Bank Predicts NYC Market to Fall Another 40 Percent
If a certain bank analyst is to be believed, New York real estate has a long way to go still before reaching bottom. A Time article earlier this week cites a Deutsche Bank report predicting that housing prices in the New York metropolitan area will fall 40 percent from their March levels. The major driver…
If a certain bank analyst is to be believed, New York real estate has a long way to go still before reaching bottom. A Time article earlier this week cites a Deutsche Bank report predicting that housing prices in the New York metropolitan area will fall 40 percent from their March levels. The major driver of the bank’s estimate is an affordability index that shows New York is still relatively a very pricey place to shack up.
New York Home Prices Forecast to Drop 40% [Time]
Photo by tomodea
“All the Asshats and Hipsters who thought Harlem was cool have moved the f*ck out and gone back to Ohio. Therefore the Assraping landlords who thought they could charge 5th Avenue rents in the ‘hood so Starbucks and Ben & Jerry’s could make the Hipsters feel at home are f*cked! 125th Street will revert to the old days! The young ‘uns are coming!”
Not bad Denton welcome to the Dark Side. Kill Luke Skywalker…
The What
Someday this war is gonna end…
brickoven, do you understand what the term “speculation” means?? It looks like you don’t.
THis is Goldman from late January:
We use the recently introduced S&P/Case-Shiller index for
condominium prices to assess the valuation of the New York apartment
market. Although housing market valuation typically has little
predictive value for the near term, it is useful for anticipating
longer-term moves, especially when prices are far away from
equilibrium.
· Indeed, New York apartment prices are very high relative to
the observable fundamentals. Using three alternative
yardsticks—price/rent, price/income, and affordability —we find that
prices would need to decline by 35%-44% to return to the valuation
levels seen in the 1995-1999 period, before the start of the recent
boom.
· The uncertainty is substantial. On the one hand, the picture
would worsen further if per-capita incomes in Manhattan returned from
their current level of 3 times the national norm toward the pre-1990s
average of 2 times the national norm. On the other hand, it would
brighten somewhat if jumbo mortgage rates converged toward conforming
rates, perhaps because of a broadening of the Fed’s support measures.
In addition, societal and demographic changes could also help, though
these types of arguments are difficult to quantify and are often heard
just prior to a real estate market downturn.
Following a decade-long boom, activity in the New York City apartment
market is now slowing sharply. The sales reports for the fourth
quarter of 2008 released on Monday by two of the largest New York real
estate brokers—the Corcoran Group and Prudential Douglas
Elliman—suggest that sales dropped by 25%-30% from the fourth quarter
of 2007 (see “Striking Declines Seen in Manhattan Real Estate Market,”
New York Times, January 6, 2009, page A20). Although the prices of
closed sales were little changed from a year earlier, one analyst
estimated that the prices of apartments that were under contract but
had not yet closed fell by 20% from August to December. Moreover, it
is well known that prices lag sales activity in the housing market, so
most observers agree that both contract and closing prices are likely
to decline in the near term.
Information on sales and price momentum is very helpful for predicting
near-term moves in the real estate market. But in order to gauge the
longer-term outlook, it is better to look at fundamental valuation
indicators, such as the level of prices relative to rents or incomes,
either directly or adjusted by mortgage interest rates. These types
of variables don’t have much predictive power over the near term, but
they start to become much more powerful at horizons longer than 1-2
years.
Until recently, a fundamental analysis of the New York apartment
market was hampered by the lack of high-quality price data. The
various brokerage firms publish mean and median prices for both co-ops
and condos on a quarterly basis, but these are difficult to interpret
due to significant changes over time in the size and quality of
apartments being sold. In addition, research firm Radar Logic, Inc.,
publishes a “price per square foot” series for the New York condo
market. However, there is only a year’s worth of history, and changes
in the average quality of homes sold can still distort the data even
though the Radar Logic approach does control for variations in size.
But the data situation has improved dramatically with the recent
broadening of the S&P/Case-Shiller (CS) repeat sales home price index
to cover five of the nation’s largest condominium markets, including
New York. These indexes stretch back to 1995—not as far as we would
like but much better than what is available currently—and they adjust
for changes in both size and quality of the condos by using only
matched price observations involving successive transactions in the
same condominium for estimating the overall change in prices.
Admittedly, a repeat sales index does not perfectly adjust for quality
changes. In theory, the bias could work in either direction. On the
one hand, wear and tear will reduce the value of a given condominium
over time if the owner does not look after the property well. On the
other hand, upgrades such as new flooring or a nicer kitchen may raise
the value. While the CS index seeks to eliminate the influence of
these factors by downweighting price change observations that are far
out of line with local comparables, this is unlikely to eliminate all
sources of bias. Still, we believe that a repeat sales index is far
superior to the available alternatives for the purpose of measures
changes in underlying real estate prices.
In analyzing the data, it is useful to look first at the raw numbers
for New York condo prices. As shown in the table below, nominal
prices tripled from 1995 to 2006, went essentially sideways in 2007,
and have declined by about 3% in 2008. The stability since 2005 is
somewhat at odds with reports from the New York real estate brokers
that still show meaningful gains in mean and median prices over this
period. However, we suspect that the apparent contrast is resolved by
a shift in transactions toward larger and higher-quality apartments
over this period, which would increase the mean and median price
figures but leave the CS index unaffected.
Index
(Jan 2000=100)
Oct-95
75.3
Oct-96
75.4
Oct-97
80.6
Oct-98
89.2
Oct-99
97.5
Oct-00
111.3
Oct-01
126.7
Oct-02
144.3
Oct-03
161.2
Oct-04
188.8
Oct-05
222.6
Oct-06
227.4
Oct-07
226.7
Oct-08
221.1
Source: Standard and Poor’s.
But are the price gains sustainable? To assess this, we focus on
three primary valuation measures:
1. Price/rent ratio. We divide the CS index by the Bureau of Labor
Statistics’ index of owners’ equivalent rent for the New York
metropolitan area, and index the resulting ratio to 100 for the
average of the 1995-1999 period. We choose this base period because
it mostly precedes the recent boom but covers a period when the
quality of life in Manhattan had already improved significantly from
the 1980s and early 1990s. Hence, a return to the average 1995-1999
valuation level might seem like a fairly neutral assumption.
2. Price/income ratio. We divide the CS index by the Bureau of
Economic Analysis’ measure of personal income per capita, and again
index the resulting ratio to 100 for 1995-1999. Although the condo
price index covers the entire New York metro area, we use an income
series for the County of New York (i.e., Manhattan) rather than the
entire metro area. The New York condo market is quite concentrated in
Manhattan; this concentration is particularly pronounced in the CS
index because it is weighted by value rather than units and therefore
typically assigns a much greater weight to condo sales on Fifth Avenue
than in Queens. (Note that New York County income is only available
through 2006; we somewhat optimistically assume that it has grown at
the average national rate since then.)
3. Affordability. Using a standard mortgage
N’slope, Jersey City has not tanked yet. it’s dropped good amount and will continue to drop more but it hasn’t reach “bottom-like” prices yet – at least not those listings I’m tracking
“There’s far less speculation (flippers) in the NTC market and even less so in Brooklyn townhouses. It’s not like NV & FL where 40% of the market was econd and third homes.”
by daveinbedstuy
Dave Brownstones going up 400 percent in ten years is not speculation? Are you sure? Dont get caught on the wrong side of the trade Dave.
more4less… sorry, I was actually trying to agree with you/emphasize what you were saying. But I see that I was really unclear with my use of “you” and “your” — that was meant to be a generalized you, not a you you.
My job ain’t recession / collapse proof — but I have a job that’s a little less vulnerable.
I have to say an additional 40% reduction would be great. But I think it would have to be quicker and more painful for the message to even resonate with the flippers and prospectors AND banks that give out the loans. It’s just unfortunate that the working class that keeps this city running will be the ones that get spanked the hardest.
I don’t have much sympathy for “investors” and the generally well-to-do that see their money dry up because they’ve overextended themselves. It’s analogous to the $5 million a year football star that finds himself broke when he retires… spending all as he goes and being surprised that he has no skills to do anything else.
“Whatever. Next.”
I think you underestimate the number of people who will say “WTF! Why should I pay $850K for a 2 bedroom condo in NYC when I can get a 3 bedroom house with a yard and garage for $400K 45 minutes from the city by NJ Transit?”.
Or, frankly, they could just look at Hoboken or Jersey City. Closer to the financial district than most of Brooklyn and the bottom has fallen out of prices there and new condos are still coming on the market.
Denton, that’s good. real good
There’s far less speculation (flippers) in the NTC market and even less so in Brooklyn townhouses. It’s not like NV & FL where 40% of the market was econd and third homes.