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October 10, 2006

Housing Report: Broad and Deep Pain Across U.S.

for sale
An article this weekend in the Real Estate Journal (which, unlike its parent paper, is free online) told of widespread doom and gloom for the nation's housing market. The article sites a recent report by Economy.com that predicts that prices will continue to slide for at least another couple years in roughly 100 metropolitan markets across the country. The biggest risks lie in California and Florida, the report says. As for New York, the forecast is for a relatively benign decline of 3.5%. Elsewhere on the East Coast, Economy.com says that Boston has already bottomed out. The good news? The current downturn "so far looks more like a correction than a crash on a national scale." A spoonful of sugar helps the medicine go down.
Prices in 100 U.S. Cities Expected To Decline [Real Estate Journal]
Photo by sercasey

Comments

>>The forecast is for a relatively benign decline of 3.5%. <<<

Real estate reports are always geared towards the seller's POV. For buyers, the next couple of years may be a jamboree...

www.forgotten-ny.com

Posted by: Kevin Walsh at October 10, 2006 9:18 AM

Oh, OK, forgot the rules about cut and paste, ie. can't do it here.

I was saying that real estate reports are always geared toward the seller's POV. For buyers, though, the next couple of years may be a jamboree.

www.forgotten-ny.com

Posted by: Kevin Walsh at October 10, 2006 9:20 AM

If you really want to get a case of the heeby-jeebies, go to the url on the "for sale" sign in the picture. It's a blog of a twenty something who's gotten into enormous debt flipping houses in California.

Posted by: Anonymous at October 10, 2006 9:33 AM

The Staten Island Advance reports from New York. “Need more proof it’s a buyer’s market? How about getting a new car, money to pay closing costs or free home furnishings to go with your new house. They are not prizes in a game show, but the perks some new home builders are offering in the let’s-make-a-deal atmosphere that’s come with a softening real estate market and rising inventory.”

“A free $15,000 Saturn Ion might be the most unique inducement as of late. Brokers marketing a 72-unit townhouse development in New Dorp thought giving a free new Saturn with each new house might attract ambivalent buyers. Some buyers didn’t even take the car, opting instead for $15,000 in closing costs or money toward home furnishings, said broker james Prendamano.”

“Sweetening the pot is what a lot of builders who are trying to sell multiple units are doing in a changed market. Last summer, home builders also lost what had been a standard marketing tool over the years, the ability to offer buyers an eight-year tax abatement on new homes.”

“‘Builders are trying to make up for the [loss of the] tax abatement program, which didn’t exist for resale homes,’ said (realtor) Neil Litvin in Dongan Hills. ‘If one builder has some homes that have a tax abatement and another doesn’t, the second builder has to do something to make his homes more appealing to the buyer.’”

“Litvin said builders such as Dora Homes and the Biadon Group are offering to pay down the interest rate on mortgages, or paying $15,000 in closing costs and throwing in upgrades such as more expensive granite countertops when it comes to marketing the custom detached colonials.”

“The Advance reported last month that home sales dropped 16 percent and housing inventory rose 25 percent, according to figures from the Staten Island Board of Realtors.”

Posted by: Anonymous at October 10, 2006 9:55 AM

3.5% ? How do you even measure 3.5% decline in markets like Brooklyn? Most of the properties are so different. Marginally inferior light fixtures can probably justify that…

Posted by: Anonymous at October 10, 2006 9:57 AM

I've been following the housing stocks for the past year. Toll brothers, Pulte homes, Ryland. Take a look at these stocks. They have rallied dramatically in the last couple of months. The bottom for these stocks were all hit about 3 months ago.

Can their recent success signal a housing bottom?

Jim Cramer from "Mad Money" says that a housing rally is about to happen and I just saw Donald Trump on "Larry King' say that real estate is a better investment than stocks right now.

I have my doubts about whether we've hit a bottom, but it's hard to argue with the recent rally in housing stocks.

We'll see.

Posted by: Anonymous at October 10, 2006 10:25 AM

I'm with Kevin--what's bad news about a price correction that edges a few millimeters down toward reality? In a market that forces two-income lower-middle-class and working-class families to commute from the Poconos, even a 3.5% "decline" is still meaningless. As homeowners who bought 20 years ago, for us, a paper 'loss' will be just as meaningless as the huge paper 'gains' were...since we'd have to move to Missouri in order to trade "up" after cashing out of NYC.

Posted by: Brenda from Flatbush at October 10, 2006 10:35 AM

As someone who just sold a home in Florida (two days on the market, priced right at market prices), I think the change in the housing market is simple. Used to be you could overprice your piece of shit and some sucker would come along and buy it. Suckers are offcially out of the market and only serious buyers left.

At a fair price (fair for both buyer and seller) homes will sell in any market.

Posted by: Anonymous at October 10, 2006 10:35 AM

"At a fair price (fair for both buyer and seller) homes will sell in any market."

I guess then we just have to determine "fair" - 3.5% decline does not seem fair, nor will it bring the rent/own costs much closer to balancing out. I would not listen to Jim Cramer. He's been wrong before.

Posted by: Anonymous at October 10, 2006 10:57 AM

no one cared much about jim cramer until he started acting like a retarded gorilla on tv. i would not put a lot of weight in his opinion.

that said, he knows more than me about anything finance related.

Posted by: anon at October 10, 2006 11:15 AM

3.5% decline in prices? yay, now i can afford a 362.25 sq foot apartment instead of a 350 sq foot apartment. what WILL we do with all that extra space?

Posted by: sylvia at October 10, 2006 11:17 AM

Who said renting and owning should cost the same? It shoudl not. Owning a home is an asset approach with related expenses of carrying...renting is an straight expense. If they are anywhere close together, something is majorly wrong.

Posted by: Anonymous at October 10, 2006 11:18 AM

"an asset approach with related expenses of carrying.." sounds more like a liability than an asset for now.

Posted by: djr at October 10, 2006 11:29 AM

"Who said renting and owning should cost the same? It shoudl not. Owning a home is an asset approach with related expenses of carrying...renting is an straight expense. If they are anywhere close together, something is majorly wrong."

What on earth are you talking about!? Of course they should cost the same if you take all costs into consideration.
One of the costs of renting is not having as much control over the building you are in, along with the threat of eviction. Some people don't care about that: for those people, renting vs owning is exactly a spreadsheet calc that assumes the asset rises with inflation.
Some people regard this very differently and are prepared to pay a premium over renting.
A third group perhaps even are the opposite: for them, the "hassle" of ownership is actually a negative. They may even rent when owning is cheaper on paper.

So you have these three groups but they are united around a common baseline: cost of renting = cost of owning.

When house prices have moved so far up that all three groups find renting cheaper, then either the market falls or rents shoot up. Take your pick.

What other relationship can there be supporting house prices? fairy tales? I'm sure a broker wants you to think that.

Posted by: Anonymous at October 10, 2006 11:40 AM

You can say the costs of owning and renting should equalize if you assume that there is no value to what you are living in. The fact is that at the end of extended period of owning, you have an asset that is worth something. (generally more than what you paid for it but for sake of argument, lets assume its the same in real dollars minus inflation)

So the cost of owning should be the cost of living somewhere + cost of investment.

You may argue that the difference in renting vs owning should be less than it is now...and thats open for discussion. But to say they should be the same makes no sense.

(Please note that it seems like there are a lot of doom and gloom renters on this board. Why would a die hard renter even care to read this board unless they were about to buy and wished prices down? )

Posted by: Anonymous at October 10, 2006 11:56 AM

"(Please note that it seems like there are a lot of doom and gloom renters on this board. Why would a die hard renter even care to read this board unless they were about to buy and wished prices down? )"

I disagree. I have heard plenty of owners on here agreeing with many of the above statments - why would you call anyone a doom and gloom renter unless you were an owner hoping prices didn't go down anyway? Everyone has their motives, you included.

Posted by: Anonymous at October 10, 2006 12:06 PM

agreed, Anon 12:06. we all make more or less educated guesses at what a wise investment would be, given our personal circumstances, and then hope that our guesses are proven right by the market.

that's what these discussions are all about, right? personally, i hope the decision to continue to rent for a while is a wise one, and that i'm not kicking myself a few years from now. but you never know, eh?

Posted by: sylvia at October 10, 2006 12:17 PM

Anon 11:40. Well said. I love these pointy headed discussions about renting vs buying. If we talk about real estate as a "housing solution", i.e. where you LIVE, there is enormous value in having an owner's control over one's living circumstances.

Tenants are protected by leases but leases can end and not be renewed. Owners can sell apartment buildings. Tenants have rights but they are nothing compared to the control of being an owner, particularly with owning a live in rental property, in my humble opinion, even though owning a building is a lot of work.

If owning an apartment or building is your housing solution, you get a tax benefit, a chance to build equity, the shot at equity appreciation (be patient....), and best benefit of all, IT'S YOURS. In this environment, if you own an apartment building, you are golden. So your house goes down 3.5%, who cares? I mean really? My place went up some crazy amount in 2 years on paper, so what do I care about a 3.5% decline on paper? If your numbers work, and you can cover the costs and these days you are getting higher rents, don't you think my fellow brownstoners and I can ride out a sideways to slightly lower market? If you are a huckster of some kind, looking to buy and flip endlessly making money and/or you are overextended, that is another issue.

Maybe I am howling at the moon, but I think all of this Chicken Little business is for the amateurs who are in the business of writing dramatic magazine articles or hi-drama TV reports.

OK, there's my rant of the day.

Posted by: donatella at October 10, 2006 12:27 PM

Donatella, hop off the self righteous "I can ride it out, I'm awesome" horse for just a bit. Maybe you can, but many cannot, so have a little sympathy for your fellow brownstoners who may not be as set as you.

It seems as though you may not feel so secure, as you sit here calling people names ("chicken little") to make yourself feel better about your decision to own. You would not be alone in that, and I think equally, there ARE people who do not own who are a little doom and gloom. Put yourself in their position for just a second. If we all did that, we'd see that we all have vested interests and no solution or outcome is perfect.

But I agree with all above who point out that owning will always cost more than renting, with maintenance, etc. I don't think anyone with a brain would argue the costs should or will be equal. The issue is whether they are so completely out of whack as to justify house prices right now - not 30 years down the road, or even 10, but right now. Thinking about that doesn't make one a "chicken little" necessarily.

Posted by: Anonymous at October 10, 2006 12:40 PM

OK, I just spanked myself. Happy?

Posted by: donatella at October 10, 2006 12:46 PM

just for the sake of discussion: a few people mentioned that one way of the market correcting for the huge gap between the cost of renting and the cost of owning is for rents to go up.

we've obviously seen that happen, at least a little, in the last few months (no-one buying, everyone renting, inventory non-existent). but, really, is that sustainable, in the long run? i mean, people's salaries are not going up. where are new yorkers going to pull an extra couple of hundred a month from, to be able to afford climbing rents?

i've seen an awful lot of expensive short-term sublets on craigslist. people going on vacation for 5 days trying to rent out their bedroom in a park slope share for $120 a day, that kind of thing. i'm wondering if that's people who can't really afford their rent to start with, trying to make up the difference any way possible... or just a natural response to supply-and-demand: if tourists are willing to pay $120 a night to stay in nyc, why not capitalize on them?

Posted by: sylvia at October 10, 2006 1:19 PM

Anon, at 12:40pm. I'm curious to know what you mean by the idea that many brownstoners cannot ride out a r.e. bust. I honestly fail to see how a 3.5% decline in property values will have any effect whatsoever on any brownstoner, most especially those who have owned for some time and have considerable equity, and relatively low debt.

Even those brownstoners who bought recently are not likely to be impacted - most of them put very large downpayments and funds for renovation into their properties; I don't know any "poor" brownstone buyers. The only thing I could maybe see is if they bought with an ARM, maybe rising interest rates might get to them eventually, but that scare seems to have subsided for the moment. And if we really see a real recession, interest rates will likely decline (that decline is exactly what softened the last recession).

And as donatella pointed out, anyone who is receiving rental income is quite happy right now. Last time I put my garden apt on the mkt, there was practically a riot to submit applications vs. 2 years ago when the rental mkt was relatively tame.

Bottom-line, as long as our local economy holds up and employment remains robust, both the brownstone and rental markets will be just fine, despite a little bumpiness. So, far, I'm not seeing any blood in the streets. What I do see is rent increases accelerating in the future, as LL's respond to increased costs for heat, insurance, taxes, etc., and I think that is what will help equalize the balance between cost of owning and cost of buying, at least for NYC.

Posted by: Miguel at October 10, 2006 1:33 PM

I'm waiting this thing out it will be more than 3.5% decline in nyc

and cramer is pumping up those hb stocks

if you buy on his say you are a fool

Posted by: patient homebuyer at October 10, 2006 1:47 PM

Renting cost VS buying cost... the way I always look at it is:
if I were to buy right now, how much would I have to deposit (down payment) so if I were to rent it, the rental income would cover my mortgage + monthly? I owned a house in another state 10 years ago, where I bought with 0 down (yes, zero) and rented it a couple years later, and the income covered my cost. That's a strong rental market. A couple years ago, I bought a small studio on the UWS (way up) and my monthly cost with 10% down was about the same as the rent on the same units in the building. I sold that place over a year ago, and at the time, the rent would have been much lower than the buyer's monthly cost (with 10% down). What that tells me is the "owning" market has increased at a much faster rate than the rental market. Currently, I'm renting, and pay about 2k/month. If I were to buy my place (it's not for sale), I figure my monthly cost would be 3500-4k/month, with 10% down. So, I figure renting is still much cheaper than buying, at least for me. I've been using this sort of simple calculation for years (in differnt states), and I think it always gives a fair evaluation of buying vs renting.

Posted by: ron at October 10, 2006 1:53 PM

I wish the housing market tank and all those, who bought many homes as investment, file for bankruptcy. I know many people who bought houses (not homes) for $200k are selling the same houses (not homes) for $700k. When buyers try to negotiate the price down by $100K, they think that they are being ripped off.

Why should I have any sympathy for those who have no sympathy for me? What the hell….let them rot.

Posted by: Dave at October 10, 2006 1:55 PM

"and cramer is pumping up those hb stocks if you buy on his say you are a fool"

Kramer is bullish on housing stocks. He believes that we hit a bottom 3 months ago. It's not just him though ,Alan Greenspan said almost the same thing yesterday. Also the market for housing stocks (which is the compilation of all demand and supply)has gone up sharply over the last 2 months. Try and buy Toll Brothers if you don't agree.

If you believe the stock market is a good indicator of what is to come, the indication is that housing has bottomed and we have seen the worse.

Also history tells us that it is very difficult to sustain a downturn in housing without a corresponding weakness in the economy. In NYC, the economy is booming!!!

Posted by: Torch at October 10, 2006 2:05 PM

I wanted to have an entire Brownstone and was oepn to either renting or buying. I looked for 2+ years. If you're looking to rent a whole Brownstone, good luck, because there are about 10 of them on the market at any given time and the asking rents start at about $7-8K per month in the neighborhoods I looked in (Brooklyn Heignts, Cobble Hill, Carroll Gardens). $7K of rent per month = about $84K a year which would support about $1.3 million of mortgage (at 6.5%). If you rent, your rent is sure to go up every year. Assuming it goes up 3% a year, you're rent is going to increase to $9,500-$10,000 after 10 years. Contrast that with owning. Buy the Brownstone at $1.3 and borrow $1.0 million. Annual interest expense on the mortgage is $65,000 per year. Keep a triplex for yourself and rent out a garden apartment for $1,800 per month for income of $21,600 per year leaving you about $43,400 of interest expense to cover for your triplex. Assume the mortgage interest tax shelter saves you enough to cover property taxes, heat + water, property insurance etc. That means you're getting your triplex for a monthly payment of about $3,600 per month and that payment is going to stay relatively fixed over the next 10 years. There is no way you can rent a comparable place for that,

Posted by: Anonymous at October 10, 2006 2:29 PM

I guess Alan Greenspan is a fool too.

Posted by: Anonymous at October 10, 2006 2:33 PM

Anon 2:29, please let me know where I can get a 4 story brownstone in the nabes you mentioned for $1.3 million. Not only will i buy it, I will pay you a finder's fee.

Posted by: Anonymous at October 10, 2006 3:09 PM

"I honestly fail to see how a 3.5% decline in property values will have any effect whatsoever on any brownstoner."

That is based on a big ASSUMPTION that prices only fall 3.5%. And that's a big assumption - there are areas of NY where they have already fallen more than that.

Posted by: Anonymous at October 10, 2006 3:09 PM

How much have rents gone up?

Posted by: anon at October 10, 2006 3:14 PM

Anon 2:29's example works anyhow because even though the bstone will cost more like $2mm in today's market, that buyer will be putting $1mm down. Yes, there I said it. There are people with $1mm down payments. Today's bstone buyers are not taking out $1.8mm mortgages, and if they did, they probably expect to pay it down by half with their next bonus. Anyone who sold a 2BR apt in Manhattan might have a $1mm down payment. And a lot of them are getting money assistance from the wealthy parents, like it or not. That's reality. So, the $1mm mortgage scenario works. And with a 2fam, the rental income offset, makes it quite affordable relative to renting. And owning means you can renovate it to exactly the way you want and nobody can tell you what to do with your own home.

There is substantial value to owning a bstone, even in today's market, when you factor in the rent equivalent for the space.

Posted by: Miguel at October 10, 2006 3:57 PM

You can't buy a house for $1.3 in the neighborhhoods mentioned in the 2:29 post above because and you won't be able to in the future because of the point raised in the post. That's why I think all the posters on this site who think that every property that comes to market right now is overpriced and that they'll get a big discount by wating will ultimately be disappointed.

Posted by: Anonymous at October 10, 2006 4:04 PM

i don't know exactly how much rents have gone up, but i'd guess it's around 10 or 12% since last year, at least in the neighborhoods i'm looking in. anyone have a better estimate?

Posted by: sylvia at October 10, 2006 4:04 PM

Not sure if the 2:29 post was directed toward my post about cost of owning vs renting, but if you're talking about a down payment of 50%ish, then we're in a whole 'nother league. I'm just a regular guy (no rich relatives). Since a 10% down payment would pretty much stretch me to the max, that's the figure I always use. $50K cash in the bank is worth way more to me than $50k equity in my house. I'll never be a big down-payment sorta guy.
If I'm off-base, then nevermind.

Posted by: ron at October 10, 2006 4:39 PM

Ok, for the quants out there. Answer this question. Person needing a place to live does extensive calculation and determines time value of money, net present value, opportunity cost, etc. etc., determines that it is smart to rent. Rents nice apartment with lease. Owner decides to sell vacant and not renew lease when up in one year. Said person needing place to live then has to move. Goes through the hassle and expense of moving. Rents another place and in one year that owner decides to sell the place, vacant. This happens. This happened to the people renting a duplex next door to me. The value of stability in your life has a cost that has to be entered into the equation.

Posted by: anon at October 10, 2006 4:46 PM

36 posts debating the state of the housing market and the final post concludes that "moving is sort of a hassle."???

The level of intelligence in this discussion is mind boggling.

Posted by: Anonymous at October 10, 2006 4:54 PM

Just a simple question. So often I see pre-tax rental income used in caclulations to offset the cost of multi-family home ownerships. These calculations take into account the tax deductions of mortgage interest and property tax but fail to reduce the rental income by the appropriate marginal income tax.

Doesn't anybody in Brooklyn report rental income and pay taxes on it?

It would appear that even when reduced by proportionate maintenance expenses, the benefit of rental income is oft overstated.

Posted by: Andrew from PS at October 10, 2006 5:06 PM

Dear Anon 4:54

You say "36 posts debating the state of the housing market and the final post concludes that "moving is sort of a hassle."???

What the post says is:

"Said person needing place to live then has to move. Goes through the hassle and expense of moving...."

The point is that one of the less directly measureable value of owning real estate is that it gives the owner
a certain control over his or her living circumstances. To have no control over where you live from year to year is a problem.

Attention Deficit disorder is a problem too.

Posted by: Anonymous at October 10, 2006 5:23 PM

Andrew, when they do the calculations they only allow you to count 80% of the potential rental. That is to offset the related expenses.

Posted by: glarph at October 10, 2006 5:24 PM

Thanks, glarph.

It would appear that for an honest tax payer, 80% is still too much to factor in. If I get $1000 per month in rental income, reduce this by $200 for related homeowner expenses, I have net $800. Assuming that all $200 are expenses that can be deducted legally for tax purposes, I still need to pay income tax on the remaining $800.

Depending on the marginal income tax rate, the net benefit could easily be $500 or less, which leads me to believe that many strapped owners of multi-families simply do not report this income because they cannot afford to. They do, however, factor the rental income in when justifying or qualifying for the purchase of a multi-family.

Just trying to get a feel for what my neighbors in Brooklyn do as I contemplate buying a house.

Perhaps two or three-families sneak by under the radar or homeowners take cash payments to avoid a paper trail for tax audits.

Not looking for an endorsement of tax evasion tactics, just honest feedback about common practice.

Posted by: Andrew from PS at October 10, 2006 5:38 PM

Andrew from PS

The big expense that you miss for tax purposes is depreciation.Liberal depreciation rules can often negate any income that you may have to declare to Uncle Sam.

Remember also that you will have fuel, utilities, property taxes, mainteance, and other expenses. After all of that the property will most likely be running a loss for tax purposes.

Posted by: Torch at October 10, 2006 6:00 PM

"Yes, there I said it. There are people with $1mm down payments. Today's bstone buyers are not taking out $1.8mm mortgages, and if they did, they probably expect to pay it down by half with their next bonus."

Then they are a fool for not considering the INCOME they could get by sticking 1m in a CD or better yet a more intelligent investment vehicle. That is lost income sunk into a house, which HAS to be taken into account when looking at whether to buy or not.

I can buy a brownstone this month for $2m if I go poke withdraw all my semi-liquid assets, and pile them together, but I'm not going to, not when I would forgo about $100k per year I was getting from them, after tax! $100k can rent a super nice place!

Posted by: Anonymous at October 10, 2006 6:26 PM

I bought last year in Bed Stuy. My 2 rental units are paying my mortgage and I get an apartment for myself as well. Whether we are discussing home prices falling or renting vs buying, I feel confindent that I made the right decision to buy when I did.

Posted by: Anonymous at October 10, 2006 6:56 PM

anon at 6:26,

I knew somebody was going to come up with this oppty cost arguement. You ignore a couple of things:

1) You gotta pay to live somewhere. For similar bstone space, in a "prime" nabe, this could be $7K per month. That's $84K that you gotta pay in after-tax dollars. If you're in a high tax bracket, then you need $140K of pre-tax income for rent, which more than cancels out what you're earning on your CD.

2) Your rent will go up with inflation, which partly cancels out what you're earning on your CD.

3) Your r.e. equity will appreciate at at least the same rate as the interest you're earning, actually much more because it is a leveraged investment (i.e. as your home appreciates, your equity accelerates).

4) Your mortgage ded's will further reduce the cost of owning.

5) Even a 1BR garden rental will fetch $2000/mo in a prime nabe. That's $24K virtually tax-free income to offset cost of housing.

There's more, but I only have so much time to devote. If you don't get it yet, I can't help you.

Posted by: Anonymous at October 10, 2006 8:38 PM

anon 6:26 - where are you getting a 10% asset backed return? I think i just might sell my house and quit my job.

Posted by: Anonymous at October 10, 2006 8:40 PM

Oh and I forgot about the $100K (10%) you claim to be earning on your $1mm investments. Do you really think that return is a historic norm after loads and expenses? Now who's smoking what?

Posted by: Anonymous at October 10, 2006 8:42 PM

All you geniuses with the "we had a housing stock rally, therefore the market is going up", time for you to take a basic stock market class. You have no idea what you are talking about.

If the market thought the market was going down 10%, then if that estimate changed to 9% down, the housing stocks would rally.

These folks are showing the same ridiculous logic that was shown in the bubble.

Learn how markets work people.

Oh yeah, and cover your head. Thats the bubble bursting.

Posted by: Eddie Wilson at October 11, 2006 4:56 PM

« Tuesday Linkster Developer Non Grata: 330 Park Place Destruction »

October 10, 2006

Housing Report: Broad and Deep Pain Across U.S.

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