CNN/Fortune - What the Big Apple housing bust will do to the economy

I would like more clarification of how a 'drop around 18%' would bring us to an equilibrium of a purchase price equivalent of '13.5' times rent, unless you assume that prices have already dropped significantly since 2006 highs. For the purpose of easy math, let's say you are looking at an apartment that would sell for $1,000,000 at 13.5x rent, meaning that the rental equivalent is $6,173 per month (I rounded up a couple of cents), or $74,074 per month. At 19x, that apartment would sell for $1,407,407 which is approximately 41% higher. To the contrary, for the 18% number to get down to 13.x5 rent the current price of the apartment would be $1,219,512, or about 16.5x rent. This means that this article implies that NYC prices have already declined by over 13% from 2006 highs in order for the math to work. Maybe I'm missing something?

Interesting read, I agree with the overall picture presented. To this I would add that European economied are getting in trouble and Euro expected to weaken, so the European buying base cannot be counted on.

Thing is, if rents are now declining, doesn't that mean prices have to drop even more to get to the equilibrium point?

Rents are not declining.

yes, rents are declining...

Rents are UP for doorman buildings, down for non-doorman buildings. You have to remember that there are, in essence, 2 rental markets in Manhattan: Luxury and non-luxury that behave quite differently.

The boom was driven by people with a high tolerance for risk (put their life savings down as a 10% deposit, take out an ARM and hope for a re-fi, etc...). Even the medium risk people bought. If a bust happens, which appears likely, the only buyers with the ability to actually buy will the low tolerance for risk people who have been waiting, waiting, waiting. I expect the low risk buyers to tell the high risk sellers "you got yourself into this mess eyes wide open. I'm not bailing you out. But I will take the apartment at a price of (*) which would be lower than my monthly rent with all the costs and benefits factord in. Take it or leave it"

This would be the equilibrium for the market when properties would be sold at a healthy rate and the inventory would be cleared. Either that or the economy has a startling reversal, credit restrictions are eased and the high risk buyers are allowed back in the pool...

The observer article posted on the other thread notes that rents for all types - doorman, non-doorman, studios, 1 bedroom, 2 bedroom - are down since last year. So there might be two markets, but it looks like both are not doing well.

Check out the 26-page July, 2008 Manhattan Rental Market Report provided as a pdf at:

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

An excellent report covering different types of properties and neighborhoods.

Bottom line: On balance rental prices have been flat to lower over the past 12 months.

Enjoy.

Looks like it confirms the observer decline... for manhattan overall, every single line (doorman/no studio/1 bedroom/2 bedroom)seems to be lower this august than last... though neighborhood by neighborhood is all over the place...

ready to apologize yet, alpine?

jasper - good point. perhaps they meant 18% real decline - i.e. nominal no. including inflation would be higher. maybe someone with more patience with doing no.s can verify...

topper - thanks for the link. that's a useful report.

here are my recent experiences with rents and apartments for sale and currencies fwiw -

- I rent in a luxury doorman building near Grand Central and my landlord offered to reduce my rent of his own volition. I'd like to believe it's because I am a good person but somehow I doubt my landlord cares.

- On sales: No surprises here from what the rest are reporting. Fewer apartments on market. Recent closings are taking their time showing up on acris. Broker speak is becoming "make an offer, seller is open". Last year, the brokers acted as if they would be doing me a favour by agreeing to take my money.

for me the key in that article is that only 11% residents can afford nyc -- so the qs. becomes how long can foreigners / the ultra-rich hold up the market. Long enough for the economy to recover ? I wouldn't bank on it (no pun intended).

A smart friend who was recently laid off from a high profile job at a Wall Street bank had some interesting thoughts on foreign buyers propping up the New York market:

* foreign buyers will only be interested in specific addresses: Madison, Fifth, CPW, etc. That part of the market may indeed feel some support from foreign buyers, but then again, that part of the market, which is extremely well established, might be the least affected by the downturn in the real estate cycle. Foreign buyers will *not* be interested in Chelsea or Brooklyn or other areas that saw big runups in price over the past few years.

* foreign buyers are well-off people with financial savvy who expect to make money when they buy real estate. They may not find the idea of buying into a down market very attractive, and may put their money elsewhere.

* The execution cost of getting into a coop or condo can be signficant -- closing, due diligence, broker's fees, etc. For luxury apartments it could add up to a significant sum, and, that, combined with the down market cycle could create a deterrent to some buyers.

The single most important factor, that will cause housing everywhere to decline more, will be the tightening of credit. Getting a mortgage, is getting tougher and tougher everyday, and it will continue to get worse. If these standards were practiced over the last 5 years, there is no way, we would have seen such price appreciations. The elimination of these buyers will cause housing to fall much more. NYC is just beginning this process.

Just ask yourself. There are thousands and thousands, of new construction condos, still waiting to be released. The average price being well over $1M. The "NEW" buyer will have to come up with $200-300,000 down payment and get approved for the remaining mortgage. This will require, the buyer, to show the ability to pay the monthly mortgage and CC's. The salary needed for approval, will be somewhere in the ballpark of $250,000. Now I know NYC has a lot of money, but you have got to be out of your mind, to think that there are thousands and thousands, of qualified buyers waiting on the side lines. And this is just Manhattan. Now figure in the outer boroughs and you begin to see the problem.

Use LIC as the example. There are hundreds of units asking $800,000+, with hundreds more poised to hit the market. Who are going to buy these units? The only reason, they ever sold were, lack of standards.

OH, I almost forgot. There is a difference a between sold and a contract signed. The reason I bring this up is that, there are thousands of signed contracts that are assumed to be sold units. However, those buyers are going to have to seek mortgage's, in the future and will face a much more difficult time then they ever imagined. There are going to be, a lot of people, who are going to be out of luck. This will further increase inventories two fold, because they are actually being counted, as sold units for inventory purposes and then will go back on the market. It's like a double hit to the inventory and sales number.

Of course, I could be totally wrong and the credit crisis could be over.

dco - your arguments are all plausible. essentially you are saying that the supply - eligible demand gap will widen.

have you thought of crunching the no.s on them by making some realistic assumptions - e.g. if mortgages were to fall vs last year by, say, even half the national average. if the new construction in the pipeline will hit the market at the same rate as the last 3-yr average etc ? would be interesting.

"Daniel Alpert, a managing director at investment bank Westwood Capital in New York, wrote in a report earlier this month that the average price-to-rent ratio in New York between 1988 and 2000 was around 12. At the 2006 regional house-price peak, however, New York's ratio was 19."

What have I been saying all along? petrfitz? LICC? Care to comment?

In Manhattan, the ratio is closer to 24x.

i was just informed that the nyc real estate bull market is expected to level off in the near future. since ask prices are not negotiable, it was advised to offer 5% above ask just to be considered. any thoughts?

perhaps crazy eddie was right, prices are insane

"it was advised to offer 5% above ask just to be considered. any thoughts?"

Absolutely. Go for it!

stevejhx- although I actually have quite the hangover, it is my exact sentiments. perhaps after my morning scotch, i may increase it to 7.5%.

steve -- just curious -- is there any analysis out there which is purely manhattan -- everything i see is "ny state" or "ny/nj" or "only single family home" etc -- is there any data on "manhattan" that you know of ?

NewYorkNewYork,

Click on the Data section of the Miller Samuel website for a wealth of statistics on Manhattan (and by neighborhood) real estate prices. By condo, coop. By square foot. By rooms. Pretty awesome data base.

http://www.millersamuel.com/data/

Apologize? Apologize for what? For saying that rents are up?

Where Prices Increased:

Upper West Side— Non-doorman one-bedrooms (1.9%), non-doorman two-bedrooms (0.6%), doorman two-bedrooms (1.3%)

Upper East Side— Doorman studios (0.3%), non-doorman one-bedrooms (1.6%), doorman one-bedrooms (0.3%), non-doorman two-bedrooms (0.1%), doorman two-bedrooms (0.2%)

Midtown West— Non-doorman studios (1.1%), non-doorman two-bedrooms (3.9%), doorman two-bedrooms (1.3%)

Midtown East— Non-doorman studios (1%), non-doorman one-bedrooms (2.8%)

Murray Hill— Non-doorman studios (1.1%), doorman studios (1.9%), non-doorman one-bedrooms (0.9%), doorman two-bedrooms (4.7%)

Chelsea— Non-doorman one-bedrooms (6.2%), doorman one-bedrooms (1.9%), doorman two-bedrooms (3%)

Gramercy Park— Doorman studios (1.2%)

Greenwich Village— Doorman studios (1.7%), doorman one-bedrooms (1.2%), non-doorman two-bedrooms (1.6%)

East Village— Non-doorman studios (6.5%), non-doorman one-bedrooms (0.2%)

SoHo— Non-doorman one-bedrooms (0.7%)

Lower East Side— Non-doorman studios (3.8%), non-doorman two-bedrooms (1%)

TriBeCa— Non-doorman one-bedrooms (1.2%), doorman one-bedrooms (0.9%), doorman two-bedrooms (2.1%)

Financial District— Non-doorman studios (1.3%), non-doorman one-bedrooms (1.1%), non-doorman two-bedrooms (1%)

Battery Park City— Doorman two-bedrooms (1.6%)

"it was advised to offer 5% above ask just to be considered. any thoughts?"

Is this a joke?

"is there any analysis out there which is purely manhattan -- everything i see is "ny state" or "ny/nj" or "only single family home" etc -- is there any data on "manhattan""

No. Until 2 years ago, co-op sales were not recorded, making Manhattan approximately the most opaque real-estate market in the world.

Just like the realtors like it!

Most rent increases last year did not exceed the increases for regulated rents, and apparently didn't even beat inflatoin.

once that offer is made the sales info is released. this proves to the seller that you are a serious buyer. after being enlightened with this requirement, i proceeded to finish my bottle of scotch. it reminded me of the days at "Studio 54" in order to gain entrance to this fabulous establishment you had to be chosen and worthy. In response to your inquiry, im not joking. you just cant make this stuff up.

i was also informed that although the case-shiller index reported a 15.9% annual decline. it was a typo it should read a 15.9% increase. so the 5% is quite the bargain

""is there any analysis out there which is purely manhattan -- everything i see is "ny state" or "ny/nj" or "only single family home" etc -- is there any data on "manhattan""

YES! The Miller Samuel reports, which are skewed by the high end and lagging.

stevejhx- do you reside in manhattan

How is Miller Samuel "skewed by the high end," Steve?

When I look at the Data section on their website and look at price per square foot of "studios," that wouldn't seem to be a particularly "high end" view of the world.

Am I missing something?

First off, I am alpine292, not Steve.

The Miller Samuel quarterly reports that track the average and median prices are skewed by the high end and are not worth the paper they are written on.

Steve rents in Manhattan and owns a house on Fire Island.

"When I look at the Data section on their website and look at price per square foot of "studios," that wouldn't seem to be a particularly "high end" view of the world"

Topper, "high-end" generally refers to luxury and high PSF, not big or small apartments... A studio in 15 CPW is certainly higher end than a 3 bedroom on W99. And, the new high end condos have definitely swayed the median numbers,especially as there have been many closings on them, and the low end has seen a major drop in sales. Its just match...