Survey says uh-oh to mortgage mess

<i>A panel of experts weigh in on local fallout from national housing slump</i>

The R word — recession — is a looming concern for Manhattan’s real estate market, and it’s one of the wild card factors that local pros are keeping their eyes on.

The Real Deal spoke to commercial and residential experts about how the credit crunch and mortgage fallout will affect the market going forward, finding out their biggest worries as well as what’s not keeping them up at night.

Here’s what an acclaimed economist and professor, a closely followed local appraiser, two top residential brokers and head of one of the city’s biggest commercial brokerages had to say:

Barbara Fox
president, Fox Residential Group

Jeffrey Gural
chairman, Newmark Knight Frank

Jonathan Miller
president, Miller Samuel appraisers

Kathy Korte
president and CEO, Sotheby’s International Realty

Robert Shiller
professor of economics, Yale University

How do you think the credit crunch and mortgage fallout will affect New York’s real estate market in the short and long term?

Fox: New developments will slow down, but I can’t imagine them coming to a screeching halt. Fear affects the market more than anything, and once everybody gets over the fear, the market resumes.

Gural: Higher interest rates will affect the [commercial] sales market. A lot of people bought buildings in the last five years with the idea of making improvements and selling them rather than continuing to run them. They used to be able to pay 5 percent to borrow to do this, which made sense with a 4 percent return. Now, if they have to pay 7 percent to borrow, they won’t be so quick to buy.

What are you most worried about as far as the effects on New York’s real estate?

Fox: The greatest impact will be on the upscale properties if year-end bonuses on Wall Street are down. My guess is that if they are down more than 50 percent it will be hurtful.

Miller: Reductions in bonus payouts for 2008. This year, bonus payouts were ahead of last year, for a second consecutive annual record, and every year they are a major catalyst to drive the real estate market.

Korte: There might be a hiccup or a wait-and-see attitude among some buyers, but the lack of inventory across the board for high-end properties means that when people see a home that’s priced right, they will purchase it.

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Shiller: Falling prices, which is happening everywhere. New York’s metro area has tracked the rest of the country fairly well, according to our data, though Manhattan is a different market.

What are you least worried about as far as the effects on New York’s real estate?

Fox: I’m least worried about mortgage availability. Also, we haven’t had major foreclosure situations in the last few years. In the grand scheme of the number of units, it’s still a very tiny percentage.

Miller: The weak dollar. Foreign investment has been a key driver of demand for development, playing a large role in absorbing the new development housing stock.

Gural: The office leasing market is still very strong, with low vacancy rates. Keep in mind that the buying and selling of buildings is not a critical element of the commercial real estate business; it’s more geared to rents.

Shiller: I’m not worried about people who once took home $50 million bonuses, because they will still do fine. They’re not on my welfare list.

In the near term, what’s the biggest wild card?

Gural: A national recession.

Miller: If there’s a general economic slowdown, or if we slip into a recession, it could affect corporate profits on Wall Street.

Shiller: It depends on how this whole credit crunch plays out. If confidence isn’t restored, there could be more bankruptcies among the mortgage lenders. If you were thinking of stretching and buying this really expensive property, you might now think, “Well, let’s wait till the dust clears and see what happens.” I think the vacation-home and second-home market in particular will definitely suffer.

How will New York fare relative to the rest of the country?

Fox: We’re a separate entity in so many ways. Still, there are times, like after the Sept. 11 attacks, when we were very affected, and the rest of the country not so much.

Gural: We should continue to be okay, but the housing markets in others parts of the country are really in trouble, and we’re dependent on the national economy.

Miller: We’ve been moving in opposite directions. Inventory is up in the country, but here, supply has contracted a third from the same period last year. Also, transactions here have doubled while nationally, they’re down by a third.

Shiller: Manhattan is about the most unusual place in the country. Where else is it that nobody owns a car? It’s also an island, though the East River isn’t the barrier it used to be. Manhattan has grown well beyond the island.