5 Reasons Why NYC Housing Won't Crash
A: With all the bubble talk and speak of a housing market doomsday, I thought it would be warranted to take a step back, and see why NYC's housing market is likely NOT to crash compared to other highly speculative local markets such as Miami, Las Vegas & Phoenix.
First of all, housing must NOT be taken nationally! What is happening in one local market might be the complete opposite of what is happening in another local market! For example, as the housing market in Miami continues to see inventory rising and speculators rushing to flip their already purchased properties, the housing market on the outskirts of Philadelphia are seeing more demand and increasing prices.
See Jonathan Miller's post: Real Estate Brotherly Love: 2nd Quarter 2006 Market Report For Philadelphia, PA
On UrbanDigs, I try to focus on the NYC housing market because it is so different than almost all other markets across the country and the fundamentals powering it standalone. Given current macro-economic conditions that include rising interest rates, high energy prices, geo-political tensions, and inflation pressures where would one look to mark strength in housing? Well, people need a roof over their heads and rental prices nationwide are on the rise! That's a start. But what else?
Here are 5 reasons why I think the NYC housing market will correct but will NOT crash as the housing downturn continues into the next few years:
1. Population Growth - According to www.census.gov, NYC's estimated 2005 population is 8,143,197! Just to give you an idea of the size of this number, here are some population stats for other major cities.
New York - 8,143,197
Miami - 2,376,014
Chicago - 2,842,518
Denver - 557,917
Las Vegas - 545,147
Boston - 559,034
NYC's population is still growing and buildable land is scarce! Housing will always be in demand and it will only be a matter of time until the rise in rental costs combine with a slowdown in housing put BUYING back in favor again! Read my post on "Rent-Hike Induced Housing Surge" for more info on this changing dynamic.
2. Rent Increases & Vacancy Rate Will Prevent A Housing Crash - Taking #1 a step further, NYC has experienced a declining vacany rate for the past 1-2 years or so mainly because of the housing boom and the conversions of rental buildings to condos to take advantage of market trends. The combination of high housing prices and lower inventory translated into a nightmare for renters; higher rental costs, less inventives offered, and little inventory to choose from!
Now, as the housing market continues to cool and inventory slowly rises more choices will be available to prospective purchasers feeding a buyer's market for years to come. Once prices start to come down as a result, I would expect more and more renters to convert to buyers to take advantage of the opportunity. This may not happen for another 1-2 years, but seems a very logical chain of events to predict given information at hand right now.
The skyrocketing rental market in NYC will be self-defeating and will contribute in providing a floor in the housing market downturn.
3. Lack of Speculators - Very interesting fundamental right here in that NYC is made up mostly of co-op's (aproximately 75% of NYC is co-op). As we all know, co-ops are private corporations that issue stock and a proprietary lease to the homeowner and generally have strict policies governing who is allowed to buy into the private corporation!
Since the other shareholders of the corporation have a vested interest in who becomes a stockholder, they can reject those who do not meet their financial guidelines or those who intend to use the property as a second home (pied-a-terre).
Speculative investors (a.k.a. flippers) do NOT like the co-op legal structure because it limits the marketability of their property and therefore goes againts their gameplan of buying and selling for a quick profit. In a nutshell, speculative investors go for condos! Since NYC is mostly co-op it is also protected against a large # of speculative investors which in turn will prevent a large # of apartments hitting the market at once as flippers run to 'cash out' before its too late!
On the other hand, a market like Miami is closer to 80% condo and allows a buyer to sell a pre-contruction unit even before they closed! That is speculator friendly and presents a very tough market to profit from when housing starts a downturn! Watch out Miami, San Diego, Las Vegas, and Phoenix!!
4. New Yorkers Earn $$$ - NYC is the financial Capital of this country and there is a ton of money floating around this city both to be made and to be spent! The median household income of a NYC family in 2004 was $50,731 as opposed to these other cities:
New York - $50,731
Miami - $37,025
Chicago - $40,656
Denver - $43,777
Las Vegas - $44,737
With the economy only now beginning to hint of a slowdown, NYC workers have had a very good run and incomes have risen over the past few years fueling the creation of a very large and suitable buyer pool. As the housing market cools and new workers save up for homeownership, I think all these dollars will be put to work via home ownership providing another floor to prevent any housing crash here in NYC!
The skinny: There is no lack of demand in NYC because people can't afford it! If anything, people are choosing to wait and save more to eventually buy down the road! In the end, there will be a very healthy and growing buyer pool waiting to put their money to work in NYC housing when an opportunity presents itself! NYC housing tends to have longer boom cycles and shorter bust cycles making it very hard to time the market perfectly.
5. Energy Prices & The Fed - I'm stretching a bit here on this one but I don't care. Its worth noting that living in NYC doesn't require a car! Everything is right at your footsteps here and if it's not, then your only a short subway/bus ride away; which is one of the main reasons why I love this city. The money you save on buying/leasing/financing car and the gas, insurance and maintenance fees are enough to rationalize moving to NYC! If you will save $800 a month by living in Queens but need a car to do so, then calculate what your spending every month on car expenses, gas, insurance and maintenance. I bet you it adds up to the difference in housing expenses saved! But, some people want a car and this argument won't apply to them. Fine. I'll stick to renting a car for $75 all in when I need to.
The there's the fed and their monetary policy. I reported last week on the fed's pause in raising interest rates for the first time in 2+ years. Good news for homeowners (especially HELOC owners) and potential buyers as mortgage rates dipped a bit in anticipation of this pause. The worst may not be over but its a start! With interest rates very close to their peak, money will still be historically cheap to borrow making homeownership possible for those who planned accordingly! While your monthly payments will be higher now than if you borrowed a few years ago, but hopefully the temporary decline in prices will be enough to offset the difference.
There you have it! My 5 reasons why NYC real estate will NOT crash. I do think a correction is already underway and that once the housing market makes that turn, it is very hard to stop it from proceeding down its chosen road. But you should all note that a correction in the housing market is a HEALTHY, NECESSARY STEP FOR LONGER TERM SUSTAINABLE GROWTH of housing. So, save up, get your credit perfect, and look for the opportunity that will both put a roof over your head and make you money!
Comments (10)
Hey pal,
Nice blog but you are way off, study demographics and pay, the average cost of a house apart is 8-10X the average pay, nationwide it is only 2-3 times the average pay. Furthermore the population is growing but with whom? MIT and Harvard educated scholars? No with immigrants with limited education and money. NYC right now has apts on the market for upwards of 180 days and rental units at 101% capacity. This means no one can afford to buy a place and everyone is forced into the rental market, which BTW has been raised 10% in one year by the rental board ergo 2500 per month is now 2750 next year for the same place. My salary did not go up 10% this year so how am I going to cover it? I make a good salary but it is sad that a single man making good cash with no obligations is having a tough time to make ends meet. I represent a lot of people whom love the city but like in 1991 in which crime drove us out, now it is taxes and cost of living which is making this city I love financially unbearable.
The bottom line we all don?t make 150K plus to live here and in the long term the core of the city which makes it run; fireman, police, teachers MTA etc will be commuting from the Pocono?s or moving all together.
M7
Posted by marc | August 18, 2006 3:44 AM
M7,
Thanks for the comment! I agree with a lot of what you said but the idea of the post is not whether the NYC housing market is going to correct, which it is, or whether it is fair that housing prices appreciated so much compared to income, which they did, or whether rental increases are fundamentally warranted, which they are.
Rather, the post was about why the NYC market will not crash when compared to some other local markets across the country. Its hard to argue that housing nationwide is expected to decline with rising inventory, builders confidence low, builders backing out, and the economy cooling. But, every market is different and the points I brought up here only explain why NYC is protected, so to speak, when compared to markets such as Miami, Phoenix, and Las Vegas where housing prices also grew much faster than incomes, where many speculators bought into, and where inventory is rising at a much faster level than in NYC.
All in all I agree with what you are saying, but not as an argument specifically to this post.
Posted by Noah | August 18, 2006 1:38 PM
From my understanding, the NYC area is actually losing more population than its gaining. And its losing primarily the middle class.
The other problem I see on the horizon is an equity market crash caused by an exogenous event or by the contraction of money when people refuse to spend/borrow money or default on their loans.
Again, I still see the effects of defaulting or screwed borrowers in CA, FL, DC, etc causing problems for the financial sector - which results in job lossses.
If we look back to the crash of '87 and the resulting loss of jobs - and then the RE correction which lasted from '89-'94, we are made aware that we are in much more precarious situation now with the potential for a much more dramatic correction than you predict for NYC.
Yes, co-ops will retain value but, Noah what about all of the luxury condos on the market now or in development all throughout the NYC area? These condos will dictate the going rate for $psf. And these condos will free fall in price.
What happened to 55 Berry St; who will buy a 2/2 700sf tenement condo on Mott St for $1,500 a sq ft, or the luxury condos in slum neighbrohoods like certain parts of harlem?
Foreclosures have occurred and will occur in NYC.
Posted by jmr | August 22, 2006 5:48 PM
Noah, If developers like 55 Berry's are going bankrupt and banks are putting the units on the rental market to get some payback, what does it say for the future of the McCarren Park Developments? Or The Jay Condo or the Beacon in DUMBO? Or any one of the 15 highrise developments visible from the BQE? Or any of the 50 new developments on Corcoran's development site? Or what about the Smith Street developments or LIC developments? Nobody is willing to pay these prices. My wife and I bought our place in 1998 and laughed our way to the bank in 2003. Now we will watch as this massive glut of well appointed apartments find their way onto the scrap heap at deep discounts or, more likely, bargain rentals. Most of them are supposed to be done by this fall. Either way, we'll take advantage.
Posted by T | August 24, 2006 2:51 AM
Wasn't there an article in the Post just yesterday about how NYC inventory is at a 10 year high? Supply and demand work how they work, whether it's NYC or not. There is most certainly a correction coming and it won't be pretty.
Posted by Mel | August 24, 2006 2:01 PM
T: I agree with you, but the new development market is a lot different than the existing apt market in NYC. So whats going to happen if this market corrects, or even slightly crashes? Units will sell for $1000 a sft rather than $1400 a sft? Thats still very expensive to me.
Whereas, existing might fall from $1000 a sft to $750 a sft. I've never lived through a market like this one yet, I dont think many new homeowners have, so I will certainlpy be looking to educate myself on how this whole thing plays out and what affect it has on NYC housing. But, a nasty correction in new devlopment market seems eminent.
Mel: Yes, inventory is rising and a 10YR high seems like a possibility; didnt read the article. However, don't interpret this post as NYC real estate always appreciating! Rather, the reasons I mention are why I think NYC will experience a correction, the severity of which i dont know, rather than a full blown crash, which I think markets like Miami and Phoenix might experience.
Again, I'll be anaylzingt what actually happens and if I'm wrong, I'll be the first to admit here on the site when the data proves itself.
Posted by Noah | August 24, 2006 2:25 PM
You are WAYYYYYY off. You are a classic example of 'it is crashing but NOT in my area'.
Everyone thinks that. Until such time as their houses get repo'd
Posted by Donald Trump | October 11, 2006 4:45 AM
I would like to see what you think after today's news. 10% drop nationally, that's a big drop.
The issue I see with housing is that regardless of where you are located, it is too expensive. And when buyers run (no ones hype about real estate anymore), they run in all locations. Yeah, there might be more runners in NYC than anywhere else too.
Posted by Danny | October 27, 2006 12:20 AM
Danny,
Its really not too shocking to me. Sellers are putting apartments on the market at prices still above last years peak.
That is why time on market is lengthing. After numerous price cuts, its the sellers who MUST SELL, and not those sellers who were waiting to get their price and testing the market, that is contributing to the current correction.
This correction will continue and if prices are down 5-10% a year for 2-3 years, that will be healthy for long term growth and not what I would consider a crash. If someone bought for 300K in 2002, and that same unit sold for 550K in 2005, but is now worth 450K to a seller that MUST sell, they just experienced a correction in housing; not a crash. If that apartment sold for 300K, and ALL gains were wiped out for the past 3 years, than you can say the market crashed!
Only time will tell but I do NOT see the NYC market seeing 5 years of gains wiped away in this current housing correction
Posted by Noah | October 27, 2006 8:22 AM
The nyc market won't crash but it will fluctuate.
here is why:
When i say "NYC market", first of all, i am referring to manhattan apts prices below
96th street. Other areas may crash so I won't speculate on those.
That mean/median is at around 1 million, give or take $50k. That market is for people making AT LEAST $250-300k annually.
There are tons of people making that kind of money in the NYC area. And then of course, there are many more making 4-5 times that much in the world.
This is why this market is resilient: the dollar will continue to decline. As it does, NYC will become relatively cheap for foreign investors. Among the $1 mill + market, this will lead to alot of sales - many of which will be pied-a-terre's for the euroasian rich that are growing rapidly. This is already happening. My friend sells real estate in midtown and has stated that she gets 3-4x as many euro & london buyers now than 5 yrs ago. You can expect even cheaper areas like Chinatown to also be affected by this as the nouveau rich Chinese citizens will also buoy this market.
Posted by Uhhh | October 31, 2006 6:38 PM