The Real Deal New York

Gauging the repercussions of Bear Stearns’ meltdown

Brokers see spooked buyers pull out of deals, but low inventory may help buffer market

March 31, 2008
By Lauren Elkies

Go to chart: Adding up the numbers

Two days after the collapse of Bear Stearns, the country’s fifth-largest investment bank, Brian Huang, the sales manager at City Connections Realty, e-mailed his brokers to say that the bleak news could also represent an opportunity.

“Currently, the real estate sales market is already slow, and this is certainly going to add to the problems we are facing,” Huang wrote. “Any aggressive pricing is going to mean that the apartment is going to sit and sit and sit on the market.”

He continued: “But now that the market is down (marginally, not like the rest of the country), this is the perfect time to pull the trigger. … Explain to your buyers that now is the time to buy.”

While last summer’s credit crisis pushed some homebuyers to the sidelines, recent news has prompted even more buyers
to put off their plans indefinitely. JPMorgan’s buyout of Bear Stearns at a measly
$2 a share (later increased to a still low $10
a share) and Citigroup’s plans to lay off 2,000 more employees in New York and London (reported last month following a January announcement about cutting more than 4,000 Citigroup jobs) have underscored just how dire the economic situation has become.

“On top of everything happening since last summer, [the Bear Stearns bargain-basement sellout] adds that much more uncertainty, so buyers are going to be more cautious,” said Gregory Heym, executive vice president and chief economist for
Terra Holdings, parent company of brokerages Brown Harris Stevens and Halstead Property.

It’s too soon to gauge the full effects of the collapse of Bear Stearns. They will not be fully apparent until the second half of the year, or maybe even the fourth quarter, Heym said.

“Prices aren’t going to fall sharply
until there are too many homes on the market,” he said. “This isn’t like the Dow Jones, where a piece of bad news comes out and the numbers shift. It takes time for that inventory to build because we have so little.”

In the meantime, buyers are watching with some level of uncertainty, and some sellers are slashing prices or offering concessions to entice buyers.

Frederick Peters, president of Warburg Realty Partnership, said, “Clearly, this credit situation is going to take a reasonably long period of time, more than a couple of months, to work out, and during that time, there will no doubt be people who sideline themselves in the marketplace because they’re sure the real estate market will plummet,” he said. “My prediction is, our real estate market is not going to plummet.”

Yet the market is bound to suffer from the large number of deep-pocketed investment bankers and traders being laid off as well as the large number of investment bankers who received bonuses in stock options that are now performing poorly.

City Connections’ Huang said that he had showed one couple more than 20 properties, and when they were finally ready to buy a home, the news broke about Bear Stearns’ demise. The man was an employee at another top global investment banking firm, Goldman Sachs, and although the company was not expected to suffer the same fate as Bear Stearns, the couple pulled out of the sales market.

“They are going to rent. They are of the opinion that the market is going to be
tepid at best, and that’s my opinion as well,” Huang said.

At least one broker sees the collapse of Bear Stearns as an opportunity to
find buyers.

Ray Schmitz, an associate broker at Coldwell Banker Previews International, wasted no time after hearing the news. He handed out dozens of business cards at the Bear Stearns headquarters at 383 Madison Avenue.

“I was saying, ‘Do you know anyone who may need to sell their apartment?’” Schmitz said. “I’m only there for the benefit of the people who need my help.”

Schmitz said he was surprised that other brokers didn’t think to do the same.

Despite the increasing gloom, there are still reasons to be optimistic about the New York City market. Positives include low inventory, foreign buyers taking advantage of
the weak U.S. dollar, the Bush economic
stimulus package (including the temporary raising of the conforming loan limit) and the initiative of Fannie Mae and Freddie Mac, two of the country’s largest sources of financing for residential mortgages, to provide up to $200 billion to the mortgage-backed securities market.

“I think those are some good shots in the arm,” Terra Holdings’ Heym said.

Adding up the numbers

Number of securities industry employees in New York City as of January 2008: 184,000

Wall Street job cuts predicted by city’s Independent Budget Office by the end of 2009: 20,200

New York State comptroller’s office estimate of city’s securities industry bonuses in 2007: $33.2 billion

Percentage of state tax revenue derived from Wall Street business and income tax: 20

Number of securities industry jobs Bear Stearns accounts for: 1 in 25

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