Posted by Jonathan J. Miller -Thursday, September 8, 2011, 2:43 PM
Here’s something I wrote over at the WSJ’s Developments blog, comparing the housing market aftermath of the two events.
Comparing Manhattan’s Housing Market After 9/11, Lehman
(New York, NY 9/8/11)
The Wall Street Journal asked me to look at the period following 9/11 and the Lehman Brothers bankruptcy in September 2008 (and the related credit crunch) to see what, if any, housing market comparisons could be made. Of course, it goes without saying — but I need to say it — that on a human scale, 9/11 is not comparable to the Lehman bankruptcy in any way.
To look at the markets following of both events, I assessed how each economic shock impacted sales activity of Manhattan co-ops and condos, which account for roughly 98% of the Manhattan single-unit residential market. I compared both event timelines by using a three-year window. I track quarterly closed sales, and they lag contract signing by an average of 45 days at that time — but you get the general idea.
One important similarity between the two periods: Both were already influenced by recessions, whether people were aware of it at the time or not.
Sept. 11: The housing market was already sliding down that slippery slope as sales activity weakened and marketing times expanded. The go-go market created by the tech boom in the preceding few years was unwinding and prices were beginning to soften, especially at the upper end of the market. Access to credit remained reasonably accessible, unlike today.
In the weeks that followed 9/11, the housing market was a virtual ghost town with little contract activity. A well-known brokerage firm issued a press release saying that prices had fallen 30% overnight, but I took issue with that claim since there were essentially no sales to measure the market — a classic mark-to-market situation. That press release was subsequently withdrawn.
When the Federal Reserve pushed rates to the floor shortly after the attack and mortgage rates fell sharply, consumers responded. We observed a surge in demand firsthand about five weeks after the attacks — the market restarted at the entry-level priced apartment segment. This was made clear to me when we were engaged by a bank to appraise the purchase of a one-bedroom apartment in the East 50s in a non-doorman building. The contract was signed after a five-way bidding war. Soon we were seeing many such bidding wars and the market began to boom from the bottom up.
Lehman: Sales activity in the housing market peaked in 2007 and prices peaked a year later in 2008. Sales activity was erratic in 2008 leading up to Lehman but the trend was clearly weakening. The slowdown actually began during the summer of 2007 when the mortgage system started to break down. When American Home Mortgage collapsed and the two Bear Stearns hedge funds famously imploded during that summer, the pace of the market began to cool. By the time Lehman went under (and Fannie Mae, Freddie Mac and AIG were bailed out at nearly the same time), the consumer and mortgage lenders went into the fetal position and waited.
Unlike the 9/11 timeline, the Manhattan housing market took nearly two years to reach levels seen in September 2008 and have not come close to peak sales levels reached in the two years prior to the credit crunch (obviously because artificial credit conditions were in place). Unlike the months following 9/11, residential mortgage credit has continued to remain unusually tight and has in fact tightened since the beginning of 2011. Hard to rally the consumer when the Fed continues to keep rates too low for banks to be incentivized to lend.
Leading up to 9/11 a lot was done to reduce oversight of commercial lending, neutering regulators and allowing investment banks step into the mortgage process. The Fed kept rates rock bottom through June 2004, fueling an unprecedented housing boom. Prices were rising so quickly in the first half of the decade that affordability waned and banks removed all underwriting standards in order to keep the pipeline full as Wall Street off-loaded the risk to investors across the globe.
Of course, it all ended badly, marked by the Lehman bankruptcy.