New York’s Wealthiest Cut Losses as Manhattan Real Estate Falters
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I assume this myth has been around much longer. Perhaps people know what was being said or written in 90s, 80s, 70s and 60s.
But in spite of all this, in spite of temporary slow downs and slight blips, the broader market just becomes more and more expensive. Numbers that seem to make no sense, or seemed absurd even 5 years ago get blown past.
I don't know what the reason is, but I would love to read a truly satisfactory explanation for this.
Chinese and Saudi Arabians own a very large portion of our country.
This is for several reasons:
1. Saudis feel quite unwelcome in the US, and prefer to buy homes in London.
2. New York is so far that a Chinese billionaire would prefer something on the other coast. Especially in Canada where they don't have to pay taxes on worldwide income if they establish residence.
And without data, this is just an impression based on fragments of articles. I still haven't seen data for the Chinese buyers in Vancouver, and that is a far easier case to make.
Good luck. Link it if you find it.
I think the missing component of the demand side is the prices of these places. Even with bank bonuses, the numbers are so astronomically high you have to wonder how so many people can afford them.
Except midwest housing prices are constantly rising too. Obviously not anywhere near coastal cities, but Midwest city housing prices keep going up even as the manufacturing economy there supposedly shrinks.
...
"I don't know what the reason is, but I would love to read a truly satisfactory explanation for this."
Well, it did just happen ... bay area housing, for instance, plummeted from 2007 to 2011. This was neither a slight blip or a "slowdown":
https://www.bayareamarketreports.com/trend/case-shiller-refl...
Note that mid-range homes dropped, in their index, from "220" to "125" (give or take).
How long have you been an adult ?
Thanks for showing some data!
Wealthy Chinese families want to get their money out of China, and thus, overseas real estate is a good way to bank that money outside of the Chinese economy. Couple that with the fact that foreign investors bringing over $500,000 to the United States basically buy citizenship. So, if you're a Chinese family with a factory, and you want your kids to move to the US, go to American colleges, etc. You buy a $650,000 property in Vegas, or SF, or wherever, you send them over, they reap the investment benefits, and get fast tracked to citizenship. Plus, your investment always goes up because the American real estate market always goes up, right?
Well, tariffs and the coming trade war mean those exact types of investors are now pulling out, selling, leaving... That sort of behavior ran us right back to the brink of another bubble bursting, but it slowed a year or two ago and now we're seeing the resulting cooling of real estate markets.
This citizenship loophole was what Jared Kushner's people were giving seminars on in China, presumably to help sell newly made suburban homes over $500,000 to foreign investors. ( https://money.cnn.com/2017/05/06/news/jared-kushner-nicole-f... )
Some cities have woken up to this and are imposing taxes to curb these "investments". As the world population grows and more people move from rural to urban areas, housing problems are only going to get worse.
San Francisco and Manhattan (as well as most of Western Brooklyn) are almost exclusively for those who the media would call “elites”. This wasn’t always so. Go back to the 90s, 80s, 70s, and 60s and the population of these areas is much more diverse. You’d think prices can’t possible go higher, but income inequality is actually increasing—so they can. In 10 years there will probably be zero market rate properties in either San Francisco or Manhattan under $1 million. It’s already a rarity, but soon it will actually be non-existent. And unless things change in another decade that bar will be $1.5 million, and so on.
The Houston metro area:
* Population: 6.3 million
* Land Area: 10,000 sq. miles
* Average wage: $25.87/hr
* Average 1 bed rental rate: $967/mo
* Wage/rent ratio: 22% monthly income.
* Population: 8 million
* Land Area: 7000 sq. miles
* Average wage: $37.19/hr
* Average 1 bed rental rate: $2500/mo
* Wage/rent ratio: 39% monthly income.
Additionally, I don't have numbers but Houston does seem to have much lower income inequality for the bulk of the population. The SF Bay Area is really good at churning a lot of moderately wealthy people through the tech industry, who far outearn anyone else, and end up bidding against each other for the available housing. I imagine Houston's energy industry creates far fewer moderately wealthy people who outstrip everyone else in income to this extent.
Finally, one big thing that Texas does very right is having strong property taxes instead of state income taxes. You don't have early homeowners holding on to their feudal properties while new workers struggle to make ends meet, as you do in California.
Median salary for Houston: $61,708. Median salary for SF: $77,734. Does a 26% increase in salary explain a 250% increase in rents?
Start defining your perimeters and we might be able to get an answer to your first question.
Houston wages [1].
SF wages [2].
Houston rents [3].
SF rents [4].
San Jose rents [5].
Houston wiki [6].
Bay Area wiki [7].
The total geographic area as defined by the city or region's CSA.
> what does it include relating to uninhabitable/unusable space?
Examines land area without regard for zoning or habitability.
> Is average a mean or median wage?
Average means average. Mean.
> What are the rates of poverty in both regions?
Irrelevant.
> What the hell is an "elite of the world" defined as?
Don't know that's why I requested more information from the OP.
1. https://www.bls.gov/regions/southwest/news-release/occupationalemploymentandwages_houston.htm
2. https://www.bls.gov/regions/west/news-release/occupationalemploymentandwages_sanfrancisco.htm
3. https://www.rentcafe.com/average-rent-market-trends/us/tx/houston/
4. https://www.rentcafe.com/average-rent-market-trends/us/ca/san-francisco/
5. https://www.rentcafe.com/average-rent-market-trends/us/ca/santa-clara-county/san-jose/
6. https://en.wikipedia.org/wiki/Greater_Houston#Metropolitan_Statistical_Area
7. https://en.wikipedia.org/wiki/San_Francisco_Bay_AreaThe Bay Area has a number of different independent cities that are geographically isolated, and connected by limited infrastructure (e.g. the bay bridges and a few congested highways). You can debate the latter point, but realistically, large parts of the Bay Area are impractical commutes from the major tech centers. Even getting between SF and silicon valley is a miserable daily commute -- I wouldn't want to do it from Berkeley.
A more realistic comparison would be Houston vs. San Francisco County, or Houston vs. Silicon Valley.
The New York CSA spans into upstate New York and Pennsylvania. It isn't reasonable for normal people to make a daily commute from upstate New York.
I like the city, lots of good stuff there. It has essentially nothing bounding growth, and that helps keep real estate and rent down I suspect.
The "elites" like demonstrating that fact by collecting scarcity. There really isn't much to be had in Houston from a real estate point of view; there isn't even much in the way of fancy neighborhoods. I mean, they exist but they aren't anything special. Partially perhaps because the whole area is pretty homogeneous, there isn't a part of it that is clearly advantageous in the same way, say, NYC, SF, LA, Chicago has. I suspect this is self fulfilling .
What they really need are good services, an educated workforce and a place their workforce wants to live.
Elites need the high end of resources for the winner to take the lions share - otherwise they would be one among many and not elite because many can do it. In this case talent is the resource they must seek.
They tend to want to live in an area with plenty of alternative jobs and like minded people. Those two tend to self perpetuate. Since demand is high and working in a hot area is good for advancement, makes them look good and helps boost salary expectations combined with a desireable place to live the demand stays high unless it is a bubble and it bursts.
Why would wealthy people want to move to a place like Houston? They are already rich. They don’t care about low taxes and regulation.
It’s like somehow you missed the whole point. Houston is very attractive to people who aren’t wealthy.
It's the inevitable result of constricted supply and growing demand.
Another major factor is that zoning laws make it more difficult to build new housing in most cities than it used to be.
Zoning restrictions are combining in a bad way with another major economic trend: the increasing centralization of good jobs in large coastal cities. Those cities are experiencing high population growth and the housing supply is not growing enough to meet the new demand.
It's pretty interesting that the recent changes in the tax code have had the effect you'd predict: since you can't deduct property taxes and interest off your federal taxes in the same way as before, real estate has defacto become more expensive.
I haven't closely studied Tokyo real estate values, but I remember at one point Tokyo's real estate was worth more than Japan's GDP or something absurd like that. I think that bubble eventually normalized. https://en.wikipedia.org/wiki/Japanese_asset_price_bubble
There seems to be a global undersupply of housing development in the largest cities.
My guess would be that the growing information economy has meant a much denser concentration of well-paying jobs in a small fraction of cities (farming was obviously very spread out, and industrialization somewhat spread out as well, since factories naturally require space), coupled with the double populaton bulge from baby boomers and their children, the millennials. Additionally, outside East Asia, communities seem to have become increasingly unable to dream big and invest in large scale development.
There's too many of us. And most of the good land has been taken and/or ruined.
California has high state income tax but low property taxes.[2]. 0.625% in SF
The worst is New York. NY has high state income tax and high property taxes[3]. 1.925% in nyc. That is insane. I just don’t get how people put up with this and where all that money is going to
[1] https://smartasset.com/taxes/texas-property-tax-calculator#I... [2] https://smartasset.com/taxes/california-property-tax-calcula... [3] https://smartasset.com/taxes/new-york-property-tax-calculato...
They don't. In the past couple of years staples of the Northeast such as Wawa and Yuengling can be found in places as far away as Florida. The reason for this is because of the number of people leaving the Northeast due to the fiscal pressures that you describe.
Also, NJ is just as bad as NY when it comes to taxes. My parents live in Central Jersey, and their property taxes are insane.
Really made the area's uncomfortable relationship with wealth very clear to me, and easily ignorable when the information is so bad.
"Why exactly do you want me to come to this housing protest again? Because our tour of the 2 bedrooms are scheduled at the same time?"
And in addition, SF home prices dropped ~30% only 10 years ago during the financial crisis.
The truth is that real estate in the big urban centers will likely always be more expensive than the average American home, but there is no reason why NYC and SF couldn’t see a big reset with people losing a ton of money.
If SF real estate drops 20% and you bought a home for $2M, that’s a major loss.
Hmm, which part of manhattan are you talking about? Living in the upper east side I don’t notice any change at all
Here's a walk down the memory lane:
* In 1997 my girlfriend at the time bought a two floor condo in Park Slope (2,400 sq feet) for $220,000. Her friends told her that she overpaid.
* In 1999 a friend of mine had her generation skipping trust buy two buildings in Soho next to each other for $1.27M. They had to modify trust documents because with that buy trust was over exposed to real estate.
* In 1999 apartments on Broome St in Soho were lofts with the kind of showers one would expect in the third world countries. 5-6 artists would live in one because they split 3000 sq foot one floor apartment 5 ways for a grand total of $1200/mo.
Residential leases are simply too short which is why we do not see the massive spikes in rents as the lease is being re-negotiated the way we see them in commercial real estate.
You may also find this more noticeable if you are into food, great restaurants getting booted out of their space, only to have that space sit there and remain vacant.
And that appears to be what’s happening. Commercial landlords apparently are still waiting, hence the empty storefronts, but it seems the residential landlords have finally realized the market needs to correct.
It needs a long correction.
High vacancy symptoms can be caused by suppliers seeking higher surplus than the market will offer, it can also be caused by artificial price floors caused by free-market perversions. E.g. factor in all state-mandated costs contributing to a price floor: no one is going to rent a property for less than its property taxes etc.
If you own it already, not renting it doesn't save you from paying property taxes and renting it even at a lower rate reduced your losses from ownership. The only reason you shouldn't want to do it, then, is that you think that the low rental price will depress future rental prices or create friction that will make you miss an opportunity for a higher-paying tenant, and that expected costs outweighs the present rent—but that's just as possible with rent above the property taxes; the property taxes aren't a special cutoff.
Your 2-N homes are also investments, just riskier ones than they were thought to be previously. Whether people know this or are just blindly parroting outdated advice remains to be seen.
It is possible to use your primary residence as an investment, but everyone still needs a place to live, so it is also a form of consumption.
If you want to consider it an investment by definition, then you should actually explain how it is an investment.
Speculation is allocation of capital to an entity because you believe you or someone else will need it in the future. e.g. A banker buying a baker's oven.
A primary residence is at best an investment (you need to live somewhere to earn an income), a second residence is purely speculation.
The housing market is highly highly leverage with the median ratio ~= 14:1 [1]. Since small changes to the amount of money inflated by commercial banks and the Federal Reserve can have extreme consequences on prices, it's highly inadvisable to speculate in highly leverage markets.
[1] 7% median down payment, 1/.07~=14 https://www.attomdata.com/news/mortgage-and-finance/q3-2017-...
The average American loses money on real estate once you factor in inflation, property taxes, interest, and maintenance. Yes, we hear all sorts of stories about houses appreciating six figures per year in the Bay Area but that is very, very far from the typical American experience.
They dont make new land anymore while population growth continues and more and more money is printed. The changing climate [real as well as political] also makes many places less livable than before. That all makes for strong appreciation at good places.
Land and real estate are very legitimate investment vehicles. That fact is not diminished just because they can lose value. All investments can lose value.
Largely this is because in LA most companies/residents strongly prefer buildings with occupied ground-level, to the point where otherwise identical buildings with differences in ground-level occupancy can see double digit differences in above-ground occupancy rates! (This played out earlier this year and last year in the Little Tokyo and South Park neighborhoods.) Due to the sprawl of LA, ground-level commercial spaces don't command a significant enough premium over the above-ground offices/apartments rental prices to let the ground level remain empty.
In contrast, in NY, land, office space, and residential space is at such a premium that tenants don't really have much of a choice, so landlords can afford to wait out poor leasing conditions for their ground-level units since an empty storefront doesn't impact the rent they can charge for their above-ground units.
Large parts of Tribeca right now are empty and boarded up. You'd think it was London during The Blitz and everyone was just hiding or something.
For all that people complain about SF, it's pretty amazing that you can go there after not having visited for ten years and not a single thing has changed. All the houses are the same color, all the same little shops and restaurants are still in business, etc. Whereas you walk down St. Marks or Carmine St. and the majority of businesses are less than a year old.
As for there being many businesses starting all the time, that's a good thing. It means the city's economy is vibrant, and less profitable businesses are turning over to make room for ones that can be more profitable. Neighborhoods that only have the same businesses that have been there forever generally aren't doing very well economically-speaking, as they haven't been able to attract investment or growth.
Manhattan has the wealth and technology to build infrastructure to mitigate against changes in weather and environment. What is lacks is competent administration and the political will to tax the rich to build any of it.
friends who have bought homes are experiencing
a depreciation in their investments
Yes. They just are bad for different sets of people.
Your home shouldn't be an investment. It's actually good if home prices go down because that makes housing more affordable. Housing can be either affordable or an investment, but not both. There's plenty of other investments you can park your money into so it's better that housing be affordable.
I'm used to seeing HN comments where people who don't live here say all sorts of obviously untrue things about NYC (like how a lot of it is vacant) -- but you've lived here for ten years.
In what way exactly do you think Manhattan is declining? (Except subway service, that's well known.) Why is it a problem if people are not buying second or third houses?! Is this a 1%er problem?
https://www.timesunion.com/news/article/New-York-s-infrastru...
Queens and parts of Brooklyn are likely out of luck, but Manhattan will be protected.
While all NYC area real estate is pricy, outside the ultra high end stuff the market isn’t seeing such fluctuations.
Tax law changes, higher interest rates, and currency controls on foreign buyers means it costs more in real wealth to buy a home, so the prices shrink to match. (or they don't shrink and the houses just stay on the market)
Below million market was pushed down by interest rates.
The over million market was pushed down by capital controls on foreign buyers and tax law changes.
This seems to support what the OP was saying.
A good way to see how atypical NYC pricing is is to take a look at what a house right next to the road that leads to JFK airport will cost you. I think spot checking 4 bedrooms was like $600k (when I checked years ago). The same amount will get you a super nice suburban house (with a lawn in a nice neighborhood and school district) in many other places. Not next to a heavily traveled freeway.
My South Bay neighborhood: 8 months ago, a 1300 sqft 3 bed/2 bath sold for a staggering $2.4M. It’s still being renovated. They almost tore the whole place down with only outer walls and roof standing.
Last week, a 1500 sqft 4 bed/2 bath just a few houses down the road went under contract for $2M, after multiple price reductions.
> But agents said the slowdown extends beyond new condos, hitting every segment of the market. While the cooling is more significant at the high-end, smaller units also are affected. In the third quarter, the median price for a one-bedroom Manhattan home was $815,000, down 4% from the same period in 2017. The volume of sales fell 12.7%.
> “What’s most significant about 2018 is that even the sub-$1 million market is slowing because of rising mortgage rates,” said appraiser Jonathan Miller. Rates for a 30-year mortgage averaged 4.81% in late November, up nearly a full percentage point from the beginning of the year, according to Fannie Mae and Freddie Mac.
Higher interest rates and lack of SALT deduction are a big double whammy for the non uber-wealthy (who can afford to move to optimize taxes).
Losing the SALT deduction really burns, though. That's new.
This is one of the reason why you see all kinds of house trading among celebrities - they don't actually "buy" houses with conventional 30 year mortgages. When the balloons come due, they instead sell a house either for more money or for less money and make the balloon whole with the "saved rent"
Any anecdata on this?
And about "high-end dominated markets." I think it's true that there is simply not enough of billionaires and Saudi sheikhs to fill 10 million bucks apartment buildings, and there are simply too many places in the world competing for billionaire level clientele. People developing such projects are too optimistic, and omit that they will never make money on them because there are too many ifs in their plans. Simple demand/supply math is not on their side, and they lack any unique advantages to lure away wealthy buyers from other places.
From all above, I conclude that high-end real estate is a very, very, very risky business.
News coverage, and popular public stereotypes also play a role there. In case of Shenzhen for example, the press is happy to report that average price continues its surreal non-stop growth, while completely forgetting to mention that the median price was going down for at least 5 years. The high-end of the market is being dominated by big name speculators, and low-end with "moms and pops investors."
NYC isn't a centrally managed economy. Things are worth precisely what people are willing to pay for them. There's no way to force prices down.
And you thinking it's overpriced doesn't matter when others are willing to pay those prices. Clearly that means that price is accurate, you're just not willing to pay it.
Add in increased Chinese export vigilence, tariff wars, slowing economy, and the tax overhaul that targeted blue states, and of course the multi-multi-millionaire apartments and condos are taking a hit.
The thing is, and this article leaves out, is that that luxury apartment glut was originally expected to last 3-5 years. Then rising population rates and etc were supposed to take over again.
So your sub-million dollar condos might take a hit for the next few years, but barring another economic recession or crash, its probably just temporary (read, possibly a good time to buy).
For truly high $ places, where all the other things on the list of causes above will have much more effect, it might be worth sitting out for a while.
I definitely wouldn't put the threshold for uber-rich money parking or buying a pied a terre at $1M
The rich get outsized benefit of compounding, outsized benefit of money managers saving their losses in every bust, outsized benefit of buying assets at rock bottom prices and then outsized benefit of compounding again.
Every single cycle, the rich get richer because of their resources.
How is this not obvious? The problem is not wages. The problem is richness from speculation.
https://www.facebook.com/flx/warn/?u=https%3A%2F%2Fwww.wsj.c...