Tag Archives: New York

Reiss on Foreign Buyers in NYC

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MainStreet.com quoted me in Foreign Buyers Driving Up Rental Prices Impacts New York Residents. The story opens,

Emir Bahadir, a native of Turkey, purchased two apartments in Manhattan for the purpose of renting them out. The 24-year-old paid a total of $9 million for the apartments in the West Village and Chelsea and earns some $40,000 a month in rental income.

”Entry into the real estate market in Manhattan by the foreign buyer has become easier because of technology,” Bahadir told MainStreet.

As a result, foreign buyers are increasingly coming into the Manhattan market and buying properties worth $2 to $5 million for the benefit of rental income. That can push rental prices higher for those on Main Street.

“[Foreign buyers] are not keeping them empty but filling them with tenants,” said Tamir Shemesh, a Realtor at the Corcoran Group. “A $2 million apartment can be rented out for as much as $8,500 a month, while a $3 million apartment can go for $11,000 to $12,000 a month.”

The tenants who can afford to pay thousands a month in rent are largely foreign as well.

“The reason we invest in real estate in New York is because of the exorbitant amount of rent that people are willing to pay,” Bahadir said. “That doesn’t happen anywhere else except in the U.K., but because of complications in the Middle East, London is not so popular these days.”

The downside for Americans is that escalating prices impact the overall rental market.

“It lets landlords know what the ceiling is and may encourage them to reach for it,” said David Reiss, professor with Brooklyn Law School.

Wednesday’s Academic Roundup

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Housing in Smart Cities

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I attended an interesting research seminar led by Anthony Townsend yesterday at NYU’s Center for Urban Science and Progress (conveniently located in downtown Brooklyn). Professor Townsend is affiliated to NYU’s Rudin Center for Transportation Policy & Management. He discussed his recent book, Smart Cities: Big Data, Civic Hackers, and the Quest for a New Utopia. Townsend argued that the 21st century will be defined by two global trends – urbanization of the world’s population, and ubiquitous computing. He traced the origins of the “smart cities” movement, its goals and the problems it faces.

As noted on Amazon, the book argues that

cities worldwide are deploying technology to address both the timeless challenges of government and the mounting problems posed by human settlements of previously unimaginable size and complexity. In Chicago, GPS sensors on snow plows feed a real-time “plow tracker” map that everyone can access. In Zaragoza, Spain, a “citizen card” can get you on the free city-wide Wi-Fi network, unlock a bike share, check a book out of the library, and pay for your bus ride home. In New York, a guerrilla group of citizen-scientists installed sensors in local sewers to alert you when stormwater runoff overwhelms the system, dumping waste into local waterways.

While Townsend’s talk did not apply his thesis to urban housing and his book only touches on it, it is certainly worth thinking through how Big Data can help provide more housing and better housing in big cities.

Housing is as “unvirtual,” or perhaps as “real,” a good as a good can be. But businesses such as Airbnb show how the virtual and the real can combine into something quite new. Obviously Airbnb does not solve many housing problems for residents of cities, but it does demonstrate that there is a brave new world ahead. Housing policymakers should try to discern what it is going to look like and how it can be harnessed as a force of civic good.

Are Billions Enough?

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Jenner & Block has issued the Citi Monitorship First Report. By way of background,

The Settlement Agreement resolved potential federal and state legal claims for violations of law in connection with the packaging, marketing, sale, structuring, arrangement, and issuance of residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs) between 2006 and 2007. As explained below, in the Settlement Agreement, Citi agreed to pay $4.5 billion to the settling governmental entities, acknowledged a statement of facts attached as Annex 1, and agreed to provide consumer relief that would be valued at $2.5 billion under the valuation principles set forth in Annex 2.2 As part of the Settlement Agreement, [Jenner partner] Thomas J. Perrelli was appointed as independent monitor (Monitor) to determine Citi’s compliance with the consumer relief and corresponding requirements of the Settlement Agreement. This is the first report assessing Citi’s progress toward completion of those obligations. (3, footnote omitted)

Because this is the first report, much of it sets the stage for what is to come. I was, however, struck by the section titled “Impact of Relief Provided:”

To evaluate fully the impact of the relief that is the subject of this report and authorized under the Settlement Agreement would require a variety of activities not contemplated by the settlement and not easily achievable (e.g., interviews with individual homeowners). Isolating the effect of this settlement, the National Mortgage Settlement, and other RMBS settlements from the broader housing market is also difficult.

One question frequently asked is whether the relief provided to borrowers and for which Citi has received credit would have been provided in any event (e.g., is this really additional?) On this question, the answer is mixed. Given ordinary accounting practices, loans for which foreclosure does not make economic sense are frequently written-off by financial institutions. In that circumstance, however, the banks may not release liens as a matter of routine, leaving borrowers with an ongoing burden and impeding potential efforts to redevelop the property. To get credit under the Settlement Agreement, Citi was required to release the lien, thus giving an additional benefit to the homeowner to allow him or her to make a fresh start and to remove any legal obstacles from the transfer of the property. (17, footnote omitted)

As I have noted before, it is hard to truly assess the restorative and retributive impacts of the ten and eleven digit settlements of litigation arising from the financial crisis. Are individuals appropriately helped? Are wrongdoers appropriately punished? Are current actors appropriately deterred?  I find it bizarre that it is so hard to tell even when settlements are measured in the billions of dollars.

Reiss on Housing Unaffordability

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TheStreet.com quoted me in Homeownership Unaffordable For Most Americans in Major Cities. It reads in part,

Homeownership remains unaffordable for most Americans who are living in major cities.

A median-income household can only afford a median-priced home in 10 of the 25 largest U.S. metropolitan areas, which is actually an improvement from 2013, according to a report by Interest.com, the Chicago-based consumer financial information website.

The most affordable metro areas area Atlanta, Minneapolis and St. Louis while San Francisco is the least affordable since the median income in the city is 46% less than what is required to buy a median-priced home in the area. Median-income households in San Diego, New York and Los Angeles don’t fare much better.

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Many potential homeowners should evaluate what kind of mortgage they really need, said David Reiss, a law professor at Brooklyn Law School. Since most homeowners only stay in their house for an average of seven years, getting a traditional 30-year mortgage may not be the solution and an adjustable rate mortgage which resets after a period of years could be more affordable.

“This advice holds particularly true for families that are thinking about having more kids, since they may move sooner than they think if they come to realize that they want more space,” he said.

Reiss on $17 Billion BoA Settlement

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Law360 quoted me in BofA Deal Shows Pragmatism At Work On Both Sides (behind a paywall). It reads in part,

Bank of America Corp.’s $16.65 billion global settlement over its alleged faulty lending practices in the run-up to the financial crisis may have made bigger waves than recent payouts by JPMorgan Chase & Co. and Citigroup Inc., but attorneys say the deal still represents the best possible outcome for the bank and for federal prosecutors, who can now put their resources elsewhere.

The settlement, inked with the U.S. Department of Justice, Securities and Exchange Commission, the Federal Housing Finance Agency, the Federal Deposit Insurance Corp., the Federal Housing Administration and the states of California, Delaware, Illinois, Kentucky, Maryland and New York, released most of the significant claims related to subprime mortgage practices at Countrywide Financial Corp. and investment bank Merrill Lynch, both of which Bank of America picked up during the crisis.

Although the hefty price tag, which includes $7 billion in consumer relief payments and a record $5 billion in civil penalties, is nothing to balk at, the settlement will help Bank of America avoid a series of piecemeal deals that could stretch out over a much longer period without the prospect of closure, according to Ben Diehl of Stroock & Stroock & Lavan LLP.

“They want to start being looked at and considered by the market, their customers and regulators based on what they are doing today, in 2014, and not have everything continue to be looked at through the perspective of alleged accountability for conduct related to the financial crisis,” said Diehl, who formerly oversaw civil prosecutions brought by the California attorney general’s mortgage fraud strike force.

And the bank isn’t the only one looking for closure, according to Diehl.

“It’s in a regulator’s interest as well to be able to look at what is currently being offered to consumers and have a dialogue with companies about that, as opposed to talking about practices that allegedly happened six or more years prior,” he said.

The government also saw great value in getting a big dollar number out to a public that has expressed frustration over a perceived lack of accountability of financial institutions for their role in the financial crisis.

“The executive branch get a big news story, particularly with the eye-poppingly large settlements that have been agreed to recently,” said David Reiss, a professor at Brooklyn Law School, who added that the federal government also has an interest in global settlements that keep the markets running more predictably.

Reiss on Housing Shortgage

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MainStreet.com quoted me in Housing Shortage Presents Challenges for Buyers. It reads in part,

While the housing demand continues to outpace supply in various urban pockets around the U.S., potential homeowners are faced with competing bids from other buyers.

The pent-up demand has created bidding wars from New York to San Francisco, putting additional pressure on homebuyers, many who are buying their first home in an unprecedented climate.

Despite weaker job growth, there remains a shortage in housing supply to satisfy current demand, said Jeff Meyers, president of Meyers Research, a Beverly Hills, Calif. data provider for real estate. Job growth is expected to pick up throughout this year, which will only increase demand. Unemployment will finish at 6.4% in 2014, which will be its fourth consecutive year of improvement, according to a forecast from Zonda, a mobile application for the residential homebuilding industry.

While all local markets experience their own dynamics and quirks, areas such as San Mateo county in California have more demand for housing because of a strong job market and limited development activity compared to weak demand in Wayne County in Michigan due to poor labor market conditions and an embattled housing market, he said.

Consumers with extra cash have the upper hand in trying to win a bid, especially in markets such as Manhattan where demand for a two-to-three bedroom apartment has pushed prices up to the $1.5 million to $3 million range, said Kinnaird Fox, director of development at Fenwick Keats Real Estate in New York which specializes in residential properties.

“This fierce competition created bidding wars with nearly every new listing since the beginning of 2014,” she said. “Cash rules for obvious reasons in a market like this.”

The bidding war frenzy has turned off many qualified buyers who are wary of the increase in prices, Fox said.

“Despite what seems like a booming sellers’ market, many qualified buyers may be looking, but choose not to jump in,” she said. “With buyers losing out on their bids, buyer fatigue sets in and some withdraw from the market. One could say the lack of inventory masks the actual demand.”

While some cities have a weak demand for housing, many have an even weaker supply, which yields in a housing shortage, said David Reiss, professor of law at Brooklyn Law School in New York.

“Some communities place severe restrictions on new housing construction so even modest upticks in demand can push rents and prices higher,” he said.

Buyers should not forget the fundamental rule of real estate. Location can have far reaching effects, especially if you are moving a significant distance, said Reiss.

“Perhaps first and foremost, ask whether the house you are considering is the right one for your family,” he said. “If the answer is yes, then you are probably on the right track because a house is first and foremost a home and secondly an investment.”