Commuting to Manhattan A Grim Ray of Hope
April 2, 2008
My second son works in Manhattan but lives in Brooklyn, about 40 minutes away from his office. He lives so far away because he can't afford the rent downtown. When he was home for Easter, we got to talking about real estate prices in New York. As long as he's been in the city (four years at NYU and now one year on his own) prices have been escalating. From his perspective of five years, he can see nothing but further increases.
Sometimes, when I'm in the city, I feel the same way. Apartments I could buy for a million dollars here in Florida would cost me $5 million there. It's too much to spend but I wonder, "If I don't buy now, will it just get more expensive in the future?"
There are arguments that can be made. New York is a unique city - there is none like it in the world. If Americans can't afford apartments on Madison Avenue or overlooking Central Park, Europeans or Indians or Chinese people will buy them up.
Ultimately, though, Manhattan's real estate market is dependent on New York City's economy and that economy is only marginally affected by overseas investors. What does affect the city's economy strongly is all the financial activity that is based there. All the banks and brokerages and insurance companies and, of course, the stock exchanges.
About a third of the Big Apple's economy is based on Wall Street. That's higher than it's ever been, according to the New York Times. Wall Street's incomes – which are extremely high right now - are likely to be coming down. They are being destabilized by the recent bad news about Bear Stearns. And if the news gets worse, as it likely will, there will be lots of demotions, firings and even massive lay offs...
According to the New York Times, Wall Street incomes escalated from about $250,000 in 2001 to about $390,000 last year. That's enough to buy a pretty fancy apartment. But what will happen when that figure drops down to a more realistic figure? What will happen to the rents then?
"Up to this point in New York City, the material result of the credit crunch hasn't been felt as quickly as people were expecting," Marcia van Wagner, deputy comptroller for the budget of New York City, told the New York Times. "It took a while for the other shoe to drop."
This Bear Stearns bailout is pretty scary on the face of it. But if you look behind the curtain, it is scarier still. To save the financial giant from complete collapse, JP Morgan Chase bought out Bear Stearns stock for just $2 a share. That was barely one tenth the going market price, which meant that all those stockholders were decimated.
But it wasn't really JP Morgan that saved the company. It was the government guarantee that stood behind JP Morgan. According to the deal, JP Morgan assumed the first $1 billion of Bear Stearns' debt. But the government agreed to take on the rest. For the purpose of the deal, that was estimated to be about $30 billion.
Only a fool would think that Bear Stearns is the only big financial company in serious trouble. And only a bigger fool would believe that the government has the resources to keep stepping in at the last moment and saving the day.
It seems inevitable to me that there will be a big financial shakeout coming. And at the end of it, most Wall Street honchos that were making almost $400,000 a year will be unemployed or working for a quarter of what they are making now.
When that happens, real estate values and rent prices will come tumbling down. And that's when my son will be able to move into Manhattan and walk to work.
posted by M. Masterson @ 4:24 PM,
2 Comments:
-
At 3:26 PM,
Gryffindor said...
-
The thing about unwinding leverage is its likely to happen in spurts -- "punctuated disequilibrium".
So things could look stable for the rest of the year and we could still be subject to more major dislocations.
Have a number of colleagues on Wall Street and the crazy thing is no one knows how much unknown risk there is still left in the system.
Which is the scary thing.
Cheers -
At 1:37 AM,
Steve Chambers said...
-
It was a fun party while it lasted and a lot of people made a lot of money doing basically nothing. There was so much money being made leveraging assets and taking risks that valuations lost all sense of reality and the system went out of whack. Unfortunately these unrealistic values are unsustainable long term.
It seems to be a law of the universe that whenever people start to provide you with a bevy of reasons justifying why things are different this time they aren't. Secondly, and this is the scary part, whenever the government get involved it only gets worse.
We all want to believe in magic and that we can get something for nothing, hence the popularity of books like "The Secret".
Traditional values like hard work, self-discipline and conservative accounting seem so old fashioned and oh so last century, but they have proven over time to be the only things that succeed long term.
Subscribe to RSS Feed