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December 13, 2006

How Bad Will The Market Be in '07?

Business Week asked a bunch of economists to look into their crystal balls to try to predict what the housing market would do over the next year. The general consensus was not too encouraging:

Home prices will continue to fall in some markets, and the rate of price appreciation will slow in most places. Declines in homes sales, which directly influence price trends, will set the stage for another year of price decreases in 2008. Foreclosures will continue to increase. For those struggling to hold onto their homes, their net worth will shrink as these homes lose value. Long-term mortgage rates will rise. Housing starts will see double-digit depreciation, the sharpest decline since 1991, the worst year for housing starts on record.

You want the good news? Home prices are predicted to be flat to up slightly on a national level in 2007, with many large markets seeing small increases. (Of course, if you own in Southern California, Florida, and Las Vegas, you're screwed.) And although new home sales are almost sure to be down for the year, existing home sales will probably be flat. And in a glass-half-full spin, housing starts aren't likely to suffer as sharp a drop as they did in the early '90s or early '80s.
How Bad Will the 2007 Property Market Be? [Business Week]

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Housing starts have already tumbled pretty badly. But does that have such an effect on this area? Condos, I suppose.

Flat would probably make most people happy. But we'll just have to wait and see.

Posted by: Anon at December 13, 2006 9:28 AM

What goes up MUST come down. Everyone, like with the stock market, thought to buy buy buy...real estate was going to double their money..some people have owned houses over the years and gained almost NO appreciation in 30 years.
I know someone in Florida sold their house for1,000 more then they bought if for 30 years earlier (bought it at 50K...sold it for 51K)
My aunt in Crown Heights bought in the 1920s, sold in the 1970;s for about the same price she bought it!

Posted by: Anonymous at December 13, 2006 9:41 AM

Oh, no, Mr. B. not THIS discussion AGAIN!!!!!

Posted by: anon at December 13, 2006 9:41 AM

It's an entirely relevant discussion, and I think it would be irresponsible of Mr B not to bring it up every week or so. If you don't want to discuss it, don't.

Posted by: sylvia at December 13, 2006 9:45 AM

The whole U.S. economy is going to go down the tubes soon. Wait and see.

Posted by: Anonymous at December 13, 2006 10:07 AM

None of these prognostications are relevant to the average Brooklyn brownstone owner. Most of us have bought for the long haul, and except for using our homes as a source of cash to do more renovations, are generally not doing much in the way of exotic financing that would merit any concern over depreciation. Florida is not like New York and Albany is not like Brooklyn. These "national trend" predictions are meaningless in respect of local markets.

Posted by: crouchback at December 13, 2006 10:27 AM

As someone who is not even considering selling in the next three years, and probably longer, I read stories like this with sort of a detached interest. I know it may affect the economy on a macro scale, but so may a lot of things. I guess the media has to write about something.....

Posted by: Anonymous at December 13, 2006 10:34 AM

"None of these prognostications are relevant to the average Brooklyn brownstone owner."

Perhaps -- although I personally don't really know exactly what the "average" Brooklyn brownstone owner plans on doing with his or her property. But these prognostications are of great relevance to prospective buyers. There will be homes sold in Brooklyn over the next year and I cannot believe that national trends are as utterly irrelevant to local markets as you seem to suggest.

Posted by: Anonymous at December 13, 2006 11:09 AM

I would say the national trends are much more relevent in Brooklyn than they are in the rest of the city. The borough has seen a much faster run up in prices relative to most other places. It's not like SoCal or Boston, but these trends are most certainly relevant here.

Posted by: Anonymous at December 13, 2006 11:21 AM

As a single woman looking to purchase her first home (Co-op or Condo), this news is crucial to me. It makes a difference between actively looking for a new home and waiting for prices to fall a little further (while I save more money towards a down payment and closing costs), or at least stabalize.

I am in a very unique situation, in that I live in a rent stabalized apartment in Manhattan, but would prefer to own my own two bedroom home, as opposed to living in a cramped (400sqf) 1 bedroom.

My goal is to purchase within the next 12-18months and hold the property for 5 to 10 years before renting it out and purchasing a house. With that time horizon, for me this as a first time buyer, the corrections in the real estate market is good news!

Posted by: LitSupport at December 13, 2006 11:28 AM

Well said previous Anons - especially in areas of large runups where there are few true underlying fundamentals to support them, such issues are very important. Many owners without plans may be just fine if they don't sell, but I find it hard to believe that it's as easy to shrug off as they claim. Housing has been the entire US economy, sadly, and if it goes wrong, which I believe it will, it will affect us all. After all, if you really think about it, despite any owner/buyer/seller bias you might have, can an economy really thrive if all it consists of is building, buying and selling homes to each other? I wouldn't dismiss the national picture so quickly - the whole "not in my area" thing is the equivalent of covering your ears and saying "I can't hear you, I can't hear you."

Posted by: Anon at December 13, 2006 11:29 AM

1) where are stats saying that price increases in Brooklyn are more than rest of NYC? You maybe just be a bit myopic.
2) If house prices nationwide decrease
(although the forecasts are market by market) and you sell your brownstone next year - you'll also probably be buying into a 'down' market. So whats the difference.
I was evaluating 'trading up' a year or so ago.... and decided no because of size of mortgage I would need to take on. But if mine and the nicer block both went down 20% - it would make the 'trade up' much easier for me.

For someone contemplating buying condo/coop in NYC these days - I wouldn't rush into it... with so many new apts under construction and planned
you'll have more choices and maybe better prices- especially if have rent-stabilized apt. where able to stash more money aside for downpayment.

Posted by: Anonymous at December 13, 2006 11:40 AM

As the saying goes, S@#T HAPPENS, so I think that even people who are NOT planning to sell should be a little worried if the Newsweek article is correct. There is so much that can happen in our lives that can result in changed plans - loosing your job, illness, death, having to relocate b,c your kid has asthma and you have to live in a warm climate

I think it is a bit smug to assume that a declining national real estate market will have no impact on brooklyn brownstone owners.

Posted by: Anonymous at December 13, 2006 11:40 AM

did anyone see what the bonuses on wall street will be this year?!!! these people drive the market, so don't bet on the real estate market in nyc drying up.

Posted by: Anonymous at December 13, 2006 11:50 AM

"did anyone see what the bonuses on wall street will be this year?!!! these people drive the market, so don't bet on the real estate market in nyc drying up."

Not this tired argument again. Repeat after me, The fact that I can afford to spend $2 million on a house does not mean that I will, especially if I think that that same house will be worth less in a year. The people on wall street who make the kind of money that you are thinking of (MDs and traders) are not stupid.

Posted by: Anonymous at December 13, 2006 12:04 PM

People tend to underestimate the psychological impact of national RE trends. Tales of falling prices and rising foreclosure rates and a slowing economy will make prospective buyers pause and proceed with more caution even in NYC.

This hesitation alone leads to properties staying on the market longer, prices falling, and a continuing cycle until the prices appear to be a good value and the prospects for substantial appreciation reappear.

Just as buyers were frantically buying just a year ago lest they be left out of the equity boom and look on with increasing envy as houses became less and less affordable, today buyers are hesitating lest they be the chumps to buy close to or near the top of the market.

I am convinced that most NYC buyers are not thinking in terms of a 10-year commitment and ARE concerned about the potential loss if they were to sell in 4 or 5 years. Given the imbalance between the cost of renting and the cost of owning for most scenarios, I think this sobriety is healthy and necessary.

This shift in mass thinking is very real.

Posted by: Andrew from PS at December 13, 2006 12:05 PM

11:21 AM,

"It's not like SoCal or Boston, but these trends are most certainly relevant here."

Interestingly, they predict NYC to suffer greater median price declines ('06 to '07) than Boston (-3.1 vs. -1.9, respectively)

http://images.businessweek.com/ss/06/12/1212_realestate07/index_01.htm

Posted by: Anonymous at December 13, 2006 12:08 PM

What exactly is the correlation between current/potential rental income and housing prices, especially with respect to multi-family, owner-occupied brownstone Brooklyn?

-- is it not, the better the rental income, the more valuable the house?

Is current rental income in brownstone Brooklyn such that could support current housing prices or is the cost of ownership still too high? And if rents are on the rise in Brooklyn (which, in my limited experience, they are), wouldn't that help to at least prevent current prices from falling dramatically in the future?

I don't expect to see prices on multi-family brownstones in Brooklyn drop more than 10%, if at all.

Posted by: Anonymous at December 13, 2006 12:13 PM

"You want the good news? Home prices are predicted to be flat to up slightly on a national level in 2007, with many large markets seeing small increases. (Of course, if you own in Southern California, Florida, and Las Vegas, you're screwed.) And although new home sales are almost sure to be down for the year, existing home sales will probably be flat. And in a glass-half-full spin, housing starts aren't likely to suffer as sharp a drop as they did in the early '90s or early '80s."

This good news, only for 2007, simply means there is still time to cash out. What about the rest of the decade? The booms that preceded the early '90s or early '80s were dwarfed by the recent boom. The bigger the boom, the bigger the bust.

Back to Businessweek: "For those struggling to hold onto their homes, their net worth will shrink as these homes lose value."

Posted by: Anonymous at December 13, 2006 12:28 PM

I have said this before (not the exact words) on this blog and I will say it again now: The most significant impact one will see in brownstone brooklyn as a result of a downturn is a flight to quality. Well-maintained, move-in condition properties will more or less obtain prices that are in line with recent trends. Recent sales have more or less bourne out this analysis (in the face doom and gloom projections since the end of 2005). I strongly believe that if an analysis of properties languishing on the market is done one would arrive at one of the following conclusions: (a) they are priced above or ahead of the current norm/trends, (b) they need work, (c)they have legal impediments (e.g.,rent controlled/stabilized tenants)or (d)there is a location issue. Or, in a some cases, its a combination of all 4 problems.

Posted by: crouchback at December 13, 2006 12:37 PM

owners MAY lose equity over the next couple of years. renters WILL lose cash.

rudimentary example:

rent: 2k/mo x 12 = 24k/annum.
were she to purchase, this renter could "afford" to lose at least 24k/annum in equity without taking a relative loss.

Posted by: Anonymous at December 13, 2006 12:39 PM

12:13,

"And if rents are on the rise in Brooklyn (which, in my limited experience, they are), wouldn't that help to at least prevent current prices from falling dramatically in the future?"

That would be a 'no'. The temporary hot rental market is a refuge camp for outpriced buyers. That market will soften, first, when more and more condos are converted to rentals and second, when these refugees are priced back in while brownstone medians fall and affordability returns.

Posted by: Anonymous at December 13, 2006 12:39 PM

12:39,

"owners MAY lose equity over the next couple of years. renters WILL lose cash."

At least they have cash to lose (how big of a loss compared to a failed real estate investment by the way) with no debt attached to it. Do you NOT lose cash while owning and operating a brownstone?

Posted by: Anonymous at December 13, 2006 12:49 PM

...and is that cash ALWAYS recovered when you sell?

Posted by: Anonymous at December 13, 2006 12:52 PM

...or collect rent?

Posted by: Anonymous at December 13, 2006 12:53 PM

rent v own nonsense

what about the interest cost on the mortgage, which in this rent v own market would be more than the rent assuming 10% down?

if you are going to do analysis, at least do it right!

Posted by: Anonymous at December 13, 2006 12:57 PM

if a couple makes 150k per year and they invest in a one-family in north queens, with a down payment of 20%, and the (advertised) average home is costing 700-800k, the payments would be upwards of 3600 per month - that's not counting tax, insurance, heat, etc. everything marked under 700-800k needs at least 100k worth of repairs.

where are the first-time home buyers coming from? with average rents in northern queens around 1500-1600 a month it doesn't even pay to buy a two-family.

where are all the first-timers with this kind of cash flow? how can second time buyers move up with no one coming in at the bottom? how long can sellers continue to hold out with the high prices before the log jam of inventory forces them either to take the house off the market or capitulate?

how can a market that doubles house prices in five years expect to correct in eighteen months? how can a "reduction" of $5000 or an offer to pay closing costs affect a mortgage payment?

how many bonused brokers buy new places each year? will this demand set nyc on the track to 15% price increases again?

i seriously think that everyone who is optimistic about this market is a homeowner, and everyone who is pessimistic is a wannabe homeowner. neither is a realistic bellwether of future trends, however, the facts are clear: housing in nyc has always been nuts, but never as nuts as this.

ask youself this: how come our parents, on middle class salaries, could afford some sort of house at a time when down payments required 20%, but now people who make six-figure salaries can't afford anything even with 0% down?

the answer to that should answer any questions about the directions of this market.

Posted by: poutre at December 13, 2006 12:59 PM

"ask youself this: how come our parents, on middle class salaries, could afford some sort of house at a time when down payments required 20%, but now people who make six-figure salaries can't afford anything even with 0% down?"

What is considered middle class or middle income now ($75k to $100k per year) was considered very well off 30 years ago. The housing market back them was in a major slump. And, prices reflected that fact. With the current market, someone making $75k to $100k can not afford to buy in NYC, that is unless they have been saving (while renting) for several years.

Today's buyers want all the luxuries and amenities. They are far less likely to have the time or desire to put in the sweat equity to purchase an undervalued piece of property and upgrade it to meet their needs. Also, (A/C, after the crack epidemic) some neighborhoods are such shit holes that no one in their right mind wants to live in them!

30 years ago buying a house in Bed-Sty was a good idea, now, hell no! They may be cleaning up Harlem (Strives Row, Sugar Hill, Inwood, Washington Heights). But these neighborhoods are still pretty skanky. I this past weekend, I was on my way to three different open houses, on a Sunday afternoon at 2:30pm I saw an open hand drug deal, heroin addicts dividing up their stash, and had a panhandler begged me for loose change. This all took place in locations where the co-ops/condos were priced at $400k to $1.5mil. Why in the hell would I buy anything in these "up and coming" areas?

I'll hold onto my money and keep looking.

Posted by: LitSupport at December 13, 2006 1:21 PM

Like a poster earlier said, if you're already vested in the market (and have been for a few years) this doesn't mean so much. Prices of new places will lower along with your property value.

But for first time buyers this is a huge deal. If you put 10% down and the market drops 10% you've lost 100% of your investment. And for existing home owners the biggest impact is that if you want to move, sell your previous home first. Otherwise you could easily get trapped with two mortgages. Nightmare.

There's also an ancillary negative wealth effect to the local economy in general, but that's harder to quantify.

And as many have discussed, the supposed Wall Street is a myth. As is the "it's different here" argument.

Posted by: sean at December 13, 2006 1:23 PM

"...housing in nyc has always been nuts, but never as nuts as this..."

Yup. NYC housing has always had a high intrinsic value compared to the rest of the world. However, since WWII, it's median price appreciation 'curve' has always wrapped itself around the average inflation 'curve' between booms and busts. If it's true that history repeats itself, housing will have to crash land back into inflation (Fed's public enemy #1) and would likely overshoot upon arrival as it did after departure.

Posted by: Anonymous at December 13, 2006 1:27 PM

throw into this the projected housing crunch by 2030 with at least 1 million new residents in nyc

Posted by: Anonymous at December 13, 2006 1:46 PM

"Today's buyers want all the luxuries and amenities. They are far less likely to have the time or desire to put in the sweat equity to purchase an undervalued piece of property and upgrade it to meet their needs."

Partly true, owing to the extremely spoiled and materialistic culture we now live in. But there seem to be a lot of folks on this blog willing to put in the time to fix up their places...although the argument could be made, if one believes the market is overvalued, that they are putting money into places that are overvalued instead of undervalued, as our parents might have done. But they are still putting in the time and effort.

Posted by: Anon at December 13, 2006 1:58 PM

"throw into this the projected housing crunch by 2030 with at least 1 million new residents in nyc"

Is that when the market's supposed to bounce back? Damn. Long time to hold on.

Posted by: Anonymous at December 13, 2006 2:03 PM

I would be more than happy to buy an undervalued property (in FG or PS) and upgrade it, the problem is that these types of properties are still priced very high. I cant see paying $1.7+ for a place and them have to spend hundred of thousands to upgrage it, not to mention the headache that comes with a removation (and I am not one of those people who need or want central A/C). I mean, there are sellers that have been in their properties for 20+ years, never even bothered to update the electricity and they still want top dollar for these houses - its the epitome of greed.

Posted by: Anonymous at December 13, 2006 2:10 PM

continuing from above....

I would actually prefer something that I could fix to my need b.c I personal hate most of the bling/bling finishes that are being put into most of the new "renovated" places. Who wants floor to ceiling tiles in a kitchen, or 6 whirlpool baths, or stainless steel everything.

Give me an old fashioned clawfoot tub, good MEPs, a building that is structurally sound and I will be happy to take care of the rest ... all at the right price of course.

Posted by: Anonymous at December 13, 2006 2:14 PM

It is now obvious that many who browse this site and jaded wanna-be owners who gloat angrily at the beautiful homes featured here, knowing that they will never own anything close to them. These are compulsive, begrudging, parlor-window shoppers who rejoice at the slightest spin on this bursting bubble theory that, with real estate being such a prominent topic, is designed buoy a failing print-media empire.
Such news lends hope that, with a failing real estate market, one day they may own one of these gorgeous brownstones or, at best, they can laugh at the fools who commandeered the great white ship of rising real estate values while they remained stranded teary-eyed in their rented caves while depleting their meager salaries.

Posted by: KillJoy at December 13, 2006 2:24 PM

interesting absolute value comparison: i recently checked the historic sales price of a two family house in greenpoint. it sold in 1981 for around $20,000. my parents bought a 4 bedroom brick ranch style in katy, tx that same year for $30,000. today, the greenpoint house is worth around +/-$800K and the katy house would sell for around $110K. mind blowing.

Posted by: Anonymous at December 13, 2006 2:24 PM

KillJoy, you are so POETIC! About this RE market discussion in general, I am pretty tired of it, but 1:23 makes an excellent point about the new buyer's difficulty in making a decision at this point. It takes a leap of faith to move forward and I am convinced that if long term housing is your objective, you will be OK if you really do your homework and find something appropriate for you that you love.

Posted by: donatella at December 13, 2006 3:35 PM

I realize that this site is geared toward Brooklyn reale state, but I live in Manhattan, so that is my point of reference... having said all that....

I remember when run down brownstones in Harlem was auctioned off for near nothing 10 years ago. But because they were in such great dire need of a complete overhaul that they languished on the market, in ruins.

Those same brownstones are on the market in the same horrid condition for 1.5mil or more! had I known then (or had the financing) what I know now, I would have purchased one of those Brownstones at a City auction and gladly spend the 100k to 200k to renovate it!

I mentioned that the current market is driven by those looking for "all the luxuries and high end amenities" because I have seen this madness in action. i personally am not opposed to sweat equity. There is a great feeling of accomplishment once a renovation is over, especially if you personally did some of the work yourself.

My old boss bought a midtown condo almost 3 years ago. It was a studio with less square footage than my 400sqf one bedroom! I thought she was crazy! And, she barely had a downpayment for the purchase. Borrowed heavily (from family and her 401k plan)to get it.

But I guess her current equity in the property justifies the insanity of the purchase.

Posted by: LitSupport at December 13, 2006 3:37 PM

donatella:

Great point, I agree completely. Buying a home is a big decision emotioinally and financially. It is to be entered into with caution and a pleuthora of information.

Posted by: LitSupport at December 13, 2006 3:43 PM

poutre, while you certainly do make a strong point there are some mitigating factors:

-most of those parents probably had zero to no education debt

-health insurance was significantly cheaper

-lifestyle spending was often lower - middle class people didn't travel, eat out or buy as many clothes/electronics, etc. as often as today

Of course, many other expenses were higher (food, for example, is typically much cheaper today adjusted for inflation) as were mortgage rates. Overall, I'm not exactly sure how homeownership nets out in terms of affordability comparing the 1950s, for example, to today. Anyone have any ideas?

Posted by: eeeck at December 13, 2006 6:17 PM

did anyone see what the bonuses on wall street will be this year?!!! these people drive the market, so don't bet on the real estate market in nyc drying up."

heh, stupid, in the past few days 4 wall streeters have called me looking for houses! million dollar houses in brooklyn heights, so....while they may not be stupid, they do need a place to live. ever heard of negotiations, or are you too stupid and living in a rental.

Posted by: Anonymous at December 13, 2006 8:08 PM

You pathetic renting fools just don't get it! You missed the boat! You will never afford to live in prime Brownstone Brooklyn - no matter how far real estate prices in Brooklyn fall! No one who makes any serious dough spends their entire day on a freakin' real estate blog site hoping and praying for 50% correction just so they can someday afford to buy a studio apartment in Park Slope South! Get a life!

Posted by: Anonymous at December 13, 2006 11:24 PM

Brownstoner, looks like a few worthless a-holes have taken over. Sometimes I wish for those comment log ins again.

Posted by: Anon at December 14, 2006 10:08 AM

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December 13, 2006

How Bad Will The Market Be in '07?

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