Over the past few weeks, discussion of the impact of the Wall Street bonus has increased as rapidly as the housing prices did in 2004. Its a big economic event in the New York region and provides a significant impact on the local economy.
Bonuses been get a lot of coverage with more to come:
Huge Profit at Goldman Brings Big Bonuses [NYT]
Brokerages report record profits [AP]
Unbelieva-bull spending spree [NYDN]
Downtown realtors ready for bonus time [Metro]
Jaw-Dropping Bonuses on Wall Street [US News]
However, I don’t think that bonuses are the only reason why 2007 looks more promising today than it did 6 months ago. While bonus income seems to have more impact on pricing than the number of sales, the consensus is that a wider market strata will be affected this time.
Last year, the bonus income had more of an impact on the upper 2% of the market, for properties priced above $5 million dollars. This year however, as the saying goes, its different. But no real reason has been given as to why things are different this year other than bonuses, it just feels different. For example, its my impression that there have been more bidding wars in the last month and a half than in the early part of the year.
Here are some thoughts on why the outlook for 2007 could be better than last year in New York real estate:
- Bonus income is higher than last year and its no surprise. Each quarter, news coverage of the pace of bonus money tracking has remained on target. The news gradually built expectations over the year.
- Bonus income has seen 4 successive years of gains (assuming this year is), which provides a cumulative effect. Bonus payouts don’t necessarily go into the housing market in the first year of payout. Activity today may originate from payouts made a few years ago.
- Mortgage rates have been generally in decline or flat for the past 6 months. Mortgage applications are rising including refi activity which adds to the churn. The Fed is largely expected to cut the federal funds rate in mid-2007 because of a cooling economy. However, the NYC economy is expected to be fairly solid so the market benefits from weaker conditions in other parts of the country through tapping into lower mortgage rates.
- International buyers have been coming to the market in increasing numbers, (but less than I would have thought by this point). Favorable exchange rates due to the weakening dollar makes NYC properties increasingly affordable to foreign buyers.
- Lending (underwriting) standards continue to erode making it easier to get deals done.
- Some developers are starting to get the message that its all about accurate pricing and that marketing alone doesn’t move units. We are hearing that some stalled projects are being re-priced and then see units started to move. Placing ego aside is a huge step int he right direction.
- Overpriced listings from non-serious sellers started to expire and not be renewed last spring, reducing the clutter and frustration for buyers. Inventory levels in the region have remained level for more than 6 months, after seeing substantial gains for the prior 18 months. There is some evidence of inventory bottoming out nationally after several months of gains but the jury is still out.
- Rental rates spiked this year as a result of people moving into rentals for safety and lower cost. They became disillusioned after seeing bidding wars and 20 to 25% rent hikes in the luxury sector.
- The local economy is on solid footing and the city is projecting a surplus.
- The recent national election brought significant change to the Congress, implying some sort of changes in the future.
To expound on the last thought, the real estate market is often defined by negative milestones, ironic for such an upbeat industry. One of those milestones could be the recent national election.
With the president’s approval rating at record lows for his tenure and the situation in Iraq deteriorating, I thought that a change in control of the Congress could be one of those milestones. The looming election had turned the focus away from the housing market. While the change in power may or may not impact housing, it was a change and seemed to precipated a change in perception.
The latest wrinkle is the sudden illness of Democatic Senator Tim Johnson, who, if unable to continue in office, would be replaced by someone appointed by the Governor, a Republican by presumeably, a Republican. This would move the Senate to 50/50 representation by both parties just after the newly majority that the Democrats earned last month. However, I suspect that this is a non-event for housing. The momentum has already been initiated by the election.
Sure, the bonus money is an important, and perhaps primary component of the recent surge in activity in Manhattan, but it can’t claim all the credit.