NY Housing Trends: Where is NYC Headed?

I have received a few requests regarding the NY metro area pricing trends. I don't predict the future, but I try my best to get a good grasp of the present. For those that didn't get to read the piece on Manhattan for the month of September '07, see Manhattan Real Estate is Falling. That's Right, I said it!!! And Beware Those with Short Term Memory.

As for the NY Metro MSA (which consists of the statistical MSA including Bronx, Brooklyn, Flushing, Jamaica, Jersey City, Mount Vernon, New York, Paterson, Staten Island, and White Plains) I will offer the following research.

Pricing

I have (personally) observed pricing pressure trending downward since the second half of '05 in Downtown (gentrifying) Brooklyn and Manhattan. Here are the empirical stats for the last 6 months for the statistical MSA (NY metro area). Click the graph to enlarge.

As you can see, pricing is trending downward and due to the macroeconomic outlook will probably trend downward farther and at a steeper pace. This is the case for higher priced homes (25th percentile), median (middle) priced housing, and lower priced housing (75th percentile). This includes attached, semi-attached, detached, and condo style housing.  Keep in mind, these are asking prices and not transaction prices.

Inventory

As pricing is trending downward, inventory is trending upward (sans the seasonally slow holiday period). This means buyers have more choice as more property comes onto the market, and at a lower price than in recent history.

Rising Foreclosures

Unfortunately, REO's are trending upward. REO stands for Real Estate Owned (by banks) and is the result of a lender repossessing a property, usually after foreclosure. These properties are increasingly popping up in the NY Metro market. The black line is a 2 month moving average to smooth out the trend. These REOs compete with new properties as well as existing home owners, and since they are bank owned, can come with preferential financing since banks are anxious to get them off of their books. Keep in mind that the buzzword "foreclosure" doesn't necessarily mean a good buy. As early as late '04 I noticed NYC foreclosures becoming available above what current market rents would carry. That meant that, at least from my perspective, even the foreclosures were overpriced - and that was 3 years ago. The reason for this was that people were putting too large a mortgage on their properties. When the bank foreclosed and tried to resell the properties they set the upset price at a point to recover their losses, which was often at low or negative cap rate (income yield). Like I said, this was three years ago, things are worse now.

I have broken down the affordability as follows:

Percent Income: The percentage of the local median family income required to make payments on the mortgage for a median (sale) priced single family home given a 20% down payment and a 30-year fixed rate loan at prevailing rates. Keep in mind when looking at these charts that the time on the horizontal axis starts with the present at zero and scales back in history along the axis.

Mortgage to Rent: The ratio of the mortgage payment on a median (sale) priced single family (again assuming 20% down and a 30-year fixed rate loan) to the local median rent for a 3 bedroom apartment.

Price to Income: The median single family home sale price divided by the median family income for the metro area.

Price to Rent: The median single family home sale price divided by the local median monthly rent for a 3 bedroom apartment.

The mortgage, price and income data is assuming a 30 year conventional or jumbo mortgage at prevailing rates with a 20% down payment (80% LTV). This may throw some off since many, if not most, of the sales in the last few years were considerably above 80 LTV.

When will pricing level out? Well there is basic supply and demand, wherein we presently have more supply than demand. Affordability is the key to unlocking demand

To make a long story short, housing is just too expensive. We have a lot of housing, but NY is a dense and dynamic metro area that can absorb the housing - AT THE RIGHT PRICE! Currently, prices are much too high in relation to affordability. Houses will not sell until someone buys them. It is as simple as that. People cannot (or should not, this is how we get REOs) buy homes if they can't afford them. Thus when prices drop (unfortunately I feel they have to drop significantly), inventory will begin moving at a faster pace. Although I have heard many pundits (a few who have not been in the real estate industy) have been trying to call a bottom in the market. You cannot see a bottom until you have already past it. The bottom callers are crystal balling, and my crystal ball's batteries just died:-) If I were to ever find batteries for my old ball, I would say we would have to return to the 2001 prices + the real income appreciation rate for the areas in question. This gets tricky though, since much of NYC was the recipient (victim, beneficiary - I don't want to start a fight here) of extreme gentrification. Throwing socio-economic trend shifts into the mix makes things much less straightfoward.

Comments

[Otto]

Wow! This poses what I believe is a realistic (scary, to those who recently bought/presently own) view of what the New York City market has in store for it.

I am so tired of the desperate bottom callers
who are trying to suck people in to their "buy now" before the market doubles schemes! Maybe the market prices will double in ten or fifteen years, but honestly folks, we're in for one heck of a ride, and that includes you, Manhattan!

Thanks again for a great post, Reggie.

[Reggie]

You're welcome!

[Peter Comitini]

Hi Reggie: Just discovered your blog. Enjoyed reading your analysis-- refreshingly well thought through, without the bile I read on many bubble blogs. As a Manhattan RE broker, it's a bit gloomier POV than what I'm experiencing, but its healthy to have another well reasoned voice on the state of the real estate economy.

[Reggie]

Glad you enjoy the blog. Manhattan will lag the rest of the metro area on the way down, but it is definitely not impervious.

[Peter]

Housing has become too expensive. Currently, prices have increased were the people are not able to afford to buy the house and the borrowers are finding it difficult to clear their dept as there is no one to buy it in foreclosure.