Will NYC dodge the real estate crash ?

      So far, New York hasn't taken the kind of housing price hits we've seen in Los Angeles. The latest Case-Shiller home price index shows Big Apple area prices down 7.3% in October from a year ago. New York prices are also down just 11.4% from their 2006 peak.

      Here in L.A., we're down 27.6% in October from a year ago and off 32.6% from their 2006 peak, according to Case-Shiller.

      New Yorkers justifying the apparent side-stepping of a full-on real estate crash cite variations on many of the same themes once offered by those who arguing Los Angeles was not in a bubble: undeveloped land is scarce, everyone in the world wants to live there, it's filled with rich people and immigrants who pool their money to buy homes, etc...

                

    

     New York hasn't been immune to down markets in the past, however. Home prices fell 14.5% there between 1998 and 1991.

     New York may not have quite as far to fall as Los Angeles. Home prices in the Big Apple rose to a peak in 2006  126% above prices in 2000, Case-Shiller's base year. In the same period, Los Angeles prices peaked at 174% above 2000 levels.

      But there are signs New York may be overheated. This week, Irvine real estate consultant John Burns put out some interesting stats on building activity. In Los Angeles, the level of building permits is at 19% of its peak level. That shows an over-supplied market correcting itself, as builders back off from construction to let the existing supply move.

      In New York, permits are still at their peak level, according to Burns' analysis. Housing costs in New York City are also at 78% of income levels, compared to Los Angeles's still-heavy but lower 61% level.

      That means the typical person in New York would have to spend 78% of her income to live in the median-priced home.

     Economist Dean Baker of the Center for Economic Policy and Research, who was an early and so far accurate predictor of the current real estate bubble, thinks the crisis on Wall Street will have a heavy local impact. Laid-off financial sector execs have the money to stay in their homes longer than most folks who've been pink-slipped, which may delay the impact of high-end job losses on real estate there, Baker said.

    But he cautioned, "New York's lost a lot of jobs, it's hard for me to see them losing as many jobs as they have and real estate not taking a hit," he said.

--Peter Y. Hong, David Pierson

Comments

[Steve]

Like LA, NY is the most over rated and over priced dump in the world. I do not get it what is the attraction.

[latesummer2009]

D-E-N-I-A-L.... NYC will feel much pain in the coming years as the financial crisis comes home to roost. It will radiate out from there, all across the country and effect most high end areas across the country. Not to mention, The Westside.

Even 90402 in Santa Monica is starting to look bad...

http://www.westsideremeltdown.blogspot.com

[TrojanDLA]

It's all about economic fundamentals. If NYC residents have the money to keep their homes, then it's no problem. Laid off millionaires is not the same as laid off construction workers in L.A.

[el_guapo]

They're just late to the party.

[SoCalJim]

People like to compare LA and NYC just b/c there are No. 1 and No. 2 in population, but in reality, there is no comparison. NYC tops LA in almost every category of business, sophisitcation, style, culture, intelligence, etc. It is the capital of this country on so many levels. Just another reason why RE is cratering in LA - for such a large city population wise, we are really not that important. In the end, very few people care about the crappy movies and sitcoms we produce. Also, living in LA is like living in the burbs in NYC. Typical housing prices in LA are like living in the burbs in NYC. Ever look at what RE actually costs in NYC? LA is nothing in comparison. Seven figures there gets you a crappy, small apartment for which you have to pay lots of $ for parking. 1M in LA can actually get you a nice, much larger place in what is considered a yuppie/attractive area. Only reason to live here is the weather. And if you like living LA, you could never hack it in NYC, and if you "struggle" financially here, you could never make it in NYC. Everything is more expensive there. Living here is like a vacation. I could not imagine some of the mindless folks from here living there - scary. And with our ever changing demographics and decreasing number and flight of educated people to other parts of the US, LA will continue its downward slide.

The more suitable comparison at leat in terms of the attributes mentioned above is NYC and SF. Those two cities are more similar than NYC and LA.

That being said, NYC was part of the bubble just like LA as a result of credit and the stock market boom. It will eventually fall just like it is here.

[desmo]

"Laid off millionaires is not the same as laid off construction workers in L.A"

Yes, and those so called "millionaires" will lose their overpriced housing just like "construction" workers. btw trojan, did you get your Rose Bowl tickets? there are only 66,000 left.

[Laker]

NYC compares to LA like West side compares to Lancaster.
NYC is down 7% from peak just as West side is down 7% from peak.
But...That is only because at first the tree hugers are losing their jobs aka sub prime. The last to lose the jobs are white collar executives such the bankers that are now starting to lose jobs.
The first to default are specuvestors and those that took 2/28 loans. The last to default are 5 and 7 year ARM holders.
So West side will collapse 50% the same as Lancaster. And similarly, NYC will correct 50% too. Check out all these wall street firms that because of the government money that is bailing out the big causing them to eat the small and this lay off hundred of thousand workers from the smaller banks that are bought.

About:
"undeveloped land is scarce, everyone in the world wants to live there, it's filled with rich people and immigrants who pool their money to buy homes, etc..."

I think Tokyo had same problem with no land, rich people....that is why their RE went down for 20 years....and their economy never fully recovered.....

[ed]

Not to mention they're way way way overbuilt here, too. People are clinging to bubble prices here with a kung fu death grip... but even RENTS are going down. So, as with all things economic, reality will set in. Eventually. Which will be good for those who didn't behave stupidly.

[Drew]

NYC is just starting to tank. It's going to get a lot worse there and stay that way for a long time. What we've seen here in California is what they are just starting to experience in NYC.

I sold a co-op apartment in NYC this past June and am following developments in NYC vicariously and with a hefty dollop of schadenfreude.

We originally listed our apt in NYC in October 2007, immediately after a nearly identical apartment on the same line (with an updated kitchen and bath) sold for $615k. At the time, the Dow was at it's all-time high and there was no reason to think the market was declining. But unknown to us or anyone else it seems, the decline had already started.

We listed our apt at $625k (foolishly listening to our broker). A few offers fell through, a few low-ball offers, but no sale. We dropped the price to $599k, fired our agent and hired another, dropped again to $575k, and ultimately sold for $555k.

Had we listed 6 months earlier, we would have sold for $50k more. But we still more than doubled our money in 8 years, so can't complain too much, particularly since we'd be getting even less today.

Immediately after our apt sold, another near-identical unit on the same line (again with a newer kitchen and bath) was listed by our selling agent for $585k. It was recently dropped to $549k -- less than what we sold ours for -- and is now in contract.

Other units in this building have had their price slashed by $100k or more, which was unheard of in this building in the time we were there. And most of them are still on the market.

One of the main drivers of the real estate market in NYC is the financial industry. High bonus-driven salaries have historically been the primary support for NYC real estate prices. With financial industry jobs being cut, and those remaining employed earning far less as bonuses are slashed, there is simply less money available to spend on real estate.

And the financial industry's problems trickle down throughout the economy. City tax revenues are down, so services are cut. Less discretionary income means less spending on restaurants, bars, clothing, luxury tchotchkies and entertainment -- putting those jobs at risk. Even the shoe shine guy at Grand Central Station reports that business is way down -- but that he's doing a brisk business in shoe repair.

One thing that has helped keep buoy up the NYC market is the fact that most builldings are co-ops, not condos, and that co-op boards usually set much stricter financial guidelines than do lending banks. Co-ops are about 75% of the NYC housing market, with condos and single-family homes (mostly in the outer boroughs) making up the remainder.

Typically, co-op boards require 20% down or more, and have hefty income and reserve requirements. (Even if you are renting in NYC, most places expect you to have annual income of 80 times your monthly rent). Because of these stringent requirements, people are more likely to have significant money invested in their apartments as well as the financial stability to weather bad times.

Notably, foreclosure rates in Manhattan have remained near zero, even as they are increasing in lower-income areas in the outer boroughs.

One last thing I'd like to point out -- historically (over the past 30 years anyway), recessions have hit harder and lasted longer in NYC than they do in the rest of the country. So when the declines hit, they hit hard and recovery takes longer.

[Drew]

Laker posts: "West side will collapse 50% the same as Lancaster. And similarly, NYC will correct 50% too."

I most emphatically think that you are not correct with this forecast. Looks like the "doom and gloom" industry got to you with the Kool-Aid.

[Drew]

SoCalJim writes: "And if you like living LA, you could never hack it in NYC, and if you 'struggle' financially here, you could never make it in NYC. Everything is more expensive there. Living here is like a vacation."

LOL, how true! Living in LA is a cakewalk compared to living in NYC! Excellent post.

[FreedomCM]

"Laker posts: "West side will collapse 50% the same as Lancaster. And similarly, NYC will correct 50% too."

I'm not so sure. The lowest tier rose 330% in LA, so it needs to decline 67% to get to affordability. The highest tier in LA rose 225%, then 50% down. Greater NYC (all tiers) rose 225% overall, so it should need to decline like the west-side, about 50%. Manhattan itself was slightly less than the greater NYC area, though exact numbers are harder to come by, due to co-ops not recording deeds as SFR and condos do.

Of course, that is discounting the recession/depression. add maybe another 25% or so on for that, it looks like.

[aldo818]

Yeah, NYC is so different on so many levels. For one, NYC has ALWAYS been prices very high due to the concentration of high paying positions on Manhattan. 2nd, NYC is closed off by two rivers making the suburbs a little more difficult to get in and out of and most likley out of state(see:New Jersey, pronounced New Joysey).

I'm not saying that prices won't drop. However, they will not drop as much (percentage wise) as they are here. I believe that NYC typically costs 2x as much as an LA area home. Also, they have to build up to accomodate more people. We just build out into the desert with plenty of land in sight.
Also, there's the LA LA Land mentality we have here.
-aldo

[Mary C.]

Real estate prices in NY have been driven by the spectacular returns/bonuses/salaries in the financial industry. That is going away, fast, for thousands and thousands of workers. Some of them got so rich that they had 4 or 5 different homes, and NY was their principal residence. But from what I've read, many headhunters are luring away NY exec to other parts of the country, often for less money. They might not be selling now, but they might eventually sell their NY places. Rank and file financial industry worker might have to sell sooner, as they may be forced to relocate to find other jobs elsewhere. The entire economy of NYC is starting to deteriorate due to nationwide conditions, dropping tourism. Broadway shows are closing sooner than anticipated, which means decently paid Equity performers and union stage crews are losing their jobs. Eventually, there will be a drop in NYC real estate. It's just a matter of time, but their are less people to afford the apartments that will be put on the market (including international types, because the economy is experiencing problems globally).

[Rich]

People who haven't travelled to New York have no idea of the differences between the infrastructure of the skyscraper canyons and just about any other city in the world. The number of high-rise buildings, with their unique lifestyle challenges (parking, elevators, altitude sickness) dwarfs anything you will find in LA. New York is in a league of its own among world cities and the its specialized buildings create an atmosphere which draws people of high incomes from all over the world to take part in it. I'm not saying I would live there or even think of sacrificing what it would cost to do so, but until you've seen it from ground level you can't even imagine why LA can't be discussed in the same terms as Manhattan...

[Laker]

Drew wrote: "....doom and gloom" industry got to you with the Kool-Aid...."

Drew, When RE bulls like you will write here that RE is bad investments and that price are about to drop 50%, then, only then we would know that we have reached the bottom. Until then, we are still dropping.
I think high end RE like NYC will be hit much harder than low end because of lack of money, jobs, financing to support jumbo mortgages. There is no way government will increase the limits on conforming or buy MBS for $1million-3 million each. That means private investors are financing jumbo mortgages now...and guess what. Private investors are a little smarter than the government. They will NOT give you a loan to buy the $2 million house at 5% interest. They will demand to get risk based interest that is more like 15%. Guess what that would do to your jumbo payments/affordability of jumbo....
Government would continue to support conforming up to $417K, and that means low end would have better access to less expensive financing...that would translate into big decline in low end, and HUGE declines for high end!

[tew]

Massive. Permanent. Job Loss.
is not good for housing prices in any market, especially when the job losses are at the top of the food chain.
That's what NYC is looking at.

NYC will combine elements of the current housing bubble with elements of the SoCal bubble bursting in the early 90s. From the current situation it will suffer from less available easy credit and a termination of go-go mentality. The similarity to SoCal early 90s is in the permanent loss of formerly stable, high paying jobs (in SoCal it was defense engineering and union jobs).

[Drew]

Laker writes: "When RE bulls like you will write here that RE is bad investments and that price are about to drop 50%, then, only then we would know that we have reached the bottom. Until then, we are still dropping."

Laker, I am no bull. Neither am I a believer that the world as we know it is coming to an end.

As I recall you were looking to buy not so long ago, Something obviously happened to change your tune. I'm curious to know why.

[TrojanDLA]

Desmo, RB tickets just doesn't feel as compelling this year. Can you believe that I actually may pass?

I know this is terrible to say, but ever since SC has become a fixture in the NC picture, the RB has lost its luster. Honestly, I was hoping OSU won so that we could play either Texas or Florida in the Fiesta, and put on a real show for the masses. Granted, Penn St. is definitely better and more likely to be competitive than Illinois last year (went last year, great game), but the Big10's lack of competitiveness combined with the Rose Bowl's insistence on putting in a Big10/Pac10 team every year has destroyed the allure that is the Rose Bowl. Those associations worked before the BCS era, but today it's undermining fan interest.I know it's tradition, but times are changing and the RB committee better move with the times or they'll be left behind!

As for NYC real estate: yeah, I do see it declining, but not as much as LA, only because I'm under the impression that LA's bubble was a creature of subprime/Alt-A funny money, whereas NYC's bubble is a result of people with "real" money bidding up prices. People with equity at stake rarely sell for a loss and are more likely to hold on through the hard times, until they need the cash.

[Drew]

Laker also writes: "I think high end RE like NYC will be hit much harder than low end because of lack of money, jobs, financing to support jumbo mortgages. There is no way government will increase the limits on conforming or buy MBS for $1million-3 million each."

First off, $1-3 million is not high end in Manhattan. The median sales price of a Manhattan apartment is more than $1 million.

The "real" high end -- $5 million and more -- is usually paid for in cash, not financed. A lot of these apartments have taken big price hits, but there is no real established market mechanism for these and it's all paid for with play money anyway. Dropping an asking price from $46 million to $34 million, or from $5 million to $4 million, is often more a sign of ridiculous expectations than an indication as to the health of the market.

Where the real problems are taking place in NYC is in the middle of the market in the $500,000 to $1.5 million range. These are the properties that are more likely to be financed with mortgages rather than paid for in cash. And with tight financing requirements as well as declining incomes and financial situations of a large portion of likely buyers, these apartments are harder to sell.

Also, it is not uncommon for a NYC apartment to remain on the market for months or even years before it sells. Few NYC apartment owners are in a position where they MUST sell, even though they might very much like to sell.

So rather than take a low price, they hold on until they get their price, either continuing to live in the unit or renting it out at what are generally high rents. And if they lose money because carrying costs are higher than the rent, the losses merely offset other income so the tax bite is reduced.

And PS - "AltA" and "OptionARM" loans are virtually never made on NYC co-operative apartments, so that particular problem is not an issue there.

[problemwithcaring]

Drew - the "I am Too Good to Rent" Kool-Aid drinker - read:

Rational Renter sez: "People are going to be kicking themselves for buying this year instead of next year, but it's their money."

Not if they're going to be paying a price that factors in another 20% price drop.

Posted by: Drew | September 25, 2008 at 12:49 PM
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Not if they're going to be paying a price that factors in another 20% price drop.

What if it drops 40%?

Posted by: D | September 25, 2008 at 06:02 PM
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What if it drops 40%

What if it drops 50, 60, 75, 100%?

What if they pay you to take title?

Stick your head in the sand and pull it up in 2 years from now -- then let me know how much farther prices have dropped from today.

Posted by: Drew | September 26, 2008 at 09:57 AM
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...and promise you will re-read it through all of next year K?thanxbai...

[GPS]

Here's my experience with NYC real estate during the last downturn. I purchased a small 1 bedroom apartment on East 12th street in Manhattan for $98K in 1986. I could not sell my apartment in the late 80s to early 90s since NYC apartments had fallen about 25% in value. It wasn't until 1996 that I was able to sell my apartment for a profit. After 10 years of owning it I was able to sell it for $130K. I googled my old address and saw that the same apartment sold in Aug. 2006 for $473K.

[J]

Why don't we just rename this "Laker's Blog"

[D]

Not if they're going to be paying a price that factors in another 20% price drop.

What if it drops 40%?

Posted by: D | September 25, 2008 at 06:02 P

Two things:

1) I believe this was in answer to lakers post about his reasoning for buying in this market.

2) problemwithcaring, get a life, really, researching September posts...really?

I lied.

3)Laker is an idiot.

[Drew]

Yeah, whatever, "problemwithcaring" -- I stand by my earlier statements. You can post them 15 times a day every day throughout the next year and beyond -- go ahead, I double dog dare ya!

If you think I'm drinking kool-aid, I'll just say that I think you're the kool-aid drinker who's worked himself into a frenzy predicting the end of the world.

I think you must be one of these "Oh woe is me, I'm too poor to ever be able to afford to buy a home unless prices drop to 1933 levels, so I'd better do my part to stoke the fear so that the market collapses."

A funny thing happened on the way to the Forum, Pseudolus -- lower prices lead to more buyers. Check, thats already happening. And more buyers are going to lead to... what was that law of supply and demand again?

I'm not claiming we've "reached a bottom." But prices are not going to drop another 50% like some people here fantasize about happening. Or even another 20%, for that matter.

One last point: I'm not "too good to rent" -- it just doesn't make sense to rent when the monthly costs to buy are less than the cost to rent the same property. Or when you can buy a house for less than what it cost to build it.