My take on the "Bubble-Talk"
A: Looking at the fundamentals, the demand, the available listings for sale, inflation indicators, fed minutes, etc., I do NOT think the NYC market is in a real estate bubble. Rather, I believe a healthy correction is already underway after years of unsustainable growth. This correction will probably be followed by a short term flattening of the housing market which could then be powered by a rate-easing campaign by the new Fed chief in the years to come.
My definition of a bubble crash: You buy an apartment for $600,000 in 2005 that previously sold for $400,000 in 2001. The bubble burts a year later and you can only sell it for $450,000 in 2006. That to me is evidence that there really was a bubble. Did this happen yet? NO!
After reading other NY Real Estate blogs devote so much effort to the bubble, i.e. The Walk-Through NY Times Blog's "Believing is Seeing", I felt a need to throw my 2 cents in for New Yorkers to digest.
New York City is such a different animal than other markets nationwide and deserves to be looked at as such. I do not think the NYC real estate market is in a bubble waiting to crack. Rather, I think NYC housing has ALREADY started its healthy correction by declining a good 12-15% in the past 8 months alone. If you look at stats, you will see these:
- The US median new home price dropped 4.1% in November
- Existing US homes sales dropped 1.7% in November
- The Yield Curve has inverted
So? Is this really that unexpected (expect for the yield curve)? I've been saying for months that a housing correction is not only needed but already underway! The question is, how much of a correction will it be and for how long? This is always the trickiest part to determine so lets just do our best to analyze what is really going on in the hopes of making an educated guess as to what may or may not happen.
For this argument its important to analyze the news-worthy INVERTED YIELD CURVE:
Definition: An uncommon situation in which long-term interest rates have lower yields than short-term interest rates. This is often a sign that interest rates are expected to decline. also called negative yield curve.
I believe the curve ONLY inverted very briefly before correcting, but nevertheless this caused a plethora (thanks El Guapo) of news stories marking the event. Historically, an inverted yield curve is a leading indicator of a coming recession, whereby the Fed will have to LOWER INTEREST RATES to help stimulate the economy and prevent a recession turning into a depression.
If the bond markets are predicting tougher times ahead for the US Economy, it will be very interesting to see how the fed handles the situation without Alan Greenspan. I think that rates are 1-2 hikes away from flattening out and a year or 2 away from the beginning of a new rate-cutting campaign to combat a possible recession. Thats what the inverted yield curve is telling me. So, if the timeline looks at 2006 as the end of rate hikes with Fed Funds Rate settled around 4.75%, then late 2007 could be the period when the Fed begins to lower interest rates again. How low they will go is dependent on market factors at that time and is impossible to predict right now.
If this case turned out to be true, give or take a couple of months in timing, I would expect a Flat To Lower 2006-2007 for housing (NO BUBBLE CRASH!!!) with the possibility of a rising housing market in 2008-2009. To get in before the rise, you will need to buy BEFORE the fed starts easing.
When I look at the years of 1999-early 2001, I see the fed raising interest rates to combat the over-heating economy caused by the dot.com and technology boom. Fed Funds Rate topped off at 6.50% in May of 2000 when the Fed started its monster RATE-EASING campaign to combat the impending economic fallout that was to come. Yes, they were too late! Rates fell fast and went from 6.50% to a low of 1.0% in the summer of 2003. The NYC housing market started to heat up in 2001, as rates kept diving, until Sept. 11th caused an expected sharp downturn. After 6 months, the market corrected and started its surge to record levels over the next 3 1/2 years. So, it was when the fed funds rate was between 1.0% and 3.0% that we saw the biggest gains in housing prices with red-hot demand and record low mortgage rates. Right now the feds rate is at 4.25% and looks to be heading north to 4.5% or 4.75%. This will cause the FLAT to LOWER housing markets in 2006 and 2007 that I predicted earlier.
As the fed hikes rates it usually takes about 4-6 months or so for the effects to be truly felt in the US economy. With a new fed chief coming in I seriously doubt that he will disrupt the markets by raising rates too much, which historically has been a highly criticized action of Mr. Greenspan & Company. I see rates stopping at a max of 4.75% which in my opinion is NOT high enough to cause a housing crash. If Im wrong and the fed pushes rates above 5.0%, then expect a much sharper downturn in housing nation-wide!
I would be looking at the timeline of late 2007 or early 2008 for the Fed to possibly start lowering interest rates again. This will re-vitalize the housing markets once again and deflate the notions of a possible housing bubble pop. In addition, we should have a much clearer picture of what the fed intends to do by this time next year. If the economy is heading for recession than it is almost certain the Fed will lower rates sooner rather than later, which would then create a recipe for another housing bull run.
To sum: Expect a slow 2006 for NYC housing. Expect a rate-easing campaign to be started in the years to come which would create another good buying opportunity for those with their eyes open. If housing falls 10% during 2006, there could be some very good buying opportunities during the course of early-mid 2007 for those who get in BEFORE the fed starts easing!
Comments (1)
so what do you think now about this whole sub-prime mess?
Posted by nikki | September 5, 2007 5:30 PM