_Fee Simplistic is a regular post by Martin Tessler, whom after 30 years of commercial fee appraiser-related experience, gets to the bottom of real issues by seeing the both the trees and the forest. He has never been accused of being a man of few words and his commentary can’t be inspired on a specific day of the week. In this post, he segments the ups and downs of cyclical real estate markets without buying a plane ticket._ …Jonathan Miller

Two separate articles in the November 7th New York Times about forthcoming [Wall Street bonuses](http://www.nytimes.com/2006/11/07/business/07wall.html) and the state of the [housing market in Phoenix](http://www.nytimes.com/2006/11/07/realestate/07land.html?_r=1&ref=business&oref=slogin) warrant some real estate economic commentary from this quarter. The Wall Street story heralds “Big Bonuses Seen again for Wall Street” with the average managing director expected to pocket $1.7 MM this year, up from $1.2 MM last year. This is miniscule compared to the expected $20-$25 MM for senior investment bankers and for the traders who deal in structured products and derivatives who are expected to walk away with top-end bonuses ranging from $40-50 MM each. The article goes on to say that first year associates just out of business school can expect to receive total compensation ranging from $200,000-$270,000 with first year analysts out of college hauling in a measly $105,000-$145,000.

By way of contrast, the article on the Phoenix market states that people were walking away from their 5% deposits because they could not sell their existing home or got cold feet. Builders who raised prices almost weekly last year were encountering a cancellation rate as high as 40%. Measured against a market last year where contract flippers and investors comprised one-third of all homes sold this segment of the market this segment has all but disappeared. Builders who counted on this heated demand overbuilt and supply vastly outpaced demand. And so th glut has to be sopped up by what would be regarded as normal demand-employment growth and natural increase in population including in-migration.

This leads us to what the classical land economists would call market segmentation. Real estate market demand can be classified into markets stemming from:

* Natural household growth fueled by employment (oh yes-also divorce)
* Expansion from in-migration (retirement to resort areas)
* Replacement (loss due to demolitions, fires, catastrophes)
* Upgrading (filtering up)
* Extraordinary stimuli (speculative plays, market frenzy, low mortgage rates)

It would seem that New York City, aside from continuous imigration, is going to experience an expansive upgrading market considering the Wall Street bonus pool. How many traders, investment bankers and managing directors are going to jump into the “Upgrading” pool from “Plain Jane Upper East Side to Upper Park/Fifth Avenue or whatever other “Swellsville” areas are developed? How many are going to jump into the second home market? And how many of the first year college analysts and business school grads are going to be first time buyers and abandon the 4 roommates renting one apartment scenario?

Phoenix, on the other hand, is going to have to content itself with the natural growth that has made it one of the fastest growing MSA’s in the US but without all of the hot buttons that were being pushed by the speculators and the low interest mortgage rates that caused supply to outpace demand.

Back to New York: The stock market like real estate is cyclical.

_Semper Fee Simplistic_