Manhattan Absorption Rate = 12 Months**

Thar she blows.

Game over.

I love all the sellers who come here and say we don't have crystal balls. Yes we do, it's called data and macroeconmic analysis. And one more thing, trees don't grow to the sky, nor do real estate prices.

Another word to sellers, price your crappy apartments to sell, that means price then at 2000 prices and you'll get a few buyers to come out.

All the speculators are gone.

Wall Street is finished.

All that's left are mere mortals and they ain't rich. So either you bite the bullet and sell now or sell in a year from now for even less.

Buyers aren't going to buy right now because they don't have job security and are afraid of making a long term commitment. It doesn't matter if apartments get priced lower or not. I think that if sellers drop prices, across the board, to 2002 prices, we still won't see much movement, and all that would happen is that they would drive the market down. I don't understand why so many people are frustrated that prices haven't fallen more.

actual data ... what a concept! THX Mr Digs, and Mr Vargas. BTW, I bet Vanderbilt has better sources than OLR or RealPlus. If Vanderbilt has similar numbers to Miller Samuel's, the YOY drop-off in December is probably in line with 2006 and prior years (though the trend may continue south, of course).

MS shows 13,430 sales of coops + condos for 2007, *by far* a record; with 2006 and 2005 volume at 8,493 and 7,780, respectively. (2008 was 10,299.)

If 688 is the new monthly volume number going forward, that's 8,256/yr, which is not so bad *except* compared to 2007 and 2008. Not sayin' that's what's going to happen, just looking at the numbers in a broader context....

Jon-

You are right to a certain degree, but if I had to make a formula for my "fear factor" it would like something like (monthly obligations) * (risk of losing jobs) / monthly income. That fear factor is off the charts if I am buying something at the edge of affordability that will force me to live paycheck to paycheck. However, if you bring those prices down far enough where either myself or my SO lost our jobs and we could still pay our mortgage + bills, I will be jumping right into the market.

JC/Hoboken and the parts of the outer boroughs that I would want to live in are approaching this point. Show me a 750+ sq ft 1BR apt for 500k in Manhattan below 90th street and I will be at that apartment as soon as its available to be shown.

if buyers dropped to 2002 prices, there would be a sharp increase in volume transactions, easy. $500 psf is where it's going to end up because thats the long term relationship between home prices in Manhattan to median income. if you lower the price, you will attract buyers from outside NYC. an interesting analysis would be to track long term operating cost of co-ops and condos versus average sales prices - my hunch is the last five years are way below the long term average which intuitively makes a lot sense because it just costs a lot more to finance city services.

I've not seen any mention of the GS study that concluded Manhattan RE prices had to fall about 58% to bring current price to income ratios in line with historical averages. Did I miss that here?

The argument from price-to-income ratio is one that intuitively makes sense to me- and unfortunately one that doesnt bode well for NYC. For the ratio to return to normal, prices have to come down- or incomes have to go up. Given that in the aggregate, both prices and income are going down (ie: people are getting layed off), we may over shoot the long term mean.

Noah,

Interesting that the lower priced apartments are closer to an orderly market (i.e. 6 months supply). I must say that surprised me.

Still, I would assume that the pressure from declining upper-end apartments will drive even lower priced apartments lower.

If a $6 million apt. becomes a $4 million, then the $4 million becomes $2.5 million, etc. etc. putting downward pressure on all apartments.

Do you think declines will therefore be uniform (generally speaking) across price points or we will see greater cuts at the upper end (% wise) and compression at the lower end?

As always you provide good food for thought.

Thank you.

I didn't know that UrbanDigs was a warehouse for such bitterness. Did all of you guys get priced out of a studio in Rockaway Beach? It's funny...if just one of these bitter pills owned property...then you'd find one voice on here that spoke of other things beside doom and gloom and "death to sellers". So that's it then huh? Nobody here's owns anything? Speak up now!
Pun intended...

fred is 1000% correct.

The market will settle out at somewhere like $500psf which is a reversion to the mean. This is what happens when speculalors go away.

This is what happens when the bubble bursts.

It will only be at this price level where apartment prices will bear some (underline some) relationship to income.

Now, I gather a lot of sellers reading this think some of us are bitter, or some nonsense like this.

Can I assure these people, we're just in the business of looking at macroeconomic trends and making a connection to Manhattan real estate.

"Can I assure these people, we're just in the business of looking at macroeconomic trends and making a connection to Manhattan real estate."

EXACTLY! I love when colleagues come up to me and say things like...

- "Noah, enough of the doom already"
- "Noah, you know you dont have to always be negative, rates are low, and that should bring buyers back into this market"

etc..Then I ask them if they know what a credit default swap is or a mortgage backed security, and the answer is almost always NO.

The point? Easy. When Manhattan was booming, media reported on it and enhanced it to upside; heck it even spread to foreign communities where many people jumped in to an investment together! Thats the media effect and direct marketing effect of certain developments.

Now that there are real reasons for the adjustment, people blame media and assign names to discussing these very important topics. Most brokers still don't really understand the nature of his downturn. This will play a key role in how fast or slow this market corrects to the level that draws interest on a greater scale. In meantime, I think time should be the enemy to any seller because we will soon find out where deals are being done in a very illiquid market, and you know what media will report when it comes out!

Dr. Tomaso - "Given that in the aggregate, both prices and income are going down (ie: people are getting layed off), we may over shoot the long term mean."

I think an overshoot is almost all but certain, especially in illiquid markets. I agree with you.

Bitter Buyer-

For the record, I am an investor and own some 1-4 unit buildings upstate. After buying 1 a year for a few years, I made my last purchase in early 2004. The numbers stopped working then and are only starting to come around now.

I rented my place to live and am looking to buy so I *do* stand to gain from this fall, but I have a lot of paper losses as well.

I don't believe anyone is "rooting" for the market either way. It is about following trends and figuring out where things will be in the future. Right now we still have a long ways to go before we have reverted to the mean and an average person can afford an average home to live in.

Noah, fantastic info! tahnks a lot.

truthteller said: "Can I assure these people, we're just in the business of looking at macroeconomic trends and making a connection to Manhattan real estate."

Fair enough- but if you're going to iterate over and over ad nauseam to sellers that prices will go to 500/sf so sell low now or be screwed, etc. you also have to talk about in equal detail how all but the most well to do buyers are going to secure financing for middle and high end condos in a climate where banks are ever more reluctant to lend money- even when prices do drop.

No bitterness, just the facts. NYC Real Estate faces similar macro-economic forces as does the rest of the country. These forces are well understood by now, but the implications are still unknown - such as the depth and duration of the imminent collapse of prices. In a deleveraging world where all asset classes are declining, leveraged assets like real estate face the highest declines. Remember, buying a condo with 10% or even 20% down is still a highly-levered investment endeavor, much more so than buying stock on margin which requires at least 50% LTVs. My personal estimate is for price declines in NYC of 50% during the next three years with rents declining 10 - 20%. We will never see peak bubble prices in real terms again.

For purchase prices to drop 58%, you would think rents would have to drop as well. After all, purchase demand would start to creep up if the cost of owning relative to renting dropped significantly.

Have people been seeing rents dropping significantly?

It's very confusing. There's another post here (Shock & Awe! - NOI Gets Bombed) that indicates rents are starting to fall with deflation.

But the Chinese take-out restaurant where I get my lunch just raised the price of my BBQ chicken and rice dish by a quarter (to 6.25). This is the 2nd raise I've noticed in the past 6 months.

So which is it? Are we having deflation, or inflation?

Thisson - I discussed this at the Bull vs Bear debate at Inman last week. We are seeing housing and asset deflation, but commodity inflation and food inflation in some areas from when raw costs were at such higher levels early to mid 2007. They will come down, but I think any inflation near term will be back to commodities, food, metals, and NOT housing, wages, or asset prices

I am a little alarmed by a section of Michael Vargas' assessment:

"For the purposes of bank loans, once a market is identified by the bank and/or appraiser as “declining”, there is a 5% cut in loan-to-value ratios. For example, if you have a buyer qualified for a 20% down purchase transaction, there will be a counter offer by the bank prior to closing reducing the loan to 75%. Thus, your buyer requires an additional 5% down payment as long as the market is identified as declining."

Does this mean that all buyers are definitely going to have to pay an additional 5% on down payments? Can anyone expand upon this?

Thanks much.

right again Noah.

I'm a broker, but I'm also educated and I tell the truth.

All most brokers can manage is "Manhattan is an island, there's only so much space". They are clueless.

Sorry to say, most brokers are not very bright. I asked one of my colleagues the other day whether he reads Krugman. He said, "who?"

Then another broker told me an offer I was making 15% under the absurd asking price "doesn't excite me".

Need I say more?

Please see the chart below from MIller Samuel:

http://millersamuel.com/charts/gallery-view.php?ViewNode=1208449530UATUX&Record=3

Median price for coops adjusted for inflation in 1989 was $400,000. The price in the most recent quarter was $680,000. That is an increase of 70% over 20 years, or roughly 3% annually on average - again, these numbers are adjusted for inflation.

These are the FACTS!!! I am tired of people posting BS about how prices have tripled or about how the market was out of control. Yes, the past 10 years saw significant appreciation, but it was on the tail end of a miserable 10 years where apartments became WAY TOO CHEAP relative to incomes and rents.

Also, these numbers don't take into account the fact that average apartment sizes have grown sizably in those 20 years, primarily through apartments being combined. What this means is that on a price per square foot basis, the growth rate was probably even more modest.

Condos are a different animal and I agree that there is definitely plenty of room for prices to fall here. But any discussion comparing pairs of apartments or before/after scenarios is ANECDOTE. It does not surprise me that someone who paid $950,000 for a studio is having trouble selling it for $750,000, but the overall market will not trend this way as co-op studios were selling for $350,000.

I think one of the smartest points in the past few threads came from the poster who noted that potential buyers want to buy but are nervous about job security. Most won't buy at any price (even if prices come down 50% overnight, and 99.9% won't). If there is a chance I could lose my job next month, I don't even want a $100K mortgage, but if I am reasonably certain I will have some sort of employment for the next 2 years, then a $600K mortgage doesn't scare me.

So deals won't happen until people have a heightened sense of job security. I think most right sizing actions that are going to happen will happen in Q1 (so the employers can realize the saves over the whole year - doesn't make sense to fire anyone in Q4, most of the save gets realized in the subsequent year).

So I expect that those with a job in April who have been considering buying will jump in. They will be helped along with articles speaking to the 10 - 20% drop that is inevitable this quarter - people tend to buy when prices go down 20%. 99.9% of buyers don't track the market religiously like we do and just want a damn roof over their heads.

Again as before, I will caveat all above by saying that if this is Depression 2.0 and we hit 25% unemployment, all bets are off.

I'd really like to see a similar analysis for Williamsburg specifically, or BK in general. Does anyone know if it exists or where to find it?

OT - that is all fine and good, but prices ran up about 100-300% in nominal terms over the last 8-10 years or so and there were STRUCTURAL REASONS for this.

This is where I will disagree with what the chart tells us because right now we have major STRUCTURAL problems.

We had a parabolic boom in credit across the board, exotic loans, ultra low rates, ultra high confidence, just money thrown everywhere and anywhere because the structure of the system allowed for it to occur. That system broke down in early 2007, and was broken in mid 2007. Its totally broken now.

With that said, price growth in nominal or real terms doesn't mean much to me because right now we are facing a major structural problem that simply will NOT allow for a near term recovery anytime soon. Stabilization is what we should be looking for. We still dont know how bad this structural problem will last for the banks holding the bag after the system broke down.

Thanks for the comment.

Noah - not sure why you consider nominal growth a more important indicator than real growth. Can you please elaborate? I won't insult you with a refresher on nominal vs. real growth, but will say for other readers that while nominal growth represents actual dollars spent, real growth gauges the impact to the purchaser and the economy (if I get a 5% raise and cost of living went up 4%, I really only got a 1% raise).

And I am not preaching a recovery, simply saying that those preaching a worst case scenario of 50% down or $500 ppsf (with much gusto I might add), are not likely to be right. I think you are right to predict a 20-25% drop across the market in Manhattan.

But this will not be a uniform decline across geographies and segments. I think overpriced and poorly built condos on the fringes of the island will sell at a 30% discount, and prewar near the Park will sell at a 10% discount. Uptown (Harlem) will go for a 25% discount and downtown will go for 15% discount. 12 month absorption is shockingly low given how bad things have been for the past 18 months.

The gov't is acting aggressively to keep the big banks in business, so I don't expect there to be major bank failures leading to massive ripple effect unemployment. If we look at Citi where things are about as bad as anywhere, prop trading desks are being shut down, and investment banking groups are shrinking, but there is actually opportunity in areas around wealth management, etc. NYC will continue to be the capital for high end financial services. Also, Bloomberg is almost assured another 4 years, and will capably steer NYC through these tough times with a continued focus on crime prevention and sustained provision of necessary services.

Fact remains that this is still THE city to launch a high powered career (at least in the US), and is now also a great city to stick around and raise a family. Plus, in a nod to another poster, have you ever had a bagel outside NYC?? Ouch...

As always, GREATLY appreciate your perspective and analysis.

Hey OT - working on a new discussion now and then have appintments. Will talk later.

However, please know that I really try not to predict actual percentages or any specific numbers for stock markets, real estate markets, or anything. I try to talk about trends and where I may or may not see us at the current time. The predictions discussions are only 1x a year and that I treat more of a gain. I think its silly to even start talking about percentages, or bottoms.

Market is falling off cliff right now in Manhattan with no bids. When I say down 15-25%, its because of what I see, what I hear, what appraisers are telling me, etc..So Ill provide these things here with some degree of confidence.

Right now Im more concerned over this general situation, its very worrisome.

@OT,

You raise some very good points.

I happen to agree that real dollars should be the appropriate yardstick. However, even a low 3% annual rate of increase over inflation, compounded over 20 years, results in a huge disparity in income vs affordability because real wages have not kept up with real rising prices (at least according to charts I've seen on CNBC).

A question: The condo numbers include new development AND older buildings that went condo rather rather than coop when they converted from rentals or became legal lofts. Do you think these "older" condos will see the same downturn as the entire condo market, or are they more like coops?

No, I would agree with you to keep yardstick in REAL terms. I should have pointed that out in the piece. So in REAL terms prices ran up about what, 110% in past 8-9 years?

Just wanted to point out what growth was in nominal terms compared to the chart adjusted for inflation, thats all. Sorry.

Noah said: "Most brokers still don't really understand the nature of his downturn."

Can that possibly be the case?!? I'm amazed to hear that - - what could possibly be elusive to understand about what's going on now?

hrdnitlr - Most brokers still dont quite get the structural problems we face with our banking system, the toxic MBS and other derivatives on the books of the financials, the exposure of structured credit securities held on the balance sheets both OFF & On and hiding in Level 3, the hoarding of excess reserves to satisfy future cap ratios and further writedowns of RMBS/CMBS other assets, and the depth of severity of this credit crisis that is leading to all these problems.

OT- Some choice quotes from the Goldman report that I referenced would seem to go right to the points you argue.

"New York apartment prices are very high relative to the observable fundamentals. Using three alternative yardsticks—price/rent, price/income, and affordability—we find that prices would need to decline by 35%-44% to return to the valuation levels seen in the 1995-1999 period, before the start of the recent boom."

"It is instructive to consider the potential implications of a return of relative Manhattan incomes toward the national norm prevailing before the Wall Street boom of the past two decades, either because of pay cuts in the financial industry or because of a possible out-migration of affluent individuals. From 1969 to 1986, Manhattan per-capita income averaged 2 times the national average, with no clear trend. Over the next two decades, however, it grew to 3 times the national average. If incomes fell back to the pre-1986 level of 2 times the national average—and if national per capita income remained unchanged—prices would need to fall as much as 58% to return to the 1995-1999 price/income ratio."

What's important to note here is that this is an argument about price/income ratios, and as such it abstracts away many fundamental factors- ease of credit, income expansion due to the RE bubble, income expansion due to the finance bubble, not to mention the price expansions due to the housing bubble itself. If you believe in mean-reversion, this is a very powerful argument.

Whats worse- its a lower bound argument. We know that not only are prices going to fall, but also incomes. So as prices fall (improving the price/income ratio) and people lose jobs/bonuses/take pay cuts, the ratio is worsened. Its conceivable then that we would see more than a 58% drop.

The article quoted curbed then goes on to point out that all of the usually hard-to-quantify things about living in NYC that are usually proffered up as a reason for continued appreciation (or simply lack of severe depreciation) are not necessarily engraved in stone. The NYC after this economic calamity will be a very different place than it currently is- and it may not be such a desirable place to call home. We're already starting to see that with the tax/budget crises at the city and state level.

Anon - I read the GS report and while I have a difficult time taking any analysis from Wall Street seriously these days, thought they had good points. Regarding the 35-45% decline taking us back to 1995 levels, this is absolutely true. The data I reference earlier in this thread supports this. We just have to remember that 1995 was a very, very different NYC.

Now if the city becomes a filthy, squalid, cess-pool for 15 years, then yes, at the tail end of that 15 years, we may see prices that in real terms compare to 1995 levels. I simply don't think that income ratios will collapse overnight, nor will services be cut tomorrow. If we are on a dark journey toward an unlivable NYC, then yes, when that cycle is complete, property prices will be tremendously weak.

I think the more immediate issue is that appraisers are appraising in a "declining" environment which will cause problems, and banks are being extremely cautious with their lending. EVERYTHING has to be perfect to secure a mortgage. This will lead to an average 20-25% drop, which let's be real people, is HUGE in such a short period of time. There will be floors that are established along the way.

Since we are no strangers to anecdote on this site, I will provide 2 of my own. Had lunch with a friend, former New Yorker, who has lived in Singapore for the past 4 years. She grilled me the entire hour we were together about how she can get into the market here. She misses New York tremendously, and even though she doesn't plan to move back just yet, has set aside 3 years of bonuses and wants to get into the market here.

Secondly, a friend just told me they received their bonus numbers where he works (large commercial property finance company) and they were down 15% from last year (which was up significantly from previous years). 15% down is painful, but there is still a lot of money that is about to enter bank accounts.

Also just heard that a lot of Lehman traders landed at other firms with GUARANTEED bonuses. Hard to believe, but it's happening.

One thing I found missing in the GS article (or maybe I just missed it) is the time frame for the drops that they predict.

Anon - I read the GS report and while I have a difficult time taking any analysis from Wall Street seriously these days, thought they had good points. Regarding the 35-45% decline taking us back to 1995 levels, this is absolutely true. The data I reference earlier in this thread supports this. We just have to remember that 1995 was a very, very different NYC.

Now if the city becomes a filthy, squalid, cess-pool for 15 years, then yes, at the tail end of that 15 years, we may see prices that in real terms compare to 1995 levels. I simply don't think that income ratios will collapse overnight, nor will services be cut tomorrow. If we are on a dark journey toward an unlivable NYC, then yes, when that cycle is complete, property prices will be tremendously weak.

I think the more immediate issue is that appraisers are appraising in a "declining" environment which will cause problems, and banks are being extremely cautious with their lending. EVERYTHING has to be perfect to secure a mortgage. This will lead to an average 20-25% drop, which let's be real people, is HUGE in such a short period of time. There will be floors that are established along the way.

Since we are no strangers to anecdote on this site, I will provide 2 of my own. Had lunch with a friend, former New Yorker, who has lived in Singapore for the past 4 years. She grilled me the entire hour we were together about how she can get into the market here. She misses New York tremendously, and even though she doesn't plan to move back just yet, has set aside 3 years of bonuses and wants to get into the market here.

Secondly, a friend just told me they received their bonus numbers where he works (large commercial property finance company) and they were down 15% from last year (which was up significantly from previous years). 15% down is painful, but there is still a lot of money that is about to enter bank accounts.

Also just heard that a lot of Lehman traders landed at other firms with GUARANTEED bonuses. Hard to believe, but it's happening.

One thing I found missing in the GS article (or maybe I just missed it) is the time frame for the drops that they predict.

"Median price for coops adjusted for inflation in 1989 was $400,000. The price in the most recent quarter was $680,000. That is an increase of 70% over 20 years, or roughly 3% annually on average - again, these numbers are adjusted for inflation.

These are the FACTS!!! I am tired of people posting BS about how prices have tripled or about how the market was out of control. Yes, the past 10 years saw significant appreciation, but it was on the tail end of a miserable 10 years where apartments became WAY TOO CHEAP relative to incomes and rents. " Posted by OT | January 13, 2009 9:44 PM

I am no economist but would that not make the current average 70% higher than the previous boom peak when adjusted for inflation ? Anyone have the average household income in 1989 and the average for for 2007-8 ?

kk-

I believe you're correct in your line of questioning. Current prices will not be sustained.

Very informative real estate blog. Thanks I have bookmarked this one.