Posted by Jonathan J. Miller -Wednesday, March 21, 2012, 9:43 AM
[click to expand]
When I was contacted to do yesterday’s Bloomberg interview, a by-product of the producer’s call was to show the affordability of housing to Wall Street. We never covered it in the interview and I was (self) taught never to waste a good charting opportunity.
While there is no reliable causation measure of bonus size to Manhattan housing prices there has long been a connection (i.e. common sense). I took the Manhattan annual average sales price for the past 20 years and compared it to the average annual Wall Street bonus per person. The resulting multiplier shows some element of affordability: the higher the multiplier, the less affordable Manhattan housing is.
I realize there are disclaimers needed in doing this including:
- With the regulatory overlay from DC rising, bonuses are becoming smaller relative to overall compensation.
- Not everyone on Wall Street getting a bonus lives in Manhattan (but a
disproportional amount probably do).
- Bonus income is just less than half of total Wall Street compensation.
- Post-Lehman saw higher share of deferred bonus over cash.
- Wall Street total comp only accounts for about 25% of total NYC wages.
- Foreign buyers and Fortune 500 type executives have picked up some of the Wall Street slack.
With those disclaimers aside or perhaps because of them, the chart shows:
- The 20 year trend shows greater affordability over time but significant volatility along the way.
- Post-Lehman the multiplier shows slightly weakening affordability (despite falling interest rates).
- The early 1990’s recession, 2001 recession and 2008 credit crunch/recession all showed sharp reductions in affordability (higher multiplier).
- The 20 year average annual multiplier is 9.9
Given the fact that sales contract activity seems to be ahead of last year, prices remain stable, foreign buyers continue to participate in large numbers and the economy is grinding towards improvement in the region, the decline in bonuses doesn’t appear to be a huge deal for the housing market at this point. Certainly not helpful but perhaps can be characterized as having a nominal impact on the market – if you believe this methodology.
- Manhattan Bonus to Price Multiplier [Miller Samuel]
- [In The Media] Bloomberg Television’s “Street Smart” 3-20-12 [Matrix]
- Wall Street Comp’s Influence On Luxury Housing Prices [Matrix]
Posted by Jonathan J. Miller -Tuesday, March 13, 2012, 12:54 PM
As shown in the above Bloomberg chart based on our Manhattan data and the NYS Comptroller’s, Wall Street Comp/person and the Manhattan luxury market show similar trending. Not speaking to causation here.
Bad news for sellers? So the logic follows that with a decline in compensation per person in 2011 – largely from a poor second half 2011 performance, luxury prices could slip a bit in 2012 and perhaps the following year if things continue as they were. I said:
“People are making decisions a year or more down the road because they’re getting their deferred cash,” he said. “We may see a little weakness in 2012,” and “next year could be weaker based on this trend of lower compensation.”
Good news for sellers? Some view Wall Street’s poor performance in the second half of 2011 as an anomaly, and with bond trading now on the rise, bank performance could be better next year (or the same if another second half plunge occurs). If the former occurs then there is more potential for greater Wall Street comp and perhaps better luxury housing market performance. I like the above debt chart because it really illustrates how much the industry fell in the latter half of the year. The WSJ reports:
For the first time in a year, traders and bankers are optimistic about the future following a dark second half of 2011. Layoffs, pay cuts and public outrage against the financial industry undermined morale at banks and securities firms, while economic malaise throttled banking and trading businesses.
Smaller Wall St. Bonuses Mean Cheaper Condos in New York: Chart of the Day [Bloomberg]
Bond Trading Revives Banks [WSJ]
Posted by Jonathan J. Miller -Thursday, March 1, 2012, 6:00 AM
Last fall there was a widely reported study that forecast a 20-30% drop in Wall Street bonus compensation, potentially disrupting what has been a multi-year stable Manhattan housing market.
I did the math back then with the available numbers and opined that the bonus drop would amount to 10% decline in compensation from a fairly high level.
I was close.
The NYS Comptroller released the official Wall Street bonus tally. The decline in compensation was closer to 14%.
One of the biggest question marks about compensation has to do with deferred compensation. If compensation is shifting away from cash, then arguably financial service sector employees would have less to spend on housing in the near term. The number being thrown out (20% to 30%) is a little less than 1/3 of total compensation. However the NYS Comptroller indicated that the actual share of deferred comp was probably smaller than generally thought because there were cash payouts from previous year’s deferred compensation.
Despite all the economic challenges, Wall Street seems to be trying to compensate its employees – industry profits fell 51.1%. (paid 5.5 times higher than the average private sector job – although employment has started to slide).
Stymied by regulatory requirements, the European debt crisis and a sluggish economic environment at home, the nation’s largest banks suffered in 2011…Despite the difficult environment, New York firms continued to pay roughly $20 billion in year-end cash compensation to their employees. The average bonus was $121,150, down just 13 percent from the previous year as the headcount shrunk. In 2006, the year before the financial crisis, the average investment bank employee took home a bonus of $191,360.
With the modest decline in Wall Street compensation, this report is clearly better than anticipated, but it likely means housing prices in Manhattan won’t be seeing gains in 2012 and could even see modest declines.
Still, it’s better news than originally thought from the market’s key driver of housing demand.