Just How Big Was The NYC Housing Bubble?

Excellent data! Makes a compelling argument that the -44% NYC RE drop Goldman Sacks predicts is conservative.

Thank you Jeff. This is a fantastic post. I feel it could be the almost seminal go-to-piece in any Manhattan residential real estate discussion for next few years.

The implications are very sobering. Even if one allows only for mean reversion (ie no underperfomance to compensate for this long bull market beyond mean reversion) it implies drops of over 50% from 2007 levels! This is broadly in line with a Goldman Sachs report put out in early January 2009 which, depending on the valuation or affordability measure used, "predicted" a decline in Manhattan real estate prices of 35% to 45% from late 2008 levels.

Also, if anyone questions your premise of long-term real estate returns tracking inflation (ie being zero in real terms) there is plenty of data to support that, including a long-term US study by Yale's Robert Schiller and a very enjoyable multi-century study on the price evolution of prime Amsterdam real estate.

Thanks again for a great piece,
Thomas

Jeff,
you got any long term graphs comparing housing prices to nominal income?

good post, but one quibble -- your annual increases are a bit off since you just divided the overall percentage increase by 10. you need to take the 10th root to get the compound annual growth rate over a 10 year period. so --

Greenwich Village - 185.2% gain, or 6.35% per year

Upper East Side - 209.5% gain, or 7.67% per year

Upper West Side - 200.5% gain, or 7.20% per year

Washington - 1110.5% gain or 27.2% per year

Harlem - 550% gain or 18.6% per year

i think this analysis is misleading in the sense that it make a huge different where you start the analysis from, which year i mean.

you analysis starts in 1998

now what about before 1998, was nyc price well below inflation rate? or was it negative?

i dont know the answer.

Anonymous has it right, its the annual compound rate that is important.

not simply graphing the absolute price of property value, because each neighborhood start at different price, even if their growth rate is the same you will have a chart that make it seem like one neighborhood is growing at a much faster rate, due to different starting point (compounding).

i also want to reiterate the starting point makes a big difference

does anyone have data before 1998? was the years before 1998 growing at below inflation? or negative?

Anon 6:03 - I think a straight average is useful here, we are not talking interest on deposits here.

Anyone else care to chime in on this one?

Did Case/Shiller use a compounded annual growth rate for their index prior to the collapse to show % gains?

your analysis is for last 10 years and the compounding rate of growth base on anon is

Greenwich Village - 185.2% gain, or 6.35% per year
Upper East Side - 209.5% gain, or 7.67% per year
Upper West Side - 200.5% gain, or 7.20% per year

or about 7% per year.

now what if you take last 20 years? what would be the annual compounded rate of growth? or last 30 years? just curious

***** COMMENTERS PLEASE READ *****

Please type the 'nyc' keyword with your comments or it goes in JUNK folder. I keep finding great comments there and I dont always check it before emptying it out. I dont want to lose anybody's comment.

Anon & BaileyBee bring up GREAT points, and its threads like these that I find so damn educational/useful and entertaining! Thanks guys!!

110% a year appreciation for Wahington Heights? Wow, good thing I was not drinking anything while I was reading the post or else my keyboard would be soaking wet!

I didn't use compounded annual growth rate to make it simpler for those who are not financialy sophisticated. Of course where you start the analysis matters and I used 10 years as a nice round number. If there had been a huge swoon leading up to 1998 it would be meaningful....there wasn't. Of course residential real estate prices stagnated throughout many parts of the U.S. from the mid 80s to the mid 90s. This was one rationale we heard about why the national residential real estate price growth wasn't a bubble. Bottom line is that real estate prices ran well ahead of inflation over the last ten years on an apples to apples basis, tweaking the starting date or talking about compound annual growth rates instead of average annual growth rates doesn't change that it may make it somewhat more or less dramatic, but we are splitting hairs.

in my opinion average is one of the most misleading metrics

especially if you want to track someones performance as an investor

for example of the following performance:
year 1 - 100%
year 2 - 0%
year 3 - 0%
year 4 - 0%

or

year 1 - 25%
year 2 - 25%
year 3 - 25%
year 4 - 25%

both have same avg performace if you add them up and divided by 4, but i would clearly rather have the 2nd set.

jeff, i dont agree with the fact that using compounded rate is splitting hair.

also i dont agree with having different starting point is not relevant.

i am not saying to use different starting point to tweak the data so that it looks better (weather you are bull or bear). its just gives you a better/broader perspective on what is happening.

if the 20 year compound rate is much higher or much lower than the 10 years, that tell you something same thing for last 30 years etc.

6:03 here. re noah's question, i think compound is correct since that is the annual increase you would see over a 10 year period. if prices were going up 20% every year, after 10 years prices would be up over 5 times (like harlem...).

i still agree with jeff's main point that the run-up is unsustainable (though i wouldn't call the difference between 7% and 20% splitting hairs). also, the graphs are all correct as is and show the change much more clearly (to me).

baileybee - yea, I would take the 2nd set too. Excellent point.

Fact is, the silliness came end of 2003, 2004, 2005, 2006, 2007. Charts take a noticeable step up to a new level of craziness at height of the euphoria. So, starting point is so essential.

Id like to see the compounding chart compared to OER, and I would like to have neighborhood charts that focus on overlapping 1BRs to 2BRs to 3BRs, because I bet you that the rate of growth for 2BRs/3BRs+ is way higher than for this 1BR analysis.

Noah said:

"because I bet you that the rate of growth for 2BRs/3BRs+ is way higher than for this 1BR analysis."

You bet your butt it was. As crime rate came down and Times Square turned into Disneyland, we all saw the family explosion in NYC.

No one wanted a baby in a bassinet, so these larger properties became coveted esp. in neighborhoods with better P.S.s

Over time I expect this inequality to revert to the mean as the city (again) gets grungier and younger, despite Bloomberg's best efforts.

ps: off-topic: anyone read the NYmag masthead piece about the Speyer's taking it up the pooper on the Stuy Town buy? The closing of that insane deal will mark THE top of the NYC RE Market for many years to come, IMHO.

-EVB

So how does this impact your asking price on 429 West Broadway ? Seems that 5.495 for a 4000 sq ft co-op on a second floor needing complete renovation is a very ambitious price? No criticism intended, just asking how this theory/chart/analysis would be applied "real world" style.

Thanks Jeff! Always more fun to be transparent. Well done.

JR - well, the market will determine the price. There are many variables to pricing that sometimes are not considered, and in the end, the seller is the boss and sets the original price and we just have to hope they listen. Sometimes other competing brokers put a much higher price in the minds of the seller, leading them to test the market first.

Jeff - I appreciate the analysis but you are dead wrong to state the start date does not matter. You also mislead your readers by stating that 1998 is a reasonable start year as it was not on the end of a swoon. True, there wasn't a swoon, but 1988 - 1998 saw 0% appreciation in real dollars in the coop market in Manhattan. You should know this because it comes from the same data you used to build your charts - MS's median price. Now since you know that his data goes back 20, not 10 years, and you know that the story is much less compelling when told over a 20 year frame (annual increase of 3% on average in real dollars for Manhattan coops), I think I am correct to conclude that your intended purpose with this post was indeed shock value despite your claim of agnosticism. 20 is just as round a number as 10.

I stand by my statement that median prices will fall on average 20-25% peak to trough for coops, and 35-40% for condo/new development.

Noah,

I commend you for your blog and I think it is great that you are using it to market properties for which you are the listing agent. Makes sense.

Personally, however, I do not think it is appropriate for blog comments to put you on the spot with your listings. It puts you in an understandably awkward position and I would hate to see that force you do back away from your call it as you see it approach.

I am sure JR meant no ill will with his question, but I hope others will see it as I do and cease from commenting in this regard.

Jeff,

There is no mistaken the magnitude of correction that is (and will continue) in the marketplace. I do not know where the bottom will be; nor, am I confident anyone else does.

What I am confident about is that prices have already corrected 15% to 20% in a matter of months: an amazingly short timeframe. To expect little more decline from these levels as the employment/fiscal picture worsens is to not understand the forces at work.

Your data was illustrative of the situation and arguing over starting dates or compound vs. simple growth rates is to miss the forest for the trees.

Lars,

I don't agree with you on much, but concur that it is not fair to put Noah on the spot with regards to his listing. I would hate to see his analysis and writing compromised due to any conflict of interest that is brought to bear through these threads.

OT,

I not surprised in the least that we don't agree on much. I have read your comments. I should add that my feelings, nor my views, are impacted by that fact.

@bailybee: I suppose most managers would agree with you, but personally I would rather employ someone who earns 100 in the first year and then zero for three more years, etc. The average is the same but I get 75 more for three years which I can invest. Economically, the first set is better. Psychologically, perhaps not, but perhaps you are not a trader.

In any case, I agree with the bubble in NYC despite many people I know there who still insist their tiny two-bedroom on the UES is worth $1.5 million. Ha ha ha ha ha ha ha!

Just to underscore one of the important assumptions behind this analysis, it is absolutely true that RE prices has historically tracked the rate of inflation. If you were to track the OFHEO price of single family homes since 1975, and plot the "Housing Price Index" against the CPI over the same period of time, you would find nearly perfect correllation betweeen the two data sets from 1975 through 1995. Since around 1996, the HPI diverged from the CPI materially, and thus the housing boom was born. We're going to see some wicked mean reversion in NYC, particularly when you overlay the macro economic issues like permanent Wall Street job losses, etc. If other macro factors like crime rates, schools, city tax burdens, etc, change, you could well see an overcorrection from here that puts NYC real estate prices BELOW the long-term trend line. I think it is optimistic to assume only mean reversion will happen; asset bubbles tend to overcorrect. As I've told our wife, with $4m cash on hand, we're not buyers at any price for the forseeable future.

LARS - you bring up a great point and that is why I answered JRs question the way I did.

My sellers ASKED me for exposure on UrbanDigs, and ALL MY CLIENTS are directly from this site, in one form or another. So, they are familiar with content and my view of tell it like it is.

My clients have had personal conversations with me and I tell it like it is there. Sometimes they choose to work with me, other times they dont. But I always inform them that content on the site will stay focused on its mission, and will tell it like I see it.

One seller mentioned that he may not want to work with me if the ad is up here, so I told him, we wont put it up here! Others do want the added exposure. The market will determine price, not the brokers, and sellers usually interview a number of brokers before signing that agreement. In the end, THEY tell us what the final price is but it is our job to tell them what is really going on out there.

In any case, your original point is well noted and I can assure you that content will not change with my exclusives up on the site and that any comments about my listing will be responded by me with the line - THE MARKET WILL DETERMINE THE VALUE OF THE PROPERTY.

I must protect my seller's interest but at same time, maintain the integrity of this blog. If Im honest with seller beforehand about this, and they choose to take advantage of exposure this site gets for their property, then I dont see any problems with it. I hope my readers will respect that enough and like you say, NOT put me on the spot.

OT - we are down around 15-25% right now, and some co-ops especially in higher end, are doing deals at lower levels than that if the seller needs to move property.

Are you saying that we have seen the worst of the correction already, and that from now on it is a bottoming process?

Noah,

Just a little advice - you should avoid commenting on your listings on your blog (i.e., publicly). While I'm sure you're doing a great job on it, you really want to make sure you avoid the natural tension between talking your own philosophy (i.e., sellers need to get real) and representing your client. For instance, your above response - "the seller is the boss" "we just have to hope they listen" - sounds a little bit like you might not necessarily agree with them, and therefore that you're throwing them under the bus. If I were your seller client, I think I'd prefer you to either (i) talk up the property or (ii) not comment at all on to the general public.

Just my two cents.

anon - point well taken! I have said, 'the seller is the boss' in a previous discussions on posts on UrbanDigs whereby I explained the process of sales pitching and who sets the starting price. This is a service industry, the seller is the owner of the property and in the end they must approve all pricing strategies, reductions, and accept offers that they deem acceptable. We must service them to the best of our ability, and make sure marketing/presentation/negotiating/selling is done properly.

That statement was in NO way related to the new listing I have, but it could be interpreted that way. Your right, from now on, no comment. I talk up the property in all my marketing efforts, so I dont need to do that here in comment section. Instead, i focus on marketing that is above & beyond what is considered standard for any broker/firm. For example, the new listing will be featured here and in THR.com, Billboard and Variety magazines, none of which are even venues that partnered with my employing brokerage but have the right target audience for that product. Just an example. Things get taken out of context in these threads sometimes, so for future, there will be no response to any comments on listings.

THANKS

Noah - regarding your 07:46 a.m. comment: I would (intuitively) have thought that coop boards of higher end properties would RESIST 'doing deals' at heavily discounted prices, mainly to protect the value of the properties of the other shareholders ... Are you saying that this is no longer the case?

I am hearing a story or two of lower end co-op boards rejecting a deal because asking price was too low, but I dont know how this will end up. Lawsuits? What recourse does the seller have?

If appraisers pinned this market as DECLINING and started to do a negative time value on appraisals, how could the board possibly reject a deal if that was the highest & best bid received? What if its a distress sale?

Too many unanswered questions to answer your question intelligently. Im sure we will hear more stories in mainstream media though througout 09

Guys,

Glad to have kicked off some debate. Just to be clear, I didn't choose a particular date to make the numbers look bigger (I really didn't have to, they speak for themselves). I just went back ten years. As previously noted, I am very aware that real estate did nothing in most of the country for the prior 10 years that has not stopped many markets that had too much supply growth or big employment contractions from being decimated. I will try to go back and do the analysis, but my guess is even with the prior quiessence prices more than made up for it in the last 10 years. Only time will tell, but my guess is we have a long way to go down. I'm on the record for 40% in the $1-$5 MM segment I think is most vulnerable, but it could be worse from what this analysis suggests.

FYI FROM CASE/SHILLER:

Inquiry: FW: is Case/Shiller Index show compounded annual growth rates?

No, the index is a pure reflection of price changes.

Up, down and flat periods are treated equally.

If you require further assistance regarding this issue, please refer to your inquiry number in this email.

Thank you for contacting Standard & Poor's Global Index Client Services.

Regards,
Anthony

Global Index Client Services

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Not sure if this will help the discussion, but I've been referring to these charts in my search targets as well as Noah's great analysis:

http://mysite.verizon.net/vodkajim/housingbubble/new_york.html

http://condo-sales.com/stats/condosalesstats.aspx?stat=1br

Compound vs. Annualized: they both are meaningful; btw, the compounded rate of return over the data set is on average 11%, not 6 or 7. just plug in the FV, PV, zero PMT, N = 10 and solve for I Rate; you get 11% on average for most data series.

Divergence from the Mean: is really the point of the chart and Jeff's article. He hits the nail on the head. How long and far from the mean can you really wander? There is absolutely no disputing the widening of the trend. The 9/11 mini correction is exemplified here and then, bam, CDOs take off and you have a massive swing to upside.

Reality is finally starting to sink in. I hear it, I see it. This will be a 3 to 5 year buyer's market. Just watching the rental market is very telling what is in store for home values here. I would not want to have leverage on a walk up rental bldg today because the banks will be asking for a check if you have to refi, or at best the landlord will be seeing red soon.

expat

i am not sure what you are saying, economically the first set is better??? what do you mean by economically the first set is better?

for example, lets say you start out with 100k

1st set after 4 years you'll have 200k

2nd set after 4 years you'll have 244k

how is 1st set economically better?

He is saying you will have 200K, or 100K in profits, to PLAY WITH outside of that PM's performance of 0% for the next 3 years. But that goes against the argument you place, because you cant just assume 100% return, have foresight to see that next 3 yrs will be 0%, and take money out to invest elsewhere at higher yield.

It's obvious to me that prices have to go lower to meet incomes.

But it's *not* obvious to me that incomes will be permanently lower.

In other words, yes we had a bubble, and yes it deflated -- but if anyone is going to find another bubble to boost their incomes, it will be the folks on Wall Street!

"but if anyone is going to find another bubble to boost their incomes, it will be the folks on Wall Street!"

I agree with this statement...it's just a matter of who's left on Wall Street.

The Wall Street we knew the last 10 years is GONE. And not returning any time soon.

A little breakdown of the GS research report on the NYC RE Market:

http://tinyurl.com/6vgmar

Noah,

I realize that there is a lot of talk about how prices are already down 15-20%, but I am waiting for the lagging data to prove this out. Call me crazy, but so far all I have seen to back up a 20% drop is anecdotal posts on this site. Are there properties that have declined 20%? Of course. If someone overpaid, then their property may have fallen 50% in value. If someone got a great deal and made smart renovations, their property may have gone up in value.

To clarify my position, I believe that in the Manhattan co-op resale market, the average PPSF decline peak to trough will be 25%. What this translates to is a fall from roughly $1100 psf to ~$775 psf. Condos and new dev will perform differently as there was greater inflation and more speculation in these markets, and all the shiny new buildings are going to look a lot less shiny in 5, 10, 15 years. This doesn't interest me as I can't stand most condos or new dev properties, and they are a relatively small portion of the market.

I know it looks like the world is coming to an end, but NYC will survive and so will Wall Street. Yes, we will continue to get slapped on the wrist by Obama, the media, the pitchfork wielding populists until we're off the Gov't dole, but it will happen, and we will see a massive stabilization in the next 24 months.

One man's opinion.

How about this one?

327 East 3rd Street #4C in East Village

StreetEasy History

09/13/2008
Listed in StreetEasy by Elliman at $535,000
10/21/2008
Price decreased to $499,000
11/12/2008
Price decreased to $475,000
12/09/2008
Price decreased to $450,000
01/06/2009
Price decreased to $425,000

http://www.streeteasy.com/nyc/sale/348815-coop-327-east-3rd-street-east-village-new-york

JEFF -- Terrific analysis + (obvs) a great conversation starter. There's lots of quibbling that can be done (time period picked, compound vs simple, 1 BR sample vs other apts), but I can appreciate all the thought that went into your work here, as is.

The great thing about blog discussions is that you (or someone else) may extend the work you've done here into these further areas. For example, if one ran the same numbers for 3 BRs, I bet that prices would skew higher in more recent years because (a) there used to be relatively few 3 BRs in (then) new development, (b) newer 3 BRs are often nicer, larger and in buildings with more amenities than older 3 BRs (i.e., they are just not the same product), and (c) recent 3 BR sales are much more of that 'new' product, so the sample skews high for that reason alone.

I am sure there are many other things that complicate the then vs now analysis, but thanks for the start.

OT wrote:

"I realize that there is a lot of talk about how prices are already down 15-20%, but I am waiting for the lagging data to prove this out. "

Sure hope you aren't a seller because this is classic mentality that leads people to chase the market down, never catching up.

AS to Wall Street, sure it will survive as will NY, but the changes that are occuring are fundamental and will effect the way (and amount) the Street earns going forward (outsize leverage is gone, which is what led to outsize profits, among other things).

I am confident that there will always be individuals compensated extremely well, but I am equally confident that mediocre people will no longer be compensated at anywhere near the levels paid out in the last several years.

That decrease in compensation for the mediocre masses, coupled with return to sanity on the lending front, spells big trouble for NYC real estate.

Manhattan may be an island, but not as regards the paradigm shift we are experiencing.

Of course, you are entitled to your opinion.

This is one example when the comments have more or less completely undermine the story:

1. Let's be clear....when performing calculations of long term growth rates it is ESSENTIAL to show the compounded rates of return. Simply dividing a 10 year cumulative return by the number of years is, basically, a garbage number. If a service shows growth rates each year (as referenced above with Case Shiller), and you compounded those numbers, they would add up to a cumulative figure. That figure could not be divided by the number of years to arrive at the actual growth rate each year. Please can we discontinue debating this question as a legitimate conversation. Stop the insanity!

2. If the postings above are correct, and the prior 10 years to this study really did have essentiall 0% rates of growth, and the long term average is close to inflation, that would imply no bubble, and no return to the mean.

I'm a renter who has said for the last 5 years that $750 psf was my buy price in Manhattan. So I'm rooting for you Jeff. But this is an unconvincing post.

Love, The skeptic

EastVBoy - Not sure what point your post is trying to make. Checked out the property and it is pretty much a garbage product in a marginal (at best) neighborhood. I have no doubt that properties like that will sell at $600 psf or less when all is said and done. But properties like that never really went far above $800 even during the market peak, so I think my prediction of a 25% drop still holds. My point is about averages, not individual properties that will trade based on their own merits.

Through PropertyShark, I saw a report on 2008 4Q from Corcoran, and it must be lagging because it's not showing these declines yet. On the East Side it was showing a small gain in 1BRs and a small decline in 2BRs.

Price per square foot on the East Side (I think that incldued 34th-57th Street) was approx 800/ppsf and a similar number on the west side. Upper East Side, UWS and Downtown were approx 1200.

So, Skeptic, you may be able to find someone willing to hit your bid. Good luck!

Noah / Jeff,

Great work. Such metrics are very straight forward but the public is still in denial. Studies on human behavior point to conditions where they belive the future to be just like the recent past (20% a year gains). Until cocktail conversation begins to surround topics of mean reversion on property, prices will continue to fall sharply. Psychology of public is at work

Thanks

OT:

One man's trash is another man's treasure.

The only point I was trying to make was the velocity at which the market is being pulled-out from under Sellers.

I have first hand experience with this, but don;t want to get into the details here.

The point is: within the span of 1Q this property has been marked down by 20%. I'm making a point about the Rate Of Change.

How much further we have to fall before an equilibrium is reached is anyone's guess.

EVB

EVB,

I get your points, but there is no reason a fifth floor walkup that measures 478 sq. ft. near Ave. D should have ever been listed at $525,000 (over $1,000 a foot!!). Sure, there are some who may consider a tiny fifth floor walkup near Ave. D a "treasure", but not many. I think a fair price for that property is $400,000, and in this environment, would be surprised to see it move above $350K. Even at the peak of the market, there were those who over-priced and had to drop prices, so this anecdote doesn't illustrate much to me.

Points well taken.

I have lived in upper Alphabet city where the block between Ave A & Ave B is the 600 block.

I had presumed (without looking) that this property was further West.

Good analysis and let me say that I hope you are right and properties like this get back to "normal" prices.

I think we have found "common ground".

Yep, upper EV b/w A/B is a world apart from 3rd and D - too close to the projects and still very sketchy there. Always like finding common ground.

Hey I really like your blog and the given information about real estate. Great information.