Why the next leg down is INEVITABLE.

Thousands of people have touched my leg.

Depending on the neighborhood, I disagree that buying now is a 'huge mistake.'

I rented in Hudson Heights for four years, and the rents here keep going up (rent declines never happened here). Purchase prices for good quality one bedrooms here have already declined from around 450K down to 350K. I agree that to jump on the 350 just because you think its cheap would be foolish. But if you were to compare your monthly expenses rent vs buy and you have the down payment to make it happen, then why not buy.
My new condo is heads above my old rental, and my morg/maint monthlies are not that different from my old rent. I could not see paying ever increasing rents while waiting (possibly years) for 'normal' levels to return.

I still don't see the flood of inventory expected.

I don't think you get it, its not really a rent vs. buy economics question. Its the fact that if 80% of the country's real estate isn't even close to a bottom, what effect is that going to have on the other 20% (read: your 'cheap' $350k 1 bdrm in hudson heights) not just directly from a comp standpoint, but more so indirectly as another systemic blow to the banking system is realized as a result. And then, as your 1 bdrm comes down to a level of $150,000, you have to ask yourself if you made the right move by buying.

lowery, neither do I yet, but, it looks like this could be an inflection point in the trough: http://www.urbandigs.com/charts.html

When you wish upon a star
Makes no difference who you are
Anything your heart desires
Will come to you

If your heart is in your dream
No request is too extreme
When you wish upon a star
As dreamers do

Like a bolt out of the blue
Fate steps in and sees you through
When you wish upon a star
Your dreams come true

I do not disagree that there is more room for NYC real estate values to fall, as you have laid out, but the distance you suggest is awfully far! The last time a river view one bedroom sold for 150K here was when upper Manhattan was also called 'crack city'.

dmag - At one point in the past two years inventory according to SE was something like 10,000-11,000. The numbers 6,000-7,000 were discussed more or less as a benchmark, where they had been before the fall. I agree with you that this is an absurd bubble, but I gave up long ago waiting for my ideas of what ought to be to unfold, because nothing has. I think this is all a function of interest rates, just as the RE industry has touted it. Blame ought to be placed squarely on the hyperfearful actions of the Fed (Greenspan) in 2000 after the stock market tanked, and even more so after 9/11/01, to avert the recession that seemed inevitable. It created the RE bubble not only because mortgage rates were so low(er), but because bank CDs and savings accounts paid nothing. We all had every incentive in the world to borrow money and none to save.

Here I sit in late 2010 and again proven wrong, having expected what some economists have long predicted, that interest rates must climb back up as a natural correction of credit market forces. Instead they are down, down, down. Inventory? When we're looking at 10,000 again I'll say crash. When there are floods of not just short sales but foreclosure auctions, I'll say crash. But I do not see it happening. "Shadow inventory" has now taken on a new definition for me, after having heard it screamed about for two years - "Shadow inventory" is a ghost, a phantom, inventory you hope, pray and believe exists, but which never shows its face except in your dreams/nightmares.

But I agree with you absolutely that prices are too high in NYC, and not just in prime Manhattan. I received a marketing email just this morning trumpeting the fantastic bargains of sponsor unit coops for sale, one for only $1.2 mil for a 2-brm penthouse, and one for a 730-sq-foot coop in the East 20s for "only" $620,000. To heck with rent-to-buy ratios, that's just crazy, to put $150,000 cash down on a small onebedroom apartment in a mediocre neighborhood, with a mortgage principal within a scream of half a million dollars, in a city where most people don't even take home enough pay after taxes to meet the mortgage and maintenance costs, in a country where - excuse me - HOW many people have done their time working at Wal-Mart for minimum wage?

Lowery, spot on. I'd love to see dmag prove his assertion that "all owners who bought near the top (since 2006) put down 5-10% at the most." Perhaps that would explain the absolute flood of short sales the market - all six of them since 2008.

Prices remain too high, but I fail to see what will bring them down at this point.

Finally some sensible posts on se. I too think prices are very high, absurd in many cases one could argue (I am particularly appalled at EV walk-up studio prices I've seen, in some cases at like 1000psf) but at some point one has to wonder if maybe there is so much pent up demand that prices are not likely to fall to "sensible" levels. The shadow inventory exists but it simply isn't large enough to tank the market; slow selling buildings could sell out fast by relatively modest slashes in prices, I suspect, certainly not requiring 50% reductions a la miami, and they will not just stand empty for years as in some hard hit places in the usa. My guess is that prices will remain flat or slightly down, unless there is another major macro crisis. Rents may be down or slightly off but the fact is that in williamsburg, which i am following, the rental market is quite strong (184 kent has rented up well, for example), so that doesn't indicate some major crash in prices looming, in my view.

Dmag: I agree. One interesting point of "owning" or owing the bank money is the speed of the eviction process. If I were in a financially marginal position, am I better off renting or better off "owning" something with 5% down and then just not paying the mtge?

The inventory inflection point comes solely from 90 units re-listed at Griffin Court
http://streeteasy.com/nyc/building/griffin-court

That being said, the stuy town issue whenever that plays out could be a shock to the inventory down the line though I'm not worried about it

I think we need to distinguish between local factors that affect the market and national factors. When I say everyone who bought at the top put down 5-10%, I am referring to the large majority of buyers in markets like South Florida, Las Vegas, Arizona, etc. We are all smart people who understand that what happens in other states can affect the national economy and banking system. We JUST went through this. The point is that another, more powerful shock to the system, and you may see our local market finally reach its natural level.

Btw, nyc10023, it also takes 2 years to evict a tenant who is renting because NY is so tenant friendly. I'm not sure about the foreclosure process in NY but I know it is more expensive for the banks than in most other states. Point is you can probably get away living for 2 years for free whether you rent or buy, however if you buy and are delinquent you risk losing your down payment and your credit score gets destroyed. If you are renting, it is actually hard for a landlord to touch your credit until you are in evictions court, which I understand can take awhile. Not that you want to plan on that, but I know landlords who have PAID tenants $10,000 to leave, and these tenants actually owed the landlord $25,000.

I have been bearish on the real estate market for a long time and waiting for manhattan prices to come down to 2003-2004 level but unfortunately they seem to have stabilized at mid 2005 level. In some cases, I have seen sales at 2006 levels. My best guesses about the reasons for Manhattan prices holding up in no particular order:
1. Hedge fund money even though 2008-2009 was a wash. When young people get paid a lot of money, they want a status symbol regardless of the cost - this explains Manhattan prices holding up better than the suburbs.
2. Slow influx of Chinese buyers who want a back plan to escape China regardless of the cost
3. A lack of leverage in New York City due to co-op financing rules and very little sub-prime lending 4. People lost far more by investing in the stock market relative to their real estate purchases and you do not get a margin call as long as you can make payments.
5. Knowledge based US economy rewards top 5% of skill-set extremely well. Many of these 5% want to live in Manhattan.
6. People do not want to move constantly as is the case with renting in NYC (in most cases, you can only continue to have good rents if you move as the landlords tend to increase but not lower their rates if you stay in the same apartment). When they have money, they want to modify/furnish their place nicely regardless of rent vs buy cost.
7. Rent vs buy costs are somewhat flawed as most rental properties are not the same quality as high end condo or coops.
8. The situation on wall-street is not getting any worse than 2009. Most of the hedge funds are above their water-mark.

That said, would love to hear the SPECIFIC TRIGGERS for the next leg down IF double dip does not happen. I can think of higher taxes/maintenance as a trigger (see B406, 250 mercer as an example).

300_mercer, I think we see the double dip, and I think that it gets triggered by the continued fallout in the real estate market in other parts of the country as banks begin to do what they didn't want to do for so long: foreclose and puke up these properties at disgustingly low values. That combined with higher taxes, as you mentioned, and maybe, big maybe, higher mortgage rates will cause NYC to tank. I think you are dead on accurate about young people with a little money paying any cost for the status symbol, and I think that those people will be stung the hardest when they are forced to sell.

Here is an example of plenty of money to go around in Manhattan. Sold at more than $1500 a sq ft. Assume the apartment was renovated after 2005 purchase. Still a lot of money to pay.

http://streeteasy.com/nyc/sale/507179-coop-37-west-12th-street-greenwich-village-new-york

Dmag, I do not think defaults in the rest of the country impact Manhattan much as most of the buyers here have 20-30% to put down which mean that they can still get a loan.

One trigger would wave the magic wand IF it were to happens - mortgage rates 200 basis points higher than they are now, let alone the return of 9% and 10% mortgages.

Mercer, just one question: Did defaults in the rest of the country impact Manhattan from 2007 to 2009?

Dmag2020, Sadly (for me) Manhattan has not been impacted much. 20% from the frothy prices vs places like Vega with 50% reduction. The reduction is Manhattan is due to 2008 wall street and hedge fund bonuses and stock portfolios being wiped out in addition to severe job losses. The real estate prices in other places are down due to similar reasons but with a big compounding factor - SUB PRIME. New York Based bank loan portfolios for residential real estate are already marked at low level reflecting another 5-10% real estate downturn.

Lowery,
Rates middle of last year were 100-150bp higher which did not crack the Manhattan market. But agree, that higher rates can kill it. Unfortunalely, 5/1 arm are likely to remain low as they are linked to Fed short term rates. Fed not raising beyond 1.5% for the next 3 years.

300 - so back to the inevitability of the next leg down......... if rate remain where they are for the next three years, I don't see another leg down in the next three years.

Another example of people with a lot of money. Second floor condo for more that $1200 per sq ft. Bedroom does not even have a window.

http://streeteasy.com/nyc/closing/1021182

300 Mercer: the NYT RE article this weekend was about a 40yr TFB (trust fund baby) paying more than 1 m for a small apt.

Dmag, it sounds like your assumption of another leg down in the market is dependent upon the prospect of a double dip. Thing is, most economists don't think that's going to happen. Ergo, the next leg down is hardly inevitable.

The buildings that I am interested in buying a co-op in have many units come on the market, sit there for months, are either removed from the market or have the price reduced and sit there some more. If a unit does not sell in a month or two, it is likely that price resistance is the reason. The difference in Manhattan seems to be that most sellers have substantial equity in their apts. and the resources to "sit tight" in a foul selling environment. There just seem to be so many stale listings on the market. The motivation to sell a co-op at the lowest price in the past 5 years seems difficult for many owners to accept.

Listen to your reasons for the market not coming down: Greater fools theory, sellers UNWILLINGNESS to take loss, stupid money, etc. All bubble mentalities that CANNOT PERSIST and support a market. Further, most economists didn't see the first dip coming, and they won't see the second. This does not mean that it isn't inevitable.

dmag2020 - I understand what you're saying, but I was focused not on the abstracts, but the present number of available apartments for sale and how it has not jumped. Unless many more listings become available over a short span of time, it doesn't really matter why. The late-2008 debacle was now two years ago.

More listing does not have to increase if the number of sales decreases. I think the relatively small number of 'have to/forced to sell' will set the market price.

Sunday, that was the argument two years ago and it wound up not being much of a force. Dmag's reasons for the "inevitability" of the next leg down aren't exactly well-grounded. I'd love to believe that prices will come down to affordable levels, but the fact is that all of the assumed downward pressures have had little impact on the market overall. The few who did have to sell didn't meaningfully reset the market in 2008, and prices are still stable enough that the have-to-sells are still often getting the prices they want. That makes the would-like-to-sells confident enough to ask for high prices and take them off the market if they don't get them. Hence, low inventory, frustrated would-be buyers, stale listings and high prices. Unless something comes along to disrupt that dynamic I fail to see what's going to tank prices. Dmag asserts that there will be a double dip. It's possible, but rather a fringe view. I wouldn't bet the house on that happening, so to speak.

to add to what evnyc is saying, I think a big piece is the ability of owners to absorb losses. I am impressed by the resilience of developers who have little sold in new construction and still clinging on to relatively high prices. The only high profile bankruptcy I have heard about was the stytown development, but I think so many others are in the same boat and coasting with bank extend and pretend.

What breaks this? I don't know.

would write more, but need to go...

In NYC, is it currently cheaper to rent or buy ?

I think there would be more people forced to sell now compred to two yrs ago. Many of those previously on the sidelines probably already bought something in the past 18 months.

'In NYC, is it currently cheaper to rent or buy ?'

Oh to be new again...unsoiled by the snipings of the deranged RE zelots...

The answer today is: RENT

That's not what I asked. Forget market direction for a sec, just a snapshot for today, 'In NYC, is it currently cheaper to rent or buy? (For the record, I am bearish...and expect price declines)

'That's not what I asked'

Huh?

Guess he didn't like your answer.

I think the next leg down is inevitable simply because real estate prices have grown at a pace WAY above the pace of incomes. the pace was not/is not sustainable.

If the argument for pricing coming down is based on interest rates rising (and inflation rising), is that always a reason NOT to buy?

For cash buyers, I agree completely - If your world view is rising interest rates, and purchase prices coming down, wait.

BUT, if you are buying by using 5% 30 year rates, even if prices drop and rates rise, your monthly payment won't be much lower. I think this is the argument of many buyers.

I agree with those that say the market is about 10-15% over-priced with one caveat. I don't see that applying to Manhattan. The economy seems better and the REO/FORECLOSURE issue no the problem that California, Florida or other bubble states witnessed.

I guess we will see how different the NYC market really is. News in housing is basically disastrous everywhere in the country. If NYC can truly escape the next year (two, three...) unscathed, then....

I can't remember who posted this chart on this site, but it certainly got my attention. And for those who say it can't happen to Manhattan, after you view this chart, please remember that Manhattan RE grew over 300% in just a few years -- clearly bubble territory. As OP says, every bubble returns to the mean. The mean in Manhattan is significantly lower than current prices.
http://www.theatlantic.com/business/archive/2010/08/home-prices-may-drop-another-25/62049/?source=patrick.net#toolsTop

owery> When we're looking at 10,000 again I'll say crash.

You were discussing the SE inventory numbers. Right now, SE has 10,857 listed in Manhattan. We know that is not a clean number but until the urban numbers come out it is the metric everyone on this site has been working on. And, reliable sources have quoted 8,000 in shadow inventory condos in NYC. Eventually, something has gotta give.

i have posted this before but it is worth repeating.

from herb stein:

"If something cannot go on forever, it will stop."

I always say, if something cannot go on forever, it will stop.

Housing isn't bad, leverage is.