UD Crystal Ball- suggests RE mkt correction over 4Q 2009- 1Q 2010

Did you read it? I'm not sure I conur, but his point on the velocity of the decline is a powerful one.

the main point was that Manhattan is playing catch up to rest of country at lightning speed. All it takes is another 3-6 months of illiquidity similar to the 4th quarter of 2008, and where deals occur (especially for those that MUST sell) will surprise many. Im putting bids in for clients, but sellers are for the most part not ready to accept that their property is down 25%. What happens if they dont sell by JUNE? Do we really think that June, July, Aug, Sept etc.. up until end of year will be MORE active than JAN - APRIL? No way.

By this time next year, I will not be surprised if bulk of the correction is complete. But I see a muddled L shape market for years, with slow sales volume. Thats the problem. For sellers that MUST sell, what do you do? I dont think they reached that breaking point yet, and unless bids all of a sudden come in everywhere, where will they sell at?

by this time next year, I think most of the damage will be done. That does not mean a V recovery though! Any broker that claims buyers are trying to time the market, or calling out buyers for being vultures, dont get it. I think the bottom will last a while. Just my opinion for what its worth.

We have not seen the household delever yet! Thats coming.

So, UD is calling for continued MAJOR declines, only a little faster than others suggest.

Exactly what part of this doesn't completely destroy your "now is the time" to buy claims... now, and the ones from a year ago???

SteveF, you are a funny, funny man.

This is basically Woody Allenesque. You try and quote some guy, and the the guy himself comes on all tell you you are full of crap.

You are a funny one...

The bottom is Q1 2012.

SteveF - market is down about 20-35% or so, and I am even hearing some high end deals happening at around down 40% from peak (contracts signed early-late 2007); anecdotal sure. but clearly we all see it and you cant deny it at this point.

If by end of Q1 2010, the market proves to be generally down 40% or so from peak, and the bottom ultimately turns out to be down 50% from peak (im just talking here), then the statement I made regarding the speed of this adjustment and the BULK of the correction being complete by this time next year is accurate. Nowhere is a call for a bottom, and clearly I stated that a muddled L shape picture is what I see for years after.

UD, curious to hear how you feel about bankers making more money again. I think 2010 bonuses won't be great but better than 09, and 2011 bonuses will be good again. You don't see apt. values rising again?

Looking at the experience of San Francisco and environs, where the correction is clearly further along than NYC, may be a pretty good road map of what to expect in NYC.

Here are some interesting numbers (Case-Shiller) for SF that illustrates the bifurcation (higher vs. lower price points):

"According to the Index, single-family home values for the bottom third of the market in the San Francisco MSA have retreated to August 2000 levels having fallen 58% from a peak in August 2006, the middle third has returned to May 2002 levels having fallen 39% from a peak in May 2006, and the top third has fallen to February 2004 levels having fallen 25% from a peak in August 2007."

What is interesting is that the bottom third of the market is at 2000 pricing having peaked first in 8/06. The top third is only at 2004 levels having peaked a year later in 8/07. Upper end peaked later and is correcting later... but it will.

Looks like 2000 or earlier pricing is in the cards for the market in SF and probably the country as a whole. Clearly, SF (the city) falls into the top third and so has seen correction, but not as much. It is all not terribly surprising, the more expensive houses are bought by people with more resources to weather the storm, but with decline in stock portfolios and job losses, the correction at the upper end is only a matter of time.

I do not know if the same data is available for the NYC market.

UD, i agree that the pace is rather breathtaking. My only question is whether or not the highly-paid employees in the financial world (and to a slightly lesser extent, other professions such as law) are going to see compensation cuts. Many apartments were purchased, both coop and condo, where there would be no way for the purchaser to continue meeting obligations based on salary alone.

If the employment situation becomes worse, i believe you'll see some highly leveraged people unable to pay their monthly bills. This year's bonuses weren't that bad. Add lower bonuses to unemployment severance running out and 2Q next year could be colorful. Also, I've posted this elsewhere, but the legal industry is currently in a fairly bad world of pain. Many attorneys, not as well compensated as the financial types, really did stretch to purchase. Impossible to know with any accuracy, but from what I hear, if it doesn't turn around soon i think we may have a second (or continuing) wave down.

sure there may be some bonuses, but what will they be spent on? Will bids come in for all the inventory out there? What about those that bought expensive properties in 2005-2006-2007-2008 with bonuses but now see their property value declining and job security not as strong? We cant forget the effect it has when someone's home is now lower than where they bought it OR if whatever equity is left and viewed as nest egg, wants to be salvaged.

prices rose a heck of a lot (150-200% in last 10 years?) because of a combination of forces that are no longer in place, and I dont see those forces coming back anytime soon. you? We are 1 year into our adjustment, with bulk occuring in past 6-7 months when Lehman failed and bids disappeared. What if bids stay away longer? I certainly dont see much action out there and I am putting in bids for clients.

We are yet to see who is going to enter this market and be willing to pay a premium on top of past sales. For now, I see sellers unwilling to accept that prices may be down 20-25%. What if prices fall more? What will they do if they must sell?

People correlate housing to X or Y too closely and tend not to look at the big picture. For example, markets plunged 60%, and then they rally 20-25% (say from Dow 6500 to Dow 8,000 or so), and use that as a reason that negative wealth effect no longer applies and Manhattan prices should turn around and start rising again because stocks rallied! Umm, no. What about all those that got destroyed on the way down, sold because they couldnt take it anymore, lost all their stock options wealth tied to banks/insurance companies, etc.. The destruction of wealth is enormous. People tend to dismiss what happened, and look for any light that will turn around an entire housing market. Doesnt work that way. Stocks may be up 20% from latest bottom, which happened to be the 12th, 13th, or 14th bottom call by all the experts. How are they so sure this is it?

NYC is neck deep in its jobs market recession, and I really think we have many more jobs that will be lost than gained over the next year or two. We have budget issues, rising taxes, taxes on wealthy, taxes on bonuses, service cuts, etc.. Bulls will just ignore this and any unintended consequences that may come from policy actions. For every banker that gets their bonus or keeps their job, what about those that lost theirs or realized they were living way above their means for years and cant meet debt service anymore? Its tough out there and people are hurtin, trust me. They are calling me for advice and yet they are working with another agent. Weird huh?

yes we will see velocity of deterioration slow because of the speed on the way down that got us here. That will be interpreted as recovery, and I dont agree. The side effects of this crisis will last years, and the only cure (rising prices) for housing is lower prices. But on the way down there will be deals at every price. Thats the way it works. Some can and will buy now, and be very happy. Others will wait. I see buyers as being picky, patient, nervous, cautious, and generally expecting a deal. Not the recipe for a quick turnaround and rising prices.

I dont want this to happen, its just how I view it. Prices went nuts because the system was juiced, and the party is over. Period. Rising prices will come again, but it will be after this process plays out, and I just view the process as a longer term thing than most like to view it as. Thats all. I think the 2nd and 3rd leg of the adjustment will be due to unintended consequences, and the normal things that happen in downturns like job losses, property auctions, defaults on big projects, empty retail spaces, perception of quality of life changes, higher taxes to fill void of loss of tax collections from slow sales market/lower incomes/struggling businesses/dismantled wall street, etc..

It is what it is, and we all have to deal with it. I hope Im wrong and everything turns out way better with no consequences to all these actions. I really do.

About - I think we are on same page here. We saw what 18 months of financial/HF deleveraging looks like. We are yet to see what 18 months of household deleveraging looks like!

ud, I don't agree that people will want to get out of their property as soon as values go down. I think you have a little bit of a trader mentality but most bankers I know that own Park Ave and similar real estate view the apt. as a place where they raise their kids and don't constantly assess the value. For example, a bunch of my friends haven't even noticed yet that their apt is worth a lot less than a year ago, it's simply not something they focus on. When you ask them, they say 'well, my apt is probably down 5% or so" and then move on to another topic. This site is very focused on real estate as an investment but IRL most people don't follow that market as closely as their stock portfolio.

i'm not saying they'll want to get out, i'm saying a number of them will have to. it takes very little in the way of distress to cause big change here.

aboutready, I was responsing to ud's comment not yours. I agree with your statement that there will be people who can't sustain their lifestyle.

i wasn't trying to answer for UD. sorry for the confusion, just typing without thinking again.

well I didnt say ALL will want to get out because of that, I said we can't forget about the 'EFFECT' it has on people when their biggest asset in their portfolio (their home) starts to decline in value.

ueside - I don't think that bonuses will be good for 2010, as there has been too much ground to make up in 2009 (and not enough time). I do think, however, that 2011 bonuses will be good/better.

but yes, I do have a trader mentality and many I talk to either see that as a fault (which is fine) or just dont agree with viewing the world as a trade. Its just who I am, for better and worse.

also, ueside, if you were close to retirement and you'd held a property for quite some time what would you be thinking right now?

ud, that might be true for the middle part of the market but for over $4mm properties, it typically is not the biggest asset in someone's portfolio.

waverly, all I said is that I think 2010 will be better than 2008. I think we are say9ing the same thing.

aboutready, might be true for people close to retirement. But then again, they probably have no mortgage and their maintenance is less than rent they would pay. On Park Ave I see all these ancient people in and out of buildings, often with nurses by their side. They seem to want to die in their apts rather than going to Florida.

"they probably have no mortgage" - oooh, be careful there! MANY MANY homeowners tapped into huge amounts of equity over the course of the credit boom. Not the asset price is falling, but the debts remain. I would be very cautious to assume most did NOT tap into the home ATM over the course of 2002-2007 or so.

ueside, i live in the rental equivalent, peter cooper village, where the saying goes "only the newly wed and the nearly dead." (i actually love the old birds around here, so that was just a joke).

ueside - Yeah, could be, especially since for most the 2009 bonuses were a pat on the back and an "'atta boy!" and the rest got a pink slip.

I said 50% down from the peak over a year ago - nobody listened, everybody laughed. We're talking prime West Village in the $700-$800 psf region, and we still have a long way to go before we get there.

The maintenance in the apartment where I used to live is $1300 per month. At 5% interest the apartment would have to cost $500,000 for the monthlies to equal $4,000, which is what it would rent for today. In the future it will rent for closer to $3,000, I think. What does that say where prices are going?

ud, well, I should qualify my statement: I was talking about the ancient people in coops. Often HELOCs are not allowed.

waverly, agree with that: My bonus truly stunk!!

The apartment, BTW, is a 2-br 1-ba at 350 Bleecker. Peak sale price was over $1.3 million; recent sale price about $1.1 million. Cost in 1998: $220,000.

ueside, i posted something about this earlier. i have a friend who during the refi process (combining and renovating two apartments) in a coop building was offered a huge HELOC from Chase. i don't think her coop building ever even knew of it.

"This site is very focused on real estate as an investment but IRL most people don't follow that market as closely as their stock portfolio"

IRL there normally isn't a bubble in RE prices across the nation. In fact, I don't believe there has been one what we saw this decade since the 1920s. If we didn't have a bubble, I wouldn't really view RE as an investment either - but we did have - a HUGE one - thus I am forced to view it from that perspective. Maybe if you are super wealthy you don't care if you lose a couple million of your net worth - but for "normal" people, putting 20% or more down on a $1MM property is a pretty large decision, not to be taken lightly.

From Barron's in June 2005 - but keep thinking the economic realities that apply to the rest of the country will have no effect on Manhattan:

The Bubble's New Home
By JONATHAN R. LAING

Despite what Alan Greenspan says, there's a huge housing bubble, argues Yale economist Robert Shiller, that gradually could push real prices down 50% after it bursts. Why he's worth listening to.

YALE ECONOMIST ROBERT SHILLER delivers his forecast for U.S. housing with a scholarly diffidence that only slightly mutes his stark message: The market is in the throes of a bubble of unprecedented proportions that probably will end ugly.

Such unsettling talk is cheap, of course, especially from a tenured academic, and many sources, including Barron's, have wrongly predicted housing's downfall several times in the past few years. But the Ivy League professor's forecasts of coming trouble have been right before. His best seller Irrational Exuberance, predicting a bear market in U.S. stocks, hit the bookstores in March 2000, less than a week before the Nasdaq began a dizzying descent from above 5000 that would destroy 75% of its value in a little over 2½ years.

In the real-estate market, Shiller contends, a price slide could begin at any time with the crescendo of what he describes simply as "talk" -- a word that he uses to cover everything from the recent Time magazine cover story on the vertiginous rise in home prices and the popularity of cable-television shows about rehabilitating and investing in real estate to the breathless newspaper stories of Miami condos being "flipped" for profit a half-dozen times before construction even begins.

The No. 1 topic of cocktail-party chatter these days, after all, is that nothing beats a home as an investment because prices just keep rising while the owner gets to live comfortably at the old homestead until deciding to cash out.

"THE HOME-PRICE BUBBLE feels like the stock-market mania in the fall of 1999, just before the stock bubble burst in early 2000, with all the hype, herd investing and absolute confidence in the inevitability of continuing price appreciation," Shiller observes in the calm of his capacious office in a converted Robber Baron mansion on New Haven's stately Hillhouse Avenue. "My blood ran slightly cold at a cocktail party the other night when a recent Yale Medical School graduate told me that she was buying a condo to live in Boston during her year-long internship, so that she could flip it for a profit next year. Tulipmania reigns."

Shiller sees no rational reason for the sharp rise in housing prices over the past few years in many major markets.
Shiller, like any economist of reputation, is somewhat coy about predicting how or when the housing bubble will deflate. With so much price momentum since the mania began in 1997 and with low mortgage rates still holding sway, the surge could persist for a while. Or it could end abruptly, as it did recently in the once-red-hot Sydney, Australia, residential market, where real (inflation-adjusted) prices rose 12.8% in 2003 before dropping 2.5% in 2004 and remaining wobbly ever since.

Housing busts, unlike bear markets on Wall Street, often start almost imperceptibly and unfold slowly. They're difficult to detect in their early phases, in part because accurate price data on comparable-home sales is hard to come by. Sure, you can look at tax records to calculate the prices fetched by two homes, each with four bedrooms and three baths and located in the same town. But determining precisely how their conditions, amenities and neighborhoods stack up isn't easy.

ADDING TO THE UNCERTAINTY: Homeowners often live in denial of market realities by listing their properties at unrealistic prices or simply taking their homes off the market to await better times.

Shiller worries that the market has become so overheated in many areas of the U.S. that any decline could pick up momentum in two to three years, when the adjustable-rate mortgages that have accounted for nearly half of all home loans in the second half of 2004 will begin to "reprice" at higher interest rates, potentially burying overly optimistic buyers sporting scant equity but hefty debt. Low-to-no-down-payment and interest-only mortgages would only add to the possible mayhem of involuntary sales if home prices were to sag, Shiller adds.

In Shiller's view, a real price decline of as much as 50% in U.S. home prices over the next decade isn't beyond the realm of possibility. Such a drop would be less catastrophic than it might seem at first blush. Like any economist, Shiller adjusts annual returns for inflation, which tends to amplify any downturn and mute upturns in nominal home prices. Thus he foresees only a 20% to 25% cumulative decline in nominal prices (which works out to about an average of 2% a year over the decade) with the loss of purchasing power from 3% annual inflation accounting for the remainder of the "real" decline. Still, that would be a crushing blow to anyone counting on rising home values to bail him out of any financial problems.

Such real declines aren't unprecedented. Los Angeles-area home prices fell over 40% in real terms between 1989 and 1997 before beginning a sharp ascent. That drop was largely attributed to job losses from the contraction of the aerospace and defense industries in Southern California in the late 'Eighties and the 'Nineties.

However, today's speculative real-estate bubble is so extreme that it wouldn't take an "exogenous" event like surging interest rates or a recession to prick it, warns Shiller. Prices could simply crash under their own weight.

Three months ago, Shiller released a heavily revised edition of Irrational Exuberance that includes a number of sections on the real-estate bubble and the trouble he foresees for housing.

The Yale economist has done much work over the years on the behavior and psychology of the residential real-estate market, including a number of annual surveys of current expectations of homeowners around the U.S.

In 1988, dissatisfied with the home-price data put out by both the National Association of Realtors and the federal government, he and Wellesley College economist Karl Case established a price index based on "repeat sales" (to filter out distortions from changing mixes of house sales or other problematic factors). The project led to the formation of a company called Case Shiller Weiss that later became part of Fiserv. The CSW survey captures reliable housing data from major markets throughout the U.S. that tends to closely track the best price data put out by the U.S. Office of Housing Enterprise Oversight.

Shiller's data show a housing bubble of extraordinary dimension.

The rise in real prices since 1997 has already dwarfed the surge after World War II, when long-pent-up demand for homes overwhelmed supply for a time. And it only seems to be gathering velocity, with each year's increase topping the previous one's. Though in 1997 real U.S. home prices went up 2.1%, by 2000 the rate of increase had accelerated to 5.8%. Last year it hit a torrid 11.2%, and Shiller believes it exceeded 15% in this year's first quarter. The housing-price chart has gone nearly vertical, in seeming defiance of the gravitational drag of inflation and more subdued growth in personal income and gross domestic product.

As a market behavioralist, Shiller takes a dim view of what he calls the glib fundamental explanations offered by the housing bulls to justify home prices' moonshot.

Perhaps the bull case is best summed up in a recently published book by David Lereah, chief economist of the National Association of Realtors. Its pithy title: Are You Missing the Real Estate Boom? Why Home Values and Other Real Estate Investments Will Climb Through the End of the Decade -- And How to Profit From Them. Shiller wonders whether this tome is housing's equivalent of 1999's Dow 36000, published just months before the stock market turned south.

Lereah asserts that the surge in home prices has far from run its course because of low inventories, modest mortgage rates that won't rise high enough or fast enough to end price expansion, the favorable demographics born by boomers and retirees, who buy second homes or downsize into opulent, smaller abodes, and strong demand from immigrants and echo boomers. Likewise, according to Lereah, technology has eased the cost and time needed to buy or sell properties. Automation of mortgage underwriting has helped immensely, as has the ability to do online research and to obtain innovative mortgage products. In addition, low-income assistance programs should continue to boost the level of U.S. home ownership. Finally, the shock of the 9/11 terrorist attacks shifted the flow of investment funds from stocks to real estate.

Shiller is skeptical of such arguments. He and a platoon of graduate students have culled housing data going back to 1890, without finding a particularly robust relationship between home prices and many of the fundamental factors cited by Lereah and other bulls.

Take population. It has expanded at a slow and steady pace since World War II, which hardly explains the latest pyrotechnics in home prices. Limitations on supply, even with the advent of more onerous zoning and land-use restrictions in some areas, doesn't explain the bubble. Prices have risen sharply even in cities that boast plenty of vacant land for development and that, in the past, have acted as demand safety-valves. And torrid condominium construction and conversion has relieved much of the supply pressures in glamour metro areas such as New York, Boston, Chicago and San Francisco.

In the past, home prices were somewhat tied to construction costs, but those days seemingly are gone. In fact, according to Shiller's data, inflation-adjusted construction costs largely have fallen since 1980.

Low mortgage rates are the most widely cited cause of housing bubbles, not only in the U.S. but in other developed countries, including the U.K., France, Spain and, formerly, Australia. Central banks, fearful of a weak global economy and the repercussions of stock-market busts, have inadvertently boosted housing prices by slashing interest rates, or so the thinking goes.

Shiller points out that central banks have cut rates many times in the past without sending prices into hyperspace.

The correlation between rates and housing prices isn't always clear. In fact, plenty of regional housing bubbles have occurred in the U.S. during periods of sky-high interest rates -- such as the 60% jump in real home prices in Los Angeles between 1975 and 1980. In addition, prices have jumped sharply in some areas just before rates stumbled. They soared in Boston in the 'Eighties (climbing 38% in 1985 alone) before going into a funk during much of the early 'Nineties, despite sharply sliding mortgage rates.

Finally Shiller contends that many of the innovations in home finance that Lereah and others laud may ultimately destroy the very housing bubble that they helped create.

Interest-only mortgages, ARMs and lax mortgage underwriting standards are putting many buyers into dwellings that they couldn't otherwise afford. That's one reason that affordability ratios of median home prices to median income in red-hot markets like San Francisco, San Diego, New York and Miami have soared to nose-bleed levels, despite cheap mortgage rates. "Prices better keep going up, or a lot of folks are going to be upside-down on their mortgages," Shiller warns, using car dealers' jargon for a motorist whose vehicle is worth less than he owes on his auto loan.

Frenzies like the housing bubble are more products of manic shifts in mass psychology than any rational response to favorable trends in market fundamentals such as rising personal income, according to Shiller. In essence, investors periodically succumb to greed and speculation fever, fired by vivid media and word-of-mouth testimony of can't-miss New Era investment opportunities. Price increases beget further gains, making investors' magical thinking seem plausible.

To Shiller, the housing bubble grew out of the same irrational exuberance that gave rise to the 1995-2000 stock mania. That would perhaps explain why most of the housing bubbles around the globe occurred in countries that also had stock bubbles. A recent study by the Bank of International Settlements of home prices in 13 industrialized countries indicated that peaks in home prices tend to trail stock-market peaks by two years or so.

Shiller theorizes that both U.S. bubbles were precipitated by such factors as increasing veneration of market capitalism, the growing respectability of speculation and conspicuous consumption, and the conviction that the Internet and other technologies augured a golden age of unparalleled prosperity.

Notes Shiller dryly: "Once stocks fell, real estate became the primary outlet for the speculative frenzy that the stock market had unleashed. Where else could plungers apply their newly acquired trading talents? The materialistic display of the big house also has become a salve to bruised egos of disappointed stock investors. These days, the only thing that comes close to real estate as a national obsession is poker."

According to Shiller, Uncle Sam played a role in the housing bubble well beyond a Fed monetary policy that generally has flooded the system with liquidity. Authorities in Australia and Great Britain issued a number of warnings of unsustainable conditions in their property markets, while U.S. officials have been mostly silent on the issue. Until a month ago, banking regulators had done little to rein in unsound mortgage lending practices. And only after a May 20 speech did Fed Chairman Alan Greenspan acknowledge that there might be some "froth" in the U.S. housing market, although he denied that a nationwide bubble exists.

'Fessing up to the existence of a problem only after it has exploded is old hat to government officials. The F.B.I.'s J. Edgar Hoover finally admitted to the existence of the Mafia late in life, after years of denying the existence of a national crime syndicate.

Greenspan is expected to step down early next year. It might be a propitious time for him to get out of Dodge. For if Shiller is right, running the Fed won't be much fun when the air goes out of the housing balloon.

Well as long as there is an original mortgage, you can do a simple REFI and cashout equity! Also, its easier than you think to get a HELOC on a coop, as aboutready states. I know a few coop owners that did it. Amazing what you can do when it comes down to a bank making a fee on a cashout product.

"Well as long as there is an original mortgage, you can do a simple REFI and cashout equity! "

UD, i was wondering whether it was common for lottery winners (very common to have a lottery in new developments uptown) to take equity out, given that they couldn't cash in the "gift" of the lottery before living there for 10 years. if it was common, that could end up being a big source of foreclosures. realtrytrack is showing tons of pre-foreclosures uptown already but very few REOs and auctions. it's a long process in nyc i think (i think the foreclosure process takes much more time here than in CA and TX for ex).