DB projects NY prices will drop another 32% from Q12009 in report published today

Introduction Over the last quarter, home prices in most of the U.S. have continued to fall, prompting many to question whether we are at or near bottom yet for home prices. We think not. Foreclosures are still running at a very high pace. The U.S. unemployment rate is now 9.4%, and Deutsche Bank economists see that rate exceeding 10% by early 2010. While home sales activity has picked up in some... [more]

Introduction Over the last quarter, home prices in most of the U.S. have continued to fall, prompting many to question whether we are at or near bottom yet for home prices. We think not. Foreclosures are still running at a very high pace. The U.S. unemployment rate is now 9.4%, and Deutsche Bank economists see that rate exceeding 10% by early 2010. While home sales activity has picked up in some regions, much of it reflects clearing of distressed inventory and is accompanied by falling prices. With that said, over the last several months, many MSAs reached their all-time highs in affordability, helped by low mortgage rates. Unfortunately, affordability is no longer the driving issue in the housing market, and we believe prices still have a ways to fall in many areas before home prices reach their trough. The bottom is getting closer, but we are not there yet... New York is least affordable of the Top 10 In New York, prices still have to drop an additional 32.0% from Q1 2009 levels just to restore affordability to its historic high (1998), as has already occurred in 74 of the top 100 markets.But including model risk factors beyond just affordability, we are projecting a 40.6% decline,from Q1 2009. This is, however, improvement from the projected decline that we published in March (47.4%). The improvement is due simply to the fact that recent price declines have brought New York closer to the trough. Somewhat confusingly, actual home price declines can impact our analytical framework in competing ways. First, all else equal, if prices have declined, then the MSA should be that much closer to its bottom for prices. However, because our model also includes a risk factor score for negative home price momentum, dramatic price declines can also have at least a partially offsetting negative effect. The peak for home prices in the New York MSA was in Q2 2007, when the median home price hit $552k. As of Q1 2009, the median home price had dropped to $446k, down 19% from the peak. While this is painful, it pales in comparison to what has already been experienced in many other regions of the country, particularly in parts of California, Florida, Arizona and Nevada. Many MSAs in those states peaked earlier than New York and prices have been falling in those areas for longer. Our total, peak-to-trough forecasted decline in New York is 52.1%. -i think very consistent with projections from Ivy Zelman and Goldman Sachs in last 1-2 qtrs. [less]