New York Coop/Condo Pricing

Most people who post here are anti-own, and will tell you never to buy.

Most people who post here think price-to-rent ratios were very attractive in the early nineties and are much too high today.

what are you looking at to make these observations? asking prices? sales prices? lack of price cuts?

Storwal, it seems to me that it's a combination of several things. Yes, sellers are still overpricing. Many think they can get a significant premium over 2008 prices. Most of they time they can't, but there's so little inventory right now that some do succeed in selling at inflated prices. It also depends on what market segment you're looking at: modestly priced 2-bedrooms in good areas have hardly dropped at all, while super-expensive trophy properties may be down 30% or more. New York is a lot of micro-markets, and they're all doing different things right now.

If it makes sense for your budget and you have a long time horizon (minimum 5 years), there's no good reason to think that prices will start dropping like rocks. If you find a place and make an offer but the seller's counteroffer is crazy, walk away: there will be another apartment. Just as there's a lot of pent-up buyer demand, I think there's a lot of sellers waiting to see if the market improves.

It's a buyer's market. If the seller is unreasonable, walk away. There will be plenty more for you to choose from.

evnyc: "there's a lot of sellers waiting to see if the market improves."

How about owners who can no longer hold on to there homes and will become sellers?
And the retirees who want cash out and move to the south like Florida where prices dropped a lot.
And the inventory the banks and developers are holding?

My point is, prices don't have to improve for new sellers to come out.

Low interest rate is used as an argument for buying, and some will fall for that, but most remaining on the sidelines probably prefer a lower price than lower interest even if the monthly net payment is the same (of course risk is different).

storwall,

"I've been watching pricing over the past few months and the prices seem to be holding steady despite what you read about what's happening in the rest of the country."

Why "despite"? Prices have been holding in the rest of the country in the first half of the year as well, or even been going up somewhat again. Not everywhere, but on average. This has been probably mostly due to the efforts by the government to delay the adjustment process after the burst of the real-estate bubble, or they even would like to re-inflate the bubble again. Insofar, the about constance or increase in prices in New York since Dec 2009 is in line with the rest of the country.

Is the market still overpriced in New York? I would say yes, compared to year 2000 and using various metrics such as the ratio of prices to income, or prices to rent, or at what costs for buying an apartment we would get a rent break-even.

For instance for Manhattan:
Average price per square foot:
in 2000: somewhere between $345 to $500; 3 month-average Jun-Aug 2010: $1158 (Source: Trulia)
Median household income:
in 2000: $44,085; in 2008: $68,402 (Source: Census Bureau); from average yearly increase of 1.053 between 1998 and 2008, estimate for 2010: $75,836 (probably over-estimated because of recession)
==>
average price per square foot / median household income * 1000 (APSFtMHI1000):
in 2000: 7.83 to 11.34
in Jun - Aug 2010: 15.27

This implies, the APSFtoMHI1000 will have to decrease between 26% to 49% from recent levels to get back to the (normal?) level of the year 2000 in Manhattan (If the median household income for 2010 is over-estimated, even more). This can happen by an according decrease in the prices, an increase in the median household income, or, most probably, by a combination of the two over the next years. If prices stayed just constant, and assuming the same yearly increase in household incomes as the average one for 1998 to 2008, it would take about 5.8 to 13.1 years to get back to the year 2000 level. If prices decreased it would happen faster.

We bought last summer, assuming that NYC was rather protected because of the co-op structure -- and because TARP money seemed to be shielding the city from the worst of the recession.

evnyc is right, however, in that the market reads as lots of little submarkets. Very generally, the Manhattan and Brooklyn markets under $2.5 - $3 mm are holding up, while higher-priced markets and markets in the other boros are weaker.

ali r.
DG Neary Realty

Well, Sunday, then why is inventory so low? Why aren't those would-be retirees listing their properties? And at this point, if you've survived the recession thus far what exactly is going to knock owners off the ownership pedestal now? It's been over two years since the crisis began and the much-touted flood of owners defaulting on their mortgages never materialized here. In fact, it seems like most owners are holding onto their properties just fine. So what would make them suddenly jump into the market en masse and depress prices?

Maybe there was always more would-be buyers assuming that their elderly neighbors would want to retire to Florida than actually existed, or maybe many retirees plans changed. I used to be firmly in the prices-will-decline-camp, but if I've learned anything over the past couple of years it is that you cannot look at the national data and make realistic conclusions about the New York market.

front_porch,

What do you mean with the other boroughs were "weaker"? Do you have data? Or is this just your individual perception?

For instance, I did the same calculation that I did for Manhattan for the Bronx.
APSFtMHI1000 for Bronx in 2000: 2.89 to 3.25; Jun - Aug 2010: 5.61. APSFtMHI1000 would have to come down by 42% to 48% to get back to year 2000 levels. For constant sqft prices, and given the average increase of incomes in Bronx, which is lower than the one for Manhattan, it would take about 17.2 to 20.7 years, or longer (if income estimate for 2010 is too high) from the recent APSFtMHI1000 to get back to the year 2000 level. This is longer than for Manhattan.

rootless, what makes you choose 2000 as the ideal year for rent/buy calculations? Others choose the mid-nineties, others point out that the city has become a much more desirable place to live since then. It usually depends on what point they're trying to make. So why 2000 for you?

evnyc,

"And at this point, if you've survived the recession thus far what exactly is going to knock owners off the ownership pedestal now?"

Perhaps the coming downturn of the economy, which is imminent or has already started? I guess how many are being forced to sell depends on how many of the 25 percent of owners with a mortgage in Manhattan who pay more than 35% of their household income to cover their ownership costs over-leveraged too much for their purchases so that they can't keep up with their payments.

Second evnyc's comments about absence of "much-touted flood of owners defaulting on their mortgages." There do seem to be a few more short sale/bank foreclosure sale situations than before - in that I see one here and one there, up from basically none here and none there prior to 2008 - but I just don't believe that they are or will become numerous enough to impact the market overall.

And as to the third of Sunday's boogeymen, the shadow inventory, it does seem to be significant but it also seems that most developers and their lenders have been patient and are whittling down the pile rather than trying to dump/liquidate. Short term interest rates really give the 'entend and pretend' strategy some legs. No doubt there will be some train wrecks (see Apthorp, maybe some FiDi buildings), but again we get to the question of whether it is enough volume to shift the whole market.

"Perhaps the coming downturn of the economy, which is imminent or has already started?"

An unexpectedly faith-based prediction from someone otherwise apparently data-oriented.

Lower prices turns owners into "accidental landlords" taking some supply out of the market , thus providing a valuation floor.

And yes, the wave of foreclosure defaults hitting Manhattan seems to have been dead wrong.

evnyc,

I haven't had the data for the average price per square foot for before 2000 available. If I'm not mistaken, the real estate market was somewhat depressed in the mid 90ies, wasn't it? So, if I had the data and I took those as reference point, then the APSFtMHI1000 would have to come down even more. Then again, if the market was depressed below normal in the mid 90ies, this would be an over-estimate of how much it would have to come down to get back to a pre-bubble normal. Thus, I would say choosing the year 2000 as reference point doesn't introduce a bias in favor of the argument that the APSFtMHI1000 would have to come down to get back to a pre-bubble normal.

As for other arguments to reason why a higher price-income ratio is supposed to be the new normal nowadays, like New York was more desirable than 20 years ago or so, I think at the end it always comes down to affordability and financial soundness, for which metrics like price-income ratio of price-rent ratio stand, particularly if the times of crazy over-leveraging are over. Even if some place is more desirable, one still needs to be able to afford it, or if one is an investor it needs to make financially sense to buy something. The increase in income that adjusts the APSFtMHI1000 to a pre-bubble normal could also happen by an influx of people with higher income, and an outflux of people with lower income, if we talk about Manhattan for instance. This would account for the higher attractiveness of Manhattan nowadays, and still lead to a lower APSFtMHI1000. Another way how the adjustment could happen.

Good discussion. This market got whacked by the crisis, but then it just stopped falling more or less, so now it's hard to see a freefall starting again, unless we go into mega-crisis all over again, which is a very macro-issue, not a nyc specific issue. The micro factors affecting nyc such as the supposed exodus, bad finances in the city and state, permanently smaller finance industry, basic lack of affordability of the city, etc..are not things that would drive the prices into a steep over-a-cliff decline but would have a dampening effect over time.

I think that shadow inventory in NYC is apparently not enough to wag the dog; it is simply nowhere near absolute size and market percent significance of famous disaster areas such as fla, las vegas, phoenix. And, very importantly, even when a building in nyc becomes a "disaster", or hits the sales panic button, which has hardly happened (w11 in williamsburg , nsp1 selectively), the developer or bank can sell the building out way short of florida style price declines. There is so much pent up demand that it's hard to see any scenariio of huge prices drops because inventory can be cleared out without huge price drops.

evnyc,

Why do you assume my statement is faith-based? My thinking of a high probability of an imminent recession (or a continuation of the old one, after the effects, called "recovery", of the unprecedented government stimulus have been fading) is based on data and statistics. It's based on the data of the Consumer Metrics Institute:

http://www.consumerindexes.com/

And it is based on the analysis provided by Hussman:

http://www.hussmanfunds.com/wmc/wmc100628.htm

according to which a combination of criteria is in place, which only occurred immediate before or during recessions. Now, although these criteria never failed for the data available back in time, this analysis goes back to the early 60's only, and one can't fully exclude the possibility that it will fail eventually. But I consider the available sample as sufficient to say that there is a high probability for an imminent new downturn.

On the other hand, I haven't seen so far that anyone who dismisses the high probability of a new (or the continuation of the old) recession has really based this dismissal on statistically valid data, instead of just making faith-based statements, maybe also based on arbitrarily chosen data points which seem to fit the claim.

Rootless, most economists do not predict a double dip. You can certainly find a few that do - you can always find contrarians. But while their perspectives are often valuable for providing context, one has to be careful about taking their views as gospel. Search the threads and you will find a lot of data and analysis about housing going back decades, and a lot of predictions about the NY housing market as a result. The important thing to remember is that most of those predictions didn't come true. Data is always based on assumptions - garbage in, garbage out.

Also, the oft-cited rent/buy ratio issues are not as acute in certain areas, it seems. Also, people have often cited egregious examples from very high end buildings. For example, Williamsburg rental yield ratios are not as bad as in Manhattan, because prices are lower vs manhattan than rentals vs. manhattans.

I thought the point about the double-dip is that no one knows for sure, so speaking of it with dead certainty doesn't make sense.

Buy to rent ratio while helpful doesn't work in all markets at all price points. In Manhattan the larger the unit and the higher end you go the less useful. A 700 square foot one bedroom makes for a better rent to buy comparison than say a four bedroom in 15 CPW.

evnyc,

And most of those economists are probably the same ones who didn't predict a recession in 2007/2008 either, based on the same data and theoretical foundations they use today.

I will be glad, if you can specifically point me to one or more analyses, which are equally data based, statistically valid, and thorough as the one by Hussman, but come to another conclusion regarding the "double-dip".

As for the New York real estate market, I'm careful with making predictions. Various metrics show that the market is still significantly above normal. I prefer to look at metrics like APSFtMHI1000, instead of using prices directly, since prices aren't the only factor. Incomes and rents are essential too. These various metrics imply that there is a good chance for more adjustment to come. However, it it really difficult to say over what time frame it will play out. The longer it takes the less the prices have to decrease for the adjustment, if nominal incomes increase over time. The pressure on prices will probably be stronger under general economic conditions of a recession and stronger deflationary forces than without those conditions.

My feeling is that with all the things that hit NYC, the fact that the market dropped but then basically stabilized, is due to the pent up demand in the city, and that it seems unlikely another shock event will knock prices down a lot, because the pent up demand provides something of a floor. Maybe they will stay flat, and perhaps slightly decline. Who knows.

What I meant was, unless there is another shock event, it seems unlikely there will be another sharp drop. Pent up demand will keep the drift down, if there is one, at some floor......

Hussman is fairly often rather bearish about the economy, banking system, and other things but when it comes to making market decisions his record has been very spotty in the last three years. After saying repeatedly that he would take his hedges off if the market went down to 7000 or below , he chickened out when that actually happened (oh..he says,,,he revised his analysis) and then missed a huge run-up in the market. My point is that he is interesting but hardly some seer.

Hussman has good things to say, He's a must read.

buyerbuyer,

I don't think one should consider Hussman's fund for short-term, or even medium-term investing, since his market strategy is mainly capital preservation and long-term appreciation over full business cycles. It's more like a bond fund. Faulting him for missing a huge speculative run-up in the stock market isn't really fair, since it means faulting him for something he explicitly doesn't want to achieve. Or would you fault the manager of a conservative bond fund for not performing like an aggressive stock market growth fund during speculative run-ups? If someone invests in any of Hussman's fund with the expectation of a great short-term return, above the market, even during aggressive stock market run-ups, then the fault rather lies with someone who does this, if the expectation is not being fulfilled in the end.

And, more important here, one can't logically validly dismiss Hussman's analyses of the economy by pointing to a possible poor performance of his funds. It's logically fallacious to argue in this way. Specifically, if you want to show that his recent recession warning is analytically flawed, you would have to do this by showing in what way the data, on which it is based are statistically invalid for this task, or where else his analysis is methodically faulty. But not by pointing to a spotty performance regarding his investment decisions with his funds for the last three years.

Sorry to hijack this thread re hussman.

Totally agree that you can't dismiss his economic analysis based on his fund performance. I have read him for years and have held both his funds for years, and I do value much of his commentary. I also fully understand that he is not chasing market hype, momentum trades.

That said, I no longer really buy his HSGFX spiel, which you just laid out, about performing well over the market cycle. He did well for a short while early in the decade, which gave him impressive return numbers for years, but since then has had bond like returns, basically by being almost continually hedged. That's fine in a way, and I basically consider him like a short term bond fund almost, with little risk and little upside. What I don't buy is the idea that at some point conditions will align so that he takes off his hedges at the proper moment, and gets some decent returns (and I don't mean 60% runup type returns). In 2008 in October he took off his hedges for the first time in ages, and promptly lost 10 percent of the fund. Then he re-hedged, and said he would take hedges off if the market fell below 7000, but when that happened he had various reasons to stay fully hedged, but personally I think he is a very cautious guy who got scared that he had messed up his track record in October 2008 and simply was too risk averse when the market finally got way lower. I guess I've lost faith that he will ever find the right time to take off his hedges, and don't see much value in his fund vs some short-ish term bond fund. I'm not trying to be glib. Bottom line, other than some very good calls in the early couple years of his fund, what has he done since other than just be hedged/bearish basically all the time; i don't quarrel with that being better than being in a crashing sandp index fund, but i do question whether there is an executable, real strategy there that will someday manifest itself in returns that exceed what you can get in a bond fund.

It's the difference between having a good idea and monetizing or capitalizing on it.

rootless, I'm a realtor now but my background is as a business journalist -- among other things, I was at Fortune for several years, and I was the founding editor of the real estate section of the New York Post. Trust me when I say there is no good real estate data. Every widely-used stat, whether local or national, is pretty problematic.

For example, you're using Median Household Income as a data series, whereas I can tell you from experience that a lot of Manhattan's resilience is that many buyers have access to income outside their households -- i.e. Manhattan is a place where parents buy apartments for their kids.

So when we try to measure the market we're stuck looking at fairly untrustworthy measures like median real estate prices. That said, Brooklyn's holding up pretty well.

Here's an article on that point from the Daily News:

http://www.nydailynews.com/money/2010/07/15/2010-07-15_brooklynites_have_something_to_crow_about_their_housing_market_is_improving_fast.html

ali r.
DG Neary Realty