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Monday, June 30, 2008

Podcast: the risks of ignoring risk

Wharton finance professor Jeremy Siegel says in this podcast titled "Ignoring risks", that the subprime crisis was both predictable and grossly underestimated at first. He also says that bubbles are something which cannot be easily avoided from time to time in a free market economy; and that we are nowhere in the kind of free fall which produced the Great Depression. Greed and poor leadership contributed to many of the key players ignoring the inherent risks. It perpetuated a sort of Ponzi scheme which was ultimately doomed to fail. National home prices were being fueled by low mortgage rates, relaxed underwriting standards, and easy availability of credit to speculators and people whom were not traditionally qualified. When national home prices reached a peak, it became impossible to sell off the properties for more, to pay off the debt; and the national bubble started to pop.

comitini.commentary: why has Manhattan remained so strong, so far?

marketFrom a local broker's perspective, I think that it's important to note that what caused the pop nationally, did not happen here. Manhattan real estate has remained remarkably insulated to this dynamic, largely because of the dominance of cooperative housing as a form of ownership (80% to 85% of market). It has provided an additional layer of fiscal oversight provided by co-ops' Boards of Directors, which demand full disclosure of an applicant's financial profile, and insure sufficient liquidity to protect the existing shareholders of the co-ops. Owner occupancy is a requirement in almost all cases, so speculative investment is virtually nonexistent.

"Anyone thinking of buying a Manhattan apartment or townhouse that they plan on living in for five years or more, should remain exceedingly optimistic. As a matter of fact, it may just be the right moment to buy"

Condos represent a much smaller (15% to 20% of market) part of the Manhattan market, and are mostly new developments. This segment may experience some short term volatility, as a wave of new inventory hits the market over the coming year or two. Developers are scrambling to meet a deadline for the 421-A tax abatement program that takes effect on July 1st. After that, developers will face stricter guidelines to receive benefits, if foundations for multi-unit buildings aren't started by then. Some of them, unable to meet the deadline, have begun to sell off the sites rather than move forward with building. The pipeline of new developments will start to narrow, and the current inventory will be absorbed. That's the marketplace operating to balance itself. It is interesting to note that were it not for the tremendous amount of new development over the past five years, we'd have a severe housing shortage in Manhattan, and our pricing would have gone much higher. Our population is still growing.

Real estate markets by nature are highly localized ones— even if somewhat influenced by national and global market forces. Mortgage rates are trending upward and consumer confidence in the overall economy is low. People are being careful; but I'd predict that any slowdown in Manhattan would look more like a normal market response, rather than a bubble popping. Anyone thinking of buying a Manhattan apartment or townhouse that they plan on living in for five years or more, should remain exceedingly optimistic. As a matter of fact, it may just be the right moment to buy.

The Manhattan real estate market's exposure to the credit crisis is from a lack of confidence in the overall economy by the threat of a recession, and the loss of jobs in the financial sector— a primary driver of our co-op and condo market. I can't say that I've personally seen the market visibly softening on price that much yet here, although people are being a bit more cautious in their decision making. I noted back in April, in this post when first quarter numbers were released, that it is a more balanced environment, where having the most informed perspective on value, and solid negotiating is critical to closing deals. Sellers need to be realistic, overreaching on price and second rate marketing will kill their chances for a deal. I've been involved in two bidding wars on apartments in 2008. This far from a quiet market. A short list of related entries we've posted on follows, as does an edited transcript of professor Siegal's podcast on "Ignoring risks"

related entries:
Is it a good time to buy in Tribeca?
video: How risky mortgages and exotic securities, brought us to brink of recession, while no one looked too closely
video: Todd Sinai on home values
video: Inside the credit crisis
Podcast: Mortgage Crisis Bailout: Relief for Some, Risk for Others
Podcast: Bear Stearns, Rate Cuts and the Threat of Inflation
Podcast: Is the Fed too slow on cutting interest rates?

An edited transcript of the conversation follows, after the jump.


Friday, June 27, 2008

How risky mortgages and exotic securities, brought us to brink of recession, while no one looked too closely

video: Susan Wachter on securitizations deregulation
economyReal estate professor Susan Wachter discusses how the drive to securitize mortgages, combined with deregulation, and catalyzed with a little bit of greed, were key triggers of the credit crisis. She explains how complex securities products with a lack of standardization, and where the profits were based on fees rather than trading on the inherent risk in the products themselves, has put the health of the global economy at risk.

"we have been in an extreme deregulated environment, where basically anything goes. And in that environment, even the competitors can race to the bottom"
— Susan Wachter, Wharton School

related entries:
video: Inside the credit crisis
video: Todd Sinai on home values

An edited transcript of the conversation follows, after the jump.


Wednesday, June 25, 2008

A guide to purchasing a Manhattan home

buying a manahattan co-op or condoManhattan's distinctive neighborhoods offer a variety of experiences from downtown's Tribeca, Soho, Chelsea, and Greenwich Village; to the uptown enclaves of the Upper West Side and Upper East Side. There is a rich inventory of available homes, relatively low mortgage rates, and a return to a more balanced market between buyers and sellers. A little bit of horse trading is possible again— this may be the best time in years to think about buying New York City real estate. Is it a resale or a new development? The type of home and it's location are highly personal choices which an astute broker can help you navigate and negotiate. Once you've found that Manhattan home you love, and have an accepted offer, you will need a Real Estate Attorney to handle one of the most complex transactions possible. This is the first in a series of posts which will be of particular interest to home buyers. It’s a guide to purchasing a home in New York written by Real Estate Attorney Keith Schuman, to provide an overview of what you will need to know to finance and purchase a coop, condo, loft or townhouse.

66 Crosby St., Soho, New Yorka loft at 66 Crosby Street, Soho, New York (sold)

When should I buy a home?
Choosing the place where you will live, and making what probably will be the largest investment in your life, are important decisions. While this guide was written to assist you in this endeavor, it also is highly recommended that you surround yourself with a team of trusted and experienced real estate professionals to guide you throughout the process. This team ideally should be comprised of a real estate broker, a real estate attorney, and a mortgage broker.

Every homeowner has been a first-time buyer once in their life. Since purchasing a home most likely will be the largest purchase you will ever make, you must first consider if you are ready to take this important step. You must decide if you want to own a home and if you can afford to. You also will have to decide what type of apartment you like, which neighborhood you want to live in, and how much you can afford to spend for it. As you can see, there are many choices and decisions that will have to be made.

We’ll provide some basic knowledge about the steps you will be required to take along the way to your new home purchase. However, before you even begin this process, try asking yourself several important questions:

  • What are your personal reasons for buying a home?
  • Do you need room for a growing family, or do you want to move closer to work or to schools?
  • How long do you plan to own this home? You may be better off renting if you may need to look for work outside of the area, or if you want to have the flexibility to move on a whim.
  • Do you have enough cash for a downpayment and closing costs?
  • Can you afford to carry a monthly mortgage and still pay your bills? A mortgage should generally take no more than one-third of your net income. Calculate what your payments will be.
  • Do you need the tax break? Mortgage interest and property taxes are tax deductible items. Although you may be making a larger monthly payment than if you are renting, remember to take into consideration the money you will save because of the tax deductibility of a portion of your monthly carrying expenses.

The Advantage to Owning
Almost two-thirds of all Americans own their own home. Some of the advantages to home ownership are:
  1. More Options. Generally, there are fewer options in the type and location of rental housing. If you are looking for a particular type of apartment or house or are interested in living in certain neighborhood, you may have to buy.
  2. Tax Advantages. The money you spend on mortgage interest and real estate taxes is deductible from your taxable income.
  3. Value Appreciation. The value of your home may increase over time, providing you with a valuable asset and a smart investment.
  4. Autonomy. As a homeowner, you will have more freedom to make changes to your home than you will as a renter. And, unlike a renter, you have the security of knowing that as long as you meet your financial obligation related to the property, you cannot be evicted or be forced to move when your lease expires.

You can shop for a home by reading the classified ads or by surfing the Internet. However, an experienced real estate agent will be invaluable in helping you focus your search, analyze the market, represent you in negotiations, and provide reliable references for the other qualified experts that you will need along the way, including a mortgage broker, a home inspector, and a real estate attorney.

Once you have made the decision to purchase a home, you will need to determine how much you will be able to spend. How much you can afford will depend on your income and how much money you will have available for a downpayment and closing costs. Your income also will determine how much you will be able to to pay for monthly housing expenses and how large a loan you will be able to obtain. As a rule of thumb, you should add the amount of cash you will have available for the downpayment to the closing costs and the loan amount in order to calculate your affordable price range for buying a home.

When you sign a contract to purchase a home, you will be required to simultaneously make a payment (the downpayment) equal to ten (10%) percent of the purchase price. The downpayment check may be a personal check, and it will be made payable to the seller’s attorney who will hold the money in an attorney escrow account until the closing. In general, when obtaining a loan to buy a home, any funds that will be used for the downpayment and any other funds that are used to pay for the home (other than your bank loan) must come from your own savings. No money can be borrowed from any source, i.e., no credit cards, no personal loans, and no credit lines can be accessed. You may, however, be able to receive a gift of funds for the downpayment or a portion of the purchase price as long as you disclose this to your lender in your loan application.
Closing Costs
As you begin to determine how much money you will need to purchase a home, you also must consider the costs associated with the closing. Closing costs will vary depending on the type of property to be purchased and the type of loan that you select. Generally, closing costs for a house or condominium apartment (i.e., real property) will be greater than those for a cooperative apartment (i.e., personal property) because of the need to purchase title insurance when purchasing real property and because New York State imposes a mortgage recording tax on all monies borrowed for the purchase of real property but not for the purchase of personal property. Purchasing a coop or condominium from a sponsor or developer also will increase your closing costs substantially; we’ll be discussing more about that in an upcoming posting.
Monthly Expenses (Maintenance Costs and Common Charges)
Carrying charges are those costs associated with the upkeep and operation of a house, coop, or condo apartment and are in addition to your monthly loan payment. In a coop, carrying charges are called “maintenance” and in a condo they are called “common charges”. Carrying charges typically cover a share of the costs of operating the building, such as the cost of utilities for the common areas of the building, salaries for building employees, real estate taxes, and property insurance. These operating expenses are apportioned to each coop or condo unit owner by the apartment corporation or condominium association on a monthly basis. In the case of a coop, the monthly maintenance payments also cover local real estate taxes on the building and payments on the building’s underlying mortgage. For house and condominium apartment owners, real estate taxes and homeowner’s insurance are an additional expense that should be factored into the calculation of your anticipated future monthly expenses.
Qualifying for a Loan
The best and quickest way to learn how much you will be able to borrow for a home purchase is to pre-qualify for a loan. Pre-qualifying will not cost you anything, and it will give you a good idea of how much you will be able to borrow based upon your current income, assets, and liabilities. Lenders will review your assets, your liabilities, and your debt-to-income ratio. They will consider loan payments, credit card payments, and other static monthly obligations in their debt review. A lender will also order a credit report to examine your credit and payment history with credit cards and other loans. A lender also will require you to submit a financial statement, copies of tax returns for the previous two years, pay stubs, and W-2 statements.

About the author: Keith A. Schuman, Esq. is the founder of Schuman & Associates, LLC, a full service real estate firm that provides legal services to its clients, through all aspects of their transactions. Keith is a frequent contributor to Contact him at or phone 212.490.0100.

related posts: tips on shopping for a home

Who are the key advisors in buying a Manhattan home?

What are the actual differences between townhouses, coops, condos and cond-ops?

What are the income tax benefits of owning a home

updated 10.03.2008

Monday, June 23, 2008

video: Todd Sinai on Home Values

economyIn our second installment of "Inside the Credit Crisis" from the Wharton School, real estate professor Todd Sinai talks about changing consumer attitudes. He says, "Don't think of your house as an investment comparable to savings or a stock portfolio". Yet, some of his comments about the sub-prime mortgage mess contrast sharply with today's conventional wisdom. When asked if this has been a failed experiment to make capital available to people who might not otherwise qualify for conventional mortgages he answers...
"Oh, I hope it's not a failed experiment.
I think this is a market that's terrific...the jury is still out about what has actually happened here"
— Todd Sinai, Wharton School of Business

related entries:
video: Inside the credit crisis
video: How risky mortgages and exotic securities, brought us to brink of recession, while no one looked too closely
Unconventional wisdom on housing and the credit crisis

An edited transcript of the conversation follows, after the jump.


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