Thursday, February 5, 2009

NYC Residential Real Estate Market

Finally...A correction is here!

We spoke very briefly about the major money center banks (JP Morgan, BOFA, Citi, and Wells, etc) exposures to NYC Condo/Coop market in an earlier post. This market has not had a notable correction since the late 80's/early 90's period.

With initial jobless claims continuing to rise and job losses rising monthly, will this lead to a correction in the NYC Real Estate Market? Has it already happened? Is this market recession proof?

US initial jobless claims came in this morning at a stunning 626,000. A rise of 35,000 from last month. The 626,000 figure is the highest since the 1982 recession.

Meanwhile, according to Thursday's report the tally of continuing claims, those drawn by workers collecting benefits for more than one week in the week ended Jan. 24, rose 20,000 to 4,788,000. That's the highest level since the government started keeping track in 1967.
The U.S. lost jobs every month of 2008, and employers slashed payrolls at a rate of about half a million per month in the final four months of the year. This month's claims figures point to another drop of that magnitude when January data are released tomorrow. That would push the jobless rate another 0.3 percentage point higher to 7.5%.

The job losses are continuing with no signs of a slowdown. Caterpillar, Home Depot, Sprint, Bloomberg, as well as Smurfit-Stone Containers bankruptcy filing will further pressure the labor markets.

These combined has seriously hurt consumer spending, which make up 2/3 of GDP or economic activity.

From reading various reports, metropolitan New York City real estate and employment has held up better then most areas, even with the downturn on Wall Street. (Can we stop calling it Wall Street?, There is no more Wall Street.)

As the major financial service firms downsize considerably, or even in some cases just don't exist anymore, financial services accounted for about 13% of the employment and 36% of earnings for NYC in 2007, also for every job in financial services, 2 additional jobs are created in NYC.

Most commercial banks are deeply exposed to the metro residential NYC market. You will definitely see delinquencies as well as credit costs rise from here. We are already in the early stages of this downturn.

Real Estate prices are down about 15% from the peak in NYC compared to 25% nationally. Unemployment in NYC was around 6.6% in December, below the national average of 7.2%, with job losses in acceleration mode within the financial services industry and spilling over to other industries, deterioration in home prices are likely to ramp up. My opinion is unemployment may reach 10% in NYC, 12% nationally, and home/condo/coop prices will drop another 20-25% in NYC alone.

Like I said, JP Morgan, Bank Of America, and Citigroup have the highest exposure to this market, with Astoria Financial, New York Community Bancorp, Capital One (Green Point acquisition), and Valley National (Huge in NJ as well) with deposit/loan exposure.

What's worse for this market, the high end real estate market which never corrects, will almost have to as Bank America and its brethren will have to start dumping their corporate apartments. Note- BAC has already started this yesterday. With more and more Bank CEO's/Executives compensation being capped (Obama) as well as their values in their stock holdings go to near zero (Bear Stearns, WAMU, Wachovia, and Lehman) most of these people have leveraged their stock holdings to their high end residences. As the liquidation continues, margin calls need to be met, forcing these executives to start missing mortgage payments. This will likely happen starting in the 2nd qtr. If this scenario unfolds the way I think it will, It will most likely delay any type of economic expansion well into 2010, maybe even 2011, no matter what type of Obama stimulus is implemented

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