Manhattan Prices Will Fall Because...

Home prices do adjust to all available information.

Alpine, how is your home sale going?

Alpine! we agree on most of these topics. Much of it is fear mongering, I feel? Why is everyone so eager to see everything go to hell? Home prices are only adjusting to the fear factor - once confidence is restored I think all should be ok? Obviously fear = less spending = less jobs = firing and thus the cycle perpetuates. Its pretty bad out there now, obviously. But how do we know where the true prices should be? Where the true employment rate should be, etc? We will see only over time - no one can predict this now.

1) Diminished income/employment
2) Diminished wealth
3) Tighter credit
4) Diminished expectations (aka fear, pessimism, agita, weltschmertz, whatever)
5) Rising supply due to all of the above, which contributes to a vicious circle.

81 has the list about right in my mind. I continue to read comments about "fear mongering", I don't sense that at all. It seems like a rational response to the current evidence that is readily available in the marketplace. The market seems to be searching for equilibrium between buyers and sellers, but this imbalance appears to need more time to run its course. HOWEVER, for the bull camp, I have received some, modest positive news. I have in the past reported of 3 current renters with cash in hand waiting to purchase. Now I can add to that 2 suburbanites actively looking for pied-a-terres. Additionally, a guy I know who represents European buyers, commented that the last 12 months have been the worst stretch of his 22 year career. But he now has several buyers looking to cherry pick this summer. Still not a bottom, but some "better" news. Feel any better Alpine, SteveF.

Let's just focus on one and two. Fewer jobs. Lower salaries. Smaller nest eggs. How exactly are real estate prices supposed to respond to that? These first three are not psychological factors. They are financial limitations. No matter how confident you are, if you are broke, unemployed, and have no access to credit you are not buying an apartment.

"Fewer jobs. Lower salaries. Smaller nest eggs. How exactly are real estate prices supposed to respond to that?"

Let us not forget where we came from in addition to those two! This market has seen 100% - 300% gains, and some higher, over the past 7-10 years. Where we came from plays a big role too.

UD, exactly. Calculated Risk has a great chart today on home purchase levels over the past 50 or so years. Take a look. This isn't specific to Manhattan, it's nationwide, but the upward trajectory of the purchase figures from 1995-2006 is mind-blowing.

I loved those charts Jeff put up on UD, by the way. I think instead of nitpicking over the annual inceases, your point that the gains frequently were over 300% speaks quite loudly. People keep saying the run up in prices wasn't as extreme here as elsewhere, but I simply don't think that's true generally speaking.

UD, what do you think was the peak price/sq foot in manhattan? And where do you think they settle at the bottom?

Urbandigs: I enjoyed Jeff Bernstein's article on February 3rd showing the increase in NYC housing prices using stable neighborhoods. Obviously they are ahead of inflation. Since there has been so much wealth creation worldwide in that period, it makes sense that the money would come to Manhattan to be invested.(Of course we are now seeing it given back). Is there any source of data showing the global increase in wealth that can be correlated to the date in the article? I would be interested to see if that increase is far in excess of inflation and can be used to explain Manhattan's outsized gains. This may also be instructive in estimating how far the correction will go.

Matt, I think more to the point is the fact that the majority of the wealth creation over the last 10 years went to the very wealthy in this country, and a disproportionaly large percentage of the wealthy live in NYC. I'm not saying that foreign money didn't play a part, but I think the much larger causative factor was that wealth was credit driven, thus financial, thus a lot of the rewards were paid out here.

My point exactly. I don't care about Florida.

Got it, misread the direction of your post.

So let me get this straight - the "Buy now or be priced out forever" fear-mongering on the upside based on rampant speculation encouraging people to take on crushing debt burdens was OK? But fear-mongering on the downside based on economic fundamentals encouraging conservatism from buyers is not OK? Do I have that right?

billshiers, i particularly liked the industry-wide practice of telling people that they could afford mortgages of 4 or more times income. stupid little people, not understanding that the powers that be were lying to them and really didn't care whether or not they could afford their homes in the slightest.

have to run, will try to comment later today or tomorrow

"Is it just meo, or are certain posters regularly trying to justify why prices wil fall in Mnahattan because of a current event"

What's this about "will" fall? It has already fallen. Past tense.

> Because home values are not like sotcks. They do not react to every single event.

Not immediately, because its not a liquid market. But home values definitely did respond to Lehman. And add the things up, tons of effect... and the worse part is, because the immediate shock is less, these things hang around MUCH longer. Which is why RE markets take years to bottom.

So, in a sense, that just makes it worse for folks who want prices to recover.

"So let me get this straight - the "Buy now or be priced out forever" fear-mongering on the upside based on rampant speculation encouraging people to take on crushing debt burdens was OK? But fear-mongering on the downside based on economic fundamentals encouraging conservatism from buyers is not OK? Do I have that right?"

Yes, denial is a hypocrite...

To buy stuff you need money.
To buy expensive stuff you need money and sometimes credit.
Some people have money but, fewer than before.
Some have stellar credit but, way fewer than before.
We are the few, the proud, the buyers. We got together recently...in a very tiny room.
The sellers met recently. It was an overflow crowd on the Great Lawn.
Oh Supply and demand how you confound me.
It goes 3 ways...up, down, sideways.
Today's forcast: Down

Falcogold1. That was good. Very funny and simplistic but right on. The prices have to fall, and Falco's reasons are only some of them. Rememeber, there is a real value to real estate, and that is the rental income that it generates. It is called a cap rate. Over the last several years investors both foreign and american were accepting a smaller cap rate. Anyone remember the sale of Rock Center to the Japanese in the 80's. No American would pay nearly the price because the rental cap rate was about 3%. Interestingly a 3% cap rate was standard in Japan at the time. NYC cap rates then for trophy properties were about 6-7%. And you know what happened? The Japanese economy tanked, they could not support the negative cash flow, and they lost it. Cap rates in NYC got down to about 5% from almost 8 or even 9 15 years ago for residential RE. To compare this to stocks, this is the PE ratio. You can either be a value investor(only buying stocks where the PE is low), or a growth investor who will accept a smaller PE because you feel that the earnings will go up exponentially and not slowly, thereby that high PE will be compressed next year because the earnings will be higher. If you are confident that the earnings will go up, you will think nothing of a higher PE valuation and by definition a higher price. Well remember dot coms, and the insane PE ratios, and everyone said that this time "it's different." Well eventually everyone realized that earnings really mattered and PE ratios were compressed and the prices came down. One reason why the stock market was high a while back was because of an expansion of the PE ratios when the historical mean is somewhere between 13 and 16. Well, lets get back to real estate. There is no particular 'value' to a penthouse on Park and 75th. There the value is simply what someone will pay. Let's get to basic or 'mild' luxury housing. Well if you can rent a two bedroom, doorman for $6000 q month, why pay $12000? Well maybe you will pay $12000 if you think that the value next year will be 10% higher and so on, and so on. You are buying the 'growth' stock. For the foreseeable future there will be no growth. No, NYC will not die...ther will still be people here tomorrow, and yes they will live in apts.
There was also a commentary a few years back from one writer in the NYT RE section. He may have quoted someone or maybe it was his interpretation. He said that the median or avg price(I don't rememebr) of a NYC apt from what I think was 2003 to 2004 went up almost the exact same amount as to what payments dropped to because of an interest rate drop. People were paying more for the apt but there payments were exactly the same! With that increase in price there was subsequently the fear of 'better get in now or else be priced out forever.' In addition, that price percent increase is compared to other investments and investors(foreign and american) and homeowners were saying 'well its better than the stock market.'
This is just my two cents. Make comments, and blast holes in my basic(very basic) theories.

just to clarify, after I wrote $12000, that is supposed to mean principal, interest, maintenance and re taxes.

The U.S. grand daddy real estate market is the metropolitan New York area which has been relatively immune to decline. The excuses for why New York real estate is special equates to the number of residents in the city. Unfortunately the quantity isn't equitable to quality. Because people want to believe they are special they parrot messages they have heard to that effect. Such ethnocentric or industry centric myopia is the nectar for those wonderful bubbles that pop up every 10-20 years.

One more thing to add to 81's list:
-Interest rates that really can't get any lower

If (more like when) inflation takes hold and if (not so sure on the when for this one) the Fed increases rates, you might as well just take the RE market out back and shoot it. So much of this increase was propagated by very low interest rates. Well, the Fed's just above zero now, so I don't forsee mortgage rates going any lower. There's only one way for them to go; especially if all the excess money that's been injected into the system comes home to roost in the form of rampant inflation.

If rates go up, you can wave bye bye to these prices being "affordable." Interest rates that go from 5% to 10% will be like Old Yeller and rabies.

To me, that's the 800 pounder in the room that doesn't seem to be being too addressed.

"it is different this time"

interest rates were low during the boom, and they weren't much higher during the deflation of the bubble. With low rates now, people still are not buying, not because rates need to go lower, but because prices are still too high and people have either lost jobs or income/savings or are afraid they soon might. Low interest rates aren't going to save this economy or re-inflate the housing bubble - nor should we want them too, unless we want a repeat of the crisis in another 4 years.

right, low rates won't fix anything...

but high rates will kill things...