True Gotham

I have received so many emails in the past 24 hours from readers, clients, friends and family regarding the David Leonhardt story in The New York Times, Will the Fed Reverse the Housing Slump? 

The Federal Reserve sent the stock market soaring yesterday (Tuesday). So can it stop the decline in home prices, too?

Don’t count on it.

From the late 1960s until 2000, the price of the typical American home and the income of the typical family moved almost in lock step. House prices rose a bit more quickly than incomes during the occasional real estate boom, but would always settle down again. In 2000, the median home cost about $130,000, roughly three times the typical household income — almost precisely the ratio that had held since the ’60s.

Then came a real estate boom unlike any before it. By last year, this ratio of prices to incomes had suddenly shot up to 4.5. For it to return to its old level, home prices would have to fall by an almost unthinkable one-third, and probably more in California, Florida and the Northeast.

I'm sitting in my office right now listening to two of my colleagues on the phone as they share their predictions with prospective clients regarding the possibilities of a Manhattan housing slump.  All of this is so amusing to me as so many factors come into play in determining what direction the Manhattan housing market will trend.  Of course both national and local economies play a large part as does foreign investment and the perceived health of Wall Street .  We would be fooling ourselves to think that our local housing market is immune to a slump but the anomaly that has been a healthy Manhattan market is hard to ignore.

Truth be told, I just don’t know what to make of all of it.  I will say that it appears we are seeing some increase in inventory locally but not sure how much effect it will have on market. I think weak Wall Street bonuses and layoffs will have the greatest effect on stagnation this winter but having said that, I know a lot of people (well qualified and not Wall Streeters) who are just waiting for an opportunity to buy. In the meantime, I’m keeping my fingers crossed for a slight market softening that increases inventory as well as number of transactions.

One detail to note: markets never fall to some theoretical equilibrium level, they overshoot and recover to those levels. One-third might be more like one-half.

Are you suggesting a 50% drop in Manhattan housing prices? If so, please elucidate...I'm all ears.

For those of us with long memories, I was in the real estate market in 1987, when the stock market crashed in October. At the time the Dow was around 2700 when it fell 500 points. That was scary! However from that perspective I don't see any of the market conditions in place as in 1987. Inventory was at an all time high, with 10's of thousands of new units coming on the market over the next several years. New York City was not the financial capital of the world, as it is today, and the buying public wasn't as diversified as it is now. So although there may be a slowing down, I don't see a downturn in the market anywhere near what we saw in 1990 or the conditions that led to it. It may be that I'm being too optimistic, but many thought we were done for after 9/11 and look how far we've come. So the answer, I believe to people asking what the market will do is to do what works for you. If it's time for you to sell, then sell, if you want to buy, then buy. Timing the real estate market is no different than timing the stock market, you really can't.

Not in Manhattan, but nationally, sure, it is possible. Hovnanian and others are already discounting their inventory 30% off of prices that they refused to change in the last two years, and we are in the opening stages of this fiasco.

Manhattan is a different beast altogether. In the last real estate correction, the West Village actually ticked up a few percentage points while places like California fell over 50%. Meanwhile, I'd say some of the "gentrified" areas like Alphabet City are screwed. They are still under-policed, suffer from poor transportation and services, are pretty filthy and vermin-infested despite efforts by the city to alleviate these issues, and a lot of the inventory there is old, and not "historical preservation" old, but "ugly tenement" old.

So if you are looking for a steal in the West Village or Soho when this market completes the implosion, good luck. But there will be some heavenly bargains in other areas - if you really want to move there.