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August 28, 2006

The Possibility That Landing Is Hard, Not Soft

chart
This chart puts the real estate run-up of recent years in some historical perspective at a time when market news continues to disappoint. (The black line starts at a baseline value of 100 back in 1890 and is inflation-adjusted over time.) Rising inventory, falling building permits, fewer sales. And while homeowners, especially those of us who purchase in the last two or three years, are watching closely to see the impact on their own financial status, economists are thinking more and more about how a weakening real estate market could impact the broader economy, as lower levels of equity materially and psychologically impacts consumer behavior. The Times lists the three possible outcomes: Soft landing, prolonged slump and full-on crash. Which do you think is most likely?
Reading Between the For-Sale Signs [NY Times]

Comments

Another factor - cheap easy-to-get mortgages, people using their homes as giant credit cards (home equity), it seems like it was all a house of cards waiting to collapse. So many people have bought homes they can barely afford, or can't afford (interest only mortgage payments)! reminds me more of the 1929 stock market crash - too much cheap, easy to get money inflating prices.
I have always speculated, what if loans/mortgages weren't allowed -and you had to pay cash, wouldn't property be cheaper? (no interest payments, ect)

Posted by: anon at August 28, 2006 9:21 AM

That's a scary chart. I would guess, however, that for many people on here who bought multi-families, if you didn't borrow against the value of your home, you're better hedged against a drop than other people may be, especially if you have a fixed rate mortgage.

But looking at this chart, for many folks, it's not going to be pretty. I think soft landing is a dream now.

Posted by: Anon at August 28, 2006 9:49 AM

All factors appear to point to a hard fall. As Anon stated, the variable interest rate mortgages and interest only mortgages have put many people into homes they cannot afford, which raised property values drastically. Some of teh home owners on this site argue the unique desirable qualities of a brownstone will keep the market from falling. I agree with this point, but this fails to account for the disproportionate increase in property value as compared to other economic indicators in the last 7 years. the most important discrepancy is between the average income versus the average home cost, the increases are not even close to even. While I still think Brooklyn brownstones will not be affected as hard as the rest of the real estate market, they still are overinflated now and will have to come back to reality.

Posted by: Dborr at August 28, 2006 9:49 AM

The landing will be a hard one, the fed has down played the situation but people should know better than to listen to them. The fake mortgages leaded to the fake (inflated) house prices. The prices were not real, don't get me wrong the houses were selling but the real estate agents would basically put whatever price they felt comfortable with as a asking price. Now the reality will hit and hit hard and those real estate agents will have no other choice but to look for jobs elswhere in times on recession. The agents were never needed anyhow. What a mess the Govt has created.

Posted by: donnie at August 28, 2006 10:10 AM

I think the size of the bubble won't be completely known for a few years.

Brooklyn Brownstones are basically giant IRAs. When the baby-boomers start retiring en masse, there will be even more inventory and alot of bloodletting. Effectively, there will be reduced aggregate demand for housing as retirees downsize or relocate.

I give it 5-years before the retirement selling starts in ernest. Prices will start reacting (if they aren't already) to these expectations sooner as people that are soon to retire try to get ahead of the drop.

Posted by: Anonymous at August 28, 2006 10:26 AM

that was not a normal run up in prices. What goes up must come down. simple logic.

Posted by: Anonymous at August 28, 2006 10:26 AM

Wow...

>>"people should know better than to >>listen to them (Fed")"

Right...listen to donnie 10:10 am on Brownstoner instead

>>real estate agents would basically >>put whatever price they felt >>comfortable with as a asking price

Right again...we live in a MARKET economy where price is set by supply and demand not by real estate agents...hold supply constant and increase demand through low interest rates and guess what - price goes up...it doesn't matter what real estate agents do...who out there has actually made a decision based on what a Real Estate agent told them?

>>"What a mess the Govt has created."

Oh God...it's the governments fault again...what is the "government" supposed to do in your opinion? make sure that consumers don't buy crappy stocks, don't borrow too much money on credit cards/mortgages, look both ways before crossing the street...and please don't say regulate the mortgage business more than it is already...if you bought a house using an IO and/or ARM that you can't afford because you didn't read the voluminous government regulated disclosure forms that you have to initial on every page then you are an idiot and even democrats can't protect idiots from themselves...

Real Estate is a market and markets go through cycles - you just can't cry and blame real estate agents/government if you don't time them right and/or put more on the line than you can afford to lose; that's why rental properties exist.

This market is going to correct and correct hard for all the same reasons that all markets correct - greed and fear. There will be a killing to be made at the bottom.

Posted by: Anonymous at August 28, 2006 10:42 AM

10:42 AM
we don't live in a free market that's a joke - the government has it's hand deep, deep deep into manipulating the real estate market -freddie mac/fannie mae anyone. This isn't simple supply and demand. even with simple supply and demand you need real, not fake money for it to be a 'free' market

Posted by: anon at August 28, 2006 10:45 AM

And meanwhile, Barron's cover story this weekend was wondering if we've already seen the bottom. Clearly, nobody knows and we'll just have to wait and see.

And while those agressive mortgages seem awfully risky, most buyers who have them are so far ahead of the game they could still refinance or sell if they can't afford the rate increase. Most of those loans had 5/7 year fixed rates and, so far, I don't see the issue.

Posted by: Anonymous at August 28, 2006 10:45 AM

according to the Times this weekend, the futures markets are predicting a 5% decrease in prices in NYC. so people will be back to where they were at Christmas 2005. I think we can handle that.

Posted by: Anonymous at August 28, 2006 10:48 AM

"the futures markets are predicting a 5% decrease in prices in NYC"

In what time period? Futures markets aren't crystal balls into the future.

still refinance or sell if they can't afford the rate increase. Most of those loans had 5/7 year fixed rates and, so far, I don't see the issue.

umm, if they sell they might have to sell at a loss, thus be liable for the balance of the mortgage.

Posted by: anon. at August 28, 2006 10:52 AM

5% over the next 12 months.

I agree with the I/O poster. Nobody who bought 18 months ago is selling at a loss. Or they can hold on for 5 years and be fine. These loans ARE aggressive but they remain a small % of loans and are not at risk thus far

Posted by: Anonymous at August 28, 2006 11:08 AM

To Anon 10:26 - do you not think that impact will be exacerbated by 1. all the condo's being built now and in the pipeline 2. AY (if it is built as planned) will be bringing 7000 units of mostly luxury housing online in the 5 to 10 year time span when you predict that retiree's will be creating a glut of homes for sale.

Posted by: Anonymous at August 28, 2006 11:11 AM

10:45am...looks like your foil-hat may be a little tight this morning...

Firstly - find me one house in the area that we care about (ie brownstone brooklyn) that has anything to do with FNMA/FHLMC given their loan limits of $400K on a single family house. So I'm not sure that paranoid speculation about government manipulation impacts "our" market

Secondly - sure FNMA/FHLMC has their issues; there's an inherent conflict of interest by being a publicly owned entity that existed for 30-years as a government agency. However, if you would like to have a stab at restructuring the multi-trillion dollar US mortgage market you and Donnie should give it a go. People seem to forget that it's only because of property rights and the liquidity of our mortgage market that we are even having this debate about housing values - that's why there's no "chinafarmstoner.com"

Thirdly - don't believe a lot of the fraud allegations about FNMA/FHLMC. While you and Donnie are restructuring the mortgage business, you can clear up the ambiguities in FAS133 application to mortgage derivatives

Posted by: Anonymous at August 28, 2006 11:19 AM

Rents are going up. How can the market crash?

Rents are going up because thousands of people want to live in NYC. And these thousands of people would buy, but the price isn't right.

How can the real estate market crash? It may adjust slightly downward as rates rise, but it will be impossible for prices to "crash" because there is a rising rental market acting as upward pressure.

Just a thought.

Posted by: chuck at August 28, 2006 11:21 AM

"Rents are going up because thousands of people want to live in NYC. "

You're making the "NYC is different" argument - which would be great is EVERYONE didn't make that argument about their area. NYC is different, but not so different that prices can't drop.

I'm not really sure how rising rents help housing prices - if more people are renting, less people are buying. Supply is already up and demand is way down. So, that leaves prices to go down.

Posted by: Anonymous at August 28, 2006 11:24 AM

"10:45am...looks like your foil-hat may be a little tight this morning...

Thanks for the gratuitous insult...
you were implying this was purely free supply and demand market, clearly, it is not. 'our market' does exist as a separate entity, the nation wide real estate boom has, for example, caused foreign speculators (who, according the Christian science monitor, make up as much as 30% of real estate buyers in NYC) to, well speculate. There are plenty of people in this market to make a quick buck -not to own homes. when you get enough people doing that, you get inflated prices. Not quiet the tulip craze of holland, or even the dot com boom, but due for a serious correction? just look at the hockey stick graph.

Posted by: anon at August 28, 2006 11:35 AM

Bull markets and bubbles are always bigger than people imagine, and the bottom is always worse than people thought they would be. What we're seeing now is just a hiccup and the real downturn has yet to really start. The best time to buy? When everyone is says Real Estate is the worst investment. The worst time? When everyone says it's the best time.

Look at the similarities in the dot com bust and the housing boom:

Dot Com: prices will go up everything has changed, earnings don't matter, it'll be worth so much more years down the road.

Real Estate 04-06: Prices will go up everthing has changed, rents don't matter (rents as a % of market value is way out of historical wack) Real estate, espeically Brooklyn Brownstones, are unique, god is not making them any more.... they go up in value until more people want to sell them, than want to buy them.

Go back to 1992, 1993, 1994, 1995 try and sell any real estate, it was very difficult...... add that it is such an illiquied asset...

the bigger the run up, the bigger the bust ..........

Posted by: Charlie Tuna at August 28, 2006 11:35 AM

so 92-95 was tough. that's 3 years. if that is the big deal, than I'll sleep easy

Posted by: Anonymous at August 28, 2006 11:38 AM

I'll agree with 11:24 that rising rents won't help housing prices, however it is at the point where it's more affordable to pay a higher rent then the equivalent housing cost. The 20% down is getting to be quite a bit of money even for those that can afford $2500 a month in rent. Once you factor in the maintenance fee per month plus the upfront costs of buying, high rent may be a better alternative to high housing prices. The only way I think rent will go down is if housing prices literally crash. Otherwise both are going to be relatively high for a while longer.

I was at a barbecue this weekend where someone mentioned the outlying markets have dropped considerably - Jersey, Rockland, and Nassau for example. Westchester supposedly hasn't been affected as much. Can anyone confirm this?

Posted by: cobblestoner at August 28, 2006 11:39 AM

Westchester was still hit .. not as hard as Rockland, but still hit

Posted by: Anonymous at August 28, 2006 11:42 AM

I don't pretend to know anything much about real estate as investment, the way the stock market is, but aren't most homeowners in it for the long haul? Most of us only own the house we live in, and this is our home, to live in, enjoy, and raise a family in, not just an asset. Doesn't that make a home more than just an financial asset? Most of us don't trade property like stock, we live in it for at least a number of years. Doesn't that fact help shield us from the ups and downs of the market? Of course, some people have to/want to buy and sell for various reasons, but doesn't the majority hold on, thereby making our investments a good thing over time?

Naively wanting to know.......

Posted by: Crown Heights Proud at August 28, 2006 11:46 AM

No, Chuck has a point. Rising rents are a strong sign of the viability of the NYC housing market and should help ease the sales market landing.

Sales prices won't crash through the roof because there is still a strong demand for housing in NYC.

Pretty simple, actually.

Posted by: Anonymous at August 28, 2006 11:50 AM

"Most of us only own the house we live in, and this is our home, to live in, enjoy, and raise a family in, not just an asset. Doesn't that make a home more than just an financial asset?"

To you, yes, but come on, you can't be so naive as to act like the other 99.9% of the US hasn't thought just the opposite for the past few years? While you staying in your place for 30 years likely means you won't be affected, there are many people just the opposite of you.

I was looking at properties in Southern Westchester this weekend...I have a very honest, normal realtor who basically told us nothing is selling, the market has changed, etc. (she also put no pressure on us - kudos to her!) Sellers are cutting prices - not nearly enough yet to sell anything but it's happening.

Posted by: Anon at August 28, 2006 11:52 AM

A graph and chronology of NY Times articles ('81 to '95) covering the last cycle for those who haven't visited...

... www.youdovoodoo.com

Posted by: Anonymous at August 28, 2006 11:53 AM

Wait a second. If a house which sold for $100,000 in 1890 is now, inflation adjusted, $199,000 -- sounds pretty reasonable to me. That is a compounded rate of return of all of 0.5949%. And the population of the US in 1890 was what? 50 million people or so. Lets see -- the population went up by 5 times and housing, inflation adjusted, doubled. Is the sky really falling? Or maybe we look at statisics from economists as gospel when they might be just another way to make a point. "Economists use statistics like drunks use lampposts: for support more than for light" Winston Churchill

Posted by: Jonathan at August 28, 2006 12:00 PM

. Doesn't that make a home more than just an financial asset?

Yes, but there are plenty of people, developers, ect, involved in now for short term, quick gain. and a lot of people over leveraged who were hoping to sell their condo for tidy profit after paying an interest only mortgage for three years.

I don't think this sort of mad rush speculation is good for communities or for long term growth.

Eventually I think prices will bounce back, and people who are in for the long haul, barring any disaster, should be okay.
but keep in mind japan's real estate driven ecnomony took ten years to recover and properties lost 60% of their value - that was more commercial though

anyone know the state of the NY COMMERCIAL market??

Posted by: anon at August 28, 2006 12:03 PM

Anon 11:35 am

>>you were implying this was purely free supply and demand market, clearly, it is not. 'our market' does exist as a separate entity, the nation wide real estate boom has, for example, caused foreign speculators (who, according the Christian science monitor, make up as much as 30% of real estate buyers in NYC) to, well >>speculate.

Ummm...yes I said it was a free market and you disagreed...then you go and give an example of how free a market it is by commenting on free capital flows across borders...of course European investors have been "speculating" the Euro has gone from $0.82 to $1.30 in 5-years

Posted by: Anonymous at August 28, 2006 12:08 PM

Wrong, real estate developers and investors are good for a community. They create and rehab housing which is very very important to folks who need a place to live.

Posted by: Anonymous at August 28, 2006 12:10 PM

11:52, it was only a question. I hardly think 99.9% of the country is that obsessed with moving real estate around like a hot stock. I think it's a relatively small percentage of investors and speculators that keeps that end of the home buying market moving, as anon 12:03 said. The majority of people who own homes stay put for a number of years. My question was more to address the impact these people, who are a numerical majority of homeowners, keep RE a viable investment. Don't they profit in the long run, and provide some stability to the overall market?

Posted by: Anonymous at August 28, 2006 12:14 PM

NY Commercial market is in "stupid" shape due to the massive amounts of money chasing investment opportunities - with a 4.79% 10-year Treasury investors continue to buy up higher yielding commercial properties. Vacancies are at lows and the economic outlook is good - so great office building are trading at 5-6% yields. Retail properties too are in great shape with some of my broker friends telling me that bidding wars are breaking out over good leases.

Posted by: Anonymous at August 28, 2006 12:14 PM

"Wrong, real estate developers and investors are good for a community. They create and rehab housing which is very very important to folks who need a place to live."

there are good developers and bad developers, good rehabs and slop jobs. really think that sacarano guy who markowitz praised the day after he had his permits revoked, is 'good' for the community? or Ratner? yeah there's plenty of good guys but the current administration(s) reward the bad guys.

Posted by: anon at August 28, 2006 12:18 PM

Scarano's an architect and Ratner's a developer. There's nothing wrong with either of them. You may not like one of their projects, but that doesn't make them bad people.

There's nothing wrong with pushing the envelope. It's the only way big deals get done, especially in today's hyper-competitive environment.

Posted by: Anonymous at August 28, 2006 12:54 PM

Rasing rents are not a clear indicator that the housing market is still experiencing high demand. In fact, a simple review of the asking rents for a duplex in a brownstone versus a mortgage in that same type of apartment shows, renting at the moment might be a sounder investment. AS such, the increase in rentals is not necessarily an inidcation that additional people are entering the housing market in NYC, but rather the people within the housing market are changing their position from a buyer to a renter. Further, the NYC market is somewhat dependant on the surrounding areas, namely Nassau, Westchester and NJ, as these markets continue to drop, they further increase the likelihood that buyers will look for bargains outside of NYC. It is naive to believe that the recent run-up in housing costs, which is not supported by any other economic indicators, is nothing more than a overbalued market in need of a correction. Will a brooklyn brownstone reduce by 50%, no way, I could never see that happening. However, a 20-30% increase is a real possibility, and with the asking prices now, that is $280000-$420000 decrease in a house currently on the market for $1.4 million. I think a 20% is more likely for a house in that price range, but for teh houses with a higher asking price, I definitely can see 30%. Essentially, when all is said and done, houses going for around $2million will be reduced to $1.5-$1.7; houses going for 1.8 will be around $1.4-1.5; houses for 1.5 million will be 1.2-1.3, and houses for 1.3 will be 1.0-1.1. This correction is necessary and actually healthy, the asking prices now can not be supported by the current economy and raising interest rates. In fact, home owners should hope for such a correction, and hope it occurs quickly, because if the corection does not occur, and prices continue to remain at the current asking prices, a larger and much harsher correction will occur in 5-7 years from now.

Posted by: Dborr at August 28, 2006 12:58 PM

do any homeowners belong to this forum? I think not given so many respondee's that want or predict a hard landing. Maybe I live in a bubble, but I haven't come across anyone to date that's foreclosed, in financial turmoil, or complaining about the state of the market, rates, etc. Of course this is no indication of the broader market, but I kinda think either I or someone I know would have felt somethng by now given all the BS that's been said about the RE market. geez

Posted by: anon at August 28, 2006 12:59 PM

I am a homeowner -- my $0.02 is as follows:

I don't subscribe to the "house is more than a financial asset, because you live in it, yada yada" stuff. The reality is that about 90% of people will HAVE to sell their house at some point, and need to take that into account when buying any house. The "we will just hold if the market goes down is great" except that (a) your family may grow and you will need an extra bedroom, (b) you may get old/sick/tired and be unable to climb the steps (c) you may lose your job, be asked to relocate, move to pursue a better job etc, and (d) (e) (f) this list goes on forever. Historically and typically people in those situations can not afford the luxury of riding out the downmarket. Therefore, resale value is important even to an owner.

Posted by: anon at August 28, 2006 1:11 PM

Scarano's an architect and Ratner's a developer. There's nothing wrong with either of them. You may not like one of their projects, but that doesn't make them bad people."

I would say ratner is a bad person, based on what he has done and is doing. He claims he is 'an old lefty' but anyone can say they are nice or liberal or whatever, actions are what matter.... i won't go into it here, chris smith's article in new york magazine summed it up - he has completely subverted the democratic process, and has practically turned ESDC into a private subsidiary of forest city. and his atlantic mall and metrotech projects have been disasters.

Posted by: anon at August 28, 2006 1:24 PM

In my mind poulation increase is the wild card in this market. What I have read is that the popluation in NYC is supposed to increase from 7 million to 9 million over the next 20 years. It has been 7 million for several decades. The crunch that this will put on housing will far outstrip everything in the works now, including Atlantic Yards.

What I am ignorant about is how many of these people will have salaries or other resources that allow them to afford the $6,000 monthly mort + maint on the $1 mil/ 1 br apartment. It is mostly in the brownstone neighborhoods that I see spaces that are affordable to the median income earners, i.e. housing costs of $800-1300/month per person. I can't see the pressure on this market going down if population is going up. And if that is the case, most brownstone owners should be able to keep their tenants happy, and therefore pay the mortgage.

Posted by: ameraleed at August 28, 2006 1:25 PM

"In my mind poulation increase is the wild card in this market. What I have read is that the popluation in NYC is supposed to increase from 7 million to 9 million over the next 20 years. It has been 7 million for several decades."

just shows how #$@#$3 up our leaders are - this is not a sustainable pattern, unless we want our quality of life to seriously diminish.

Posted by: anon at August 28, 2006 1:31 PM

i've been in the market for a brownstone over the past roughly 3 months and am taking my time. one are in which i have been looking pretty diligently is lefferts gardens. something i found quite alarming was that if you look back over the past 25 years or so, the vast percentage in appreciation of value in that area's properties has taken place over the past 2-3 years. i guess this is somewhat reflective of the real estate market in general, but that aside, it's still a bit worrisome to me. i'm not one for buying at the top when it's apparent that a valley is around the corner, even if i'm going to live in a house for 30 years.

Posted by: csk at August 28, 2006 1:42 PM

re: population - is currently over 8Million. Whether gets to 9 million we'll see. Only some projections -- a.k.a. guesses. Also we are all 'guessing' at value of our homes.
Until someone gives you a firm offer - just estimating.

Posted by: Anonymous at August 28, 2006 2:14 PM

First, re:
"Rents are going up. How can the market crash?"

Because rents have been about 40% under the price of mortgage on an equivalent property. This has been one of the primary arguments used to forecast a housing bubble in the first place. So the fact that rents are moving up does not mean that prices can't also come down much less mean that they should push up even further.

Second, re: does anyone own on this website own real estate? I don't (although I've been looking this spring/summer) but there's plenty, plenty of people (a majority, I believe) who do. And just because you have a vested interest in something happen, that doesn't mean the rational analysis changes. If your neighbor tells you your house is on fire, you don't blink and so, no it is isn't, because it's bad for you if it is. Your house is on fire, whether you want it to be or no.

Posted by: Mateo at August 28, 2006 2:17 PM

Anon at 11:52: 99.9% of the country? C'mon. Maybe in NYC the percentage of people who view their property simply as an investment is higher than the rest of the country but it's ridiculous to think that nearly everyone except a few naive (your words, not mine) homeowners thinks investment property first, home second. In NYC of course the numbers are such as to make property owners go starry-eyed. But in many aspects NYC does not go the way the rest of the country does. But the real estate frenzy is so driven by greed that everything is inflated beyoned what the market can comfortably sustain over a long period of time. SO it goes down and starts the next part of the cycle.

Rents never seem to go down, and I find that people price their rents based on what they think people (usually desperate ones) will pay. Rents in neighborhoods like Crown Heights, Bed-Stuy, CH, PLG- have begun rising to the point where long time residents can no longer afford them, and because landlords see dollar signs. There's nothing wrong with making money, but I have never seen rents do anything but get pushed up. And another factor to consider is that as rent controlled and stabilized apartments, and even Mitchell-Lama housing goes market rate, that affects the numbers too. That's tied to changes in rental markets, not necessarily tied to rising landlord expenses. And as we are seeing, landlords are pushing tenants so hard that only the wealthiests can afford to live here.

Posted by: Anonymous at August 28, 2006 2:55 PM

I am a owner in brownstone bklyn, i think we are in for a kick in the butts, i bought less than 2 years ago and i am seeing homes selling for $150k to $200k less than asking prices in my area (carroll gardens) I am worried , i might not have lost money from my pocket but i am feeling the pain. I bought the property as a investment and i am negative every month so coming up with the payment along with the price drop is giving me a headache.

Posted by: Anonymous at August 28, 2006 3:51 PM

At first glance that article was alarming, but I think the graph is TOTALLY misleading...The fine print reads "standard existing homes, not new construction". Doesn't that mean that they guy from Yale only charted the prices of pre-1890 buildings? My question is what percentage of buildings in this country were built pre 1890? I'm guessing like 5 percent maybe 10? So couldn't that graph simply means that buyers since 1997 have been paying a premium for pre-1890's buildings in this country? No doi...Lets all drink a sleepytime tea and get back to work.

Posted by: nryland at August 28, 2006 4:27 PM

ok, this is one thing i don't get:

"There's nothing wrong with making money, but I have never seen rents do anything but get pushed up."

about the second part of that sentence: maybe you haven't seen it happen (in your lifetime), but neighborhoods change over time, and prices go up AND down, right? just because recent NYC history has been all about gentrification and more jobs and an influx of young professionals from the rest of the country and colonizing the far reaches of the outer boroughs doesn't mean that this trend will necessarily continue... if we have, say, a serious recession, won't things get worse before they get better, especially in the neighborhoods that haven't been entirely gentrified, like Crown Heights North and Bed-Stuy and all the other beautiful old brownstone neighborhoods? isn't that what we're worried about when we talk about a real estate crash?

Posted by: sylvia at August 28, 2006 4:35 PM

4:27

Shiller's index is based on repeat sales of existing homes (necessarily). These homes may have been built last year or last century, as long as they have been resold once. What the index does not consider are the sale prices of new homes. If you believe that the recent run up in prices is due to new homes, the index would be misleading. However, we can all attest to the run up in the prices of both new and existing homes, so this is not a credible objection.

Posted by: Anonymous at August 28, 2006 4:55 PM

I can understand rents levelling off and staying the same for a while, in a time of economic stress, but here in NYC, and in brownstone Bklyn specifically, rents go down? I can't see it, unless one has priced an apartment just coming onto the market too high to begin with, and you have to adjust to the market. From what people here have said, there are many, many people looking for apartments. Doesn't that factor into our particular market, of multiple family dwellings, which is very different from most of the rest of the country?

Posted by: Crown Heights Proud at August 28, 2006 5:30 PM

Ignor my earlier comment...I was misinformed.

Posted by: nryland at August 28, 2006 5:39 PM

I'm a homeowner in NY, and I think there are a few reasons why 1) NY is (somewhat) different from other markets and 2) a harder fall than usual could be coming.

The NY issue has been debated pretty extensively here and on other blogs. First, there's coop boards (higher financial scrutiny and discouragement of investor buys makes the market more stable); second, there's scarcity. (The second obviously would be the main one applying to Brooklyn brownstones.) Both of these could mitigate a crash in NY but probably can't stop it.

In terms of the potential for a hard landing, the combination of overleverage and home equity debt mentioned by other posters plus the growth of ARMs and changing tax burdens are a big problem. Real estate (at least if owner-occupied) is usually less volatile than stocks because owners often ride out drops in value and refuse to sell. However, sometimes you're forced to sell, usually due to one of the three Ds - death, divorce and debt.

The first two Ds aren't so predictable, but thanks to loosening regulations, many people are facing big jumps in their payments due to higher rates, the end of interest-only payments and the decline of tax abatements. Accordingly, the third D could cause quite a few hardship sales and foreclosures - along with the hard landing people have been predicting.

So why did I buy this year? Well, I almost didn't. After looking at dozens of properties I had all but given up on upgrading my 1BR apartment; then I was lucky enough to win an HPD lottery for middle-income NYers. Since my apartment was priced under market and I was also able to pour in some profit from selling my last apartment made, I figured I would be OK even if values declined - plus I was able to afford a fixed-rate mortgage. Of course, since I didn't really have to move I could afford to be very choosy; I certainly feel for people facing the prospect of putting a second child into a 1BR apartment, for instance.

And even though I was very lucky, I certainly did take on some risks: My apartment is in a gentrifying neighborhood that is noticeably worse than where I lived before. An unprecedented decline in crime rates has been another huge driver of the local housing boom; if an economic downturn causes crime conditions to worsen, I could end up trapped in a building where I feel unsafe, unable to sell at anything but a huge loss.

Of course, every decision has risks, and at the end of the day I was just as motivated by loving the layout and views in my new place as I was by making a savvy investment. I guess that's what how you make every major committment in life: You try to make the best decision you can, and at the end of the day you close your eyes, cross your fingers and leap!

Posted by: eeeck at August 28, 2006 6:18 PM

One thing that should keep the NY market from a hard landing is the exchange rate. The dollar is in the toilet which makes NY a very attractive place for overseas buyers to invest right now. They keep the prices high in Manhattan, particularly for new high-end condos, and that in turn drives buyers to Brooklyn looking for what they can't afford in Manhattan. So long as the dollar stays week there will most likely not be a major correction in NYC prices, certainly not to below 2005 levels. The demand will remain too great

Posted by: Anonymous at August 28, 2006 6:18 PM

After the dotcom crash in spring 2000, prices in Silicon Valley began to drop from astronomical highs. Toward the end of that year I asked a successful real estate investor out there if he was buying yet. His answer was no: it takes at least a year for people to figure out they're in trouble and another six months for them to figure out how MUCH trouble they're in. He was basically right. I'd say, give NY a little more time to ponder.

Posted by: California Boy at August 28, 2006 6:48 PM

I'm sorry but you would have to be a pretty desperate soul to take a 25% hit on your home; perhaps an investor but a homeowner? No way! If the move is precipitated by a job relocation, my employer would have to compensate me handsomely for the hit; similar to a stock buyout on a lateral move. A divorce? "Hey, honey, how about sleeping in separate rooms until the storm passes?" Death? Ahhhhh....who cares, you're dead!

Posted by: SuperAnon at August 28, 2006 8:23 PM

As someone who bought a condo in Brooklyn a month ago, I have to admit that this chart did scare me. But here's why, after a bit of math, I still think that, even after the recent price increases, buying makes a lot of financial sense compared to renting.

The simple reason is that buying is basically a forced savings program, subsidized in the form of interest payments being tax-deductible. In my case, I pay almost $3000/month in interest. After taxes, that's a bit more than $2100/month - the rest is principal, which I basically pay to myself, in the form of equity.

This compares quite favorably to the almost $1600 I used to pay in rent (for a much smaller and shittier apartment), even if I sold the condo at the very same price I had bought it - and I am sure the same math applies to thousands of New Yorkers, and that's precisely why rising rents matter a lot in the equation.

For me, the worst case scenario would be that with prices going down I won't be able to sell at the drop of a hat, if I wanted to. For many people, that is not a big deal. I still have a roof over my head and no landlord who keeps rising my rent every year.

Compared to other cities, NYC is a city of renters, not homeowners. Yet, many people want the security of stable mortgage payments compared to renting, not to mention at least the possibility of building equity, even if prices stay flat. Yes, I could put the $500/month that I am paying extra over renting into the stock market, but the stock market is much more volatile than the housing market, and I am already tied to the whims of the stock market thanks to my 401k, so investing in my own condo has another big advantage: diversification and spreading my risk.

Just my 2cents. I am pretty sure that I am not the only one to whom this logic applies - many others like me are still renting, and many are probably saving for a downpayment right now, just like I did, for many years. They are the ones who will keep the housing market from crashing, I think. Will it go sideways or down, at least a little? Probably. Soon enough though, those people will get back into the market, making sure it doesn't crash too hard.

Posted by: newinbrooklyn at August 28, 2006 10:25 PM

Man, I can hear the Medical Alert signals going off all over Brooklyn! It's not like swine flu carring killer bees have contaminated all the coconut soda in the entire city. .

Posted by: imby at August 28, 2006 10:39 PM

Newinbrooklyn, thank you, you made much sense to me.

Posted by: Crown Heights Proud at August 28, 2006 11:59 PM

I seem to remember in the late 80's early 90's a time when new condo/coop developments were NOT selling and those few that sold went to speculators. The unsold units were turned into rentals that unfortunately because of greater supply or stiffer competition, were not even able to secure high enough rents to pay the landlords bills. I remember banks coming down hard and fast after just a few missed morgage payment. I remember multi family borrowing of $$ at 12% or higher in 1989. When I bought in 1994 the rates were at 8.6% and everyone who was still standing began to refinace. This was in an up and coming neighborhood (Alphabet City). I remember one property in particular...$10 million new construction that was foreclosed on and the debt was sold for less than half! If the owners could have just made it through the bank's panic.
Last week 5 units were just sold in a new development in the south slope for $500-$800. This price for crappy sub standard units, on a crappy block in my opinion, Mr. bubble may be popping in Miami or Tucson but not in the S> Slope.

Posted by: imby at August 29, 2006 8:05 AM

CaliforniaBoy raises an interesting point-- the thing is though that home prices in the Silicon Valley *still* haven't fallen. I can't figure out why not (I'm from there & my family debates this). It seems like some simple laws of economics--not to mention physics-- are defied by this. I don't know how people continue to pay high mortgages & down payments when the jobs have declined...

Posted by: Anonymous at August 29, 2006 9:54 AM

A reasonable explanation of why prices may not be heading down so quickly:

http://tinyurl.com/grnjm

Posted by: Anonymous at August 29, 2006 9:59 AM

A log scale would not be appropriate. Log jumps in powers of 10, and so a log scale would unnaturally compress the hill, i.e. the first gradation would be 10, the second 100, the third 1000, etc. It would give an artificial view. The linear scale is the most apposite for this type of data. You need to read your statistics book again.

Posted by: pachuca at August 29, 2006 10:56 AM

SuperAnon, I agree that most people would be hard-pressed to sell at a 25% loss if that had a choice, but that's my point - in many cases, people won't. For example, imagine paying more than 2/3 of your income to housing after your no-verification interest-only ARM spikes - and then losing your job. Then either you'll sell it or the bank will.

Many of the stories you'll hear about people who sold at a loss during the 90's crash often involve divorce; I think at that point people are facing such big financial hits on so many levels that combined with the need to just be free of the whole thing, they end up making decisions that aren't necessarily that great from an investment level.

But you are right - most people will do anything they can to avoid selling at a loss, which provides some cushion for RE in general. At times like this it's also advisable to buy a condo or condop so you know you can always sublet if, as mentioned, you have to relocate for work or other reasons.

Posted by: eeeck at August 29, 2006 11:25 AM

If any of us could really predict what will happen - we'd already be rich and only become richer.
Otherwise we're just guessing.

Posted by: Anonymous at August 29, 2006 2:54 PM

I have to comment that i think the rental market is a significant factor. If rents keep going up, as they are now, that will help soften the landing for the sale market. Why? Because once I start paying more than a certain amount each month (for me it is about $3,000) I think "I should be buying rather than throwing my cash away.." Once I start thinking like that, I see what is out on the market and start dreaming of home ownership. And there are many others like me, or others who will move to NYC in the next year or so. So my prediction is that this contingent will see the slight drop in prices we are seeing now and will interpret it as an opportunity to get into the market. It will probably go down another 5%, as predicted, but that is not a big deal if starts to slowly creep up again....

Posted by: Anonymous at August 29, 2006 5:40 PM

Most Americans are leaving expensive north eastern cities (as in NYC) and California. Heres the link: http://money.cnn.com/2006/04/19/real_estate/net_migration_tilts_south/

The only people moving in to these areas are recent immigrants and illegals. And this will be stopping soon. To compete with China, corporate America is looking for cheap employees...long term NYC and the like are done for (except for the cultural class)

Folks, we havent even seen: the retiring boomers, resetting ARMs, raising rates (30 year is actually down in last 60 days), telecommuting growth (only 1/2 percent since 2000), and the recession from the bubble blowout. Inflation adjusted prices will be 30% lower in bubble regions 5 years from now. Mark my words.

Posted by: anon at September 8, 2006 12:03 PM

Interesting post.

To me it seems like all the cities that had hyper-appreciation of real estate values from 2000 through 2005 are now really taking some major value declines.

Here in San Diego, I subscribe to: http://www.brokerforyou.com/brokerforyou This San Diego real estate publishes a real tell-it-like-it-is blog. His 12-31-07 post Real Estate Market Predictions for San Diego in 2008 is a realistic idea about what this year will hold for not only San Diego, but, all the cities that had hyper-inflation.

Jannet
http://www.lasik-surgery-san-diego.info

Posted by: guest at January 18, 2008 11:27 PM

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August 28, 2006

The Possibility That Landing Is Hard, Not Soft

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