Light at the end of the tunnel

TRD New York /
Feb.February 26, 2009 01:24 PM

Nearly everyone is preaching doom and gloom about the economy and the state of the residential and commercial real estate markets. I realize that over the past few months, many would consider me one of the preachers. Nevertheless, based upon recent comments by the who’s who of business and economy, followed by negative reports and index surveys, one might say I am wearing rose-colored glasses.

Just listen to some of the comments recently made by prominent investors and economists. As reported last week, investor George Soros said at a Columbia University dinner, “We witnessed the collapse of the financial system. It was placed on life support, and it’s still on life support. There’s no sign that we are anywhere near a bottom.”

Economic adviser to President Barack Obama and former U.S. Federal Reserve Chairman Paul Volcker said that overseas industrial production was declining even more rapidly than it was in the U.S. which is itself under severe strain.  

“I don’t remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world,” Volcker said.

Last week, the New York Times reported that values of Manhattan office buildings have declined by as much as 50 percent. As soon as this report hit the street, I confirmed that at least a half a dozen real estate lenders decided it was time to critically evaluate the underwriting for mortgage financing of Manhattan office properties.

On Tuesday, it was time for the conference board to announce that the consumer confidence index dropped more than anticipated to 24, the lowest level since 1967, when the data was first collected. On the same day, the S&P/Case-Shiller U.S. National Home Price Index reported a drop in home prices reflected in 20 metropolitan regions, reaching levels not seen since 2003. For the fourth quarter, the national price index fell 18.2 percent compared to the fourth quarter of 2007, the widest decline in the study’s 21-year history. Since peaking in the second quarter of 2006, average home prices are down 26.7 percent.

The day before, a reporter at Barron’s — who probably has no idea about the real estate market — screwed up any potential sales of residential condominium and cooperative units in New York City by saying that city home prices will likely fall between 30 and 50 percent, and recovery is not in the near future.

Yesterday, the National Association of Realtors reported that sales of existing homes in January fell 5.3 percent, the weakest showing since July 1997.

In the midst of the turmoil, Ivy Zelman, CEO of Zelman & Associates and a former managing director at Credit Suisse Group, said the city’s housing bubble was particularly frothy, and she foresees a 46 percent decline before prices become “normalized” again.

Still, instead of predicting the next Great Depression, I am finally listening to some of the smartest real estate and business leaders who agree that the best time to go into business and make investments is in the worst bear market.

A developer of residential and commercial properties in the region, who prefers to remain anonymous, said: “When everyone thinks the world is coming to the end, this is the time you want to be a buyer.”

Gregg Winter, the president of W Financial, said, “Perception trumps reality, and then can soon become the new reality. Even now, before a certifiable bottom can be marked, some real estate players will decide to shake off their ‘downer fatigue’ and start trying to deploy some of their long sidelined capital. Brutal contraction will give way to sustainable recovery.”

The truth is that condos continue to sell throughout the city at lower prices. Even though the Barron’s article noted that units are selling for bargain basement prices of $600 per square foot in the Financial District, sales continue to take place for prices ranging from $900 to $1,200. Developers are selling units at discounts of 5 to 12 percent, rather than the 30 to 50 percent reported by many publications.

In conclusion, while today may be a difficult time for many investors and owners, history repeats itself. The best bargains were available in the early 1990s and buyers can expect a rebound in the foreseeable future.

Michael Stoler is a columnist for The Real Deal and host of real estate programs “The Stoler Report” and “Building New York” on CUNY TV and on WEGTV in East Hampton. His radio show, “The Michael Stoler Real Estate Report,” airs on 1010 WINS on Saturdays and Sundays. Stoler is a director at Madison Realty Capital as well as an adjunct professor at NYU Real Estate Institute, and a former contributing editor and columnist for the New York Sun.


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