Shiller: Housing Slump May Exceed Depression

Remember, Shiller wrote Irrational Exuberance which predicted the Internet Bubble popping- that book launched right before the peak of the bubble.

He was right before. He's right again.

Doesn't the Case-Shiller Index claim it is representative of the national real estate market. I thought the Case-Shiller Index only covers 20 cities most of which are in California and Florida. Who know maybe those states will 30% price declines, but this guy was a bear since before the turn of the century. Smart guy but he was bearish on housing since 2001 and no peeps from him during the run up of the Dow since 1988 and no word from him prior to the dot.com bubble. This time he got it right though just like a broken clock being right now and then

7,487 active listings in Manhattan = 1 year supply.

bottom line: the guy who became famous for calling the Internet Bubble is now saying the Housing Bubble is going to be possible worse than the Great Depression.

Oh, and he just happens to be Yale economist who co-created the most widely used Housing Index by the market.

It's that simple.

wrong young grasshopper inventory 6883 which is lower than the Q1 of 2007 and 2006 and 2003 inventory

Where do you get inventory number from? According to Streeteasy's Sales Search function, Manhattan has over 10,000 listings.

Wrong, spunkster, those are today's figures from streeteasy. Go to advanced search, select for "listing status," click "listings not in contract," then "Manhattan," and thereat thou shalt see the number: 7,487.

5,113 at December 31, 2007 (Miller Samuel).

6,194 at March 31, 2008 (Miller Samuel).

5,923 at March 31, 2007 (Miller Samuel).

4,299 at March 31, 2004 (Miller Samuel).

You made the 2003 figure up, because Miller Samuel doesn't have it in its archives.

http://millersamuel.com/reports/mmoarchives.php

It can't be avoided, spunkster: the crash has begun.

http://millersamuel.com/reports/mmoarchives.php

Nobody's "right" or "wrong". Different sources have different inventory numbers, simply because they may have different compilation methodologies. According to Urbandigs' website, it's 6,883. As long as you're consistently tracking one source, it doesn't matter, because what's important is the trend.

Based on Urbandigs' site, inventory is now up 30% since the beginning of February.

KISS, those include listings in contract. Not that they necessarily are - real estate agents being so honest - but that's the figure for listings not in contract.

Which doesn't include a lot of smaller agencies, FSBO's, new developments not listed, new development inventory held back.

No other way to slice this pie: there's minimum a 1-year supply of apartments on the market.

yournamehere, you're correct: no single source. streeteasy is approximately the same as Miller Samuel, but it includes some 300 houses.

Average sales in Manhattan per year over the past 10 - BOOM! - years <9,000.

This year...?

Regardless of what you think of his predictions, the Case-Shiller index is for single-family houses, which makes it nearly useless in apartment-filled Manhattan and Brooklyn.

ali r.
[downtown broker}

higher inventory numbers at the same time were in 2007, 2006 and 2003. Silly rabbit

I have predicted 20-30% declines by the end of the year for months now. I also put my money where my mouth was on 10/16/07 when I sold my stock holdings and went virtually to a cash portfolio. I know poeple will say that "OH DCO thinks the world is coming to an end". Let me be frank I don't think it's coming to an end. However I can't beleive for the life of me how people can't read the "tea leafs". All indications are pointing to a housing crash. I have said from the beginning this is not a subprime problem. People with stella credit and great jobs also bought way above their heads. People are just walking away from their houses. The banks can't even determine how bad it really is. Everyday priceses fall which means the banks can't put a number on the lose.

Markets are forward looking. And it looks like a disaster for the next 12-18 months. This QUARTER of earnings on the street were mostly down. Their were some positives, however just a few. Going forward the earnings are going to be dissmal. We will enter a bear market by the end of the year (20% DECLINE IN THE MARKETS). INVESTMENT BANKING HAS VIRTUALLY STOPPED. I know there are a lot of smart people on this site. I agree with a lot of the analysis of many people. I just think that things are going to be much worse than most. I feel comfortable with that and take NO PLEASURE in offering by bearish opinion. There is alot at stake for millions of people and would not wish financial hardship on anybody. If you buy now you will most definitly lose a lot of money that you will never recap. I'm not saying that your purchase will not increase in the next 20 years, but it would of increased much more and a lot faster if you would of waited.

FOR THE RECORD I'M A OWNER. I HAVE NO PLANS ON SELLING OR BUYING IN THE FUTURE. I ALSO DO NOT MAKE A LIVING BUYING OR SELLING PROPERTY. ACTUALLY MY PROFESSION HAS NOT INTEREST WITH THE HOUSING MARKET.

If I were to listen to anybody's advise on this site I would pay close attention to stevejhx analysis. He he knowledgeable and is articulate in his rent vs own analysis. I strongly agree with this play for the nwxt 12-18 months-- Sorry for the Rant

if Shiller told Mafia to jump off a bridge, do you think Mafia would do it?

Oh, spunky, you're just being a silly billy again. There are MS's 1Q historical listings:

2007 = 5,923
2006 = 6,904
2005 = 4,327
2004 = 4,299

Anybody can check for themselves at millersamuel.com.

Today, here, 7,487; 6,733 on March 21st of this year (I wrote the figure down).

front_porch (broker), I'm not discussing the Case-Shiller index. I'm discussing the prognostication by its inventor, who likewise predicted the dot.com bubble (as did I).

dco, on another thread I was called a "fundamentalist." joepa thought it was an insult. There is no greater compliment for an investor than "fundamentalist." The fundamentals are inexorable - my new favorite word: 12x annual rent = sale price, because it is derived from the 40x monthly rent in income, 28% total housing expense market constraints. Right now we're at 24x and rents are falling, meaning that that 24x is rising.

It is unsustainable, moreover because incomes are falling on Wall Street, where tens of thousands of employees are being laid off. A friend of mine was looking to rent in Southampton last year, there was no inventory. His real estate agent sent him an email yesterday offering not only a summer deal, but a deal for full-year occupancy.

What does that say about Wall Street?

Oh, ccdevi, ignore the experts if you like!

Clearly this is going to hit every neighborhood in the country. I just shake my head at those who insist that Manhattan is some "super realestate mecca". I actually think that some outer neighborhoods will see even bigger reductions. My theory is simple. The more affordable Manhattan will become the more people is areas like LIC, Cobble Hill, Dumbo, JC, Hoboken... well you get the point, will trade up for the shorter communte. Ofcourse ability considering. This will put great pressure on the outer boroughs. I heard that Westchester numbers released today saw the slowest sales in 30 years. Things are going to start to look ugly me much quicker than I thought. Neighborhoods like Nassau, Westchester and Greenwhich are well to do area's. This is not Florida or Navada. People in these people commute to the mecca everyday for employment. Just an FYI.

Inventory should be peaking right now. People put their listings up in Jan/Feb/March/April and now we will start seeing those properties CLOSE in the next couple of months. What does that mean? Inventory comes down. It's not rocket science.

Anyway who the heck cares about 6,500 vs 7,500 vs 5,500. That's a normal range people....ohh inventory is up 50 units look out! Get a grip.

steveF- Don't worry it's just the normal spring increase. Spoken like a true "believer". Just keep telling yourself that everything is A.O.K. Don't get so angry over something you have no control over. Just one question? How high do inventories have to increase for you to conside that things are getting bad?

This is exacatly what I'm talking about ion the outer boroughs. Reduced $270,000 in the lsat 6 months. Last year at this time it would of sold for asking. It roughly a 17% decrease. I know "it was priced to high from the beginning. Oh realy, much like most of the properties purchased in the counrty over the last 3 years. Give me a break. My guess this property goes for goes down at least another $200,000. My guess is the owner will pull it off the market if already owned. If developer it will sell for 1.1m AT THE MOST. Get ready for the whole city to go on sale.
NYC: Brooklyn: DUMBO

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Does anyone know how hard it is to get a $800,000 loan today. It's almost impossible without a job that pays at least $300,000 a year. And in most cases that alone won't get you the loan. The lack of credit wiil drive this market back to earth. Now that I think about it mabe the sky is falling. With it the price will come back down to earth. LOL

You all are assuming that Manhattan real estate will follow logic and reason. I ask you when has that EVER been the case?

Based on the dearth of activity at open houses (at a time when they should be booming) and increased time on market for so many properties, I don't expect this "peak" inventory season to be followed by a drop at all.

It was discussed towards the end of the "Idiots" thread. While inventory trajectories have gone up and down Jan-May in every year 01-07, here in 08 it's been only up, and has been going up since Aug 07 (with the exception of December, which dipped in 6 years out of 7). In fact, in 5 of 7 years (but not this year), inventory went down from April to May:

http://www.millersamuel.com/charts/gallery-view.php?ViewNode=1204831603HmXFR&Record=3

dco...get a grip man.

tenemental you may be right who knows all I know I don't have to read to much more than the first couple of words of your posting to know that's it going to be negative view on the Manhattan RE market.. We all know how you didn't buy for the past few years and now finally your Ship has landed and you will now enjoy looking at all the available apts at tremendous savings.

dco as I said before most people are terrible at predicting where the market is heading when times are terrific and they are even worse during economic downturns.

spunky, you "all know how I didn't buy for the past few years" because I said so in response to an inaccurate accusation of yours. Don't act like I'm shoving it down people's throats.

I refuted, with facts, a point that someone made. What was your contribution to the discussion?

The best part about this debate is that we get to see who is who was right in the next 12 months. I hope I'm wrong. An thing less than a 20% decrease I will consider my analysis proven wrong. I think those who like to just tell people to " get a grip, your nuts, give me a break......" should make their predictions known. Keep it to a 12 month time frame. Put up or "shut up". If you decide not to take part then just post your opinions where they matter. I suggest "IHAVENOIDEA.COM". LOL

well on another thread spunky said that some of his best purchases were of overpriced apartments, but I'm still waiting for the details.

petrfitz: "You all are assuming that Manhattan real estate will follow logic and reason."

In the long-term all markets follow logic and reason; in the short-term they don't. That's why bubbles can't last.

dco, what's hard to predict is how long it will take because there are so many variables all adjusting simultaneously. However, it's not too hard to see that things are out of equilibrium.

stevejhx- Your right it's not hard for people like you and I, however most most people can't see how out of whack they are. If they did they never would have bought in the first place over the last 2 years. I'm also not the "Ban Wagon" guy. I have been seeing these problems develope since 2005. My wife and I would often talk about real estate prices. We would just shake our heads at people buying apartment or houses that were way over their earnings and most important their earning potential. I would guess that in the last 3 years, 7 out of 10 people should have never been approved for the loan amount granted. I'm not saying they couldn't get a mortgage. Just that they souldn't have been approved for the extra $200,000. That's why I have been screaming from the top of the mountains that this is beyond a subprime problem. Credit should have never been granted to hundreds of thousands of people in the first place. This artifically infalated the market. Going forward not only will these people not get loans but people who may have had a shot are also out of luck. Jumbo mortgages are getting very hard to get. Getting a loan for $800,000 is going to be next to impossible. These were the people who were driving up the markets all over the country.

When I bought my co-op on Fire Island, BofA offered me a no-doc loan (I'm self-employed), and when I was looking to buy a brownstone in Prospect Park (which I didn't) they offered me an 80/10/10 loan.

I declined because I didn't feel comfortable with that much risk.

The problem in NYC started in 2004. Things were still fine until then, I could afford to buy the apartment I lived in. Nary 4 years later, prices doubled.

Unfortunately, my income didn't.

I'd rather own the place I live I live in than rent it, but not at twice the price. Ownership is a capitalized expense not an income center, so it makes no sense to spend significantly more to own than to rent. Perhaps a little more in the short-term, but not considerably more.

sure dco, subprime people were driving up prices all over the country except Manhattan. The fundamental setup for Manhattan real estate prevents subprime buying. Banks were the first to get hit they had artificially high earnings so now their stock price came back down after flushing out the never-should- have-done bad loans. The national market pricing is adjusting too for that "extra" demand created from subprime and exotic loan buyers. Manhattan was not artificially pumped up from subprime. Again, it's not rocket science.

Don't you see the stock market settling down and getting past the subprime concerns? Any tightening of credit for the national market will begin easing once Wall Street acknowledges the end of the credit crunch. It's happening right now. As I said before "this too shall pass" and it is passing. In the future we will hear this "ya, remember that credit crunch of 2007-2008"..."sure do boy I should have bought than but I was listening to this guy stevejhx on Streeteasy, man was that the wrong thing to do" :) sorry Stevejhx I couldn't resist.

steveF- I guess you have poor reading skills. I said that this is not justa subprime problem. Subprime is just a definition. Their were 100's of thousands that were not considered subprime that got loan they can not afford. It's that simple. It people like you who refuse to see the writing on the wall. I know Manhattan is magical place where nothing goes wrong. I hope you follow your onw advise and buy today. If I have to take a guess I would say you are either a realtor or new condo owner. Or perhaps both. Face the fact that your professsional calling and your recent purchase are both going to take financial hit and for that I'm truley sorry. Stay the course things will improve in the next few years. Just try not to grow out of that apartment.

dco - why would you WANT a $800k mortgage if you weren't making over $300k per year. That doesn't make any sense. This is a natural reaction and overreaction from lenders (any lenders really) in this environment.

dco, remember this...the Fed has butchered interest rates and injected massive amounts of liquidity into the economic system. That means GDP growth and higher wages. Higher wages means higher asset prices.....hey have you notice no one is yelling RECESSION anymore.

Wages did not keep up with this recent housing bubble. Not here, not anywhere in this country. If you can find a market like this you might want to keep it to yourself, as the rest of the country experiences/experienced a disconnect.

The Fed....Manhattan wages incresed by 6.7 % YoY. 7% increase at a salary of 100k is 7k divide by 12 = 585 per month. Every 100k loan increase costs about 600 per month at current interest rates so that 6.7% increase on 100k salary translates into another 100k you can borrow. That means a studio buyer can now afford 600k purchase price versus a 500k price. I anticipate higher wage growth with the Feds recent actions.

"have you notice no one is yelling RECESSION anymore"

WHAT?!?!?!? I hear talk of the recession every day. I also hear talk of the Fed turning it's attention to inflation now, meaning possibly few or no more rate cuts. Look, I'm not a Wall Streeter, I don't claim this to be an area of expertise, but I don't think we're anywhere near the point where people aren't worried about a recession (that many of course think we're already in). I'm sure we'll keep hearing plenty about it as the election rages.

tenemental - This sentence doesn't makes sense to me

"but I don't think we're anywhere near the point where people aren't worried about a recession "

manhattanguy, steveF said "have you notice no one is yelling RECESSION anymore," which says to me that he thinks people are no longer worried about a recession. Based on what I hear from friends, family and coworkers, and what I read, most people are still very concerned.

I should have just gone home but oh well,

"The Fed....Manhattan wages increased by 6.7 % YoY. 7% increase at a salary of 100k is 7k divide by 12 = 585 per month. Every 100k loan increase costs about 600 per month at current interest rates so that 6.7% increase on 100k salary translates into another 100k you can borrow. That means a studio buyer can now afford 600k purchase price versus a 500k price. I anticipate higher wage growth with the Feds recent actions."

#1 - I was specifically speaking on a macro level, that is that nationwide they haven't kept up. There is proof out there, lots of it. This one of the first ones that I googled. http://efinancedirectory.com/articles/The_Dangerous_Disconnect_Between_Home_Prices_and_Fundamentals.html
#2 - YoY increase of 6.7% what years? Because you know, we didn't have record bonuses (that have all but vanished) for a few years or anything.
#3 - An increase from $500k to $600k is an increase of 20 percent! No way wages are going to keep up with that.
#5 - You neglected to mention down payment. A 20% down payment on $500k is $100k and on that $600k is $120k. Where does this extra $20k come from. You surely didn't earn it that year with a measly ~$7,000 raise (your numbers).

people are now more worried about INFLATION. I don't think FED will cut rates this time around. They will either hold the rates steady (80% chance) or raise it by 25 basis points. Any thoughts?

steveF- You must be living on another planet. You should read your own post and see how naive they sound. Oh I get it, your accessing the Internet through your work computer because you can't afford cable or a TV at home. You must be one of those people who borrowed 90% of your $1M apartment. Lets see $7500/month with CC's. That's funny because the same unit above you is listed for about $850. Not to mention your neighbor just rent his larger apartment out for $4000 (utilities included). Stevef Don't be mad at me if you failed math in grammar school. You truly have no clue what's going on in the economy.

manhattanguy, I agree, people are worried about inflation. I mentioned the possibility of the Fed ending rate cuts above. But I also think that when you start talking about the public at large, many are just worried about a lousy economy in general, whether it's a recession (less coming in), inflation (more going out), or the combination. It's only recently that Bernanke started using the R-word, and it's still regular newspaper fodder. I'd personally love to see inflation become the focus. It would be nice to start getting 5% on my savings again.

dco...i use the work computer because I've got better things to do outside of work than banter with you. But at work it helps pass the time. I don't know what you are talking about above, some fictitious scenario?

Tenemental....I know you desperately want a recession.......but your hopes and dreams are being shattered right now.

Well it's off for a 1031 exchange meeting...talk to you guys later Spunky hold down the fort and good work.

"Tenemental....I know you desperately want a recession.......but your hopes and dreams are being shattered right now."

What planet you live in? We are in an inflationary driven recession (aka stagflation).

steveF, cut the nonsense. I'm anything but desperate, and I'm not hoping for a recession. I was lied to by many brokers, I read a lot of hype from many bulls, I saw through it, and now common sense and experiences are telling me that prices are going to continue to come down. I'm not a doom-and-gloomer. I'm not expecting a crash, but even with malraux's relatively conservative estimate of 8% down this year and 8% down the next (for the most desireable neighborhood in New York, mind you), I'm so glad I didn't buy at the peak.

As for your claims that econimic fears have passed, see my post on the "deflation" thread.

How much did housing appreciate in the last 5 years? In the last 3 years? And falling 20% off of last year's prices or 2 years prior prices, what is it relative to how much housing actually appreciated on the last 5 years? We've got a house in 2002, and it has doubled its value since then even with this market. I think a 20% down in the housing market from last year's prices is not far-fetched.

"have you notice no one is yelling RECESSION anymore"

LMAO!!!!!!!!!!!!!!!!!!!! best post yet!

tenemental I'm so glad I didn't buy at the peak.--Please let me know when the Manhattan RE peak was. I'd like to know the approximate date.

MMAfia have you noticed Gold is crashing

LMAO!!!!!!!!!!!!!!!!!!!!

spunky, I'd say Manhattan RE peak was around Summer-Fall '07. I was shopping pretty hard at that point, and even though summers are generally "slow," open houses were quite busy. It wasn't until the end of the year that things were noticeably different.
As for the recession talk, I think it's pretty obvious we're in one, but even if we're not, how can you deny the drastic change in attitude/confidence among the buying population? That's what's even more relevant here. steveF, I don't get your delusion here.

bjw I beleive and I might be wrong that the recession if we are in fact in one started last October but that's just a while guess. Not sure what you mean by Manhattan RE peak. Do you mean the Manhattan RE prices peaked last summer and have come down since then. That is what I am asking.

spunky, I noticed softening in my part of the market starting in late 07, maybe sooner. Of course, our favorite chart (c'mon, you know the one) showed most of Manhattan down in 07 compared to 06 quarter for quarter, so maybe the peak was earlier.

bjw2103, nice to see you.

tenemental like I mentioned before you certainly have more negotiating power today for crappy apts, with crappy layouts, crappy views, in crappy buildings and in crappy hoods. Prices still holding strong if not higher for all others.

Not just crappy, spunky, average. Unless you are so elitist you think the vast majority of New Yorkers live in crappy apartments.

Not to mention plenty of "luxury" developments in the outer boroughs.

SteveF, this is pure CRAP: "Manhattan wages incresed by 6.7 % YoY. 7% increase at a salary of 100k is 7k divide by 12 = 585 per month. Every 100k loan increase costs about 600 per month at current interest rates so that 6.7% increase on 100k salary translates into another 100k you can borrow."

You can only borrow 28% of any raise and allocate it to housing expenses, so if you do the math using your mortgage, you can borrow an additional $30,000, not $100,000, because the raise comes to about $185.00 extra a month, and a $30,000 80/20 30-year mortgage @ 6% is about $180.00 extra a month.

More crap: even if Manhattan wages increased by that figure, the increase was not distributed evenly. Most of it went to Wall Street, which represents 11% of all NYC jobs but 33% of all wages (probably higher in Manhattan). Median property prices in Manhattan are closely correlated to Wall Street bonuses, and as far as I can tell, Wall Street is in a shambles rights now, and cutting thousands of jobs, meaning that, on the aggregate, wages are falling.

Or am I missing something in the newspapers?

Tenemental- no I don't but ones perception of average might be crappy for the majority of potential buyers.

Back from the 1031 and this intermediary was pitching his "like kind' as commercial/office property in other parts of the country. Sorry I like the Big Apple. Anyhow, nice to see the Dow up 140 and heading for 13,000.

spunky, peaking isn't easy to guage really, but I would say that yes, pricing has mostly flatlined, and in quite a few cases, dropped. I don't think the general trend will be rising prices in the next 6-8 months, so that's why I'd call it a peak. But that doesn't really matter much in the long run. I think it's just healthy to see a little more balance in negotiation for the market. And I don't think it's just crappy apartments, though you're obviously right that well-priced product that is highly attractive will sell quicker (isn't that a bit of a no-brainer anyway?). It's too easy to start hardcore rooting for appreciation (or a major drop if you're on the other side of the fence) in pricing once you've become an owner. Part of me really resents the elitist attitude adopted by RE owners vs renters. Yeah, I'm glad I'm buying, but I want others who want to buy to be able to do so as well.

tenemental, good to see you too - been busy with the mortgage and prepping for closing, but I'm still paying attention to the market. Anything interesting popping up in the EV? I'm predicting the fall will be very kind to you.

That's fair enough, spunky. I'm sure you, with more money, have a lower threshold-of-crappy than I, with less money, do. That said, just walking around the East Village and West Village, it's obvious that the number of old, humble, buildings (though often charming and beautiful) is much greater than the number of amenity-rich luxury buildings, whether old or new. It's that thought - where do the majority of New Yorkers live? - that makes me think "average." Of course, 2/3rds of that is rental stock, so it goes back and forth. And then, our perceptions might also differ on who the majority of potential buyers are. Not that I think the majority are like me, but I think there are probably more (the enough-money-to-buy-but-still-need-to-be-cautious type) than you realize. And FWIW, I will never walk-up more than two flights or stare at a brick wall.

I was waiting for you to participate on the "Terraces" thread...

bjw2103, best of luck, I hope it all goes smoothly. I remember you talking about a 6-month closing contingency in your contract, so it sounds like the developer is making good time. Good for you.

Some interesting things, yes, but nothing to get me off the sidelines. I appreciate your prediction. Perhaps the fall...

LOL Spunky, click on this:

http://www.kitco.com/ind/West/images/apr242008_1.gif

Sorry guys, residential real estate is a capitalized expense. Gold is a commodity with virtually no industrial value beyond fillings. I'd stick to things that make money.

MMafia even stevjhx has to chuckle on your long term outlook on Gold.

spunky, I didn't chuckle, and I have no doubt that people can make a lot of money in it. But it's a commodity with virtually no industrial uses and therefore no underlying demand, and you can wake up the next morning and the price could have collapsed.

It's happened before.

Thanks tenemental. Developer's been quite good actually. I close in less than a month (though I'm trying not to bank on anything until I get a mattress in the bedroom), so feel pretty fortunate to have avoided a drawn-out disaster, a la Tribeca Space, thus far.
Not sure if you're looking too far outside the village, but I saw this place a few months ago, looks like they took it off the market and just put it back. It's not ideal, and not huge, but I really liked it (despite the pink walls) and I think the location is huge (it's SoHo, though it has more of a village feel to it - some people refer to this as South Village actually). And it looks like you'd be able to negotiate a bit: http://www.corcoran.com/property/listing.aspx?Region=NYC&ListingID=1249574

bjw2103, thanks for the heads up. It is a nice area, but not really the right space for me. Funny, I've seen the multiple "fishing" ads in the NY Times for this apt for a while, never saw the Corcoran listing.

I'm also at tenemental@gmail.com. Thanks again.

Stevejhx, I am thinking about the math underlying your quote: "The fundamentals are inexorable - my new favorite word: 12x annual rent = sale price, because it is derived from the 40x monthly rent in income, 28% total housing expense market constraints. Right now we're at 24x and rents are falling, meaning that that 24x is rising."

I agree with your general conclusion about that there will likely be a correction in manhattan prices... but wonder if it makes sense to relax the 28% assumption given the higher incomes in Manhattan. Someone buying a $1m apartment, for example, has to have a significant income. Expenses (other than taxes) for someone with such an income will likely be smaller on a percentage of income basis than the typical american (with a much lower income). The remaining income is still significant, and could be used to pay down the debt faster than for one would expect on a house in say, Peoria. I believe that this faster repayment is one of the multiple reasons that jumbo loans have historically been more expensive than smaller loans.

You could argue that a bank will only loan you at the 28% of income level. However, the buyer can add equity, and most buyers at this level have significant assets (as the high level of income in this segment quickly builds wealth).

I think that a similar logic holds for the 40x monthly rent constraint. This constraint seems too tight for the slice of people who have incomes that would enable them to purchase $1m apartments. I would think that a rental company would look at BOTH income (the basis of the 40x constraint) AND assets. The people buying an apartment in this range have to have significant assets... making the income constraint less binding. ie I would expect the rental company to care less about income if a prospective tenant has many years of rent sitting in liquid assets.

In conclusion, the result of this line of reasoning is that the correction may be smaller than you predict. Similar in direction of effect to increasing incomes and decreasing mortgage rates.

One other area of interest... to the extent that the inventory for sale and rent is low, I would expect prices to tend toward replacement or newbuild costs. Land and construction costs in manhattan are significant. I would love more data on this topic... I wonder what the current all-in construction costs for a new project in manhattan are and how this translates into the cost to create a new one and two bedroom apartments.

10036: With regard to your point about replacement/new-build costs, it's worth considering that the price of land can fluctuate wildly too. So can the price of rental buildings that might be candidates for conversion. Construction costs move up and down too, though not as much. All of these variables have risen sharply in the last five years. They could all fall, especially land. So while it's possible to calculate the all-in cost of a completed project, it's nearly impossible to predict the all-in cost of a hypothetical future project.

10036, I make substantially more than $100,000 a year and have assets that could pay - in cash - the rent on my apartment until I die. Still, Related Rentals would not rent me a larger apartment because my "income" was about 38x the annual rent, and they wouldn't include my investment income - which is twice my "earned" income - because they reasoned that I could just spend it those assets that it took me a lifetime to accumulate, at once.

Forgetting that I could also lose my job, and that the apartment I was interested in had become available because they had to evict the prior tenant, and I have a credit score of 810.

That notwithstanding, why would anybody want to invest all their assets in an apartment - which historically has a very low return on equity of 0.7% per annum real - when I could rent a virtually identical one for half the price? Sure you could, but since rentals and purchases yield the same result - shelter - they should cost the same.

What is this 100% premium that people are willing to pay for the "privilege" of owning, and not investing in an asset class that makes money? I fail to see the logic behind it.

Steve, I am confused. I thought you lived at 21 Chelsea. That's not a Related Rentals building.

That's why I moved.

stevejhx I thought the return on residential RE had a historical rate of return of 0.000035875% not .7%.
In either case it's a horrible investment so why buy a place to live in. I agree with you. Not sure if you own a rental building in Manhattan but I may be interested in buying several and going partners with you. All I ask of you is that you continue telling people to rent in Manhattan not buy and I'll split the profits with you. Of course me and you will do a very thorough cost analysis of these rental buildings before I purchase them. You do the advertising and public relations (like rent don't buy ads) and I'll collect the rents and share the profits with you.

Over 2000 recorded sales in the past 60 days. Half of those are condos with shorter closing periods. If we stay on this pace with condos, we could see over 6000 condo units move this year. Add that to the co-op sales and what do you get?

I don't think people are listening to you steve. Maybe, as spunky suggests, you should buy some full page ads in the WSJ or Urbandigs.com with THE SKY IS FALLING printed in red lettering. dco may be willing to share the expense with you.

Juice, why do you keep aligning urbandigs with doom & gloom & sky is falling? Is it because the site is discussing what is going on in credit markets and macro without bias? You do recall me being bullish on NYC re up until early 2007, don't you. I dont see you mentioning this.

Look at past 3-4 months, and you will see that activity is nothing like previous wall st bonus seasons. Take it for what it is. Nothing more, nothing less. It seems, either talk bullish, or your in the sky is falling camp. Why cant Manhattan prices dip 5 or 10% over the next year or so without crashing? Is this not entirely possible?

I think you may have misunderstood digs; I don't associate urbandigs.com with doom and gloom any more than I associate the WSJ with doom and gloom. I read your site all the time and while I do feel it focuses more on the negative than the positive, it is well thought out, factual stuff. I was merely mentioning well known media that Steve and dco could post their sky is falling propaganda on. I wasn't associating your content with theirs. As for your question:

"Why cant Manhattan prices dip 5 or 10% over the next year or so without crashing? Is this not entirely possible?"

This has been my point exactly. I think a 5-10% correction is highly possible and probably needed (and what the current inventory picture is most likely telling us). It's the 50% decrease malarkey that I find silly and unproductive.

Guys and Gals slowdowns take time. You can bury your head in the sand and think that the boom is still going on or you can act like an educated investor an realize that we are in a situation that is like no other in the history of modern economics. The great thing about this debate is that in the next 12-18 months we will see who on this site was the most on the "money" with their predictions. I hope I am dead wrong. Everyone looses in a bad economy. There are very few things worse that losing your job. The only real advise that I think ALMOST everyone will agree on is to keep enough cash to get you through a tough time. How much is up to you. I feel most comfortable to have at least 1 year of savings to cover all my bills and live the same life style as if were working. Just some thoughts that I think might be helpful to people in the near future.

West81st - I hear you on the fluctuations... especially on land.

I wish I had a better sense of how the costs break down (including percentage of land vs materials/labor vs capitalized interest, etc.).

The one data point that I have... I met with the mgmt of Archstone when that company went private. They claimed that they couldn't bring an apartment on the manhattan market for under $1m. I assume that this figure includes the profit they expect to make and have no way of knowing if this figure is realistic. I guesstimate that a typical new apartment is a 1000 square foot one bedroom... getting you to approx. a 1000/sq ft cost on a new condo. Clearly, one could drive a truck through the holes in these assumptions.

Stevejhx - I appreciate your thoughts. You need to assume significant price appreciation to make buying a good decision at current prices. Also, amazing that Related looks at it that way.

Over 2000 recorded sales in the past 60 days.

JuiceMan, those are sales that took place last year or earlier. It's very rare for anything to close quickly in NYC. You're looking backwards.

And if sales are so grand, why did the mayor and governor and head of the MTA complain about dried up conveyance and mortgage tax revenue?

I know! Because 2000 recorded sales in the past 60 days!

Spunky, the real rate is what Shiller published: 0.7%. Why would I buy a place to live? Because at the right price, since it's a capitalized expense, it makes no difference whether I buy or rent so I will pick which I get the best buy.

Where are all those overpriced apartments you claimed you made a fortune on?

JuiceMan, if property prices only fall 5% to 10%, that won't even compensate for higher mortgage rates, let alone the decimation on Wall Street, a.k.a. falling incomes. So buying would still be twice as expensive.

I repeat: What is this 100% premium that people are willing to pay for the "privilege" of owning, and not investing in an asset class that makes money? I fail to see the logic behind it.

It was never that way before, not even in Manhattan, until starting in 2004.

10036, there was an article about a year ago about the input cost of building a building in Manhattan versus the price of residential real estate. Costs had risen, but by far less than sale prices. That's one of the reasons for all the development.

Lack of land does not affect real estate prices. Robert Shiller traced the prices of a single property in Amsterdam - where land is constrained - over 350 years and found it had no effect on the price of the house. The only thing that has a long-term effect on the price of the house is increasing incomes and leverage.

"JuiceMan, those are sales that took place last year or earlier. It's very rare for anything to close quickly in NYC. You're looking backwards."

Wrong again steve. If you look at my post I ignored co-op sales for that reason. 1000 condo sales in the past 60 days, those are all this years sales big boy, condos generally close in 3-5 weeks from contract signing (excluding new devs).

"The great thing about this debate is that in the next 12-18 months we will see who on this site was the most on the "money" with their predictions."

dco, if you are waiting 12-18 months for prices to come down you are in for a surprise. How long do you really think this economic slowdown will last? If this recession is mild, what happens then? Manhattan is always the last to be impacted in a slowdown and the first to recover. Do you think we’ll be in recession for the next 3 years?

How do you how may of those 1000 condo sales were from existing inventory, or when the deals were struck?

You have no proof. Absolutely none. Yet again.

And Mr. Big Shot, just read this and tell me how you square it with your "prediction":

http://www2.nysun.com/article/71045

Big Drop Is Seen in Real Estate Tax Revenues

By PETER KIEFER
Staff Reporter of the Sun
February 11, 2008

The city and state governments are bracing for a precipitous drop-off in the tax revenues they will receive from real estate transactions. The city is forecasting a 39% decline in sales volume for all commercial transactions through 2009, and the median price of those transactions is expected to decline by 32%, according to its latest budget projections. Fewer sales at lower prices are leading to projections of declines of hundreds of millions of dollars in revenue derived from both the real property transfer tax and the mortgage recording taxes.

stevejhx the real rate is not .7% it's much less. .7% is the return you get if you bought a house 350 years ago. I'm talking 975 years ago.

Like I said we need to buy rental buildings. You don't need to put a dime down just be my poster child for the rental building. You're the perfect renter. Your credit is good. Your a lifetime renter and you can convince others in the building how stupid it is to buy when you can rent. I in turn will give you a fee to continue convincing renters in the building to renew their leases.

What's the fee, and when's your first purchase?

stevejhx what fee are you looking for?

What r u paying, spunkster?

JuiceMan "dco, if you are waiting 12-18 months for prices to come down you are in for a surprise. How long do you really think this economic slowdown will last? If this recession is mild, what happens then? Manhattan is always the last to be impacted in a slowdown and the first to recover. Do you think we’ll be in recession for the next 3 years?

I think the economy is in and will remain in a long recession. I think their are some people who have gotten so use to rising real estate that they always forget there have been times of large declines. I don't think that this is a 6 month or 1 year problem. So does that answer your question. This is not a subprime problem. This is what is confusing everybody. There are people that bought way above there heads all over this country and yes in NYC as well. The credit that artificially fueled the boom is gone for years to come and will never be as lenient as it was. This is called a market correction and they happen all the time, except this one is going to be the largest in the history of modern economics. Economic indicators screaming this..... since 1990 or this is .... since 1973. We are showing economic signs that have not been seen in 20-30 years. This is just the beginning. So I ask you MR JUCICEMAN do you think that this is just a 6-8 week problem or even a problem at all? I have NO vested interest in any negative sentiment. I have said it dozens of times that this will hurt everyone. The only thing I suggest is keep enough saving to survive a job lose for at least a 1 year.

I refer to the 12-18 month time frame as one that will convince everyone without a doubt that the NYC market has entered a clear and convincing BEAR housing market.

No dco, I don't think this is a 6-8 week issue but, unlike yourself, I don't post "sky is falling" predictions whenever possible. Look, times are tough but we'll get through it. Five months ago people were posting on this board that the credit crisis was going to be the end the world as we know it. Guess what? We are still here.

At this point, we have seen some inventory build up but good properties priced reasonably (less than 10% increase from last years comps) are still moving. Considering the rest of the country, Manhattan has held up amazingly, and that gives me even more confidence going forward. Correction? Most likely. Collapse? Highly unlikely.

I do agree with your advice of a year of cash in reserves though. That is good advice.

dco if this is going to be an historic long recession what's up with only needing 1 years living expenses.
A one year recession is not long however a 3-5 year recession now that's long. There are some very smart economists that may agree with you in regard to this being a very deep and long recession and on the other hand there are some very smart ones as well (nobel prize) that feel that although we may be in a recession the economy will and is starting to recover If you read the NY Times everyday then I can understand your dismal long term outlook. Keep in mine this is election year so don't expect anyone to paint a rosy short term economic picture.
In regard to NYC right now rents are going up, employment (except for Wall street) is extremely and I emphasize extremely strong. We are at near term historic lows for unemployment and I think unemployment numbers for 2009 will hit an historic low. Let's not forget the weak dollar is allowing foreign consumers to more readily purchase American goods and the yield curve is nice and steep which the stock has always shown to love so why all the fuss.

stevjhx I ask you what are you looking to make for all I know you may already be representing a major apt rental corporation at the moment so I certainly want to be competitive.

Actually, spunkster, rents are coming down.

Rents are going up, generally.

http://www.tregny.com/manhattan-apt-rental-report.jsp

http://www.forbes.com/2008/03/31/homes-risky-property-forbeslife-cx_mw_0331realestate.html

It is interesting to look at the inventory numbers for "risky cities" as against their populations compared to Manhattan with it's 6800 inventory and 1.7 million (and growing) population. For example, Miami has an inventory of 80,000 and a population of less than 400,000.

Citihabitats reports the exact opposite:

"Overall average rental prices remained strong for the 1st Quarter of 2008, despite a slight price retraction in all categories with the exception of one bedroom apartments, which rose 3.7% over 1st Quarter 2007 levels."

http://www.citi-habitats.com/market.php

I see rents falling on nybits.com.

streeteasy reports 7,485 listed apartments not in contract as of today. Miller Samuel shows that on average over the last 10 years (boom years) 8,500 apartments changed hands in Manhattan per year. That would be just about what its population grows per year: 8,000.

http://cityroom.blogs.nytimes.com/2008/03/20/manhattan-population-is-still-growing/

But 65% of Manhattanites rent.

You are confused about Miami's population. What is Miami proper is a very small city; what people generally refer to as "Miami" is Miami-Dade county, whose population in 2006 was 2,402,208.

There isn't physical room in the city of Miami to build 80,000 apartments. You should visit before you say stupid things.

Also, where did you get that 80,000 figure?

You should know that Manhattan's population increases 0.5% per year (8,000/1,700,000) whereas Miami's is growing at 6.6%, or 158,000 per year. (Data from the US Census's Quickfacts.) Even if your figures are correct, Miami is not building enough units to keep up with population growth; Manhattan's production exceeds its population growth.

steve gets angry when his doom and gloom theory starts to fall apart. He also continues to go back to that nybits.com website, which has to be one of the worst sources of information I have ever seen. Here is some pretty good and credible rent information neighborhood by neighborhood. When you say rents are going down steve, do you mean median rents or average rents? Does the neighborhood which rents went down matter? Looks like Chelsea rentals are soft, maybe you should move so you can get a better deal?

Where Prices Decreased:

Harlem—All Harlem studio and two-bedroom rents fell this month.

Midtown West—All studio prices decreased (by 5.4% for non-doorman units and 0.2% for doorman units), as did rents for non-doorman two-bedrooms (by 1%).

Midtown East—Studio and one-bedroom prices dipped across the board, by as much as 5.2% in the non-doorman studio category.

Chelsea—Two-bedroom prices dropped by a significant 7.5% for non-doorman units and 1.8% for doorman units.

Gramercy Park—All studio and two-bedroom rents slid in April. Non-doorman studio prices decreased by 4.3%, non-doorman two-bedrooms by 6.4% and doorman two-bedrooms by 3.7%.

East Village—East Village studio rents fell by 2.9% for non-doorman apartments and 3% for doorman units.

Lower East Side—LES studio prices softened in both the non-doorman and doorman categories (by 2.1% and 3.7%, respectively).

Financial District—Non-doorman studios and one-bedrooms and doorman two-bedrooms saw price cuts this month in FiDi, with rents declining by 7.3% for non-doorman one-bedrooms and 3.8% for nondoorman studios.

Where Prices Increased:

Upper West Side—Rents across both service categories of UWS studios increased (by almost 7% for non-doorman units); additionally, non-doorman two-bedroom prices received a 4.5% boost.

Upper East Side—All average two-bedroom rents climbed, most notably by 6.3% in the non-doorman category.

Midtown West—All one-bedroom prices increased (by 4.1% for non-doorman units and 0.5% for doorman units).

Midtown East—Non-doorman and doorman two-bedroom rents headed upward this month, by 5.6% in the non-doorman category and 1.6% in the doorman category.

Murray Hill—Rents for every apartment size and service level increased in April. Two-bedroom prices jumped most significantly (by 6.9% for non-doorman and 3.7% for doorman).

Greenwich Village—All one- and two-bedroom rents increased, by as much as 8.1% for non-doorman two-bedrooms, 4.9% for doorman two-bedrooms and 4.6% for non-doorman one-bedrooms.

East Village—East Village one- and two-bedroom prices in both service categories increased.

SoHo—All categories of doorman rents and non-doorman prices in the one- and two-bedroom categories went up this month (by as much as 6.7% and 7.6% for doorman one- and two-bedrooms).

Lower East Side—Average LES doorman one- and two-bedroom prices climbed 7.2% and 7.6%, respectively. Non-doorman two-bedroom prices also rose by 4.4%.

Financial District—Doorman studios and one-bedroom rents increased by 4.9% and 4%, respectively.

Battery Park City—All doorman rents trended upward, by as much as 4.9% for two-bedroom units.

Here is a MUST read by Pimco's Mohamed El-Erian

http://www.ft.com/cms/s/0/0ea6d2e8-120d-11dd-9b49-0000779fd2ac.html

This slowdown will be very different, as it is consumer led in the face of the following:

a) tightening credit
b) falling home prices
c) inflation

The very vehicle that allowed us to fuel growth for so long, credit, is drastically changed. Right now, we averted a crisis and everyone thinks things are hunky dory (spelling?). This will not be a V shaped slowdown, and rather it will take time to see what some of us have been discussing for the past 8-10 months. Its a very different world right now than it was only 6-8 years ago.

Here is some food for thought. The guys that bet correctly on subprime mbs, and shorted these products, took on the position's in 2005 & 2006 mainly. They had to wait, even in the face of the slowdown starting nationally in 2005-2006, until mid 2007 for their bets to finally pay off, much later than they originally thought. Anyone in this sector or involved with a hedge fund or firm that shorted subprime, will tell you that this timeline is accurate.

Right now, its similar when discussing the real economy. Its an election year and we had tons of stimulus. The general gauge of the economy, stocks, are of course trading these dynamics. However, we still dont know the extend of the slowdown with the consumer being tapped out. 2001's recession was business driven, and was AFTER and insane # of jobs were created for Y2K and dot com boom. Of course the downside of employment AFTER that period will be much sharper. Use caution not to compare this time around to that one. We will not see the extent of job losses or the sharpness that we saw 7 years ago. We will likely see a slow churn covering many quarters instead.

Re: GV, I think the rent picture is mixed just like sales figures. I recently looked extensively. My criteria: one-bedroom; pet-friendly; very good to excellent condition; no pullman kitchen; space for dining table and two desks. Preference: pre-war, bright, views, doorman. How I looked: direct via agencies, via streeteasy, by simply walking up to doormen and asking about availability. What I found: co-op rentals with 1-2 year limits in occupancy and compromised space/views/condition were sitting around and required 2-3 price drops before renting if they rented at all over the weeks I looked. Condos were similarly sitting so long as owners were asking nutty prices calculated to cover their monthly expenses I imagine; only those which drop their prices--sometimes by 30%--got signed leases. At the upper end, in top-drawer Gold Coast rental buildings, I found some availability by asking around, but even these best units had their prices cut a few hundred dollars during the brief time I was looking. This is all obviously anecdotal, but the real challenge was finding an acceptable apartment--a LOT of total junk out there to rent, just as there is in the sales market. Unbelievable what co-op/condo owners think their units are worth! Just because it costs $6800 to cover the montly costs doesn't mean a 1-bdrm that needs more closets, has a miniscule kitchen and odd view, in mediocre condition will rent for that much--especially when you consider a 2-month broker's fee and limit on 1-2 year occupancy limit on many!

"steve gets angry when his doom and gloom theory starts to fall apart."

No juiceman, I'm not at all angry. What you published is just what I said, and what I've always said.

But anybody who thinks that there are 80,000 units under construction in the 35.58 square miles that comprise the city of Miami proper is crazy.

kylewest is right: "Just because it costs $6800 to cover the montly costs doesn't mean a 1-bdrm that needs more closets, has a miniscule kitchen and odd view, in mediocre condition will rent for that much--especially when you consider a 2-month broker's fee and limit on 1-2 year occupancy limit on many!"

I'm still waiting on those figures, JuiceMan.