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Thursday, August 23, 2007

How will the Subprime Fallout effect the West Bronx?

The recent dramatic changes in the real estate market -- ignited by the realization that making loans to folks who could never repay them was (also) bad for investors -- are slowly beginning to have an effect on the west Bronx housing market.

Up until very recently, New York had been mostly immune to the real estate downturn (dare I say bubble collapse?) occurring in the rest of the country. So while foreclosures are dramatically up in the City, the effects of them are mostly invisible (unless you know a victim), as troubled owners have been able to do a pre-foreclosure sale for more than the value of their mortgage (even if it's to a property-flipping 'we pay cash for houses'-type place). The main point here is that houses haven't been going vacant or boarded-up in recent years because there has been an out.
But while the City's economy remains strong, the troubles on Wall Street may be a sign that New York's real estate market may soon join the nationwide dive. Much of the subprime lending and "creative financing" that inflated this housing bubble is now drying up, as the secondary market (mostly Wall Street investors, but also Fannie Mae and Freddie Mac) are no longer interested in packaging or purchasing these riskier loans. That means that fewer potential buyers will have access to the type or amount of credit to pay the asking prices (pop! goes the bubble?).
Another similar issue that is especially relevant to the Bronx is the recent jump in jumbo mortgage rates. Because of concerns in the secondary market (the bank that gives you a mortgage often sells it so it can continue to make new mortgages) interest rates on mortgages above $417,000 have recently spiked. This phenomenon may not last, but if those rates do stay higher, buyers will have a harder time financing the two- and three-family homes for sale in the Bronx. In fact, some of the developers of the new-construction 3 family homes (often posted on craigslist.org) have begun dropping their asking prices lately, and many of these homes still have not sold.
If home prices in the Bronx fall below levels from two or three years ago, many homeowners going into foreclosure won't be able to sell for more than what they owe (most foreclosures are on mortgages made in the last two-five years). The result of this could be more properties actually going to auction, and potentially ending up owned by the bank until they could be resold. This is actually what is going on with distressing frequency across the rest of the country, especially in rust belt cities like Cleveland and Syracuse.
As for the specific foreclosure numbers, last week RealtryTrac reported on the rise in foreclosure rates comparing July 2006 to July 2007. The nation as a whole was up 93%, while NYC was up only 55%. The Bronx was up a measly 54.3%, from 208 filing in 07/2006 to 321 filings in 07/2007. UNHP's tracking of foreclosure data in the Bronx also shows increases in all parts of the borough, including the West Bronx.

On the multifamily side, Crain's is reporting that "financing for almost all large commercial and residential projects in the city has dried up," (subscription required) due to the lack of investor interest on Wall Street (another secondary market issue). However, this is mostly influencing deals outside of the Bronx (office and condo deals in Manhattan and parts of Brooklyn).

The majority of banks and thrifts that finance Bronx apartment buildings keep their mortgages in-house, so they may actually be able to pick up some of the business the secondary market is giving up, Crain's also reports. However, it is possible that many of these lenders will tighten their underwriting guidelines in current mortgage climate.

Overall, things remain fairly stable for owners of Bronx apartment buildings, in terms of their access to credit, but the question remains: What will happen in properties that have recently sold for high prices where the new owners need to raise rents to make their bottom line? Even in this recent strong economy, wages for most working class New Yorkers have stagnated, meaning more and more families pay upwards of half of their income on rent or are forced to double-up. An overall downturn in the economy may spell trouble for everyone, including new building owners who be forced to sell at a loss.

1 comment:

  1. The Daily News has a good article today (Monday August 27) on how all of this mortgage lending drama can play out. In this case it's a brother and sister in the east Bronx.



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