Looking Ahead: More Upside or Downside Risk?

Posted by anamaria

Mon Mar 22nd, 2010 11:39 AM

Both Noah and I have been involved in several conversations about a current market outlook with readers on this site, Streeteasy and amongst ourselves. I therefore thought I would pose the question of: are people seeing more upside or more downside risk in this market? … and for those quant fans among you, how much on either end in terms of percentages?

Arguments for further downside risk:

- The Fed stopping its MBS purchases means rates will spike and prices will have to decrease to maintain current affordability levels.
- The rent / buy equation in NYC is still largely out of whack, even if it has come down from its previously astronomical levels … with rents continuing to fall, it makes no sense to purchase right now.
- The very slow NYC foreclosure process means we are not truly seeing the real distress in the city’s boroughs; Manhattan is not isolated enough to not feel the consequences this distress
- Unemployment is not expected to fall any time soon; its ripple effects will continue to be felt, and then some, as existing owners see no need to move and all potential first-time home buyers purchased during the last 6 months, benefitting from the tax credit.
- Banks can only continue their extend and pretend game for so long before the delinquency backlog catches up with them and us; home prices will then have to be written down to reflect book valuations.
- Nation-wide, housing starts are down; little real recovery can take place without new household creation and this is not on the horizon any time soon.
- The stage is set for a double-dip housing price downturn scenario; the past six months or so was a head-fake before the second phase of this downturn kicks in.

Arguments for upside risk:
- Unemployment is a lagging indicator – the economy always gets well into a recovery when unemployment finally starts dropping (average of about 1 year after the bottom).
- Housing starts are down and excess housing inventory is being absorbed; this is an absolutely necessary step for both housing and the economy to recover.
- Rates will definitely increase and there are plenty of buyers wanting to get in before they reach 7% or 8%. This thinking has already served to decrease inventory and stabilize prices [Each 1% (100 bps) increase roughly equates to a 10% decrease in the price of the home.] Unless you see property prices dropping more than 20%, wouldn't it be worth it to lock in now?
- Manhattan’s rent/buy equation can never be compared to that of the rest of the nation; it’s a unique place that keeps attracting businesses, students and investors, alike. There will always be a premium for living and owning here.
- The weaker dollar is bringing international investors back into the NYC market, the momentum of which is only likely to continue.
- The fact that bonuses were back with a vengeance this year, while not providing a massive cash infusion, has certainly served to boost morale and confidence for sellers and buyers, alike.
- Lastly, the worst is behind us (and, frankly, it was nowhere near as bad as people expected); no longer do we have significant downside potential that would justify material discounts from sellers; we have turned the corner, as evidenced by an uptick in prices and activity at the low-end of the market which will only spread to the higher end.

Given that this market did have an adjustment already, the general consensus that I’m gathering from numerous conversations is that in a worst case scenario, we have another 15% left in terms of decreasing home values, and that’s NOT in the sub-$700k segment. The best-case scenario I hear is a flat to low single digit increases 2010, with low single digit improvements in 2011.

So … what say you, UD readers? First, does this cover both sets of arguments? Second, which side are you leaning towards and how are you quantifying your thinking?