Inventory Check: More of the Same, High End Price Cuts

Noah - I think both studios and 1-br prices will eventually come down as well.

If you look at the House Price to Rental Ratio, they are totally out of sync. With more layoffs coming in, I expect prices to go down another 10-20% across the board. We had a 10 year real estate boom (1996-2005) that ended in spring 2005. I don't think it will only take 3 years for the market to get back to normal. My prediction is that it is going to take another couple of years (2010) to revert to mean.

well time will tell! It certainly does cost more to own, then to rent a comparable unit, so question is timeline where these two dynamics would cross making buy the better overall investment. Of course this would take into account a preset annual appreciation rate for the homeowner, not a 10-20% decline.

Noah, as usual - brilliant analysis. As a prospective buyer of a classic 6 on the UWS, I have been the only visitor at open houses during the last few weeks. My personal sampling is of course meaningless in a macro context, but I am looking closely at repeteated scheduling of open houses for certain properties on the various broker's websites. When I see a frantic re-scheduling of open houses on the same property, it seems fair to assume that there is weak bidding activity, no? I am wondering if there is a way to quantify this on a macro level, i.e. # of open houses vs inventory perhaps. Any thoughts on this?

Noah, Time to put your trading hat back on. You know that if Inventory starts to make a noticeably big rise past 7000 that the psychologies will work badly for the market. Buyers will wait a bit longer if they can because time seems to be in their favor, sellers will push harder because the opposite is true for them. It is the classic psychology of why drops can be bigger and more dramatic than gains.

The key issue is how noticeable the changes are at the time. Slow increases in inventory won't change psychology until it is noticeable in the market to any actual buyer that they have choice and time. But faster increases will be noticed by the media more quickly, and if the news stories become negative for pricing, psychology will switch fast if it becomes "common wisdom" that the market is falling.

Avner - great point..I've been waiting to open a lightspeed account again!

http://www.lspeed.com/Lightspeed_Trading_platform.php

Hi Noah, continue to love the work you, Jeff, and the crew have done on this site. Two questions for you. I saw a list of rents this year vs last year, across size of unit and Manhattan area. This spreadsheet seemed to indicate an approximate 5% decline across unit sizes and location for rental rates. Have you seen this decline? The second question has to do with a comment above having to do with the rental rate and prices being out of wack. I happen to be an investor in a studio/coop in Chelsea and when I look at the numbers, it does not seem overvalued at all. Can you give me an example of how you are determining things are out of wack when it comes to rent vs. own? Thanks!

AA - well, Chelsea is a expensive area for sales and rentals, tight inventory. If you bought over a year ago, price was prob better than now.

Lets take this listing priced at 545K:

http://www.prudentialelliman.com/Listings.aspx?ListingID=916495

Lets assume purchase price of 535,000, putting down bare min, and a conforming rate of 5.875% which is for excellent credit, I get a TOTAL MONTHLY of $3,227!

The average Chelsea F/T drmn studio rent is about $2,500, according to citi-hab latest B&W report. So, it will cost about $727 more per month for this studio buyer, over renting, and we must take into account opportunity cost lost for the buyer and what that 20% might earn in interest if its working for the renter. On same token, renter doesnt get tax benefits. So, lets call it a wash. Still, its costlier to buy. If it wasn't, you'd see everyone buying right now, and renting out imm for a profit. Plus, most investors buy condos, not co-ops, for renting out making the purchase more costly on price and buy-side closing costs.

Noah,

You are so good at this and buyers would be wise to trust your analysis of market conditions. I remain impressed!

Noah, Do you have any specific thoughts about current/future conditions in so-called "emerging" markets such as Harlem? I own a condo in Chelsea, and am thinking about selling it and buying in a new condo development in central Harlem. I neither need to sell nor to move right away, and I certainly don't want to sell and buy a property that's likely to depreciate 10-20% below my purchase price. I see a lot of skepticism about the idea that a prospective buyer can time the market, but I'm wondering whether you don't think someone in my situation shouldn't at least try. Thanks!

Thx Doug!

GoodBuy - No, I wouldnt do that. Transaction fees alone + buying into a higher risk area given current environment just doesn't sit right to me. Your call ofcourse, and if deal is amazing, dont let me stop you. But if market does get hit, Harlem will be one of the higher risk higher reward types of plays and your property in Chelsea is likely to be safer on downside.

Stay put.

Noah, thanks for the answer. Last week, I refinanced our loan, 10 yr fixed no pts, at 5.5%. Because this is only a $360k loan, it's conforming. Most coop studio purchases are going to be conforming so the rates are going to be pretty good. The value of the unit, is pretty close to the value you assumed, $550k. So, let's use my numbers. If you assume a no down payment, interest only loan, eventhough these are no longer possible, they make it easier to compare with renting as there is no opportunity cost. The monthly interest cost would be $2521. If you add $800 in maintenance, that equals $3321, well above the $2500 Chelsea average rent. If you then factor in a 33% tax bracket, which assuming you didnt get a gift from the folks is probably correct and assuming half the maintenance is tax deductible, then the net monthly cost is $2357. By no means is this a screaming buy because the after tax cost is less than the rent, especially when you factor in legal fees of say $1200 plus transfer taxes, mortgage initiation, etc. I'm just saying that the price isn't "out of wack". In CA, during the heyday, prices were. We'd go through this same calculation, and it made absolutely no sense to buy vs rent. Clearly this is just one example, but I dont think it is so far away from the average. I do think rents in the intermediate term are going to come down, long term, it's difficult for me to see that happening.

AA, your right. Rents are not out of whack. Your analysis using the 33% tax braket is dead on bringing your net cost much lower to your 2,357 for a studio. That is pretty much in line with current rents. However, you did forget to mention the priciple paydown, that is MONEY MADE. Could be, on a 6% loan, anywhere from 450-500 a month for the loan above. That brings net cost to 1,857. Much better than renting and you get to control a half million asset that historically has gone up in value with moderate risk.

AA - part of the problem is that there are a lot of unknowns like where the market will be, what will happen to employment and how it all affects different products and neighborhoods. I can tell you about studios in the last cycle, but your mileage may vary.

In 1991 when I moved back from grad school and any broker had a couple of dozen "exclusives" to show me. Back then there was no listing services so exclusive was just that.

I moved into a studio for $1050/mnth (small, brownstone, high 80's and West End). Beautifully redone by the owner. The market for it back then was probably about 40k but the owner had bought at the insider price of about 40k prior and sunk another 40 into it. In the mid '90s it was again worth 80k but I was not in a position to buy.

By '99 the board forced him to sell. The broker said to list at 120k and at the first open house there was a 145 offer. most considered it insane at the time. Today I don't even know what it was worth. (350ish feet but beautifully done, better than a lot of new developments today. high mnt).

When I had to look no one had ANY inventory. I work in NJ and had to drive in the moment a broker would get a listing or it would be gone by evening.

moral - Studios can be volatile. If you like what you have, enjoy it.

Noah-
As we speak goldman is laying off people (this week). Conservative estimates suggest 20-30% reduction in headcount on wall street- approx 100-150K high paying jobs. According to economist/studies, each of those jobs supports 3-4 other new york jobs. Many of my friends are leaving the city to lower the cost of living while they look for a job.

Rent vs Buy only makes sense if you assume that rents will stay where they are. The reality is that rents are going to decline rapidly as wall street desk jockeys leave the city to find some corporate development job in a smaller city and more condo inventory in brooklyn/LIC comes to the market.
If I was a broker, I would represent sell side clients and convince them that they need to sell their investment property asap (cap rates are still attractive and properties are moving). I wonder why you work with Buy side clients when you are bearish on housing prices in New York.
Also, your investment horizon on buy decision is too short. If you had bought a property in manhattan in 88-89, you would not have been able to sell it at the same price until 1996.

-EC

Anonymous - name one other broker, besides Doug Heddings, doing what I am doing!

Cmon now. Im being as honest as I can be without being outright depressing. I have warned my readers of layoffs on wall street. They know my feelings on credit markets LEADING stock market. They know my feelings on severity of recession. Its all here. With that said, if someone wants my services to buy, I will unbiasedly assist them at the expense of the seller's sell side closing cost of half the sell side agent's commission.

I agree with Anonymous analysis. I also expect rent to decline over the next few quarters (probably gets worse after the typical busy summer season??). Brokers always have a bias towards their industry. This does not surprise me one bit. I have not met one broker who is not optimistic about the current market. But atleast Noah gives a realistic picture of where the Manhattan market is.

Btw, the govt is about to report a 0% real GDP growth end of this month (or maybe -ve growth).

http://www.businessweek.com/investor/content/apr2008/pi20080410_059360.htm?chan=search

There IS a terrible shortage of two bedrooms below the $1.75M range, and three below $2.25M (although I have recently seen a number of nice coops below $1.5, so I'm feeling a bit more hopeful, although in 2001 they would have been in the $600-700K range). However, alot of New Yorkers, including retiring baby boomers, have alot of equity in their coops, and have room to lower their prices if they MUST move. Unemployment and the rapid lowering of prices in nicer suburban areas may spur some movement. Extremely hard to track in any meaningful way, but rentals DO seem to be taking a hit, particularly at the higher end. Things are on the market a long time, and I'm seeing large landlords like Related lowering prices.

There is a GLUT of over $1.5M "luxury" condos, and this will only continue. The multi-million dollar question is what will happen with them? The NYC land bubble meant that most developers paid WAY too much for the land, then to justify the high-end prices, developed only luxury units, then due to overbuilding saw skyrocketing construction costs, and now are seeing a very shaky credit environment as well. There is only so much room in the rental market to absorb over-priced condos, even temporarily.

New York Magazine actually reported alot of activity in first quarter 08 building starts (trying to get the foundations in before the abatement laws expire).

Noah,

A few similarities between Manhattan and the Hamptons:
1- we also lag in downturns and lead upturns (thx for that articulation. Hope u don't mind if I use it)
2- quality product hard to come by
3- rising inventories
4- low-end still active

Buyers are still here, however except for the super high-end ($30M+), they appear to be "trading down" on purchases. IOW, if they would have been in the $3-5M range, they're now looking between $2-3M. Those previously looking in the $1-2M range are solidly under $1M.
Under $1M not only reduces risk, but greatly reduces closing costs due to avoidance of the 1% mansion tax and the reduced exposure to the 2% Peconic Land Tax.

Warm temps are here, counting on bringing a warmer market! From the beach, over and out! MD

Comparing the 5 year time horizon in 1989-1994 is not fair. The externalities (to use econ 101) are not nearly the same. Without needing to go further, New York is safer and more desirable to reside in 2008 than it was at any time in the 1980s or 1990s.

100k-150k (20%-30%) of high paying jobs are not all in New York. I'm not sure why everyone thinks that every person laid off works and owns in New York. A significant number of Bear layoffs will come on the west coast where JP Morgan doesn't need those offices, and abroad, where they again don't need the extra staff. Goldman is laying off how many people as we speak? So what, every time a rumor comes out that goldman is laying off people i call my friends in different departments and they tell me that no one is being fired anywhere. Of those 150k jobs that are lost, I would be willing to bet that less than 30,000 of them own New York real estate, more than 15,000 of those who do will find new work shortly that will make holding onto properties viable, and fewer than 5,000 will be forced to sell at some point in the near future.

You are grossly overestimating the number of wall street employees that 1. work in Manhattan, and 2. own in Manhattan.

For the majority of the junior bankers who are primarily renters, they will likely find new jobs. I also don't understand where the notion that there are no jobs in New York. There are a lot of jobs in New York. Companies don't pack in the corporate headquarters because there are choppy waters ahead. You cut the satellite offices in Toledo, Scranton, Miami, Las Vegas, Orange County, etc. For many businesses, one of the costs of being in business is having a significant presence in New York, London, Paris, Tokyo, Frankfurt, Hong Kong, Sidney, Zurich, and cities of similar magnitude to their country. For the US, we're lucky that New York is that city.

For those reasons, a substantial rent decline is unlikely. I expect to see another swarm of 22 year old frat guys overextending with their parents' money to get sweet apartments to bring girls home to. They'll still be stuffing 2 people into 1-bedrooms and 4 people in 2 bedrooms to make the rents work. You need to face the fact that wall street downsizing or not, New York is a place the people aged 22-30 want to be to start their careers and they're willing to go into debt or take from their parents to finance being here. Until mommy and daddy turn off the cash faucet, or people don't see New York as the epicenter of social experience, that will change very little.

Rents won't be moving downward significantly enough to impact that decision primarily because the inventory in New York is extremely bifurcated to the point that most rentals are of significantly lower quality than similar sized for sale apartments, and the rent vs. buy calculation based on the rents in the city at 2006 levels still are not nearly as far out of whack as they were and still are in places like California, Las Vegas, Miami, etc.

There's a downturn coming, but if you expect to see a drastically lower rent when your lease comes due when the city has 99% occupancy on a housing stock of 3 million (in manhattan), you're going to be disappointed if you live in any established (non-hells kitchen, Financial district, Harlem, Midtown) neighborhood. Working in CRE, I can tell you that you'd need to see occupancy fall below 95% before you stop seeing rent increases, and 90% before you see rent decreases. That 5% down from last year is taking into account all of last year, when we haven't hit July-September this year. Go up to Normandy Courts in August and ask the residents if they saw a break in rents this year.

Noah - and Steve,
You forgot to figure in the co-op maintenance fees' taxes, etc into the Buy V Rent pricing. Pushes the buy monthly up.

NYCdig - I added monthlies into that #

Ishouldaknown.

"The second derivative, or rate of change, seems to have slowed in past weeks" ... that would be the first derivative. :-)