The federal government is selling a foreclosed, single family home in Norwood for more than $250,000. A real estate broker is selling an apartment building in the Fordham Bedford community for $3 million, which is approximately $70,000 per apartment and more than seven-and-a-half times the annual rent roll. Based on recent trends, in all likelihood, these properties will sell (or may have already sold) for close to the asking price. Without adjusting for inflation, similar properties four years ago were selling for nearly half the current price.
An increase in value that is not based on a solid economic foundation could cause big problems in our neighborhood. Recent research and other published reports suggest that our neighborhood is in the midst of a speculative real estate bubble that will surely burst.
With regard to one- to four-family homes, recently released research from the NYU Furman Center for Real Estate and Urban Policy shows that the foreclosure actions in the Fordham/University Heights and the Kingsbridge Heights/Bedford community increased by 70 percent between 1998 and 2002 (there were 63 in 1998 and 108 in 2002). University Neighborhood Housing Program’s ongoing monitoring of foreclosure auction notices in the borough indicates that the number in 2003 will be even higher. This sharp increase should reduce any enthusiasm there may be about easier access to credit and soaring property values. (UNHP has worked with other Bronx groups to support the establishment of a hotline – (800) 261-7012 — to assist owners in financial trouble.)
While there has not been a similar increase in foreclosure actions on apartment buildings, the continued and rapid increase in prices defies logic and feeds the theory of a big bang at the end of a speculative bubble. Crain’s New York reports growing concerns in the banking and real estate community; in the article, one owner worried that some owners “may be overextending themselves.” Crain’s states that if there were a sharp increase in interest rates, some landlords could be forced into bankruptcy.
Locally, experienced real estate professionals subscribe to the bubble theory expecting the bubble to burst. Not only are they not buying at the high prices, they are hoping to find bargains that may become available when the bubble bursts.
In the late 1980s (when the last real estate bubble burst), the pop was preceded by a decline in services and repairs and followed quickly by foreclosures, court appointment of receivers, declaration of bankruptcies by owners and even more reduced services. In 2004, we are already hearing more complaints about worsening conditions and services in a number of buildings in the neighborhood. A bubble burst in the coming months would be followed by the same actions we saw in the late ’80s, only worse.
There are a few significant differences between 2004 and the late ’80s that make the gathering storm of problems more ominous today. First, the prices are a lot higher this time, so either it will take more money to do workouts or the losses to investors and lenders will be greater. Second, last time, one institution, Freddie Mac, was the primary lender; this time, there are many financial players. Working out solutions will have to involve more people at more institutions. Finally, the rents are already high; last time the rents in some of the buildings were less than $350. Therefore, there was some room to raise rents without making apartments unaffordable and there was federal Section 8 rental assistance available to eligible tenants. This time, there is no room to raise the rents and no Section 8 to offer the tenants.
I do not offer a very hopeful picture, but there are actions that can be taken that will limit the damage. Banks that are financing these new acquisitions can get tougher on their underwriting and work closely with tenants in buildings that are already problems. The city can get tougher on inspections and follow-up litigation. The tenants can organize to fight for better services and be prepared for future problems. A coordinated effort may stop the speculative rise in prices and restore reality to the Bronx real estate market.
Jim Buckley is executive director of University Neighborhood Housing Program.