At least luxury homes are selling well. (technorati)

The American people don't stand united on very many causes these days, but the recovery of the housing market is one of them. After all, failure was tied to the unhappy fate of so many households that most of us would like to think that its good fortune would signal similarly widespread prosperity.

Well, the housing market is now limping again, although the signs of a total return to health are a good deal more promising in the upper than the lower echelons. The Wall Street Journal reports that jumbo loans—larger, higher-cost loans used to purchase luxury properties—are doing really, really well. A lot better than the rest of the housing market, which is still bogged down by foreclosures and underwater mortgages in many parts of the country.

But at least those Americans still struggling to make their mortgage payments on houses that are worth far less than whatever they paid for them before the crash have some good news coming their way: as of this approaching November, it will be easier for homeowners to conduct short sales. Meaning that those with underwater mortgages will not need to jump through so many hoops to sell their property for less than it's worth. Progress!

Also, some cities in California are trying to use eminent domain to take over troubled mortgages—a plan that's going to be fought tooth and nail by mortgage-holders, but could potentially help to turn the tide in beleaguered neighborhoods.

Of course, the surge in jumbo loans means that Americans are buying homes again, which should, ostensibly, buoy the market overall. Or foreign investors are buying homes here because our economy still looks better than their economy. But still, good news, right?

The Journal reports that lenders issued $38 billion in private jumbo mortgages during the second quarter of 2012, up 65 percent from a year earlier. The financing generally covers loans exceeding $417,000, with higher cutoffs in more expensive markets like New York.

Rates on jumbo loans now average 4.22 percent, generally a percentage point higher than regular loans, and homeowners must generally put 25 to 30 percent down.

Luxury home sales, defined by the National Association of Realtors as homes over $1 million, went up 19 percent in July from a year earlier, a trend that the Manhattan luxury market, with higher price points (of course), is at the forefront of.

kvelsey@observer.com

The sky's the limit? (Getty)

As usual, the $4 million+ housing market in Manhattan stands strong—thanks in part to the record-setting $88 million dollar purchase a few months ago—but the rest of Manhattan continues to slump.

"For the first time since the recovery, the U.S. is growing at a quicker pace than New York City," Greg Heym, an economist at Brown Harris Stevens and Halstead, told the Journal.

Reports from the Department of Finance yielded troubling results to the housing market, further noted by the Journal:

The analysis for the year so far showed that sales of apartments selling for less than $1 million, the largest segment of the market, fell by the most, 7.9% overall, including a steep 14.9% decline in sales of co-ops at that price point.

At the same time, sales at the top end of the market, for apartments selling for $4 million or more, rose by 15.6%, as brokers reported a continuing influx of foreign buyers and strong sales in new condominiums.

Despite the clear drop, real estate firms remain optimistic:

Diane Ramirez, the president of Halstead Property, said: "It is a good, lively, active market across the board."

Jonathan Miller, an appraiser and president of Miller Samuel Inc., who prepared market reports for Prudential Douglas Elliman, said the sluggish figures reflect the fact that "people just held back" toward the end of last year because of economic uncertainty.

It just might be best to look at the glass half-full!

Though, the housing market isn't the only industry affected. The MTA takes a few blows on economic downturns.

mewing@observer.com

The Fresh Direct fridge goes here.

One winter evening in 2006, host Martin Bashir’s voice intoned over the opening of Nightline: “Meet the brash, young real estate assassin, selling lavish dream apartments to clients with money to burn.”

The TV screen bled to an earnest-looking Michael Shvo. “When you see a photo of the New York skyline,” the 32-year-old informed us, “these are buildings I made happen.”

And what made Mr. Shvo happen?

The New York condo boom, in no small part a product of 9/11. For several years during the last decade, he ran at the vanguard of a marketing movement for thousands of new condo units, one that emphasized Fresh Direct, spa treatments, 5 percent down for multi-million-dollar properties—and sex. Andre Balazs and partners pitched a steel-and-glass tent at a corner of the financial district, and called it William Beaver House; ostensibly after the corner’s cross-streets but the marketing was all about the middle word’s ribaldry.

Similarly lascivious condos popped up from Harlem to the Lower East Side to Long Island City, changing neighborhood demographics—everyone was to have the tastes of a 27-year-old VP at Goldman Sachs, it seemed—their scaffolding a ubiquitous symbol of the city’s slog back from the terrorist attacks.

Those attacks rendered an already recessionary economy supine. Most tellingly, companies fled, especially from downtown; and borrowing money became much easier for both home buyers and the people building the homes—the Fed, for instance kept the capo di tutti capi federal funds rate at 0 for nearly three years after the attacks.

“What happened was that it created this unnatural affordability for housing,” said Jonathan Miller, C.E.O. and president of New York appraisal firm Miller Samuel. “If we did not have 9/11, we would have probably gone into an expanding recession; and the Fed would have probably lowered rates to respond to the recession. But I think the symbolism of getting the economy back on its feet led them to keep rates at 0 for too long.”

Through this combination of cheap cash and vacant property, more than 6.5 million square feet of office space in lower Manhattan alone was converted to condos in the decade after the attacks, according to brokerage Jones Lang LaSalle—more than three Empire State Buildings’ worth. Much more commercial space would follow, perhaps most tellingly in the old warehouses of the Brooklyn waterfront.

Within a few years, condos were routinely outselling the co-ops that had dominated the city’s for-sale housing for as long as anyone could remember (today co-ops still outnumber condos 3 to 1). In 2006, 57 percent of all Manhattan apartment sales were just newly built condos, according to Miller Samuel. And they were going in Manhattan for well over $1,000 a square foot on average, more than co-ops. Buyers were often allowed to borrow up to 95 percent of the price (a mortgage share most co-ops would never permit). Everyone was winning.

And now? Condos still sell, though at a leaner pace—they accounted for 48 percent of Manhattan apartment trades in the second quarter of 2011. And development has slowed considerably amid a tighter lending climate since the late 2008 collapse of Lehman.

Manhattan condos, looking back, burned brightest between 2004 and 2008, in tandem with the rapid development, the loose money and the seminal marketing. All of that’s over now.

The 200-plus unsold condos at William Beaver House are rentals, acquired through a loan sale late last year by CIM, an L.A. outfit that loves distressed assets. And Mr. Shvo, the “real estate assassin?” Emails to an account that The Observer knows was once hopping were not returned. And a phone call to his offices was answered thusly: “At the subscriber’s request, this phone does not accept incoming calls.”

tacitelli@observer.com

The Massey Knakal release noted that 221 First Avenue had just sold for $1,112.80 a square foot—the most ever paid for a retail and apartment building in the East Village (city records confirmed the price).

Less than a week later, The Wall Street Journal summarized a housing report by boutique brokerage Olshan Realty. The report contained this dynamite factoid: During the week ending Feb. 13, buyers signed contracts on 31 New York apartments with asking prices of at least $4 million, generally considered the threshold for the luxury market; it was the highest weekly total since the Lehman collapse in September 2008.  (The previous post-Lehman high was 27 contracts during the week ending Nov. 22, 2009.)

Also: Sellers are getting what they want. The report showed that the spread between a seller's first asking price and the final one was narrowing.

So is this a new bubble/boom upon us? Not really. New York never exited whatever frenzy we were in four or five years ago. Things just kind of slowed a bit, and are now picking back up volume- and price-wise. The bust/burst of late 2008? Almost like it never happened—at least not here. To prove my case, we'll take building sales first, and then apartment sales.

Robert Knakal, the chairman of Massey Knakal and The Commercial Observer's Concrete Thoughts columnist, explained his firm's statistical take on 2010 a couple of weeks ago.

Interestingly, while the dollar volume of sales nearly tripled in 2010, the number of buildings sold revealed a much smaller yet impressive increase over 2009 totals. In 2010, there were 473 buildings sold, a 47 percent increase over the 322 sold in 2009. While this increase created a positive psychology within the market, the 473 buildings sold was still 53 percent below the 999 buildings sold in 2007, and well below the 860 sold back in 2005.

... In conjunction with these, we've seen the average price of a property sold in Manhattan nearly double, from $12.9 million in 2009 to $25.3 million in 2010. The 2010 average was slightly less than half of the $52.5 million average in 2007, and was only slightly below the $28.5 million average in 2005. Not surprisingly, the $25.3 million average transaction size in 2010 is nearly four times the citywide average of just $7.2 million.

So while building sales and prices are not up to 2005-through-2007 levels, they were up against 2009 numbers (and, largely, against 2008 as well). And they are trending upward still. And... and! They are, most importantly, doing so against an economic backdrop that is not necessarily supposed to foment brisk sales at increasing prices.

What brokers call fundamentals—jobs and the lack thereof being No. 1 in this case—are not as strong as they should be to warrant such sales and pricing activity. In other words, who knows, really, why things are improving? There are theories—foreigners parking money in New York City property, rules changes involving refinancing (kicking the can, a rolling loan gathers no loss, etc.)—but none really nails why, with the rest of the nation and much of the world still mired in fiduciary quicksand, New York would be recovering so quickly (I have a pet theory, and it's not mind-blowing, but more on that later).

As far as apartments go, the picture of improvement is clearer, though the reasons for it are just as opaque. In the fourth quarter of 2008, in the shadow of the Lehman collapse, 2,282 condo and co-op deals closed in Manhattan, according to appraisal firm Miller Samuel, which produces a much-watched quarterly housing report for Douglas Elliman. In the fourth quarter of 2010, 2,295 apartments traded, a nearly identical number. In the two years in between, quarterly Manhattan apartment sales spiked as high as nearly 2,800 and never dropped below 1,500. In short, Manhattan was never in danger of not reaching its typical apartment-trade volume of 9,000 to 10,000 annually.

On the luxury end, as we've seen, the steadiness was even more pronounced. Crash? Puh-leeze. In the fourth quarter of 2008, 228 luxury apartments, according to Miller Samuel, traded in Manhattan. Two years later: 230. There was a dip in early 2009, as the total descended to 150, likely an effect, indeed, of the Lehman collapse, as the quarterly numbers refleted deals negotiated months before. But, still, you get the picture. No cliffs dropped off from; no tumbles taken; no nosedives executed; your cliche here. (As Jonathan Miller, the author of the Douglas Elliman reports, has aptly put it on several occassions, the New York—or larger nationwide—housing boom was never really a housing boom but a credit boom as mortgages were cheap to come by.)  

Why, though, no nosedives? Why do nondescript East Village walkups trade for records and luxury apartments sell voluminously amid double-digit real unemployment, cable-news-ready recriminations over states' ballooning deficits, and an era of collapsing Western economies (Ireland, Greece, Italy)? Wasn't the city, Manhattan in particular, supposed to have been awash in a distressed-assets wave? Isn't it supposed to be cats and dogs living together by now?

It can't just be the cheap money; mortgage rates, after all, are creeping upward, and the commercial mortgage market has yet to return to pre-2008 fluidity (Scott Singer wrote about the slow return to normalcy in this newspaper a couple of weeks ago).

A week before Tax Day 2010, this newspaper neologistically labeled the continued faith of lenders in the Manhattan commercial market as "boomism," an addiction to belief in the redemptive power of walk-up portofilios and troubled landlords of midtown south Class B buildings. (We also referenced the last Bourbon king of France—extra points!) From the piece by Dana Rubinstein:  

Has New York real estate learned anything over the past two years? Anything at all?

"Nope," Mr. Durst said. "Nope. Nope."

"This is my third cycle," [Douglas] Durst, co-CEO with his cousin Jody of mega-landlord the Durst Organization, told The Observer, sounding world weary. "And each time we get back into it quicker and quicker. We seem to be getting there fairly fast already. Some of the things that have been done don't make a lot of sense."

So, that's it, really: A few down quarters in 2008 and 2009, and a gradual, then quick, ratcheting up to where we stand now on both the commercial and residential sides. All, I think, based on the conviction among investors and homebuyers that any money to be parked in real estate should be parked in real estate in New York, America's only true world city on par with Tokyo, London, et al. That conviction kept the boom from every really going bust, the bubble from ever bursting.

Does that mean, of course, we're still in a bubble that could pop at any moment? Well...

tacitelli@observer.com 

Former General Motors subsidiary GMAC has lately drawn attention as lawyers charged that the mortgage lender had hastily filed to foreclose on homes. One GMAC signing officer said in depositions that he has signed thousands of foreclosure documents in a month, without knowing key details about the mortgages those documents represented. Many of the documents were not properly notarized, either. These missteps could potentially invalidate a whole slew of foreclosures.

And while that's surely welcome news for people who've had their homes taken from them improperly, the ensuing fight over what should happen to the houses will keep the housing market from bottoming.

The poorly executed foreclosure documents are indicative of staffs at mortgage servicers having trouble keeping up with the flood of defaults. And now the sloppy execution is putting more strain on the system as lawyers begin to contest the proceedings.

The legal gum-up will prevent houses from re-entering the market, creating a scenario where extra supply remains hidden and prices stay higher than they "should" be. And the longer it takes for the supply to come to market, the longer we'll have to wait for a housing recovery. Hopefully a few deserving homeowners can keep their houses. Given the way banks have been handling foreclosures lately, it's not impossible to imagine such an outcome.

The U.S. housing market is one of those indicators. This market generally represents a chicken-and-egg relationship with our economy and, therefore, our employment market. One school of thought is that as housing prices rise, equity rises; a "wealth effect" is created; and the consumer spends more, bolstering the economy. The other school says that if the economy is expanding, jobs are created, providing more wealth for people to buy homes with, which exerts upward pressure on home values.

Most economists believe that the housing bubble was largely responsible for our most recent recession and the near collapse of our financial markets. Fingers were routinely pointed at several of the participants who were thought to be culpable for exacerbating the problems. They included bankers, mortgage brokers, real estate brokers, appraisers, mortgage-backed securities originators and ratings agencies.

Only a small segment of legislators or the media placed any blame on, or even mentioned, governmental intervention and policy as a--if not the--major contributor to the housing mess. One perspective could be that the government created the playing field and the guidelines; and the aforementioned private-sector players simply filled roles created by the opportunities that misguided government initiatives created.

Trying to influence the national homeownership rate and attempting to motivate the private sector to create affordable housing, rather than doing so directly, were two of these misguided policies that, to a significant degree, led to our recent crisis.

In the mid-1960s, the homeownership rate in the U.S. hovered around 63 percent, a rate that steadily increased to about 66 percent in 1980. Given the oppressively high interest rates at that time (single-family home mortgage rates were as high as 18 percent), the rate of homeownership fell back to 63.5 percent by 1986. For nearly a decade, the rate was relatively flat at about 64 percent. During this period, many on Capitol Hill thought that increasing the homeownership rate would be good for the country and the economy. Additionally, outside pressures began to emerge to dramatically affect U.S. housing policy. 

In the early 1990s, housing advocates and community groups such as ACORN pressured Congress to force lenders to move away from conservative underwriting standards. The advocates concluded that only the most restrictive underwriting would be utilized unless Fannie Mae and Freddie Mac moved aggressively to motivate banks to expand their historical underwriting standards. In 1991, an open ear was given to these factions by the Senate Committee on Banking, Housing, and Urban Affairs. The result was a law imposing affordable housing mandates on the GSEs via the Federal Housing Enterprises Financial Safety and Soundness Act of 1992.

Naturally, in 1993, we began to see regulators move away from requiring adequate down payments, good credit and an ability to meet monthly mortgage payments. So much for common sense underwriting principles.

By 1995, HUD, in conjunction with the private mortgage industry, announced a National Homeownership Strategy to loosen underwriting standards nationwide. These policies were implemented in tandem with the GSEs agreeing to back these mortgages either directly or by purchasing loans made by banks based upon these loose standards. Lenders were happy to play ball as they would originate these sketchy loans only to immediately sell them to the taxpayers.

I know that Fannie and Freddie are not technically "the taxpayer," but who's kidding who?

THESE POLITICAL INITIATIVES have led to disastrous results for the housing market. Judicious underwriting became a thing of the past in the housing bubble years of 2004 through 2007. Here, traditional fully documented loans with 20 percent down payments gave way to low-quality, poorly documented mortgage products. These included Alt-A, subprime, option-ARMs and, my personal favorite, the NINJA loan. The NINJA is the no-income, no-job, no-assets loan.

Fannie and Freddie were active contributors in the decline of mortgage standards as they, at the urging of Congress, continued to purchase and securitize boatloads of these low-quality mortgages. 

The result of these actions led to a tangible shift in the quality of American mortgages. For example, in 1990, only 0.5 percent of home loans were made with down payments of 3 percent or less. This percentage ballooned by 2006 to about 30 percent. Nearly one-third of borrowers had acquired a home with virtually no money down, leaving us in a condition ill-equipped to handle falling housing prices. These 2006 and 2007 vintage loans, for example, accounted for 24 percent of Fannie Mae's business but 67 percent of its credit losses.

Easy money and low rates followed and the housing bubble was inflated. In 2004, some in Congress became concerned that the government's role was becoming too dominant in the housing market and some even predicted that a bailout might eventually be needed. Barney Frank famously responded by saying, "Let's just roll the dice with Fannie and Freddie." That roll of the dice has "crapped-out" as the taxpayers have already poured about $145 billion into the GSEs to cover losses, and there doesn't seem to be an end in sight. It is estimated that the tab will rise to just under $400 billion over the next 10 years.

In fact, Fannie and Freddie's track record are worse than the rest of the market. It is estimated that approximately 25 percent of all borrowers obtaining home loans are presently underwater, meaning that their mortgage balance is greater than the value of their home (remarkably, 40 percent of these have loan-to-value ratios in excess of 125 percent). This percentage for loans held by the GSEs is about 35 percent. In 2008, Fannie and Freddie were placed into conservatorship, which is a purgatory between implicit nationalism and bankruptcy. "Conservatorship" is also just a nice way of saying that their losses will be covered. Given this reality, not many people were surprised when, after decades of promoting and defending the social mission of them, Mr. Frank recently called for the abolishment of Fannie and Freddie.

The present administration's attempt to address the nation's housing problems has accomplished, on purpose, what had previously happened by accident. The first-time home buyer's tax credit has put many people into homes with virtually no skin in the game.

In fact, an examination of the numbers shows that the government was actually paying people to buy houses. When the tax credit was implemented, the average home price in the U.S. was $178,000. Mortgages were primarily provided through the F.H.A. at that time, which required a maximum of a 3.5 percent down payment. Therefore, on the average home, a down payment of about $6,200 was required. The first-time home buyer's tax credit was $8,000. The result was that buyers were handed a deed to a house and a check for $1,800. We have seen that movie already and know how it ends.

Based upon this tax credit program, which steals transaction volume from subsequent periods, was it any surprise that home sales plunged 27 percent after the expiration of the program? Unfortunately, this drop has surpassed even the most bearish of expectations. Home builder confidence has been down for two consecutive months, and housing starts have been running at less than 500,000 on an annualized basis in recent months, less than one-third the pace in 2006. (Of course, the housing market varies greatly market to market, and several states have been hit much harder than others, like Nevada, Arizona, Florida and California. In New York, our housing market has held up fairly well.)

Foreclosures continue to provide significant headwinds to the housing market. Over the past year, the foreclosure rate has been about 4 million units, nearly four times the long-term average. Some market observers positively point to the fact that foreclosures appear to be slowing. We must, however, be cognizant of the fact that the popularity of short sales and deed-in-lieu-of-foreclosure transactions are displacing foreclosures at an increasing rate. Various reports project additional foreclosures ranging from seven million to nearly 10 million over the next several years.

A variety of mortgage modification programs have been virtually ineffective. The president's signature Home Affordable Modification Program was supposed to help four million distressed borrowers. While nearly 1.3 million have applied for help or received temporary assistance, real help eludes them. Over 50 percent of participants in this program re-default within 12 months of modification.

GIVEN THESE CONDITIONS, economists have projected a growing likelihood of a double dip in the national housing market. A double dip would have negative implications for our commercial real estate market. Let's connect the dots.

We have previously discussed the importance of employment on commercial real estate fundamentals. Small businesses are the leading contributor to job creation and growth in the U.S. The fact is that home equity withdrawal and credit card borrowing are the primary financing sources for the majority of small businesses. Given new regulation in the credit card industry, which was ironically initiated to "protect" consumers, credit availability has shrunk and that which is available is more expensive than it was. Therefore, small business has restricted access to this form of financing. This places even more importance on home equity.

To the extent that home equity grows, it provides existing and potential small-business owners with a source of financing for job creation. Additionally, home equity creates a "wealth effect" that stimulates personal consumption. With consumer spending making up nearly 70 percent of our gross domestic product, this has important implications for our economy at large. Second-quarter 2010 G.D.P. growth was adjusted downward from an initial estimate of 2.4 percent to just 1.6 percent. This is far below the 6 to 8 percent growth rate normally seen at this point in a recovery. An increase in consumer spending would lead to healthy G.D.P. growth.

Therefore, strengthening conditions in the housing market would be good for job creation, the economy and, consequently, the commercial real estate market. It is actually quite remarkable that the housing market is not stronger given the extraordinarily low interest-rate environment and the significant drop in value seen in most submarkets. Today, the 30-year, fixed-rate mortgage averages just 4.36 percent, an all-time low.

Getting back to the chicken-and-egg dynamic, can the housing market improve before the job market improves? Conventional wisdom suggests this will be difficult. For those of us in the commercial real estate sector, a healthier job market and stronger housing market can't come soon enough.

rknakal@masseyknakal.com

Robert Knakal is the chairman and founding partner of Massey Knakal Realty services and in his career has brokered the sale of more than 1,075 properties, having a market value in excess of $6.5 billion.

In September of 1977, there was also a Time cover featuring a blue sky with a nice yellow house, except the thing was floating upwards. The cover story was called, gorgeously, Housing: It's Outasight. This week's was called The Case Against Homeownership; for an additional take on that case, try David Leonhardt's excellent column in the Times.

The '77 story is worth pouring over, too, if only because it reads like an ancient manuscript from a long-lost land. "Some wives feel forced to go to work, not because they want to have careers or earn their own spending money, but because buying that dream house nowadays usually requires two incomes," Time explained. It has quotes from a bounty of Americans annoyed by high home prices. How quaint life was! "If anybody had told me six months ago that I would spend $115,000 for a house, I would have laughed out loud," says an executive at a Florida medical-equipment manufacturer. He sold all his bonds and cashed in his savings account to get the $40,000 for a down payment.

And California? A "housing Oz unto itself," the magazine marvels. "And these absurd numbers, $100,000," moans a high school principal there. "It's some kind of fantasy world."

But that's not all the archives offer. "Inside the New American Home," was on Time's cover in 2002. "Chef's kitchens, giant master suites, home theaters," the magazine said. "People are turning their houses into luxurious escapes. Come take our guided tour." The house, again, was yellow. "Home Sweet Home: Why we're going gaga over real estate," was the cover line in June 2005, over a cartoon of a man bear-hugging a yellow house. Some things don't change.

mabelson@observer.com

Brian Williams is quite informal! "Anything new?" It's like saying "Hey Barack, what's up with the economy, man?" Also, did Williams expect Barack Obama, the President, to be surprised by recently released GDP figures? Obama had, after all, been away on vacation.

Obama said, "The economy is still growing, but it's not growing as fast as it needs to. ... And I've said so before I went on vacation, and I'll keep on saying when I -- now that I'm back. We should be passing legislation that helps small businesses get credit, that eliminates capital gains taxes so that they have more incentive to invest right now."

He also said that there is no "magic bullet" to solve the crisis. Maybe that's why his administration is so fixated on deploying lasers instead.

But will the $8,000 tax credit for new homebuyers, a measure that may have helped prop up the housing market before a disconcerting July, come back? Too soon to say, said Housing and Urban Development secretary Shaun Donovan on CNN's "State of the Union With Candy Crowley" on Sunday. Okay, then, will the government use lasers, or at least laser analogies, to fix the housing problem?

"We're going to be focused like a laser on where the housing market is moving going forward, and we are going to go everywhere we can to make sure this market stabilizes and recovers," said Donovan.

Hard to get much more focused than a laser. Or much less focused than the Department of Housing and Urban Development. We're eager to see where on that spectrum HUD finds itself in the next couple months.

That's down from a high of 3.77 percent reached in the economically calamitous first quarter of 2009, but higher than the fourth quarter 2009 rate of 3.31 percent.

Mortgage Bankers Association chief economist Jay Brinkmann said that this is because of how hard it is to get a job, which makes sense, because it gets pretty hard to pay a mortgage without any income. Also, "some percentage of the loans modified over the last several years have become delinquent again because those borrowers, by definition, have weak credit." Some people are just bad at paying for things!

On the bright side, serious delinquencies, in which borrowers have lapsed in payment by 90 days or more, declined for the second quarter. But it's probably not good to see that the one-month lapses are on the rise. A good way to fall 90 days behind in payment is to first fall 30 days behind.