?
Steve a prius and a driver is smart - an interest only ARM is moronic.
Re: coops purchasing units: that is more theoretical than practical. Only in dire circumstances. Not at all run of the mill. Very expensive use of coop resources. Won't be done unless something nuts is going to happen. Won't happen because someone is selling for 20% below market value. Maybe some Park Ave. coop I'm not familiar with does it, but I've never actually heard of a coop buying to prevent too low a sales price for a unit in my 19 years of NYC coop ownership and involvement in the market. I've seen coops buy units to upgrade the super's living conditions or to convert the unit to a gym or something, but not to protect values in the building. Possible, not it really just isn't done. (This idea is akin to the technically possible things you learn in law school Corporations class that shareholders can do but which in reality would garner laughs if tried because it isn't how the real world operates. Reading the instruction manual doesn't always tell you how things work in practice.)
Boss77: What does mom and dad transferring money into an account do to gum up the works? Not too much. If savings are out of whack with earnings, you can bet a coop board will request bank statements going back in time to see any odd influxes of cash that aren't explained. Already the buyer has to give 3 years of tax returns typically, and if the account in question is yielding interest or dividends, they should be reported in the tax returns. If not, clearly the money is "new" and will raise yellow flags. Boards will also ask outright where monies came from. Most boards aren't stupid. And while net worth in important, debt to EARNINGS ratios are the primary focus. If you are a student with $500,000 in the bank, you aren't going to impress anyone on a board. You will be rejected. The law is not an ass is a commonly taught adage in law school. Coop boards are not stupid might as well be another.
"coops do have underlying mortgages and they are still sitting on tons of equity"
Equity in what sense? Cash on hand? That's an asset, not equity, which is a liability. Unless you mean the increase in value of the unit, which is not really anything until it is realized.
"and it is common for coops to have underlying rights to purchase units"
Not only is it not common, it's not necessary. Units are not "purchased" in co-ops; shares are. Shareholders are granted a proprietary lease. The corporation has the right to cancel the lease under certain circumstances, though an eviction proceeding. The corporation DOES NOT have a right of first refusal as is the case with condominiums. However, all business companies in New York State - and co-ops are considered business companies - are protected by law against action for ultra vires. Look that up and get back to me when you find out what it is.
We just rewrote our proprietary lease, and I was the principal proponent of the project. I know quite a bit about the subject. No standard proprietary lease grants the corporation a right to "buy back" shares, though it is sometimes done in the case of a nuisance tenant.
"i guess that you think a co-op board that is sitting on cash and leverage would jsut let their units go into foreclosure?"
What "leverage"? If you ever looked at a co-op balance sheet you will see that they run an accumulated deficit because depreciation exceeds the operating cash on hand.
Just so you know, I just got out of a co-op shareholders meeting where the shareholders agreed to take on a short-term self-amortizing ground mortgage to finance major repairs. Once a co-op has an underlying mortgage, IT IS NEARLY IMPOSSIBLE for it to get further financing. The complex I live in is valued at about $30 million; we're getting a $3.2 million mortgage and a $500,000 line of credit. The mortgage broker made quite clear what I already knew: once you have that mortgage, on top of co-op loans, the risk is too high for most lenders to lend additional money. There are 3 layers of loans, and nobody wants to hold a 4th lien.
"an interest only ARM is moronic."
For some people it is; for others it provides flexibility. In any case I can pay down the balance in full, and pay it as if it were an amortizing mortgage. No risk.
It is quite apparent, petrfitz, that despite your real-estate puffery, you don't know the first thing about co-ops. No wonder you go by that handsome moniker, Sneaky Pete.
steve you are completely wrong once again. just because a coop has an underlying mortgage it does not mean that the mortgage is new and/or is for a majority of the buildings value. For example I am a sponsor on a coop building worth 4 million and has an underlying mortgage of 600K. This building is also sitting on cash of $200K. Are you saying that this building cannot get further financing?
and your interest only ARM on a condo unit is moronic.
For those that are not familiar with the billiards subculture, a Sneaky Pete is a high quality billiard cue made to look as much as possible like an inexpensive barroom cue.
A take on his handsome moniker could be that he is willfully misrepresenting his knowledge of real estate.
It's going to be a whole new ball game with if the FED takes over Fannie. More than half the mortgages are held by Fannie. The government will be handing all kinds of candy and free taxpayer money to it's new mortgage holding tapped out customers. Like reduce mortgage payments, extended terms going up to 45 years. New tax incentives for new home buyers and buyers of foreclosed property will also be a new gift I doubt foreclosures will continue to occur at the current rate now that the tax payers are footing the bill. Thanks to people like stevejhx and other taxpayers (tax paying renters included) for helping those who couldn't afford the monthly mortgage to begin with.
Steve, I have no idea what your use of ultra vires above is supposed to mean in the context in which you use it. For one, Mr. Smartypants, I didn't have to look it up (it is a concept taught in the first 2 weeks of law school). Second, following "however" as you used it above doesn't make sense.
kylewest has it exactly right:
"Ignore risk and fail to consider your ability to assume risk is a recipe for financial disaster. I still have no idea why so many otherwise intelligent, educated, savvy people have ignored this in recent times in NYC."
I recall a really smart, younger guy who sat near me at work, and in late 2006 he and his wife went through an elaborate financing to get their condo. I mean, the fact that none of their peers could put together similar terms today, if this guy wanted to get the condo off his hands, is a real problem.
Sorry if I'm belaboring the obvious, but I would word it this way: What none of us knows is where the psychological tipping point is. When does the fear that it'll get tougher to sell your condo/co-op six months from now, lead people to more aggressively cut their prices to get access to a larger pool of potential bidders.
"When does the fear that it'll get tougher to sell.."
Depends on whether the owner wants/needs to sell. It seems as though some assume that anyone who owns Manhattan real estate will sell it the moment its value decreases. That would be true if 100% of apartment owners only bought in order to make a quick profit and do not wish to live in their real estate. People looking for a precipitous crash need to see people experience sharp declines in incomes, loss of employment, and toxic mortgages/rising common charges. That's assuming many things.
I believe many people have taken an interest rate risk in order to be able to afford payments for a larger apartment by using ARMs. Whether that leads to actual losses or financial difficulies is unknown but that does not mean that the risk is not there.
lowery - I essentially agree, but aren't some of the people who lose their jobs current co-op owners? (as opposed to johnny-come-lately, overextended condo buyers, for example). how do those people behave, and what effect does that have?
Regarding Manhattan ARMS I asked the question on Urban Digs of their mortgage person in a thread.(Mortgage Market Update: Version 1
Posted by MortgageMan on August 22, 2008 at 3.02 PM)
See Link below.
I was surprise at how many ARMs this one mortgage broker had in his experience.
"What percentage of Manhattan buyers are getting ARMs? Is that percentage higher or lower than it has been over the last 2 years?
Are co-op boards still allowing new owners to finance with ARMS?"
He answered:
"I would say that about 85% of my buyers get ARM's on purchases over $1MM and about 60% on less than $1MM.
Jumbo 30 Year mortgage rates are extremley high at this time, somewhere in the area of 8.25%. So to keep a reasonable monthly payment, many buyers choose to opt for the ARM's; which generally carry lower rates.
CO-OP's are still allowing adjustable rate mortgages but generally require more for down payment.
Keep in mind that if a bank offers a ARM product, they still underwrite the loan using the fully amortizing rate. Which means that if you get a rate of 6.50% on a ARM, the bank will add the margin to the rate (about 2.25%) and will use it to calculate your debt to income ratio, should the rates adjust. A very smart move to reduce default or foreclosure risk down the line."
http://www.urbandigs.com/2008/08/mortgage_market_update_version.html#comments
Pez, "Whether that leads to actual losses or financial difficulies is unknown but that does not mean that the risk is not there." I agree. The above post suggests the risk is higher than perhaps expected, and in a way belying the adage that conservative coop boards have nixed any possibility of a crash. Just to be plays devil's advocate here, assume hypothetically a couple bought a 3-brm coop in 2003 with an ARM. Assume their reset is +2.25%. Could their new payment be still lower than the initial payment on a 2007 ARM or fixed-rate on the same apartment at 2007's prices? Could their income not be higher t