What China's stock market meltdown means for NYC real estate
Put plainly, yesterday was an economic nail-biter in China and, yes, here in our own back yard. "We have not seen this level of full-blown panic in markets for quite some time," one expert told CNN. But what does this mean for you and the NYC real estate market, and for your mortgage rates?
We spent yesterday grilling some of the city's real estate experts for a much-needed reality check. Here's their take:
WHAT EXACTLY HAPPENED:
In short, China's economic bubble burst, taking a good deal of the global stock market down with it. After a long period of unimpeded growth, Chinese markets have started dropping precipitously—as of last Friday, the Shanghai index has fallen more than 40 percent from its June peak. The global markets have been responding in kind, and yesterday, the Dow Jones Industrial Average plunged 1,000 points in the early hours of trading, ending the day at 588 points down—the worst since August 2011. Translation: if you've got a lot of your assets in mutual funds or stocks, yesterday was quite rough.
"We've known about the weaknesses in China for a good period of time," says mortgage industry expert Melissa Cohn. "Unlike our economy, China's government has the ability to manipulate the markets. And frankly, no one is even confident that the data we're receiving is accurate." Suffice it to say that everyone is very much in wait-and-see mode to figure out the longer-term financial implications of the plunge; and if there's any further information due in the pipeline.
WHY YOU SHOULDN'T FRET:
While financial minds around the world are decisively disturbed by yesterday's market fluctuations, no one we spoke with seemed to think of this as a harbinger of a 2008-level crisis, particularly not when it comes to the world of NYC real estate.
"This is not 2008," former equities trader and UrbanDigs founder Noah Rosenblatt emphatically tells us. "First, there's not a broken mortgage securitization market"—meaning loose lending practices—"at the core of the problem. We're not teetering on the abyss in terms of the global banking system."
Rather, he says, this is the natural (if painful) end result of banking policies worldwide implemented to increase liquidity in the wake of the credit crunch. "[But] you can't dictate where that money goes, and when you create an environment where you encourage risks and take rates down to nothing, people invest in high risk assets, and you're going to have a bubble," he explains. "This is just getting the air out of that bubble—I think it's a healthy flush-out. But hopefully it's brief and not something that lasts seven months or a year."
Plus, as Citi Habitats president Gary Malin notes, factors that drove the sales market to a standstill in 2008—job insecurity, lack of Wall Street bonuses, precipitous price drops on properties—"don't exist at the moment."
"2008 was completely different," says Sofia Song, former head of research at Streeteasy and Compass and now an executive vice president at Douglas Elliman. "It was our own markets that crashed with interest rates hovering around 6 percent, and much looser credit availability."
Indeed, as Miller Samuel appraiser and data guru Jonathan Miller points out, this might be a time to find some comfort in frustrating economic data here at home as compared to the frothy lending landscape of yore. "Credit can't get any tighter, and incomes are flat," he says. "So aside from job growth, the rest of the fundamentals can't get much worse. It's hard to imagine a sudden change in the housing market." (Bet you never thought you'd be happy to hear that news.)
WHAT IT COULD MEAN FOR BUYERS AND SELLERS:
For now? Probably not much, other than the likelihood that favorable mortgage rates will be sticking around (more on that below). While experts we spoke to were divided on whether or not the current crisis will stem the flow of Chinese money into NYC's real estate market—some say Chinese buyers will take caution and hold tight to their dwindling assets, while others say they'll be more inclined to park their money in the evergreen investment that is New York real estate—in the end, it may be fairly moot for the average buyer or seller.
"In the short term, yes, we could see a slowdown in Chinese demand," says Song. "However, in the long term, what we have seen typically is that global volatility can lead to an increase in foreign demand as the NYC real estate market is often seen as a ‘safe haven’ for investment, with moderate risk yielding high rates of returns."
"[Chinese buyers] are a sliver of the overall market, even when it comes to foreign buyers," explains Miller. "We get carried away with the market's reliance on them, just like we did with the Russians, who turned out to have very little impact on the market, but happened to be more visible. And as you move from high price points down to lower price points, the influence of these sort of macro conditions is reduced—it's more about access to credit."
That, and if you're a buyer, whether or not your assets took a beating in this latest round of market volatility. "For the average buyer looking for a place to live for under $3 million, the place where it probably makes the difference is whether your financial situation has changed to make you less capable of making a purchase," says Michael Slattery, senior vice president for research at the Real Estate Board of New York. "I don't think it affects the economics on the other side—the value of property, or how many people are looking for a place to live."
In fact, if you're in the position to pounce, a slowdown could wind up being good news for buyers. "Sellers have had a very good market and a very long run," says Rosenblatt. "In general, buyers will either pause and hold back until things stabilize, or they're going to continue bidding, but adjust their bids lower. "
How much lower—and whether sellers will actually accept said lower offers—is hard to say at this point, and Rosenblatt notes that even if the trend toward lower offers does start to take hold, it usually takes a while for sellers to start accepting them. "I expect deal volume to be unseasonably low until this plays out," he adds. "Buyers should keep their eye on what's going on [since] they might be able to get some kind of value."
WHAT IT COULD MEAN FOR RENTERS:
First, don't count on rents plummeting overnight. In fact, in the short-term, economic panic might make the rental market even more competitive than it already is. Instead of buying, would-be purchasers may rent instead. "[Crisis] creates demand, because if people are concerned about buying, their net worth, their portfolio, etc., it's safer to rent than to buy," says Malin.
That said, if things really get rough, the lessons of 2008 have shown us that a shaky economy often does end up spelling some relief for renters. Last time around, Malin says that owners responded to higher vacancy rates by offering concessions like a waived broker's fee and first month's rent. "Back then, 60 percent of rentals came with concessions," he says. "Now it's more like 8 or 10 percent." And yes, rents did actually decrease. "Everything shifted in the tenants' favor," he says. "On the rental side, owners know how to create attention fast."
AND WHAT ABOUT INTEREST RATES?
Like everything else, it's too soon to tell, but most experts have a hunch that the Fed will once again postpone their planned hike to interest rates when they convene in September, and won't make any changes until at least December. "There's not a shot that the Fed can actually raise rates now," as Cohn bluntly puts it. In fact, she writes in a blog post, rates may actually dip—with "a jumbo thirty-year fixed at 3.5 percent with 0 points" possibly on the horizon. In that case, it may be time to consider refinancing.
Miller says he doesn't expect an interest rate hike soon, either. "I can't see it happening before 2016." All things being equal—which admittedly, is a large assumption—where interest rates are concerned, the rest of 2015 will still be a relatively good time to take out a loan or re-finance, provided you can lock down a line of credit (and your fiscal portfolio is still intact).
"If this were a baseball game, we'd still be in the first inning," Malin says of the past week's market turmoil. So you'd probably do well to keep a close eye on financial and real estate data in the coming months.
One key thing to keep in mind amidst the onslaught of apocalyptic headlines? Both Miller and Rosenblatt say that the crucial real estate metric to watch here is sales volume and vacancy rate, not price fluctuations. "Taking into account for seasonality—that spring and fall are always up, and summer and winter always somewhat down—look to see if sales stop or fall sharply outside a normal range. If that happens, it leads to more inventory on the market [and a higher vacancy rate], which eventually leads to softer prices down the road." But again, Miller cautions: "There's no magic number, really, for any of this."
Rosenblatt also points out that while fluctuations in the luxury segment—think $10 million to $20 million apartments—can be a harbinger of things to come in the rest-of-us market, "the higher price points will be more sensitive to what's going on... The super luxury market is fueled by different dynamics than the $3 million and under market." Translation: Disastrous news for billionaire buyers might not end up disastrous for you.
Aside from the all-important interest rates, if you're actively looking to buy or sell, Slattery recommends diving into the usual data you'd scour on the real estate hunt: comparisons. "You look at the local conditions and inventory, whether you're interested in a co-op or condo, Brooklyn or Manhattan," he says. "If you're going to buy an apartment in Brooklyn, you shouldn't be looking at what's going on in the Chinese stock market. If your equity is in China, that matters, but aside from those kinds of relationships or connections, it still becomes a local market decision in terms of value and price."
"Watch the Dow, watch the 10-year treasury, watch the value of your assets," adds Cohn. "As a prospective investor or seller, I'd take a deep breath. [The situation] is way too fluid to make any judgment calls at the moment, but we'll get more clarity soon. We may not like what we find out, but we'll get it."
Dig Deeper:
Guide to China's market turmoil (NYT)
China's 'Black Monday' sends markets reeling across the globe—as it happened (The Guardian)
Who loses most from chaos in China—and some possible silver linings (Washington Post)
Stock markets tumble as upheaval continues (NYT)
Is the Fed trapped now? Rate hike remains elusive (CNN Money)
China still has firepower to boost its economy (CNN Money)
Chinese-Americans target million dollar listings (Inman)
Why emerging market weakness is not a replay of the 1997 financial crisis (The Economist)
Impact of China's currency devaluation on U.S. real estate is secondhand (Housing Notes by Jonathan Miller)
Global stock markets rebound despite continued sell-off in China (NYT)
Sad guys on trading floors (SadGuysOnTradingFloors.Tumblr)
Related:
New side hustle: become a foreigner-for-rent
9 ways to put Midtown's empty pied-a-terres to good use
Williamsburg is not in Manhattan, and 6 other surprises for NYC's foreign apartment buyers
