"No Bottom in Housing" Barron's MONDAY, JUNE 8, 2009

Barron's is usually wrong.

to the recently in contract buyers - good morning sunshine!

Just want to add this is an editorial which equals an opinion. I'm leaning bullish at this point. But only slightly. The data this article is referring to is a reality but I'm not sure I agree with his interpretation or its relevance to the overall housing market, much less NYC. The subprime mess was what it was because people who weren't qualified got loans they couldn't afford. The coop heavy NYC market is so very different in this fundamental aspect. The defaults he speaks of will happen but nowhere near the same scale. My sense of things is that we are oversold. The fundamental supply-demand curves are in play and in my building at least, the lower end units have all gone into contract in the last two weeks. All of them. It is definitely getting interesting out there.

Counting Jonathan Miller's estimate of the shadow inventory, at current absorption levels there is a 6-year supply of apartments on the market in Manhattan. At that level, nothing else matters.

And at that level, the only way to clear that inventory is to reduce prices drastically. To where owners' carrying costs equal market rents. Meaning an overall drop of 50% from the present price level.

"the lower end units have all gone into contract in the last two weeks. All of them."

how many and at what price relative to peak?

what about the more expensive ones?

The number of signed contracts has soared over the past 30 days to 1060. How confident can we be that that figure shouldn't be annualized? If it were, the number of months supply would be substantially lower than otherwise indicated.

My impression from stats over the past 10 years is that second quarter sales figures have only been modestly higher than figures for other quarters of the year.

steve, get your damn facts straight. Just the other month you said there was 3 years worth of inventory. And I'm willing to bet that a lot of the so called shadow inventory will be converted to rentals, so any figure you have is likely over-stated.

Considering that we can't accurately quantify the shadow inventory in the city, I'm skeptical that there will be huge drops based on inventory numbers. If they trickle onto the market and current contract signings remain where they appear to be now, doesn't that suggest that prices will drift lower for a few years and inventory will eventually be absorbed without the dramatic price drops some expect?

I don't necessarily believe this will be the case, but thinking it through.

"steve, get your damn facts straight. Just the other month you said there was 3 years worth of inventory. "

No, he said counting JUST official inventory on the HIGH end of the MANHATTAN market, at the current absorption rate there is a 3 year supply. That is what steve said last month. What he said above was if you ALSO include the shadow inventory, it could be double.

Not the same statements.

"And at that level, the only way to clear that inventory is to reduce prices drastically. To where owners' carrying costs equal market rents. Meaning an overall drop of 50% from the present price level."

But, steve, what if these people just hold, just decide to ride it out?

stevejhx
about 10 weeks ago
ignore this person
report abuse Rents are down throughout New York. According to the February Manhattan Rental Market Report produced by the Real Estate Group, a New York brokerage firm, rents in the borough have fallen “across the board.”

The biggest drop was in studio apartments in doorman buildings, which have fallen 8.33 percent from the same time last year.

Many people who signed leases in the bubble years are paying much more in rent than what their apartments would get today. So when their leases expire, some New Yorkers are trading up for better deals, finding comparable places for less money or nicer apartments that do not come with a big rent increase.

http://www.nytimes.com/2009/03/29/realestate/29cov.html?ref=realestate

Now, what I'd like to hear from JuiceMan, petrizitz, LICC = tech_guy, spunky (where's spunky?!) et al., is how they can ignore all these signs:

1) Inventory over 11,000 units (2+ year supply)

stevejhx
about 7 months ago
ignore this person
report abuse How did I know it was steveF?

"By 1989, New York City had roughly seven years worth of available inventory on the market, Miller said."

True - if you count co-op conversions, of which only 15% had to agree to the noneviction plan, so the inventory was fake.

"Unlike the seven years of inventory stockpiled then, the city has only 7.9 months of supply, Miller said."

Also untrue. There is over a 1-year supply of apartments on the market at historic absorption rates (8,500 per year - current inventory 9,000). Ergo that assumption only remotely holds water if we continue at the same absorption rates, which we're not. We're at about 1/3 that, meaning that it's a 3-year supply.

steve never said he was referring only to the high end and his 3 year figure clearly menas he was including the shadow inventory.

"what if these people just hold, just decide to ride it out?"

I think a lot of people are deciding to do this. I've noticed a number of properties in my saved list going off market.

It makes sense. If you're an owner and you're reading the papers, you're seeing "green shoots..." and "inflation, inflation...". Personally, I don't think either of those two things will be all that beneficial for property prices here, let alone exist, but when owners consider whether they should sell now or wait, there's some cause for them to hold out for the "rebound/reflation". But when that rebound/reflation doesn't come, they're still sitting there losing money monthly on their property. So, I fully expect many of these properties to leak back onto the market over time. Which just keeps prices down.

property values have always went up during times of high inflation. Please don't think that housing prices will continue to decline if inflation takes off like a rocket.

think of inflation taking off as kind of like your mini van from zero to sixty in 43 seconds.

"property values have always went up during times of high inflation."

Aside from this comment not being in english, if incomes stay flat or decline and maintenance/common charges go up, how are real estate prices in NYC going to go up? That's your challenge for the day, alpine. After you finish the Jumble puzzle, work on that one.

Not to mention, if inflation occurs, interest rates will go up.

Alpine, here's challenge #2: explain what happens to real estate prices when interest rates go up.

desflurene.... I know of several I-bankers who took their HELOC cash and went buying in Miami and Las Vegas.... if you think this city somehow closed their eyes as the "hillbilly" nail salon owners were flipping 20 homes at a time from 2002-2007, well you don't know how "savvy" nycer are :)

This article said "no bottom" and I'm really trying to figure out why Steve was attracted to post?

"property values have always went up during times of high inflation."

Just plain wrong. Stag-flation (inflation without economic growth, ala 1980s) is devastating for real estate values. This is type of inflation has historically been caused by monetary excess versus traditional inflation which is caused by over-heated economic growth.

The posters here who note that the high interest rates that go along with high inflation kill real estate values are correct. And with inflation driven by monetary policy on the horizon we are likely to see significant pressure on housing prices. Add to this the utter lack of confidence among finance professionals in terms of their future earnings power and you have a recipe where the marginal buyer has been removed from the market along with financing and employment getting worse- not a recipe for a rally.

Also, with regard to people trying to hold through the downturn- that argument does not work. There will always be units coming to market from estate sales, relocation, and divorce and they will only sell a the market clearing price.

a breath of fresh air... thx u re_reality... someone w/ a econ background....

wikipedia it RE Bullz

The worse is still yet to come for both stock market and NYC realestate. Housing is still falling even after all the major banks (including Fannie and Freddie) had stopped forclosures. Now that it has been lifted, conditions will be getting much worse over the next several months. Now imagine the loses the banks are going to accumulate on top of the trillions already. Need I remind some people that nothing has still been done about the toxic assests. Oh sorry "legacy" assets. More major institutions will go under before this crisis is over. Either by "merger" or out right bankruptcy. Or our gov't will make the fatal choice to save another and it will be rewarded by a currency collapse and the US being downgraded. Make no mistake, we are one terrible decision away from some very scary outcomes.

desflurane makes a good point in that the NYC CO-OP market is truly unique, and the strict financial requirements make foreclosure a near an impossibility. That's the good news. The bad news is that it only takes one sale at the true market price to pull down the value of all units.

So...those who can afford to wait, could simply sit on their property until they must sell. Given that real-estate is probably a dead asset class for ROI purposes, this could take 10-20 years. That same rationale is further exacerbating the problem as would-be buyers are looking at housing as a place to live, NOT an investment. That thinking is leading to old-school logic that monthly fixed housing expenses (mortgage + maintenance) should not exceed 1/3 of income.

The result is the current stalemate we're seeing in the market, which given rent reductions, seems to benefit buyers. Eventually, someone in the CO-OP will have to sell, and one could conclude that a flood of price drops to match that sale would follow.

I can't predict the market, or call a "bottom", but given the flood of news, statistics, and simple word of mouth, I think much still has to change before there is any return to some sense of normalcy in the market.

> property values have always went up during times of high inflation.

Not in Manhattan, genius!

nyc10022 - where is your proof of that, genius? Read this article I've linked to, and you'll find that in the late 70s apt values increased dramatically. Or do you not consider the late 70s to be a period of high inflation?

http://www.newyorkfed.org/research/quarterly_review/1980v5/v5n1article3.pdf

it's fun to be a renter in nyc! me thinks it's gonna be a lot of fun for the next couple of years for sure.

"Not in Manhattan, genius!"

The Federal Reserve link posted by printer says otherwise, LOSER.

Well, that is actually not what it says. It says that during that period of time people viewed NYC real estate as an inflation hedge. Will they again? Maybe.

But it is a good find. thank Printer. Mull on Columbia's early post and on this time frame now:
1969 - prices peak
1973 - prices bottom 33% down
1973-74 inflation kicks in
1976-77 apartment prices start to head up

No two time periods are the same and there are a lot of demographic and other trends in that piece, but what does that schedule lead you to conclude?

this time it is very likely that we will see inflation kick in much closer to the peak, so I think we might see the same time line as in the 70s, but in a compressed form over a shorter period of time.