Predicting 60% Decline for Manhattan Property; TARP for Trump?

A very effective guide for long term home values is actually median home price to income. Houses actually don’t gain in value over the long haul. Urban density and usage shifts can dramatically change the value of real-estate, but outside of that real estate is just a flat asset. Here is an academic paper showing the value of prime real estate in Amsterdam over a 400 year period, it's a break even proposition.

A home is only worth what people can afford to pay for it. If you can squeeze more people onto a given area of land and create more homes then you can maximize the value of the land such as in Manhattan over the last few decades.

Over time the utility function of real estate is scarcity relative to the available income of those seeking the homes. I mention this relative to an article posted in June 2007 which anticipated a 20% nationwide property decline using this metric.

Historically relative to growth and all things being equal, homes are worth about 3 times the median income of a household. Please note this includes adjustments for cultural shifts in 2 income households over time. Economists see real estate more as a positional scarce good. Housing capital with a life of 50 years for example has a replacement rate of 2% year. If a housing market starts growing beyond that rate and the increased population something fishy is going on. Securitization magic anyone?

The U.S. grand daddy real estate market is the metropolitan New York area which has been relatively immune to decline. The excuses for why New York real estate is special equates to the number of residents in the city. Unfortunately the quantity isn't equitable to quality. Because people want to believe they are special they parrot messages they have heard to that effect. Such ethnocentric or industry centric myopia is the nectar for those wonderful bubbles that pop up every 10-20 years.

According to the BEA, the MSA metropolitan statistical area known as “New York-Northern New Jersey-Long Island, NY-NJ-PA” has an average per capita income of $53,428 as of 2007. If one assumes 1.8 wage earners per household we end up with a household income of $96,170. Using the crude 3:1 rule of thumb, housing should be priced at $288,510. The reality according to Realtor for Q3 2008 is at $452,500 per home. Reversion to the mean indicates a 36% decline is reasonable to expect.

Sadly the decline in financial jobs which ballooned to a ridiculous percentage of S&P 500 earnings means a drop of %50 from peak to trough is not unimaginable in the New York MSA.

The same figures if plotted for Manhattan are even worse as the distortions of increasing density and influx of high flying finance jobs which was a positive force for property values is now going to go in reverse with a multiplier effect. Predicting peak to trough declines of 60% does not seem egregious, especially when one considers the shift in desirability for certain neighborhoods as services diminish and vacancies increase.

The tide of hip, cool or gentrified that crested after the Starbucks (SBUX) arrived on the corner is now ebbing rapidly. The city has a 23% poverty rate. Grande Latte soy mochaccino anyone?

Although dangerous, to put a number and a date to an opinion, my guess is a 60% peak to trough decline in 12-16 months for Manhattan residential property. As things decline rapidly in the metro area. We are all living faster now, still not sure what the rush is about, but we if we keep those Blackberry's and i-phones humming we feel connected and thus must be winning.

The only caveat I put on this prediction is please keep it in nominal terms as the printing presses are humming at the fed. Oh and if you liked paying for bankers bonuses you’ll love the catch phrase “TARP for Trump!”

Comments

[Moon Kil Woong:]

Very good point. A house is an asset you get utility out of, living, not a money machine.

As for prime property real estate in big cities, you can't really value it off mean income like others because it is often gentrified wealthy people swapping properties. They could make 0 and still buy you out 7x over (Wall Street quote). That doesn't mean to say, as their paper wealth vaporizes they won't be stiff lipped about the next house they swap down to.

I'm with you on the value of real estate still declining. Especially areas laden with laid off bankers. I just think it won't be as extreme as you are implying.

Feb 04 02:51 AM

[joes:]

The financial business became bloated and loaded with corruption and inefficiencies, i bought a place in NYC in 2002, sold in 2006 and made enough money that it was clear that the increases were unsustainable.

The problem is that everyone was getting two loans, one for the real mortgage and another, often from family, to make up the down payment and fees.

NY is big and has resilience but it is in for some tough times, it will be the end of premiums for buildings with famous name, until next time.

Feb 04 11:26 AM

[P. Kalven:]

This is a reasoned and logical argument, but where is the historical data to support the proposition? If you eliminate the decline of values in one company towns, appreciate that the Dutch Monarchy operated a brutal and repressive colonial regime that led to their declining fortunes once Nutmeg became a spice rather than the cure all for the Black Plague; do you have an example of a 60% decline outside of the current crisis, which has more to do with over leveraging the system, than the product? Real Estate is a supply and demand, highest best use commodity; do you see a 60% decline in net migration to NYC?

Feb 04 02:28 PM

[Sanibel:]

New York City real estate values are distorted because of rent control. Many people prefer to rent because it is cheaper than a mortgage for a home. As home prices come down the monthly mortgage cost becomes closer to rents, won't we see a dramatic shift from renting to owning? It seems to me this pressure limits the downward risk of real estate, at least in Manhattan. Any thoughts on this?

Feb 04 03:11 PM

[johnhaskell:]

other 60% declines:
Hong Kong past decade
Tokyo 1989-present
Any major German city 1991-present

and I didn't have to even get into the history of the nutmeg market.


On Feb 04 02:28 PM P. K. wrote:

> This is a reasoned and logical argument, but where is the historical
> data to support the proposition? If you eliminate the decline of
> values in one company towns, appreciate that the Dutch Monarchy operated
> a brutal and repressive colonial regime that led to their declining
> fortunes once Nutmeg became a spice rather than the cure all for
> the Black Plague; do you have an example of a 60% decline outside
> of the current crisis, which has more to do with over leveraging
> the system, than the product? Real Estate is a supply and demand,
> highest best use commodity; do you see a 60% decline in net migration
> to NYC?

Feb 04 05:32 PM

[johnhaskell:]

1. Rent control only applies in NYC, not the whole metro.
2. It applies to a small minority of apartments
3. The shift from renting to owning has already happened, due to the recent bubble and absurd financing structures. It's impossible for NYC to have yet another huge shift into owning.


On Feb 04 03:11 PM Sanibel wrote:

> New York City real estate values are distorted because of rent control.
> Many people prefer to rent because it is cheaper than a mortgage
> for a home. As home prices come down the monthly mortgage cost becomes
> closer to rents, won't we see a dramatic shift from renting to owning?
> It seems to me this pressure limits the downward risk of real estate,
> at least in Manhattan. Any thoughts on this?

Feb 04 05:33 PM

[john1:]

Just more unpatriotic negativity from liberals who hate America, and the troops.

Feb 05 03:21 PM

[Reclined:]

johnhaskell,

what German cities with house prices declining by 60% from 91 to now are you talking about? I can't comment on the other markets you're citing but at least for the cities I am familiar with (Berlin, Hamburg, Munich, Cologne, Stuttgart, Düsseldorf) your statement does not hold true. While there hasn't been a large increase there weren't any large decreases either.

And, maybe interestingly, in Germany the relation between income and house price has been and still is around 4-5. (To us, houses in the US outside the biggest cities seem inexpensive). Most people expect to be mortgage free just before entering retirement.

Regards

Feb 05 03:27 PM

[Refuse to b...:]

The futures markets are predicting a 27% decline from current prices in New York Metropolitan area, with a bottom in 3rd quarter 2010

Feb 07 12:56 PM

[Refuse to b...:]

I hope we do not become a society of chronically overpriced housing, like Germany.

The result would be catastrophically low birth rates just like in Germany, where people pay so much for housing that they can't afford to have children.

Soft genocide.

Feb 07 12:58 PM

[truuluv:]

if ppl in nyc would adjust their ego's to the true value of their homes
we could finally get to the bottom and burst this bubble - homes
would still have more than doubled in 10 yrs, just not quadrupled

Feb 08 11:26 PM