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Boroughs & Burbs, the National Real Estate Conversation
Boroughs & Burbs 179 || Tariffs and Industry Impacts
In Season #5, Episode #179, we dive into the critical issue of Tariffs and Industry Impacts with three industry experts: Scott Hobbs of Hobbs Inc., Jonathan Miller of Miller Samuel, and Noah Rosenblatt of Urban Digs. As construction costs continue to rise and tariffs impact material pricing, the real estate landscape is feeling the pressure. Join us as we discuss how these challenges are affecting builders, developers, and buyers alike. We explore how the market is adapting, the outlook for the coming year, and what strategies real estate professionals should consider in this ever-evolving environment. Don’t miss this deep dive into the intersection of construction, pricing, and the future of real estate!
The Burroughs are New York City. The Burbs are everywhere else. Real estate is the ultimate game of risk and reward. It's the biggest investment most people ever make. Fortunes are made over a lifetime and lost in a day. And we're not playing with monopoly money. How do you stay ahead? Who's buying? Who's selling? And why? What do they know? We want the truth. You need an edge. Burroughs& Burbs is your secret weapon, giving you the insider knowledge and strategies you need to succeed in the high Welcome everybody, Burrs and Burbs, number 179,
SPEAKER_06:tariffs and industry impacts. From Manhattan to Malibu, we press the experts. Today is one of those shows where we're pressing the experts. I've got several on the show and we are going to try and make sense of the tariffs and its impact on real estate market, both short and long term. I've got Noah Rosenblatt of Urban Digs. I've got Scott Hobbs, who's a luxury custom builder. I want to find out what's going on at the high end of the real estate market. I've got Roberto Cabrera, my co-host. Where are you, Roberto? I'm
SPEAKER_04:right here. I'm on the Upper West Side of Manhattan. I couldn't be more excited, seriously.
SPEAKER_06:Okay. I've got Jonathan Miller of Miller Samuel, an appraiser and economist, yes?
SPEAKER_02:No, market analyst.
SPEAKER_06:Market analyst. I'm John Engel, co-host. I'm out in Connecticut, Douglas Elliman, Connecticut, and Deke Rothfuss. 38-year veteran of the bond trading, bond market at Goldman Sachs. Recently become a real estate agent, real estate professional. And I may just want to start out with him. But first, a little bit of housekeeping. I know, I know. You're going to find us at burrowsandburbs.com. I want to thank our sponsor, Grace Farms, gracefarms.org. Come visit them. They're beautiful in spring, as you can see from this photo. I want to thank Feedspot, which named us this week to their top 50 New York podcasts. We are right there behind the Giants, Fireside Giants, and just above, Play Like a Jet, about the New York Jets. So there we are, bros and brubs, sandwiched in between the New York Giants and the New York Jets. Thank you to our friends at Feedspot. That's me, John Engel. You'll find me at theengelteam.com. Roberto, I wanted to ask you about this. The anticipation has been killing us, your last newsletter, and it talks about we're due for a breakout year. And we're going to ask you, do you still feel the same way after the market volatility? rismedia.com. There we go. Risk Media featuring Noah Rosenblatt. That's Noah of Urban Digs. As we said, Deke, you'll find him at element.com. MillerSamuel.com, that's where you find Jonathan Miller. And with no further ado, let's begin. Deke, how rare is it that the bond market and the stock market both decline together? And what does it usually mean in terms of the general economy?
SPEAKER_01:Well, I mean, usually we luxuriate in their inverse relationship, and that's what balances people's portfolio and helps them perform over time, right? But now we have chaos. And then on top of that, a little extra chaos with the bond market not following suit. You know, it did follow its inverse relationship for a short period of time. until it didn't and that's sending a strong signal to markets and that hasn't happened since pre-pandemic or just around the pandemic right and what does that affect well it affects liquidity right which is the scariest thing possible for uh people's holdings why are we getting this illiquidity in the marketplace there are several theories to that right now um first There may be forced sellings by hedge funds who are typically over leveraged. Conversely, there may be additional value buying, people selling bonds to buy what they feel are undervalued equities. Also on the other side, we're looking at foreign investors that have been opting out of the US government market, fearing that illiquidity, fearing that backup in rates, right? We had a three-year auction that didn't go so well. We've got a 10-year auction that's coming up, and that's gonna be really telling as far as the mood of investors right now. You know, stocks, people can deal with the stock market taking that hit, right? The stock market, by all accounts, tremendously overvalued. It may still be overvalued right now, but the illiquidity of the bond market is what's gotten everyone's attention. And so that's what they're focused on. And that's what will drive things for the moment.
SPEAKER_06:So when bonds suck and stocks suck, we all go buy real estate, right, Jonathan? That's typically what happens?
SPEAKER_02:That's the theory. It doesn't always happen, but when people are spooked about the financial markets, you would think logically they would go tangible. The problem right now is that we don't know anything. I call this period we're in the era of dumbness. There's no actual understanding by the policymakers of what a tariff actually is, and it changes every day. It's all on a whim, shoot from the hip. One thing that investors don't like at all is uncertainty. Our uncertainty has uncertainty. What do consumers do in general when they don't know which end is up? They pause. Right. And so that's why I contend this early in the game or in the circus or whatever you want to call it, that I think it's easy for people to overreact quickly, you know, make irrational decisions because the world is so irrational right now. And because this is, you know, just my gut, but because this is so bizarre and it's, it's really not how our government works. This is a congressional, tariffs are congressional, but Congress is just sort of sitting there and letting the president do this. You know, we're getting this sort of every day, it's a new thing. And then every day there's retaliatory tariffs against the US. So when I think about, like, here's the thing that sort of blows me away is if we were, as a country buying diamonds from a poor South African country, and we spent$100 million. On the books, it's$100 million trade deficit. So they're screwing us. That's the take. And that's not at all. It's just a bookkeeping error. They don't have any money to buy$100 million stuff from us. That's what they're bringing. So it's just, there's no logic to any of this. And that's why I'm a little bit optimistic that this will implode in the shorter term because of all the political pressure that hopefully will be applied.
SPEAKER_06:Scott, you've got a forecast 18 months out and on projects that are going to last several years. Are you starting to see the effects of this uncertainty yet? Meaning people who are still a year and a half out from breaking ground or the people who are very much committed, having already spent a million dollars with an architect and plans. Are you seeing at any stage in the process the uncertainty manifesting itself in your forecast?
SPEAKER_05:Well, in the last week, sorry, sorry. I think it zoomed out there for a second. In the last week, since all this stuff broke, we haven't seen a whole lot of changes, you know, because people, again, they've been at this for a year or two years, three years. They're finally at the starting gate. And this is all brand new information. I mean, I think that one of the biggest questions is what will it do to cost? Well, sorry, there's two questions, one of which we don't participate in as to how do our owners feel and are they going to go ahead and go ahead and And or did they lose a lot of money? And that can certainly end up affecting us. That'll probably affect us the most. There's the other part that people have been pushing us to go ahead and order materials early, which we've done. However, I don't think that at the end of the day, the added cost on a custom home from the tariffs should not be huge. I did some very rough calculations. And if you said like 50% of the materials, 50% of a project is materials, 40% of those have substantial import parts to them. And the average tariff is 20%. And again, who knows if any of that's even remotely close. But that gets you down to 4% increase in material, which by the way, if you don't do it today, it'll cost 4% more next year anyway. So that kind of leads toward the price thing should not necessarily matter. And we can get into substitutions and other stuff later.
SPEAKER_04:Scott, what about supply, though? Is supply chain going to be affected at all? Because a lot of the inflation that was driven before was really a supply issue.
SPEAKER_05:I think everyone right now and for me is I'm an expert in my business, but I've got 40 different trades that I'm dealing with, actually a lot more, but 40. And I might know where my stuff comes from. two steps back. So, but after two steps back, I have no idea where the components come from. I was talking with an HVAC guy yesterday, and we were talking about Mitsubishi high efficiency units. And we're like, we have no idea. I have no idea whether the 200 or 500 or a thousand parts in there come from Mexico, assembled the United States, shipped from Japan, parts from Canada, from Eastern Europe. We have no idea. And that's going to be one of the tough parts. And that, again, will be one of the, you know, how you work, how you figure out something this complex in such a short period of time. I have no clue.
SPEAKER_06:Noah, what are you hearing?
SPEAKER_03:Well, I got to be honest with you. I'm looking at the data in Manhattan real estate. I'm not seeing anything right now, but it's just too soon. Yeah. It's just too soon. I mean, it makes you realize, the last time we had a real, real catastrophic market event was the great financial crisis. And we didn't have the decimation of information like we have now. We are in a second by second information age right now. And we're digesting and consuming and there's bad headlines and misinformation and stuff that's not true and it's corrected and it's changing. And all of this is... adding a hell of a lot more drama and uncertainty to the situation. I mean, it used to be a 20% bear market drawdown. The market wasn't that big of a deal. I mean, we had a 30% drawdown just a couple of years ago when the Fed was hiking rates. You know, I feel like this is a lot scarier. But you know what? Jonathan made a lot of good points right now. There's a lot of uncertainty going on right now. And there's a lot of small businesses that are in the discovery process right now. I don't think the costs are hitting just yet. That is a future element. I don't think any tariff slash inflationary economic data is hitting yet. That is a future element. What you're seeing right now is a lot of businesses, suppliers and businesses discovering what this change is going to do to their input costs. And they're about to make decisions of what the hell am I going to do over here? To me, it's the depth of this situation that really is the critical point. Does this go on for another three months, four months, five months? And is this stuff permanent? Or are we going to find ourselves a month from now, a lot of this stuff is just... gone, faded, negotiated, and it's not permanent. So it's really an influx period. From a macro perspective, more up Deeks Alley over here, I'm worried a little bit about credit spreads blowing out, not blowing out, they're widening. I worry a little bit about what the bond market's doing. That's not normal. There's definitely some plumbing issues that are being tested a little bit. Why do I care
SPEAKER_06:about widening
SPEAKER_03:spreads
SPEAKER_06:in the real estate
SPEAKER_03:market? Because this is going to lead to a risk-off period in the stock market. It's going to lead to a lot of the volatility in the stock market, if credit spreads continue to widen, if this continues to happen more than it's doing now, the risk-off period is gonna get longer and deeper. If that happens, the trickle-down effect to psychology and perceptions in the Manhattan real estate market means buyers are gonna get less aggressive and buyers are going to pause. As Jonathan said, that's further down the chain. So you gotta follow the dominoes down the chain. It's happening already, but the question is, does it stop right now? In a week from now, are we 10% higher? Are credit spreads coming in? Well, then that's a very different conversation. It may not impact. I've just heard two
SPEAKER_06:different answers. and maybe opposing views. Help me out with this. But what I just heard is the buyer's response to this widening credit spreads and uncertainty is to pull back and offer less. But then I heard Scott Hobbs talk about price increases. And so that would cause, if the cost to replace this condo, this luxury condo in the future is 25% higher, then prices will rise. But if buyers are offering- I
SPEAKER_03:don't know if Scott said 25% higher. I thought he said that it was just like 4% higher. Not, not much of an impact on housing prices. I thought. Yeah. Right. Well, there's the clock. Okay. I
SPEAKER_04:tell you one thing, the sentiment that's happening out there is I've had, had a couple open houses and there've been a, just two or three people that have their brokers have canceled their appointments because the people are worried about the stock market. At the same time, I think the majority of people right now are still waiting to see where the dust settles and they're staying the course. And because so recently ago, we had COVID. And I think that people, it's like, you've been shell-shocked once, you've been in a car accident once, the next time it happens, you're kind of like, Okay, I know what's happening, kind of, and people are a little bit more calm and they're not so reactive to it. And the other thing about the market going down and people going to hard assets, I think typically people have money and if the market comes down, they'll deploy that cash somewhere else. I think this particular event caught even wealthy people off guard and that money is just evaporating. So it's not even there. That's what I think is happening.
SPEAKER_01:I would make one point and pick up what Noah said about the credit spreads widening. And I think that it's important to look at financial institution, banks, et cetera, who finally got all these weak assets off their books they've been carrying for so long and then started to stockpile more and more as it looked like things are going to be stable for longer and they're going to be able to get a better return. Now, liquidity is hitting those assets. They're scared. That can translate into more restrictive borrowing, certainly, and with higher rates. But it is. It's the unknown, right? There's not going to be this short-term economic fallout all of a sudden, returning the status quo quickly. Too many things have to happen for that in the future. politics of tariffs to really come back to normal at this point in time. But like I said, gonna see good indication how the Japanese, Chinese and people in the UK vote with their treasury purchasing power today.
SPEAKER_04:Why is the 10 year going up? Why? People say China doesn't want to buy it anymore. Some people actually have no liquidity. They need to pay off some things that are calling. What's happening?
SPEAKER_03:There's different takes on that. There's takes that China is retaliating by selling their treasuries. And there was a take that the policymakers were trying to get the 10-year lower so they could refinance$9 trillion in debt this year that's coming due. There was that take. I'm not saying I agree with it. There was a take out there. There's a take out there that China's trying to combat that and screw up that plan and get rates higher so when the$9 trillion gets refinanced, it's not lower retire. There's a take out there that there's a basis cap unwind going on. There's a take out there that the Japanese yen carry trade unwind is going on. A lot of takes that are going on out there. So I don't know exactly what's happening. Maybe this is more up Deke's alley. Well, I think
SPEAKER_01:those are kind of like reactions and, you know, that are adjunct to it. But I think at the end of the day, it's a greater fear of recession. And it is the anticipation not only of higher inflation, but stickier inflation.
SPEAKER_02:Also, in the housing context, you think about mortgage rates already have been rising, you could argue, as a result of all this chaos. The only way I see supply flooding in or coming in at a large quantity is we see a sharp drop in mortgage rates, which Tariffs are inflationary. It's a tax on a consumer. So it's not just our tariffs, but it's the retaliatory tariffs that the consumer is grappling with.
SPEAKER_06:Are you predicting that a point and a quarter drop by the Fed rates predicted by some over the next year could be negated by the effects of inflation?
SPEAKER_02:Yes, I think it makes them in a crazy difficult position. How can you cut rates when there's more inflation than you want? You're just making the problem worse. So there's sort of between a rock and a hard place. I know that Wall Street was looking a week ago at two rate cuts towards the end of the year or in the back half of the year. And then everything I'm reading is like 4% or 5% now, in terms of the number of cuts. And whatever it is, I have a hard time imagining that mortgage rates are substantially lower than where they are now, unless there's real economic damage, which obviously, we're on the precipice of that. It's just such a bizarre moment in history. We
SPEAKER_06:just had two bizarre moments in history, COVID and the financial crisis, that 08, 09. What did we learn from those, meaning and specifically the lagging effect? When do I know? Well,
SPEAKER_02:in both of those cases, at least in the New York City or the Manhattan housing market, the tell on all this stuff is transaction volume, much more than pricing because it's a slow-moving asset. What we saw within 18 months to two years after the event, that sales activity and prices were higher. notably higher. And we saw that with COVID, right? We, you know, because we have this, you know, the Fed kept rates too low for too long in my view, and we created this boom. So the other sort of wrinkle to all this is American consumers have, you know, that are homeowners have record home equity right now, you know, because of the significant surge in valuation across the U.S., not just the New York Metro area. And so they're not, you know, even with job loss, you know, because that's, to me, the defining characteristic of a recession and, you know, you know, the Apollo and, you know, the big banks like Bank of America are talking about, you know, 50%, 45, 50% odds for a recession. And I just saw Larry Fink of BlackRock just said, no, we're already in a recession. And he's talking to all the, you know, these corporate CEOs are in a recession and we're seeing layoffs jump. Layoff numbers are really rising. In addition to all the doge, insanity, which we don't even know is how much that's gonna actually be given the courts and whether some of it's legal or not legal. But just outside of that chaos, we're already seeing layoffs. And so job loss, is directly, will impact housing demand. I do think that housing demand remains elevated largely because people have been waiting three years for rates to come down.
SPEAKER_06:You can't talk about a housing demand with one brush, right? I mean, are we talking about my$4,500 one bedroom in Hell's Kitchen rental? Or are we talking about Scott Hobbs customers? Because they're not behaving the same way. Noah, what's going to happen to those record rental rates that we're seeing in Manhattan? Probably going to go higher. What? John, back to you. He just said layoffs. I just heard the
SPEAKER_03:recession word. Until it hits. Until it hits, it's probably going to go higher. I
SPEAKER_02:mean, John, when mortgage rates rise, rental prices rise.
SPEAKER_05:And John, I think we misinterpreted your 25% comment. Replacement cost still exceeds the cost of existing inventory. So therefore, building more with higher interest rates, with higher building costs, the supply side, it's tough. It's really tough. Therefore, the demand, you know, having supply equalized demand is very difficult.
SPEAKER_04:Scott, how do you manage? Scott, how do you manage if you if you have someone who today you're you're literally creating a proposal and this is going to be, you know, it's their relationship with you is two and a half, three years. How are you pricing that or what are you saying? Because you go you're looking into the abyss.
SPEAKER_05:So most of our work, because of the complexity of it, is done on a cost plus basis. That being said, we've got to have really good budgets. And as I tell clients, for every dollar that we're off on, that our expectation of the budget is different from theirs, really can jeopardize our friendship. So we want to make sure these are right. And so we'll talk to them and we'll end up either adding in, do you want us to put in an escalator clause? There's some things like we can go ahead and buy all of the lumber material at any point. And we have a lumber yard that will actually, we'll buy it, we'll give them the cash. And then if it goes, the price of lumber goes down, we'll split the difference for the windfall. If it goes up, we're locked in because they're going to buy the lumber, they're going to stick it in their yard. And again, if it goes down, they get a windfall. If it goes up, there's our lumber sitting there. And we can do that across the whole chain. And we ask the clients, and it's just knowing that Look, when you hedge a bet, you could hedge the wrong way, or it could just be an insurance premium that never pays off. And so where do you want to be on this spectrum as to helping the hedges? We partner with our clients on that. If you're on the speculative side, that's a different animal. You're trying to partner with the bank, and the bank is not necessarily a great partner for uncertainty.
SPEAKER_02:If I could just sort of tag onto what Scott was saying, because he makes... Such a good point about sort of the context of new construction with existing supply. And, you know, and I might have said this on a prior podcast, but it's sort of it just continues to amaze me. If you look at nationally and regionally, you know, new construction is like 10% of inventory and existing or resales 90%. So even if Scott was able to triple or quadruple his business, it doesn't really make a dent in the inventory problem. I mean, maybe in his sub-market, but generally speaking, inventory, I don't think, is going to be resolved. You know, there's a lot of like, if you go on the, like Twitter or whatever, I always call it Twitter anyway. It's just Twitter. Yeah, I can't call it X. But, you know, first of all, it's very depressing because it's very extreme. But like when you look at inventory issues across the country and that's why this time, you know, you know, rates rising isn't going to cause people to flood into the market with supply, I think, is the lock-in effect. But the Sunbelt states, inventory is much more, much higher because they have less regulatory challenges that things get built faster. And I know in the rental market, rents are soft in the Sunbelt, but they're rising everywhere else. And the reason they're rising everywhere else is because there's not much supply. And so we have regional differences. For example, I cover a good chunk of Florida. The Gulf side is awash in supply. And the ocean side is very tight. Miami, who we used to think is the poster child for XS development, inventory is 30%. up this year. So you go, wow, there's, you know, but it's 30% below five years ago, pre-pandemic. Whereas on the Gulf side, it's at parity or higher than five years ago. So, you know, to me, inventory, when we talk about this, like, you know, I'm not a bond trader. I'm not a Wall Street person like Noah and Dekar, but I know that inventory is the most important metric in housing today to determine which way the wind is blowing. And right now, Right now, at least in the regions that I cover, primarily Southern California, Florida, and the New York City metro area, to Noah's point, I'm not seeing anything yet. It doesn't mean there won't be, but I'm saying at the moment, I think, and maybe this is to Roberto's point, which I like, people, you know, we're going through these crises more frequently, and we're a little bit more or less, maybe less reactive. I don't know.
SPEAKER_06:You know, the headlines, everybody says so much uncertainty. We don't know. Nobody knows. We're in uncharted territories. But I'm hearing some conclusions. I'm hearing consensus here with respect to the real estate industry. Nobody is saying prices are going to go down. Oh, no. Nobody on this podcast says prices are going to go down. There's going
SPEAKER_02:to be- Wait, let me qualify that. For a
SPEAKER_06:hundred reasons. For inflation, for supply, for- But
SPEAKER_02:like, so I understand what you're saying. I don't disagree. But like when I say like prices won't go down, that means the aggregation of all the prices won't go down. But- you know, in median, half of the, you know, half of the prices, if it stays flat are going down and half are going up or, you know, you know, some sort of, you know, mix of that. So, so, you know, like a month from now, you could pull out, Hey, this sale, the price is lower, you know, it went down or whatever than it sold for two years ago, but just in general, like I'm generalizing, which is very dangerous, you know, as you said, with all the different sub markets that, it really comes down to the fact that the Fed kept rates too low for too long. It eviscerated inventory off the face of the earth. And today, the only way we can see inventory flood in, in my mind, is if rates drop quickly. And I don't think anybody here sees that as a reasonable sort of outlook for 2025, that rates are going to crater and we're going to have inventory flood in people that bought at with a three or four percent mortgage why do they want to become now rates are up to seven percent why do they want to become a seven percent buyer they don't so they're going to wait as long as they can and that's what they've been doing since 2022 and there are crafts that are happening because people just have to move right they bought a one-bedroom condo and they had triplets right how long can you wait Right. Or, you know, you get a new job somewhere else or whatever.
SPEAKER_04:Noah, what about the apartments that need work that during COVID it got the gap was like 70 percent of value. And then we had been seeing that actually narrow. But now with this happening, I would I mean, if I'm looking at an apartment that needs a full gut renovation, I'm it makes me step back for a second.
SPEAKER_03:Yeah, it's a different conversation right now than it was just a couple of weeks ago. Before all this uncertainty, chaos, whatever you want to call it, began, anecdotally, I was hearing a lot of reports that those stale, lingering, unrenovated apartments that the market was penalizing for so long were actually starting to get a bid. starting to get a bid. Now, it's not they're flying off the shelves, but they're starting to get a bid. And I got to be honest with you that one side effect of this situation that's going on right now is going to be probably those unrenovated apartments. It's probably going to start getting penalized again. And buyers are just going to be like, you know what? All those input costs are just going to go up. This is the perception element. This is like the perceived decisions are being made. It didn't quite happen just yet, but that doesn't That doesn't mean it's not going to happen. It could happen because of the buyer's perceptions, and then that changes the markets right there, even though the actual cost didn't change and there could be a penalty. That's probably in the process of occurring right now, early stage.
SPEAKER_05:And there's certainly a ton of just unknown out there. So Canada got hit with, I believe, 20% tariffs on everything, but then they pulled out all lumber from Canada. And meanwhile, they excluded copper from all tariffs. But we're not sure they excluded all copper. It may just be part of copper, maybe pipe or maybe wire. And so you're like, and these are big important things to a lot of the construction process. And at any given moment, you may have the right information, you may not, you may have total misinformation. So it's very difficult to make the educated choice.
SPEAKER_04:Can we talk about tariffs on a macro level, like in the sense that you have tariffs essentially because you're trying to make money, you're trying to use it as a negotiating tactic, et cetera. However, it does make things more expensive. There are consequences to all of this. And there's also this intention to bring manufacturing back to the U.S., Okay, but we're never going to be a country who makes small things. Like, we just don't, it would be too expensive for us to make sneakers and things like that. So we're bringing manufacturing back, but it's all going to be robots. So who are we actually hiring? Like, what's the intent there? I mean, do you guys have any thoughts on that? Like, I'm so confused by the intention.
SPEAKER_02:There is no intention. It's just seat of the pants. Do we want$10,000 iPhones and manufacturing labor paid$2 to$3 an hour? And then the other part, and this is a little bit over my head, but the idea that the financial markets are roiling right now, and so that damages or impacts access to capital to invest in plants domestically like there's no rhyme or reason to any of this it's all based on a misunderstanding of what a tariff actually represents it's it's and then it's also not understanding that people retaliate you know if you had a 25 tariff they had a 25 tariff coming back at you and both both parties lose um and then And that's the nut. That's what has to be sort of processed to end this insanity. There's nothing wrong with tariffs, but not if you're in an environment where you're trying to lower interest rates. It does the opposite. From my sort of non-Wall Street take, that's how I... have to see it or I see it now and then relate that to higher mortgage rates for the housing market. I want to come back to
SPEAKER_06:a debate we had yesterday, Jonathan. And I want to frame it in very specific terms. The debate was on compression and whether that's a valid theory of what's going to happen next. And what I mean by that is in the new Canaan market, the top of the market is$15 million. The bottom of the market, a teardown. I just sold two duplexes, 1960 unrenovated duplexes last week,$1.2 million. million five, okay? So that's the market. You can't buy anything less than a million two in New Canaan and 15. Now, I believe that we're gonna see compression, that the buyer of the$15 million, he's much more dependent on real estate, he's much more on capital gains, the stock market, and he is going to be looking for a deal in recessionary times. I believe that the buyers and sellers at the million and a half dollar mark in New Canaan are much more subject to the lock-in effect, okay? The job market, unemployment, the cost of eggs, the cost of gas, and therefore a lot of them are going to hold back and they're not going to sell. And we're going to start to see that inventory tighten up even further as if that was possible. So I believe that that million and a half dollar never goes down. it could go up for a lot of the reasons that you've described, whereas that$15 million property could come down as the very wealthy are looking for deals. You said my theory was wrong, and that the rich get richer, and that the top of the market's going to do well, and that the bottom of the market, that million and a half dollar, is going to disproportionately feel the pain. So which way does it go?
SPEAKER_02:I didn't call it dumb. No,
SPEAKER_03:no,
SPEAKER_02:no.
SPEAKER_03:He called me right up and he's like, that was so dumb. I
SPEAKER_02:thought I read that on X. Exactly. On my feed, that's all it said. So the way I think of it is, and I wasn't thinking about New Canaan, I was just thinking of low, middle, high. And my point that I made was that the spread between middle and high over the last five or six years has gotten a lot wider. You know, that your million, you know, like when I think a million two, you're describing it at the low end, you know, I'm thinking middle just because I'm not thinking about specifically New Canaan, but low, middle and high. And I think one of the characteristics of the housing market is that the spread between the middle of the market and the high end market has gotten a lot wider. a lot bigger because of the wealth gap.
SPEAKER_06:And I think this disrupts that.
SPEAKER_02:Go
SPEAKER_06:on.
SPEAKER_02:Yeah, yeah. So you think it disrupts it. But the driver of demand for me is people with more means to navigate easier, meaning that if they are going to get financing, they're not going to get 7% 30-year fixed. You know, it's going to be, you know, a link to their stock portfolio and they're going to get a couple of, you know, a couple hundred basis points off of that. Or, you know, or they pay cash, but where do they pay cash? They pay cash from the financial markets. And so that's, that would be the sort of entryway into, you know, maybe them pulling back because of the volatility in the financial markets because they can't use it in the way that they could. I just...
SPEAKER_06:So they pay less for Scott Hobbs' mansion, right? They want a deal. But they'll spend it. You just talked to me about margin calls a minute ago. Those poor guys at BlackRock are suffering right now.
SPEAKER_02:They want a deal. Well, I think... But I think the concept of deal is they're looking for blood in the streets and, hey, can I get a deal? And I guess what I'm saying is I'm not sure that happens. This is... this phenomenon right now is being created by one individual. It is not being sort of this massive sort of breakdown in our financial system. And so it could end in two days or two years, like we don't know. And that's why I don't think you're gonna see some sort of pricing collapse at any level. But I think the more exposed, because of job loss is going to be as you move lower in the food chain. So
SPEAKER_04:I'm talking about this in my newsletter that comes out tomorrow. It's that same point, which is, so interest rates have come down just a little bit, right? Which has been, they've come down a point from last year, which is actually the most favorable place that we might be considering that we all kind of think there's going to be some level of inflation. There's probably going to be interest rates are probably, although the CME says, thanks to Noah, that we looking at four cuts. I just don't see, in this moment how that happens. But this is a small window of opportunity for people in the lower price points to actually seize something before that rates go up. And with regards to the rich, I'll make the point that the rich will do what the rich does. They will take every buying opportunity possible because people in these days are not just rich, they're rich. As Scott knows, these people, they spend a lot of money. And regardless, if there's a little bit of a differential on the price, it doesn't matter. If they can seize an opportunity to get a piece of property, they're going to. And property, if you look at anything that you read from Knight Frank's Wealth Report and everything else, the family offices, 40% to 60% of these family offices, they're looking to incorporate more and more real estate into their portfolios.
UNKNOWN:Yeah.
SPEAKER_06:No, you're the analyst. Are they looking, as a result of this uncertainty in the stocks and bonds, and you too, Deke, are they looking for alternative asset classes like real estate? Is Roberto correct? Is there going to be a flight to safety and we're going to benefit?
SPEAKER_03:Deke, would you like to go first?
SPEAKER_01:Not quite. I would just mention that where interest rates are involved, I mean, exclusive of Mr. Hobbs' clients, The people who flock to buying houses, higher priced houses in the fairly recent past did so because they thought there was a value, obviously, but they also did it because there was cheap money involved. And that was the main driver. Now, when you're taking into account interest rates, well, and that prices have gotten up to a certain level and may or may not be justified. I think that's a much more difficult investment for a private equity firm or BlackRock seeking to put together a portfolio.
SPEAKER_03:Interesting. I would just add a couple of elements of color to our market. Let's not forget that 60%, 65% of our market is a cash marketplace. So the interest rates are really going to more impact the$2 million and under market. There definitely may be a negative wealth effect situation going on that Jonathan mentioned that could potentially trickle down and impact the super luxury and all that kind of sector. We don't know yet because it's a depth thing, right? Does this last and get worse or does it get better from here? And I think, you know, Manhattan specifically did not do what a lot of other markets did over the last 10 years. Manhattan's flat. You look at price action in Manhattan, it is flat. It's been down a lot and then it's come back. So it's been like a lost decade in Manhattan. A lot of, I guess, reasons for that. But I think the shape and form of whatever down cycle that's going to hit this market is going to be very, very, very different than what it's going to look like for, as you bet, the Sunbelt and a lot of other regions that are already down. well into a housing turnaround right now. It's not like it just started. They're in it and it's been happening for a while. We're getting out of our little rut and now this whole macro situation hit. So we don't know what the impact is on Manhattan. It's too early to tell, but we were just coming out of it as a lot of markets were neck deep going down in it. So it may look very different this cycle for Manhattan than other markets.
SPEAKER_01:I would just add about... The percentage of cash transactions, because just over the last five years, maybe 10 years, clients, high net worth clients, ultra high net worth clients have had a lot of cash on the sidelines. They've been reluctant to invest. So sensing that value in the real estate market, I can see how that translates into that higher percentage of cash for the market.
SPEAKER_02:Yeah. And I just said to Noah's point, like, you know, tracking Manhattan over the last decade for cash transaction, it averages about 50%, 50, 50, but in the last two years, it's been, you know, like two thirds, one third cash, you know, a little bit lower, you know, somewhere in the high fifties, the low sixties as a market share of cash. And that's, And that skews higher as you move higher in price. So$5 million and up in Manhattan is 90% cash. It was in the fourth quarter. It's in the 80% to 100% sort of range when you get north of five. The problem with this, and when we compare this against New Canaan, is that New Canaan or Fairfield County is much more devoid of supply than the city has been. There's about a nine-month delay between the city and Fairfield County, Connecticut, because, you know, not to sound like an old man, but going back five years ago, the whole pandemic, while, you know, after the lockdown ended in the spring of 2020, New Canaan and And all of Fairfield County, Westchester, all the surrounding counties exploded in demand, but not the city, because we were seen as the sort of poster child for COVID. And it was a global perception. And it was deemed unsafe. And then it didn't really change until the vaccines came out. And then in early 21, we saw the city take off. but the suburbs are well underway and it eviscerated all their supply. We got interrupted in 22 by the Fed pivot and we were sort of interrupted midstream in terms of at peak demand, we were interrupted and all of a sudden rates are going up and it knocked people out of the market. So our market as a comparison is, I would almost describe it as behind the Fairfield County market, if that even makes sense. You know,
SPEAKER_04:we're dying for momentum in our marketplace for a decade. Like Noah was saying, every time something we're about to make a turn, there's some sort of policy that comes in or there's some sort of something that happens. I remember in 2020, we had at the beginning of 2020. I mean, everybody was so optimistic that the market was going to turn and it was going to be an amazing year. And then all of a sudden, bam. This year was the same. We were just starting. The rates were coming down a little bit. The three years had passed. People had reached that saturation point. Things were starting to move. And then all of a sudden, I made the analogy in my newsletter of Michael Corleone saying, just when you think you're out, they pull
SPEAKER_02:you back in.
SPEAKER_04:Pull me back in.
SPEAKER_06:Scott Hobbs. I know you're a small sample size, sample size of one, right, with 20 wealthy clients. And Roberto, you've got 20 wealthy clients out there. I want to understand the impact of uncertainty in the U.S. financial system. A lot of people said, oh, foreign buyers are going to pull back, the foreign market. How much is that affecting your building, Scott, in the Hamptons, in Fairfield County? And I mean... Does it matter what the foreign investor is doing in terms of your buyers, Roberto, in Manhattan? A big percentage, your buyers, Scott, in the suburbs and in Manhattan, does it matter what they think?
SPEAKER_05:I don't think it's a huge market under the custom construction. We do have foreign buyers. I have not seen any, again, I'm a small sample size and my sample size of foreign borrowers is even smaller. So I don't think I'm a good indicator on that and I haven't seen any change yet.
SPEAKER_06:I mean, they represent one out of 20 projects, two?
SPEAKER_05:I think it varies depending on the time. And again, what exactly is a foreign buyer? If one of the spouses is American, the other is not, if they spend most of their time out of the country versus
SPEAKER_06:just- No, no, if the source of their wealth is overseas and they're getting nervous about the dollar and the tariffs as opposed to a Wall Streeter.
SPEAKER_05:I don't know if I can. Well, this seldom stops me. I'm not sure I can actually make a knowledgeable statement on that. So I'll pass to Roberto.
SPEAKER_04:I just have one particular client that I spoke to who's quite wealthy. And he said, you know, he's planning on coming here. And he said, you know, I said, is this going to affect you? He said, well, you know what, I think this is the US's Brexit. He said, you guys look like it really seems like a circus and no one knows Like, it's ridiculous. So the perception from very wealthy people outside of here has to be skewed because there's, you know, people come to the United States because things are reliable. You know, there's a form of law. There's a form of order. There's a form of the way things get done and due process. And that seems to really be being disrupted. And a lot of people can say, look, it's just one guy. But at the same time, that one guy was elected by, you know, bazillion people and put him in office and he's got it, you know, now he dominates the Republican party. So they're, they're concerned about that. At least this particular guy was, and he was talking about his colleagues as well.
SPEAKER_06:Does it cause any of your customers to say, maybe I'll look in Dubai instead of Paris?
SPEAKER_04:That, no, I haven't, I didn't hear that. Just that they're not, they're going to hold off on, we'll see how things pan out.
SPEAKER_02:Oh, go ahead. I was going to say, you have to think of two things. First of all, I'm not seeing, you know, I'm seeing international participation, but I'm not seeing a heavy volume or unusual volume of it in the city itself. But the way to think of this is the dollar is really strong. And so there's no currency play. Like, you know, people aren't international buyers that come here unlike a decade ago, aren't getting a big discount. I mean, the Euro and the dollar are almost at parity. There is a little bit of a spread for the pound, but You know, these numbers are massive when we were seeing all the wave of international a decade ago, you know, there was like a, you know, a 10, 20%, 30% discount for making a purchase that doesn't exist. And then the other thing is our sort of random immigration policy right now is starting to impact tourism. So I would think that it is not a growth sector for the housing market right now. I mean, you know, if this, if I can't, I can't see the dollar getting a lot weaker in the near term either. So I think we're sort of on hold in the context of international demand, aside from sort of the regular demand. One more
SPEAKER_06:argument that prices will go up and volume will go down. Go ahead, Noah.
SPEAKER_03:No, I was just going to talk on the, the, the Foreigners kind of investors kind of play there. There's no currency play. There's also been a lot of capital controls going on outside. So, you know, we've definitely seen that go down. You know, it was interesting because anecdotally over the last six months or so since the election kind of played out, if you trip back to like last summer. Right. Last summer, it's going back like almost a year now. You had interest rate uncertainty, you had election uncertainty, and you had a recession uncertainty. Remember the inverted yield curve? I mean, there's an inverted yield curve for a long time. Right. The recession was going to come, it never did. Okay. That's still yet to play out. But you had those uncertainties. Well, the interest rate uncertainty went down. And then when the election uncertainty went down, forget about the outcome of the election, the uncertainty went down. So after September, October, November, December, January, February, I was hearing anecdotally of a lot of investors making decisions, pulling the the trigger, making decisions. That's the key word, making decisions. When uncertainty goes down, decisions get made. When uncertainty goes up, decisions get paused. So now here we are. A week into mass, like this uncertainty is not like we just trickled a little higher. This is a shot straight up. We're in a whole new strata of uncertainty right now in a very short period of time. So I think you're starting to see those decisions probably go the other way, in my opinion. But you're not going to see it yet in the data. It's just too soon.
SPEAKER_05:I would say also the one other wild card is the immigration gold card. If that actually goes through and wealthy folks are able to get residency in the United States from around the world, I would think that that would actually be very good for the high-end residential market.
SPEAKER_02:Right. Isn't it$5 million? Yeah. Correct.
SPEAKER_05:But who knows? Makes sense. Who knows what that will eventually look like?
SPEAKER_04:The sector of our market, which is foreigners, whereas more substantial than the rest of the country, is still quite small, right?
SPEAKER_02:Yeah, I mean, I was going to say over my career, I estimated, you know, as a baseline about 15%. And then we have periods like we did, you know, in 07, you know, a long time ago, I remember when it was, you know, the condo market was 50%. international, 50% domestic. And it was locational. It's midtown for international and downtown for domestic. But when you blend it together, it was like one out of every two condo sales were probably international. The pound was 210 to the dollar.
SPEAKER_03:Yeah. And I was just going to mention that I don't think New York City is still recovered from the pandemic. I mean, I really don't think we're at full capacity as we were beforehand in regards to the commercial sector operating at full capacity or the foreigners and the investors operating at full capacity and foreign businesses and foreign students, all that. I'm not so sure that's all back to where we were beforehand. I still think we're operating with three of our legs cut off, so to speak, from an octopus point of view. But do you think the
SPEAKER_04:operationality of that has not just, not that it's not like you're saying like the old days, but has shifted to being more remote and that type of thing, yet it's busy? Yeah,
SPEAKER_03:I mean, that certainly has a play in it. And, you know, I just I don't know how long these cycles are going to sustain itself without being at full capacity like we usually are. Does our seasonality change? Does the depth of these moves change? Does price action change? I mean, all of these things are still being analyzed.
UNKNOWN:Yeah.
SPEAKER_06:So we have a few minutes left. I want to give everybody a chance to make one last prediction, crystal ball. Maybe the question I'll ask is, for each of you, and you can take this in any direction, what are you looking to see? Because we've talked about uncertainty. We've talked about some things that we're expecting, like rising prices, decreasing volatility. What are things that you're looking for that will trigger your decision making? For example, in my mind, am I looking for the Fed to take an action and therefore it'll become clear for me? Do I expect that if Trump starts negotiating tariffs with individual countries, that will give me some certainty? What are you looking for that will give you some certainty in your business moving forward? Anyone?
SPEAKER_02:I think I'm just going to keep my eyes on the tenure. I just see the Fed between a rock and a hard place. At least in the first half of the year, it's hard for me to make a decision based on what they're doing. And then the negotiating that we might hear about and the lack of, you know, trying to just... But
SPEAKER_06:the 10-year is the best indicator for you of what the real estate market is going to do or the economy generally?
SPEAKER_02:No, the real estate market, I'm thinking about mortgage rates. But honestly, I don't even know if that's a great... metrics like there's like a thousand things to look at um and we still know nothing um we're not going to know any more than we know now two weeks from now i don't think uh so so my reaction is to not overreact and to just keep all you know eyes and ears open and look for something i just I don't know if there is like this one magic thing to sort of focus on, which would make life a lot easier if there was. I
SPEAKER_05:would go for two things to watch. One is if they fail to pass the tax bill that expends the tax breaks, that would be a catastrophe. So hopefully that actually gets done. If it gets done, then I don't know if that'll really help. If it doesn't get done, it'll get killed. And then the second thing is I'm kind of hoping that there's some framework of deals that'll come through under the tariffs, which will show that there's a way out of this. If no deals get done in the next two, three, four weeks, I'm really scared because then I think that window starts closing and things will get even more pessimistic.
SPEAKER_03:Yeah, that's a really good take right there. I'm in a similar boat. Give it a couple of weeks and let's start. If this continues past that, that's a problem. I am watching credit spreads. I am looking for credit spreads to narrow. I am looking for volatility to come down. That's what I'm hoping for. I'm looking for markets to stabilize. Credit spreads are going to be your guide there. I'm looking at the Fed fund futures in terms of the market's expectation on what the Fed is going to do. I think it went a little too far on the rate cut side. I wonder if it's going to come back a little bit. We'll see how that works out. And on the Manhattan side, I'm looking at the liquidity number on Urban Digs, which is just a 30-day pace of deal activity, which is quite good right now, but doesn't take into account what's going on. It's too early. Eek, Roberto?
SPEAKER_04:I like monitoring the 10-year, but I think it's not about the Fed, what they're going to do, because I think they're just reactionary to what the larger mechanics of what's happening. And I'm really looking to see how quickly this resolves itself. I think it's going to take about two and a half, three months for us to kind of have a general idea of where things are settling. And then from there, we can make some decisions. But that's what I think. Because if it goes longer than that, it's really, it could be detrimental for us for many years.
SPEAKER_06:I'm looking at supply. I think that demand, I'm not terribly worried about demand. I still think there's a$72 trillion wealth transfer from grandmothers down to millennials. So there's still a lot of cash out there in the economy. So I think demand is going to be fine. There's still plenty of cash out there. And I don't think that it's going to be hard to borrow money. So I worry whether people are going to put their houses on the market. And that's going to be my indicator for the next couple months, whether supply loosens up or doesn't. Deke?
SPEAKER_01:You know, I would really like to see the heads of a lot of the major financial firms come out with supporting comments to what's going on in the economy. I think that if they offer and get involved in the bargaining process, that would hearten me greatly. I think that that should be welcomed. I have a high level of no confidence in some of the players right now. And I think it would mean a lot coming from them. I think that the curtain of opinion that seems to be pulled back from a lot of the billionaires just recently It's not going to mean a whole lot in the equation. It's just supportive in nature. And I would just like to see a little bit more smart elbow grease applied to this overall process to make sure that it kind of resonates with the American public that things are being handled well.
SPEAKER_06:I think what I've heard is Jamie Dimon used the recession word and BlackRock used the recession word. I've heard the word recession used more in the last couple of days than maybe the previous six months combined. And stagflation, too. That's not helpful.
SPEAKER_01:It came back. They're doing that for their investors. They have to come out with something like that. I would like to see them pitch in the process.
UNKNOWN:I agree.
SPEAKER_02:Yeah, I mean, they're thinking about their investors. I mean, when Jamie Dimon said, hey, five days back in the office, RTO, the reason why they're doing it is because they have like trillions in debt on commercial office buildings, right? So sometimes the positions of these banks aren't necessarily neutral, right? They're in their own self-interest. But I agree with what Deke is saying, that it is in their best interest to not see an economic collapse. And so they probably need to chime in whether or not they agree with the politics, but try to provide some sort of comfort and then assist in negotiations or something to sort of stop the circus.
SPEAKER_06:Wow, what a show. I think we got a lot done. I mean, is there anything left to be said? I
SPEAKER_03:don't know. This was fun. This was really fun. You guys run a good shop here.
SPEAKER_06:So thank you very much. Noah Rosenblatt from Urban Digs. I mean, what an analytical mind. Awesome. And Jonathan Miller, another analytical mind who I love to debate on things like compression. And I love reading your market reports. And I like the fact that you're actually looking at the South Florida market separately from the manhattan brooklyn suburban market i mean you look at every one of them and i think that's you know so important that we stop talking about the real estate market with one brush and we start reading the individual reports thank you scott hobbs this was awesome we need to understand how the the wealthy think and uh you know you're building their houses and And what I heard from you is they're not pulling back at the top of the show. You said they're not pulling back yet. And I think that's encouraging.
SPEAKER_05:Let's hope that first week continues.
SPEAKER_06:And, Zeke, thank you so much. I mean, when I woke up this morning, I know it was a late-minute addition to ask you and say, I need a 38-year veteran of the bond market and Goldman Sachs veteran to come in and explain to me just how bad is this and how unusual is this. Thank you for coming in and bringing your insights. Skipper, great job. Thank you. Well moderated. And you too, Roberto. And my final comment is, Roberto, are we getting a new market report out of you tomorrow? Yeah. Are you teasing
SPEAKER_04:us? Yes. It's been two months.
SPEAKER_06:And do you
SPEAKER_04:feel certain when you make these statements? It's a moment in time.
SPEAKER_02:I think he's uncertain.
SPEAKER_04:As Jonathan said, it depends.
SPEAKER_02:It depends. And
SPEAKER_04:on that note,
SPEAKER_06:I guess we're done. All
SPEAKER_02:right.
SPEAKER_04:You guys,
SPEAKER_02:thank you. Take care. Thank you all. You bet. Good stuff.
