We couldn’t help but be hypnotized Thursday by the almost 1,000 point market drop, and whiplashed by its subsequent jump within 15 minutes. The Greek situation is now believed to be far more than a liquidity crisis but rather an issue of solvency, and one that is not likely to be contained regardless of any short-term band-aid solutions. The foundation of this crisis is the sovereign debt explosion in industrial countries (i.e. bloated public finance landscape marked by governments spending beyond their means), and its implications are yet to be determined.
There are many factors at play in determining the consequences of this fiasco, including:
- How Greece will react to its having to lower its sense of entitlement, after the deadly riots and crippling strikes seen as a reaction to its austerity program
- When Germany’s patience will run out after already “subsidizing” the weaker EU nations for so long
- How successful the EU & IMF will be in stopping the bleeding in Greece and managing the situation throughout Europe to prevent Portugal, Spain and Italy from following suit
Yes, there are the likely consequences for the global economy as a whole:
- Aggregate demand will decrease, negatively impacting trade flows and adding a fiscal drag throughout Europe
- Capital will be reallocated, firstly away from the weaker members of the Eurozone to the stronger ones, and secondly towards the US, most likely
- Volatility will continue to rule, risk will be re-priced across the board (think widening credit spreads)
- Investors will look away from the oscillation of equities towards the relative safety and liquidity of government bonds, as they readjust their risk appetites
- The Euro is likely to continue its decline versus the dollar (having reached a 14-month low late last week)
Yet we couldn’t help wonder what the consequences may be for Manhattan real estate. It does require extrapolating 5-6 steps ahead to even get to that point, but that’s what we’re here for. It’s premature, and it’s hypothetical, but here are three interesting scenarios of where things may go (not mutually exclusive and collectively exhaustive (MECE)):
- Scenario 1 – Brief buy-in: The purchasing power will continue to deteriorate, sparking fear of a long-term continued demise of the Euro. This may prompt Europeans to buy now before it gets even worse, and at least park their money in dollar-denominated real assets such as NYC real estate. (Though we find it hard to believe, we have heard from several agents already that those European buyers sitting on the sidelines have been jolted awake into a renewed sense of buying purpose over the last two to three weeks.)
- Scenario 2- Long sell-off: The purchasing power of Europeans will continue to deteriorate. According to Urban Digs’ calculations, that purchasing power has dropped 7% just in the last three weeks, and a whopping 15% from November of 2009. Those foreigners who already purchased investment property in NYC over the last few years will find it the perfect time to offload those investments as the currency gains will outweigh the local market depreciation of those properties. Result: a potential mini-flood of foreign-owned apartments. Depending on the volume of these sales, this may or may not depress local prices.
- Scenario 3 – Flight to liquidity: The longer-term crisis is larger than most had expected. The weakest of countries opt out of the Eurozone and precipitate the break-up of the European Union, the Euro proves to be unsustainable, and the global economy stagnates. Liquidity is at a premium and investors are not willing to commit to the purchase of real property, despite record low interest rates (the rush to treasuries saves the Fed from doing all of the heavy lifting in keeping rates low). Spurred by a flight to safety, investors will instead opt for REITS, commodities or TIPS as ways to ride out the storm.
While no one has a crystal ball, the one thing we can say for certain is that there is more uncertainty that lies ahead. We live in interesting times, and they’re only going to get more interesting over the coming months, to be sure. We would love to hear your thoughts on other possible scenarios over the short-to-medium term.
{ 5 comments… read them below or add one }
Wonderful newsletter today ladies…..it takes true creativity to go from 1031 exchanges to bed bugs in the same publication.
I utilize your newsletter and blog as a gauge as to what the rest of the country can expect to happen within the next year. Your ability to include information that is both useful and interesting for sellers/buyers, renters/owners, and also for locals/outsiders such as myself is nothing short of brilliant.
It is virtually impossible to find anything to pick apart in either your newsletter or your blog as your information is factual, well thought out, and written in a way that all can understand and enjoy.
Your newsletter said “cash is king”, and if that is true, “The Apple, Peeled is queen”!
Keep up the great work…….
It is a complicated situation, but you failed to mention inflation. A breakdown of paper currencies causes people to exit cash and go into tangible assets, such as real estate, precious metals, precious gems, art, and others. When the value of money goes down, things priced in money goes up. Real estate was devastated over the past three years and now is reasonably priced and affordable for many people. Governments are spending with abandon and central banks are monetizing debt, a combination that will create much higher inflation. This is a factor that will support the nominal price of real estate. Of course, a decline in productivity and real incomes that will accompany this process likely will lower the *real* value of real estate. It’s just the nominal price that will go up.
You are absolutely right, Brandon. While we alluded to it in terms of investing in TIPS, REITS, and commodities, we did not call it out. It is, after all, the same dynamic the US is facing and why so many are worried about hyper-inflation, let alone high inflation. Although written almost a year ago, here is a link to an inflation piece we wrote that dives into the concept as it applies to real estate. It seems like we should shortly revisit the topic.
Brandon – true they cb’s of the world are trying to reflate but to fear inflation in my opinion is to miss out on the real concern – deflation. Fed printing and QE policy has been sterilized so far, and likely will continue to be..in addition, the money printed was basically filling the void of the destruction of wealth in the shadow banking system. Dig a 2Trln hole of losses, print 1.75trln to fill it up. Does this money inter the system and be multiplied by our fractional reserve banking system? not yet. The fed is paying interest on excess reserves for a reason, and the moment the multiplier starts to rise from the bottom of the cliff, the fed will likely start to sell holdings via POMO to primary dealers and money center banks. I dont see any wage inflation spiral anytime soon. The reason gold, and other precisou metals are rising is NOT out of inflationary fears – Ive argued this for the past 2 years when people thought hyperinflation was just around the corner. Its because of a complete lack of faith in paper currencies, fiat currencies, across the globe as govt’s and CBs print their way out of the same fiscal mess due to deflationary forces. You cant print gold. Gold is finite. A seearch for an alternative currency is on, and gold is benefitting. I argued over a year ago to people that thought higher gold = inflation worries that gold can rise even when the dollar rises too..that gold rising is NOT a dollar hedge in this situation. They got very emotional over that.
http://www.urbandigs.com/2009/02/how_in_is_gold_huh.html
Feb 22, 2009 – “Anon – I would go as far as to say it this way. The gold rise is NOT a US dollar hedge here. Gold is finite, and paper is unlimited. In a world of printing presses, they cant print more gold. When I argued for the rise of gold a year ago, the main reason was not a fear of dollar collapse. What will the US dollar collapse relative to? Plus, do we see wage inflation going rampant in the near future? I see reverse for a while ahead, yet gold will rise. Something else is at play here. Can gold rise at the same time your dollars gain purchasing power? Yes.”
I find myself saying the same thing today as gold rises above recent highs and the dollar continues its upward march.
You bring up a very solid point, UD … I flip-flop back and forth between the inflation vs deflation argument. Here is a strong deflationary argument from Pragmatic Capitalist: http://pragcap.com/are-the-inflationistas-right