In this scenario, a full-fledged credit crunch rips through the system. The August employment figures, showing no growth for the first time in four years, are the beginning of a serious downward trend. The economy heads for a hard landing, and an all-out recession ensues.
2008: Consumer spending weakens nationwide, as the slackening economy, soft labor market, and progressively crunched financial markets create a vicious circle. By the beginning of the year, the economy enters a recession. The Fed has cut the federal-funds rate, but it’s too little, too late: In the wake of the bad-debt wave, there’s been a significant repricing of risk. As a result, safe government-bond yields fall while lending rates rise. About $1 trillion in adjustable-rate mortgages reset at a higher rate, including billions’ worth in New York. Subprime-related foreclosures are not a significant cause for worry—there are relatively few in New York—but those who can’t afford the new rates are beginning to sell at a loss. Meanwhile, the qualified-buyer pool is shrinking because jumbo loans are harder to get, even with good credit. Wall Street gets hit on three sides: Banks and brokerages cope with large losses, stock prices reflect the recession, and everyone sheds excess personnel. Smaller Christmas bonuses guarantee that the demand for four-plus-bedroom apartments won’t pull up the rest of the market. In addition, some of the younger banker types who bought in 2006 are now laid off and pondering selling. Inventory swells, and the price slide begins in earnest. “Pockets of distress” (former fast-flip frontiers such as Bed-Stuy and Crown Heights) lead the way down.
Correction: 5 percent.
2009: There is an insolvency crisis afoot as homeowners, mortgage lenders, home builders, financial institutions, and even some corporations go into debt distress. The economy is buckling under unserviced debt. The recession is the last nail in the coffin of the Republican majority; Democrats march into Washington, solidify control of both houses of Congress, and promptly raise taxes, which initially affects Wall Street negatively. In some pockets of the country, new homes lose up to 50 percent of their value. Here in New York, the ailing financial-sector labor market and ever-decreasing bonuses continue to chip away at the local pool of qualified buyers. Among those who can afford to live in New York, conservatism spreads. It is now common wisdom to sit tight and ride out the storm. Finally, toward the end of the year, rental prices come down, making renting, for the first time in a long while, an appealing alternative to homeownership. Subprime borrowers who are still hanging on, as well as arm recipients whose loans had reset in 2008, are seriously tempted to sell—at a loss if need be—and start renting. The city bids farewell to Bloomberg, now irrationally blamed for “too much new construction” as Greenpoint luxury condos stand half-empty or turn rental. The decline accelerates.
Correction: 18 percent.
2010: There’s a new mayor in town! Regardless of his political affiliation, Bloomberg’s tax breaks for developers remain in place, but new construction is limited by smaller developers’ reluctance to enter the fray. The 2007–8 credit crunch is still reverberating on Wall Street, depressing stocks. However, housing prices are now low enough that cautious buyers begin to think they’ve spotted the bottom of the market and start to get off the sidelines. There’s an uptick in the buy-side demand, especially from wealthy speculators, individuals thinking long term, and foreigners snapping up New York apartments at fire-sale prices. The U.S. economy recovers from the 2008–9 recession. Inventory tightens back up. We’re on our way to normalization.
Correction: 3 percent.