Moody's: NY RE down 15% next year

New York-area home prices still to plunge
December 11, 2009 02:00PM

Mark Zandi, chief economist at Moody's Economy.com
While the rest of the country looks forward to a bit of a respite in the hard, grinding slide of property prices, New Yorkers will enjoy less relief in 2010. Mark Zandi, chief economist of Moody's Economy.com, said prices are still inflated compared to rents, eroding the possibility of price improvements in the near future. The New York City metro area ranked 84th-worst out of the 100 markets in his forecast, with the 2009 median home price of $416,730 expected to fall another 15.63 percent, ahead of his national forecast range of 5 percent to 10 percent. Rounding out the regional duds, Nassau County in Long Island ranked 76th, with the $368,260 expected to drop 13.14 percent and Newark, N.J. was No. 71, with the $367,380 median slated to drop 11.29 percent. [Fortune via CNN Money]

As an example of sale price: rental value -- and I will let Rhino do the math -- here is an apt at Time Warner that is asking $4mm. It is also on the market for rent at $7500.

http://streeteasy.com/nyc/building/25-columbus-circle-new_york

Another apt listed at $3,650,000. The same apt a few floors lower is listed for rent at $6500 but probably will rent for considerably lower since it has been on the market for 292 days.

http://streeteasy.com/nyc/sale/476929-condo-111-west-67th-street-lincoln-square-new-york

Zandi is a clown whose predictions are almost always wrong.

Re: Zandi's predictions of last year:

"The results are broken into 100 metropolitan areas. (Last year the projections were pretty accurate, forecasting a 14.5% decline in 2009; the actual figure is likely to come in around --13.2%.)"

And that didn't account for the fact that the market was propped up by the govt so I think you would have to spot him at least 1%

The_President is not a clown. I repeat: NOT A CLOWN!

So that face paint is makeup? Get outa town!!!!

the_pres is a jester. out of work, of course, as he isn't a particularly good one.

Based on fundamentals, you'd think prices will go down further for some time. But no one knows by how much and I wouldn't rely on analysts to give me the answer because they don't know much more than the average person who follows the subject matter on a daily basis. I just bought - main reason is that I got more than 40% discount on my unit and I was just sick of throwing away $5k on rent every month.
I also follow oil prices for personal investment. The one super star analysis is from Goldman. I remember this guy last year predicted oil will be hitting $200 by mid 09. Obviously that didn't happen. Then when oil came down to the 30s in early 09, he lowered his target to $90. His explanation for the change of target from $200 o $90 was that he didn't account for a recession in his $200 target. Hummm, now that is a super start...And I guarantee you, some people out there still follow this idiot's predictions on a daily basis.

Good point george12. Experts, schmexperts.

I was choking on the 60k/yr rent as well. They way I see it, prices can fall further and I'll still be whole. If I waited another year or two would I get my 60k or 120k back in a lower purchase price? maybe, hard to say, anyones guess, yeah I suppose..... but then what will the weather be? Good selection of properties? Good lending rates?

George12, it's true rating agencies have made some spectacular mistakes. For instance, most of the triple A ratings they put on home mortgages turned out to be nonsense.

However, we all read their reports because there is usually some value in them, even if the predictions fail spectacularly from time to time.

The value: they use generally accepted data that has been parsed by third parties, and they use relevant data, and they crunch the numbers through economic models that are relatively sophsticated -- at least compared to anything else that is out there.

Someone who is a recent home buyer, or an investor, also has a valuable take on the market, but so does Moody's. I agree with you that it has to be taken with a grain of salt, but that is not the same thing as dismissing it outright.

choking on the 60K rent? you are obviously paying something a month now. isn't the choke the difference between the 60K and what its currently costs you?

GG, it was either moody's or s&p, but one of them had two different modeling programs, one their general financial analysts used, and one for ratings. one company in one building using different economic models.

i think the general analysts have a better track record.

My $ is paying my mortgage now, not my LL's.

so...you don't pay any monthly maintenance charges? you're mortgage is 90+% interest at this point. how is that better than rent?

who's up for a rousing game of rent vs. buy! anyone, anyone.

> and I was just sick of throwing away $5k on rent every month.

Well, more evidence to add to the "why people make mistakes with RE" every month - just not understanding basic finance. Front and center is often not understanding that owning can be throwing away even more money.

Its this psychology that lets people often rationalize some extremely poor decisions.

BTW, all your interest payments (net of taxes)... did you "throw that out", too?
Taxes on your place? Those go right to the garbage?
Maintenance? Its like burning the money, right?

Not all your money is paying your mortgage. Really you have to compare rent, on the one hand, versus mortgage interest plus common charges plus taxes, on the other hand.

Chances are if you were paying $5,000/month in NYC these days in rent, then if you were to buy the same apartment and aren't wealthy enough to pay all cash then your interest plus CCs plus taxes would exceed $5,000/month by a considerable margin.

ugh.

the other day on some thread that i don't recall lobster asked what we renters thought we might do upon retirement. so i spent some time thinking about it. currently i need (or feel i need) a 2/2, but when i retire i'm fairly certain a 950sf 1/1.5 with a dining space will be fine. if i were to assume that i'd retire in manhattan, and i owned the 2/2, would i sell to exchange for the smaller space? who knows, likely not. so i'd have the maint. or cc + common charges for a 2/2, which would now run an average of say $1800ish on a 1250sf apartment. current results are no guarantee of future returns, but right now i can easily rent that 1/1.5 in the city i'm leaning toward for retirement at less than $1800 per month, and not have any ties to boot.

in terms of using housing as a retirement savings vehicle, for lord's sake, show some constraint and save the difference between renting and owning. for at least the first many years you'll likely save significantly more than you're paying in principal.

"Chances are if you were paying $5,000/month in NYC these days in rent, then if you were to buy the same apartment and aren't wealthy enough to pay all cash then your interest plus CCs plus taxes would exceed $5,000/month by a considerable margin. "

Problem is, the majority of Americans don't even know that they should do this calculation, which is why so many made huge mistakes here.

Its just one of those places where "conventional wisdom" ends up being... a whole lot of stupidity.

I'm sure most people understand what the costs of ownership are. They just have unrealistic expectations that appreciation of the apartment's value will always exceed the amount by which the cost of ownership exceeds the cost of renting the same unit.

> I'm sure most people understand what the costs of ownership are.

Yes, they have unrealistic views of appreciation, but I think you're wrong on the other point... its pretty standard to just miss the actual cost of owning as well.

I think many folks don't really understand the interest costs over the long term. I think many folks don't fully think about the taxes long term (especially with increases) and often miss the maintenance piece as well (and, by that, not just the co-op maintenance payments, but the cost of upkeep as well, that will usually be covered under rent).

When folks say things like "throw away $$xxx on rent", the clearly miss what is being "thrown away" in the same regard.

Ignorance is bliss, I guess. Until it craters the economy and has people lose their homes.

somewhereelse: I also don't think a lot of the young professionals who bought the new condos really understand the tax abatement issue and don't factor in inevitable tax increases even if they do have a grasp on the abatements.

Thank you for all the enlightenment everyone. What you fail to realize that we all have our own unique situations and preferences - looking at it from all angles, we are better off buying especially given that the current prices (paid 45% off original asking in 07) and the low interest rates (4% for 5yr ARM). And in about 5 to 7 years the place will be mortgage free and the only payments to make will be cc and taxes.
I tend to remove from the calculation the returns that my deposit could generate from potential investment. Given what happened in the past year, it is very hard to really argue that you can be guaranteed a certain return even with the safest investment such as short term treasury. Even keeping your $ in cash position in a savings account is no longer safe because the US$ is losing value on a daily basis. A broker suggest that I buy gold but again gold was around $200 only 8 years ago and I can easily see it falling back to those levels if the US$ appreciates again. So really the combination of 1) Decrease in property values, 2) historical low interest rates, and 3) high rents, led us to make our purchase and we are proud and happy of our decision. Have a good weekend.

If you want to put the value of money on a risky asset at 0, which is what you are doing when you don't calculate a cost for your deposit or the money used to pay off the mortgage in full after 5-7 years, it's pretty hard to argue against. Just realize that you could be loaning out that money to someone else with your identical credit risk for purchase of a home (i.e., you provide a mortgage), and you'll earn interest on it and be exposed to roughly the same risk you're exposed to now.

I just received a Streeteasy notification of 17 updates in my search parameters, 14 of which were "in contract". People are definitely in the buying mode. They must feel prices have stabilized or they just don't care anymore. I remember hearing repeatedly that December is a slow time to buy. Accurate predictions are scarce, including Moodys. And I would love to believe them that prices still have a way to tumble, but I have this sense that prices are inching up again. In the fall I would get occasional listings under a million, now they are more in the 1.5 million range. I know this is purely anecdotal, but I thought I would share my thoughts.

But why would I do that. And who would rate the risk of that mortgage - probably the same rating agencies that got us in this mess to start with. I'd rather stay away from relying on these idiots and invest in my own mortgage, which at minimum would help me avoid throwing money away on rent. I would probably agree with your argument if this property was for investment purposes and if the credit rating system in the US is completely changed and there is no longer a question mark about these agencies' objectivity.

based on the recent past, the fact that people are in a buying mode does not mean that prices will not decline in the future. i wonder if we will be reading articles in 2013 about all the people who jumped in in 2009 just to discover that prices dropped even further--yet another article in the times about a couple buying in harlem with 5% down. how can anyone do that with a straight face?

George, the fact that you'd rather "invest in my own mortgage" is fine, but note the operative word "invest". No doubt you have a better grasp on your own credit risk as compared to some random mortgage. However, for that investment, you should have an expected rate of return commesurate with the risk of that investment. Just as if you'd be exposed to losing money if you put your money in any of the things you had mentioned, putting money into your mortgage exposes you to losing money. E.g., home prices could have fallen 50% at the time you need to sell (not saying it's likely, just that it's a risk). You would be out 1/2 your money. For that exposure, the money you lend from your right hand should be compensated for the money borrowed by your left hand when you're doing your mental accounting.

assuming an 8% transaction cost, its not crazy to envision a 20% loss of principal. how is that different from throwing money away on rent? the money will be gone and you will no longer have the use of the unit. exact same thing.

The expected return - at minimum, it is our happiness and security that we are in our own home and we are not throwing money away on rent.RE prices could fall lower for sure but everything else could go lower as well.

Let's talk numbers. Is there ever any price at which it makes sense to "throw money away on rent" in your book, george12? Say you could rent a place at $1 per month or buy it for $1M cash you have sitting around. Does it make sense at that point to flush that $1 down the toilet every month yet hang onto your $1M? If so, at what point does it no longer make sense to do so, and how do you figure it out for yourself?

I go to contract next Wednesday on a W'burg condo, new construction. Headwinds: unemployment still high, interest rates artificially low, big shadow inventory, 20 Bayard bankrupt and more coming. Then why did I buy? Simple this developer is pricing his units at 10-20% below where the market currently is. Other developers(a precious few) are moving units at these levels too and to avoid bankrupcy others will have to follow. Zandi's prediction is already here. The media are always the last to get on board with what is happening. Remember "Dow 36,000" or Fortune magazines Enron cover story how this was the company of the future? Both were published within one month of the internet stock crash and Enron scandal, respectively.

so---you figure you got such a great deal that you can't pass it up?

i have been going to open houses for months in w'burg. they are definitely more crowded and units are going into contract. paying just under $600/sq/ft. i think that is where most things are headed. i would also describe market sentiment as slightly bullish, but very scared. in the stock market we would call that climbing a wall of worry. the V-shaped recovery in the stock market, which nobody saw coming, is widely hated and feared yet the market keeps climbing. still plenty of people on the sideline and they will eventually capitulate and buy stocks. i do not expect a V-shaped recovery in RE but I do think we have hit bottom. as more units sell it will beget more buying.

aboutready
about 19 hours ago
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the_pres is a jester. out of work, of course, as he isn't a particularly good one.

spoken by someone who is not employed, has no prospects of employment, and makes no attempts at employment.

But, if she breaks her toilet seat, it's someone else's fault.

columbiacounty
about 1 hour ago
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so---you figure you got such a great deal that you can't pass it up?

Is that columbiacounty language for "you are an idiot and I wish you harm"?

Hi hfs

It is silly to have buy vs. rent arguments because buying is ALWAYS chepaer in the long run. In the long run, rents ALWAYS go up (the short term is a whole different story). For those of you who rent, your rent WILL be higher in 2019 than it is today. My mortgage will not. Your rent will be higher in 2029 than it is today. My mortgage will not. So who is the smart one???

The answer of rent vs. buy comes down to liking (even loving) where you live. I am lookign to buy in Manhattan but have found nothing nicer than my 2/2 rental in Murray Hill? So, no matter which side of the argument you are on....are you happy where you live? It's really quite simple (and perhaps a little naive).

"It is silly to have buy vs. rent arguments because buying is ALWAYS chepaer in the long run. In the long run, rents ALWAYS go up (the short term is a whole different story)"

Unless of course you buy at the top of one cycle and sell at the bottom of a future cycle.

Also, you should add, renting is always better in the shorter term, if not for transaction costs of buying alone. In the end, if you chart the buy vs rent with all the variables (and there are plenty making any formula suspect), it will be an elongated X with renting the right move in short term and buying the right move in long term (outside the risk I noted above)..the question is, when do the two lines cross?

Sorry I missed this thread. Maybe if you are going to live there forever, a 3% cash yield on your apartment purchase is okay. However, buying at these values, with interest rates low as they can go...you are at serious risk. I am not sure how anyone could justify buying anything but their last apartment right now. The mark to market risk is too great.

Noah, if one is honest about transaction and opportunity costs...isn't the least to ask of a purchase that the fully loaded ownership costs be equal to rent? Another simple way to just would be that the cash yield be equal to or greater than the mortgage rate. The sad truth is a rational actor may need to wait for rents and rates to spike to get a sensible entry....something on the order of what 1998-1999 was.

"the question is, when do the two lines cross?"

The unfortunate thing is, at the moment, "never" or "close to never" if you know how to count. You've got an asset that yields 2% plus growth at inflation, which the market puts at 2-3%. That translates to a zero-inflation yield of 4-5%. You've gotta finance it at 4-7%, depending on how you calculate the cost of capital. Essentially, you've got a risk premium that is somewhere in the neighborhood of zero where it had traditionally been a few percent. That will eventually be corrected, and that is where the hit will be taken.

The best bull case, as I see it, is that rent inflation will be much higher than 2-3%...given that rents are at 2000 levels. But as you point out, you're already looking at a cash yield of 3% against mortgage interest of 6%.... so its not like rent inflation upside is coming at low cost.

"It is silly to have buy vs. rent arguments because buying is ALWAYS chepaer in the long run. In the long run, rents ALWAYS go up (the short term is a whole different story). For those of you who rent, your rent WILL be higher in 2019 than it is today. My mortgage will not. Your rent will be higher in 2029 than it is today. My mortgage will not. So who is the smart one???"

ROTFL. Alpo, a moron as usual.

Funny this popped up.