Obtaining a mortgage can be like playing a chess match. Borrowers need to see what moves lenders are making and then react accordingly. I receive daily updates from all the major lenders either changing product guidelines or eliminating products altogether.

Borrowers should be prepared. The basic current elements in this market include: good fico scores, good income, reserves (money left over after closing), and in most cases, a down payment of 20%. Banks are looking for “A” borrowers, and the definition of an “A” borrower has gotten tighter over the last three months. Banks want to see credit scores of 720, if not higher, with certain products asking for a 740 score to qualify for the best pricing. Down payments are generally 20% down on non-conforming loans (i.e. jumbo loans).With conforming loans, there are still 10% down products, but there are far fewer. You need to have a pristine application or you will be asked for more money down.

It is especially important to truly understand your options before signing a contract. Many contracts are signed with no mortgage contingency in them. In this market, you need to make sure you are dealing with a reliable mortgage broker or lender and have everything in place before signing a contract.

In the last week, I have had clients come back to me with this situation: After being pre-approved a few months ago, they no longer have the same options they did when we first spoke. Many borrowers may not have realized that banks are now asking for larger down payments and more reserves after closing. It is best to check with your mortgage professional to find out what the latest guideline changes are and how they may affect your ability to get a loan.

If you are in the shopping stage, it is a good time to make sure everything is in order. Have you checked your credit recently? Have there been any inconsistencies in your income over the last two years? Do you have rental history for the last 12 months in order? Have there been any large deposits into your bank accounts that you will be asked to explain? These are items that will most likely be addressed at the time of application. In order to rule out any bumps in the road that may affect your application, it is best to work on them before making an offer.

In addition, interest rates currently remain very low. In most cases, the thirty-year fixed mortgage is better priced than the ARM (adjustable mortgage), giving you the security of knowing what your rate and payment will be no matter how long you intend to live in the property.

With all the changes that have been made by the lenders, there are still great opportunities for buyers. We have just received the new loan limits under the 2008 Economic Stimulus plan. These new loan amounts, which can go up to $729,000 for a single family residence depending on the property location, are designed to bridge the gap between conforming and jumbo loan limits and accurately represent the property value based on location.

These loans are being bought by Freddie and Fannie Mae, offering low pricing with new higher loan amounts. These new loan limits are not permanent. If you have been waiting to purchase a property, you may be able to take advantage of new loan limits while they are available and lock in a long-term rate with the benefit of a larger loan limit.

Similarly, the FHA loan limits have also been raised. These programs are government supported and allow small down payments (3-5%) to first time homebuyers to allow them to take advantage of low rates with higher loan limits. FHA loans have certain guidelines and criteria, and you can learn more about these programs at www.fha.gov.

Given the current state of both the building sales and credit markets, the most commonly asked question I’ve been getting recently has been, “Bob, how did we get in this position?” My answer to this question has simply been that 2007 will be remembered as the year we started to pay for the Fed keeping interest rates too low for too long. Here is why and how we got here:

The market can be broken down into three distinct segments: the pre-August 2007 market; August and September of 2007; and October 2007 through today. To fully understand where we are today, it is very important to take into consideration what the Fed’s policy on interest rate fluctuations has been going back to the early 90’s. From 1994 through 2000, as we were coming out of the recession of the early 90’s, the Fed kept the Federal Funds Rate between 5.5% and 6.5%. In 2000, with the overseas credit markets getting a little squishy, the Fed began a policy of cutting interest rates. Between 2000-2003, the Federal Funds Rate was dropped in 13 successive sessions from 6% to 1% (see graph). This extended period of interest rate cuts brought interest rates to a point where they were below the rate of inflation. Let’s consider this for a moment; if interest rates are lower than the inflation rate, monies kept in the bank have less purchasing power in the future than they do today. This dynamic creates a tremendous incentive for people not to save and to purchase long term assets. What is the long term asset of choice for many investors? Real estate. This created tremendous incentive for people to buy apartments and to buy investment properties and led to excessive domestic demand in our real estate markets. This is when tremendous upward pressure on pricing began.

Looking at the Fed policy from mid-2004 to mid-2006, we observe a period of 17 successive sessions where the Federal Funds Rate was increased from 1% to 5.25%. During the period of 2000-2003 when the Fed was cutting rates, mortgage rates adjusted almost instantaneously. As the Fed was increasing rates from June 2004-June 2006, the lending rates did not increase in concert with the Federal Funds Rate increases. The market was simply not reacting. As the excessive demand continued and banks were competing viciously to put debt dollars on the street (which kept compressing spreads), our low interest rate environment persisted.

In the pre-August 2007 market, we were faced with a perfect storm of scenarios in our building sales market. 1) Low interest rates 2) Low supply of available properties in New York City 3) High demand for Manhattan and Brooklyn properties both from domestic and foreign purchasers (it is important to note that in the period 2001-2007 there was more economic global expansion than during any other period in history) 4) Lower yield expectation on behalf of buyers 5) A growing percentage of sellers were opting to effectuate 1031 tax deferred exchanges. Up until this point prices kept going up, tremendous amounts of capital were created and the infrastructure in which to invest all of this capital lagged behind the amount of capital that was created. Shortcuts were taken in due diligence processes and the result was continually escalating prices.

During August and September of 2007, we saw a number of confluences. The sub-prime crisis started to have a tangible effect on the market; interest rates starting rising; recession fears started growing; institutions were coming to grips with the fact that multi-billion dollar writeoffs were eminent; unemployment started to escalate; consumer confidence was falling; consumer spending was slowing; and the dollar continued to get weaker. All of this led to a tremendous amount of uncertainty and for those two months, the market was very reminiscent of our New York City market from 1990-1991 when things came to a standstill. During this period in the conflict of fear versus greed (in which greed normally wins 75% of the time), we saw that fear was winning. We also started to see cracks in the global economy. The result was that banks started to increase spreads, debt service coverage ratios increased, amortization returned as a component of almost every loan (which was not the case previously) and loan to value ratios were dropping. More equity was required and, given that equity is more expensive than debt, intuitively you would think that prices would fall.

Let’s look at the market from October 2007 through today. The Fed has started cutting rates and for four sessions in a row (plus a mid session cut) the Federal Funds Rate has dropped from 5.25% to 3%. Interest rates are coming down. There remains a very low supply of available properties in New York City, demand is still very strong and the influence of the U.S. economy relative to the global economy has become apparent. It is amazing to think that the U.S. Gross Domestic Product is 4.5 times the size of China’s and in fact Wal-mart buys more goods than China and the entire United Kingdom does. There must be a word missing from this sentence? Also, layoffs have not been as severe as had been anticipated. However, GDP growth has been very low with a significant portion of that growth coming on the heels of increased exports based on the very weak U.S. dollar.

The question remains, are we headed into a recession? Four main indicators that economists look at to determine whether we are indeed in a recession are 1) Real personal income levels 2) Employment 3) Industrial production 4) Retail and manufacturing sales. We are presently in an economy where these indicators are showing about 40% positive, 40% negative and 20% unchanged. In a great economy 45% are positive, 35% are negative and 20% are unchanged, so presently things are not so bad. What we are facing is a liquidity crisis. The fundamentals of the real estate market remain strong, with Manhattan residential vacancy hovering around 1%, office vacancies in Midtown Manhattan at 4.6% with a $74 per square foot average and the Manhattan hotel market continuing to thrive as the weak dollar continues to attract foreign travelers to New York. This also keeps domestic travelers within the U.S. as international travel becomes cost prohibitive for many.

Looking forward, we believe the volume of sales, in terms of the number of properties sold in New York City, will decrease approximately 10-15% in 2008. It is important to differentiate volume on a “number of transactions” basis from “aggregate dollar of volume of sales basis” as we believe the aggregate dollar volume of sales will be off more substantially as the number of billion dollar transactions decreases in 2008. Thus far, we have seen prices remain fairly stable as cap rates may be inching up slightly but given the increases in rents that the market has experienced over the last few years, even with slightly increased cap rates, prices per square foot continue to escalate. For certain, transactions require more effort to close in the current market, but there still is a good flow of activity even under these new market conditions.

With so much negative press about the real estate market, downward economic pressure and political uncertainty, 2008 may appear at first glance to be the year to hunker down and wait until it all blows over.

But wait-and-see is a dangerous game in New York. What New York has going for it that other parts of America don’t is its status as a global city. New York is a key part of an international network of major business/finance/media/culture hubs through which a vast amount of essential work flows. As a result, there is always a need and a demand for residential real estate amongst an international clientele of professionals, executives, creative artists and the wealthy. Those facts haven’t changed and aren’t likely to anytime soon.

I know what you’re thinking: what about the credit crisis? It’s true that the credit crunch is going to impact the real estate markets. One of the most anxiously discussed potential ripple effects for the New York market is whether our clients from the financial sector will have bonus money to spend in 2008. However, the evaporation of Wall Street clients is not one of the ways I expect it to play out. For one thing, many of those working in finance still made bonuses in 2007. Those may be reduced, but when you’re coming down from six and seven-figure bonuses by 5 or 10 percent, that’s still not too bad. For another thing, the financial sector represents just one segment of our annual business – it’s a significant minority, but not a make-or-break affair.

One effect that we know that the credit crunch will have will be to tighten the ability of developers to secure funding for the kind of new properties that have driven our market over the last five years. We should see two paradoxical effects of that phenomenon: first, a perception of decreased inventory of quality property so that buyers will become more aggressive for certain property types, and second, a withdrawal from the market of high-end condos so that prices drop or stagnate. How the market will cope with these two contrasting forces will be interesting since there will be pressure on sellers to “get more realistic” and bring their prices down while at the same time some sellers may experience more demand for their properties and that will have them digging in their heels on negotiability.

In such an environment, real estate agents will have a lot of work to do to balance clashing expectations because the economic and psychological forces putting pressure on American consumers are very real, even if they do not impact New York in the same way. People know that the dollar is weak, that oil and gas are high, that we face political uncertainty in the face of the 2008 election, that we are still mired in an unpopular war, and that there is a very serious and very real credit crisis in this country. None of that inspires a lot of confidence.

What agents have to do is speak the truth about the New York market – tell their clients how it performed historically, why it is still a vibrant and important place to live and own your home, and concentrate on the real and personal reasons why their clients need to or ought to buy here. Most consumers purchase a home because they have a life-changing reason that necessitates the move – not because they want to make a quick buck. Finding the right home is a deeply personal experience, made up of an alchemical mix of price range, space, bedrooms, views, neighborhood, architecture and myriad intangible qualities that no one can articulate perfectly. But we know the perfect place when we see it. That’s why it’s better to act than to regret later that you lost the home of your dreams.

I feel confident that New York’s real estate market is going to be just fine. We are emerging from six years of unprecedented activity and growth during which a lot of families “traded up” thanks to record low interest rates and a significant baby boom in New York City (there are 32% more children in the city under the age of five now than there were in 2000). We are going to see those families holding on to their homes longer but not because they changed their plan – they weren’t property flippers – but because they always intended to be in them for the foreseeable future. In the meantime, they’ll sit back and watch their home equity grow while they raise their children, advance their careers, and live out their dreams in the world’s greatest city.

In light of the difficulties in the nation’s financial sector, the American residential real estate market was closely watched in 2007. Slowing sales and widespread home foreclosures in regions across the nation attracted media attention, but New York bucked the trend and set new records in nearly every sector. Thanks to aggressive sales in Manhattan during the first half of the year and robust sales at the high-end in the second half, the value of residential property climbed 8% higher last year to $1100 per square foot. The average sale price for an apartment in 2007 was $1.395 million, an increase of 12% over 2006 when the average sale price was $1.243million.

Much ink has spilled over the national real estate market’s slower pace in the wake of the subprime mortgage crisis. However, Manhattan’s market has remained largely insulated from the crisis and its effects thanks to such factors as: the extra layer of financial review brought to bear by co-op boards; the greater degree of all-cash deals in our marketplace; and the ongoing status of New York as a global city whose property enjoys demand from an international class of professionals and wealthy clients. In fact, foreign buyers were a major reason why our business was robust in 2007, a trend that should continue as long as the dollar is weak and New York is regarded as good value.

Having said that, we are still waiting to gauge the full impact of the crisis in the financial sector on American real estate markets. The fact remains that the weight of all this bad debt underwritten in the form of subprime mortgages is corrosive of our entire credit-based economy. In the short term, the limited access to credit will impact prospective homebuyers and cause them to postpone their decisions. Even more worrying is the potential loss of value in real estate markets since that not only reduces wealth and decreases the homeowner’s ability to borrow against his home, but also narrows the ability of financial institutions to provide additional credit, deflating the entire marketplace. While Manhattan’s market has not been plagued with foreclosures the way other cities around the country have, the fact that our city is the hub of America’s financial institutions suggests that a significant portion of our core buyer base is likely to be more reluctant to take action than it has been in recent years.

Needless to say, 2007 was a year of challenges but it also was a year of record-setting prices, exciting change and continued growth here in New York. One notable trend was the increasing sales shift in our market from co-operatives to condominiums. The appetite of the luxury buyer tended to favor condos, particularly the super-luxury properties that shattered all previous price records. The resulting activity caused condo sales to outpace co-ops in 2007 by a significant margin; approximately 55% of all apartment deals were condominium sales. While both property types experienced price increases, condos continue to appreciate at a faster rate, growing by 9% in price per square foot in 2007 compared to the more modest 3% rise for co-ops. All of this was due, in no small measure, to the spectacular rise of world-class luxury condominium properties throughout Manhattan, many of them the work of the world’s leading architects, designers, and service providers.

Another notable trend that urbanites observed was the changing character of Downtown neighborhoods once considered marginal or – in the case of the Financial District – non-residential into vibrant communities. Conversions of properties, construction of new buildings, and the introduction of traditional lifestyle service providers and cultural institutions to areas as diverse as the Bowery, Hell’s Kitchen, and the Financial District are transforming the character of those areas into prime areas for residential living.

New York is the greatest city in the world and her resilience in the face of adversity has been her biggest asset over the last decade. I continue to be impressed by the enterprise and determination of our city and firmly believe that although there will always be bumps in the road, nothing that can keep New York down for long.