The NYC Housing Market Bubble 2.0
In 2007, wide eyed and ready for a thrill, I started my own practice and focused on two areas: Bankruptcy and Real Estate. That’s proabbly why the practice survived and grew the way it did.
In 2006-2007, people had lost their minds when discussing Real Estate. Professional “flippers” were everywhere. The market was teetering, but there were still some out there that kept buying. Just a few years prior, I had a conversation with a cab driver while visiting my sister in Miami. The cabbie wouldn’t stop talking about the 6 (yes, 6) properties she owned and rented. People were applying for, and receiving, 100% financing. Some were receiving 103% financing. There was a hysteria that took hold of an entire country (not hyperbole), where the common thinking was that real estate prices would go up forever.
2007-2010 brought panic. People lost their homes and livelihood. We “learned from our mistakes.” Homes would no longer be thought of as investments, but rather as places to live. If they appreciated, great. If they didn’t, you had a place to stay. You kept hearing “don’t buy more house than you need or can afford” from pundits on TV. We obviously knew we went too far. We drank too much. This was the hangover and we promised we would never drink again.
We’re now drunk again. Or, maybe just really, really buzzed. Banks are lending to people they shouldn’t be lending to. FHA loans now make up 45% of all loans for single family homes. That number used to be 3%. Again, in just a few years, the number of loans that the government guarantees has gone from the single digits, to 45 percent. I’ve railed about this ridiculous number before, but it’s worth noting again. The number of defaults have obviously gone up as well. This isn’t so much a political statement, but the government is basically propping up the entire real estate market across the nation, with absolutely no plans to curtail this.
And prices in New York? Through the roof. In over a year, the price per square foot in Manhattan has gone up 11%. Apartments are going for $90,000,000 with prices of about $8,000 a square foot. But that’s Manhattan, right? In Brooklyn, the average price per square foot has TRIPLED in the past ten years. That’s not normal. When you mix in the fact that interest rates are at historic lows (and have been for years), you start to see that we’re repeating the same mistakes. Folks, we’re drunk again. People are buying more than they can afford, and their incomes haven’t gone up. Employment hasn’t really increased that much either. So where’s all the money coming from? How do you afford this now if you couldn’t just a few years ago.
I grew up in Brooklyn. Great area. Sheepshead Bay was where my first office was located. Homes there were passed down from generation to generation. There was no “speculating.” No huge refinances to pay for second homes and cars. It sounds traditional because it should. This was the way it always worked.
I’m as guilty as the rest of us. I represent hundreds of people in transactions across New York. Each time I go to a closing, I see that twinkle in the eyes of the purchasers who just plunked down close to $1,000,000.00, with interest, on their first place (yes, I’m serious). I see the same twinkle from the seller that just got more than they would have dreamed, even a few short years ago. And while it’s nice, you can’t help but wonder whether all of this can possible continue this way for much longer. How does the FHA, out of cash reserves, continue issuing loan after loan while defaults increase? How do banks continue lending to those whose credit is less than stellar? How do buyers play with the numbers and make payments that account for more than 50% of their net take home pay? They do it by saying “this house will appreciate in value. It was selling for ‘x’ just a few years ago.” That is an all too troubling and common saying. I hope I’m wrong, but it seems more and more likely that we’re getting drunk again, and, soon enough, the inevitable hangover will come.