Awaiting next year’s opening moves

<i>In chess-like fashion, NYC residential industry positions itself for coming big changes, including stock-option bonuses and possible MLS</i>


As the holidays approach, speculation in the real estate industry has turned to next year. While 2010 is expected to be an improvement over 2009, experts say several potential game changers are lurking ahead, with the possibility of throwing the city back into a slump or injecting unexpected strength into the market.

In a series of stories this month, The Real Deal looks ahead to the changes in store for New York’s residential brokers in 2010.

A new kind of online brokerage, known as a VOW, is already changing the playing field for listings in Manhattan. Many say it’s paving the way for a true Multiple Listings Service database, something many brokerages have resisted here.

Meanwhile, as market activity continues to shift from flashy new construction condos back to resales, well-connected high-society brokers are re-emerging as the ruling elite of the brokerage world, replacing powerful up-and-comers who reigned as recently as last year.

Some brokers are attempting to change the paradigm by proactively working with co-op boards to increase their pool of buyers. And new development firms are hoping to inject life into their business by focusing more on new-construction rental projects.

The backdrop for all of that, of course, is unemployment, which topped 10 percent in New York City in September, up from 6 percent in the same month of 2008, according to the state Department of Labor.

If unemployment continues to rise steadily in New York, real estate here may face another weak year; if job losses taper off faster than expected, the market could gain ground.

“The thing that everybody is watching now is unemployment,” said Gregory Heym, the chief economist at Terra Holdings. For now, all experts know for sure, he said, is “it’s going to be a while until we start seeing any significant job growth.”

Another question mark is Wall Street bonuses. Experts expect payouts to top 2008 levels by 40 percent, according to a study released last month by compensation consultant Johnson Associates. But banks may also increase the percentage of bonuses paid in the form of stock or options. Exactly how much, no one knows.

“The question is how much is going to be cash versus stock,” said Gary Malin, the president of Citi Habitats.

Employees face restrictions on when they can sell stock given as a bonus, so Wall Streeters could have significantly less cash available to buy real estate in 2010, Malin explained.

Stock-heavy bonuses would also impact the high-end rental market in New York, which has already seen brokers flocking over from the torpid sales market. Finance workers, many of whom depend on large yearly bonuses, occupy many of the city’s luxury rental apartments. Without the assurance of a hefty cash bonus, Malin said, these renters may no longer be able to afford expensive doorman buildings.

Real estate professionals here are also closely watching mortgage rates, which the Federal Reserve Board has kept low for some time. If those rates creep upward in the coming year, brokers can expect buyer behavior to change too.

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“We’ve had an increase in buying activity since May or June,” said Bruce Cholst, a partner at real estate law firm Rosen Livingston & Cholst. “Part of the reason is that rates continue to be seductively low.”

The federal government has for some time been the primary buyer of mortgage-backed securities from Fannie Mae and Freddie Mac, helping to keep rates on conforming mortgages hovering around 5 percent. But the Fed has recently announced that it may stop buying Fannie and Freddie’s paper in the first half of next year.

If that occurs, “you’ll see a rise in mortgage rates,” said Jonathan Miller, president of appraisal firm Miller Samuel.

Not all the potential game changers will hurt the industry. Possible changes to requirements for loans backed by the Federal Housing Administration, for example, could provide a boost to the New York real estate market.

In other parts of the country, federally backed loans have boosted real estate activity by allowing low down payments of 3 to 5 percent. But the program has barely impacted New York, and especially Manhattan, because the FHA currently won’t insure mortgages in co-ops or condos where there is a right of first refusal, which is the case in the vast majority of condos in the city.

However, as of Dec. 7, the FHA restriction on the right of first refusal is slated to be lifted, in addition to other changes to the program. That means a much larger number of New York consumers will now be eligible for FHA loans, especially now that the maximum loan amount has been raised to $729,750 through Dec. 31, 2010. “For a lot of [New York buyers] it will mean they can get financing when they otherwise wouldn’t have been able to get financing,” said Glenda Winter-Irving, a vice president at DE Capital Mortgage.

In particular, the changes could help New York condo developers sell units in a climate where most banks require a minimum down payment of 20 percent.

“I think it would be very helpful to our new developments if they could advertise 95 percent financing,” Winter-Irving said.

Still, these developments aren’t a sure bet. The scheduled changes to loan requirements have already seen several delays, and the FHA last month announced that its cash reserves have dipped below the legal minimum of 2 percent amid concerns that the agency may need a government bailout.

Regardless of FHA’s fate, brokers expect 2010 to be the year when units at the city’s many struggling new development projects finally start to move, whether that means as rentals or as deeply discounted sales.

Pedigree takes priority

Co-ops starting to bend — ever so slightly

Will new virtual firms pave way for full MLS?

Migrating to new rentals