Archive for August, 2008

Still Skating in New York

posted on August 23rd, 2008 filed under: Real Estate News

One of the remarkable things about the housing bust is that real estate is doing fine in the nerve center of madcap finance: New York.  Take, for example, the price action in several local markets in southern Westchester County.  These are close-in suburbs of New York City.  As the chart below demonstrates, these bedroom communities to the world’s financial capital appear to be skating along without experiencing the devaluation that has enveloped so many other places.

One possible explanation is that dollar devaluation attracted foreign investment in Manhattan real estate, thus propping up the buying power of young couples who often sell Manhattan apartments and move to Westchester after starting a family.  It’s worth noting that the Manhattan market may have rough sledding ahead.  Fund manager Ken Heebner called a top in Manhattan real estate about a year ago.  If he proves right, that could pressure the Westchester market.  On the other hand, in the early ’90s, when Manhattan fell by 25% to 50%, Westchester basically went sideways, with only minor dips.

The chart shows median prices per square foot from 2000 to 2008 in Larchmont, Bronxville, the Bronxville P.O. area of Yonkers, and Edgemont.  Please note the data ranges in price and elementary schools.  Keep in mind that the data for 2008 represent a partial year, until August.  Somewhat lower prices per square foot are often registered toward the end of the year, so the final ’08 numbers are likely to be a bit lower.

This is not a recommendation to buy in these areas, just an observation that prices have not fallen in the NY ‘burbs the way prices have fallen elsewhere.


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Miami — Now with Mountains!

posted on August 11th, 2008 filed under: Real Estate News

Of homes for sale, that is.

Seriously, though, there’s a question about what the inventory numbers are telling us right now.  The charts below show the months’ supply of homes for sale in Miami, Coral Gables and Pinecrest.

Months’ supply means the number of homes on the market in a given month divided by the number of homes sold that month.  The result is the number of months it would take to sell all the homes on the market if the pace kept up and there were no new listings.  Of course, the pace changes and there are new listings, so the number never goes to zero.  But this is one of the most objective and important measures of market conditions.

The perenial pattern is that supply rises at the beginning of the year with new listings, and recedes into the summer as deals from the spring market close.  So we should expect seasonal fluctuation.  In a normal market, the pattern would be a cycle within a sideways channel.  In a weakening market, the pattern is a cycle within a rising channel.  In a strengthening market, the pattern is a cycle within a downward channel.

As you look at the charts, keep in mind that the direction of months’ supply does not dictate the direction of prices, at least in the short term.  A balanced market is generally regarded as about 6 to 8 months’ supply.  Anything more is considered a buyer’s market characterized by downward pressure on prices.  Anything less is considered a seller’s market characterized by upward pressure on prices.

The data below therefore suggest continued downward pressure on prices.  But a turn in the trend is a necessary precondition to recovery, so it bears watching.

Here’s the chart for Miami.  Is it receding after a peak, or is it just making another higher low within a still-rising channel?


Below are charts for Coral Gables and Pinecrest.  Are they leveled off and ready to decline?  Or are they headed higher again?





It might be tempting to see the recent declines in months’ supply as an indication that the market has turned the corner toward recovery.  But the recent data are from the spring-summer period when the months’ supply should be falling anyway.  Beware wishful thinking.

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Math Problem

posted on August 2nd, 2008 filed under: Real Estate News

Anyone remember the old conservative lending formula that says a person’s home payments (including principal, interest, taxes and insurance, also known as PITI) should be no more than 28% of their gross income?  What would happen if we went back to those tried and true lending standards?  It’s a question worth asking, because we just might be headed that way.

Here’s the answer: A person’s loan should be no more than about three times their gross income.  That’s a scary concept, because most people have been borrowing way more than that, and a return to old standards could mean continued downward pressure on home prices.

The math is plain.  The old standard says .28 x gross income = PITI.  With interest rates a bit over 6%, the P&I portion is about 7% (gotta pay principal).  Taxes are usually 1% to 2%, and insurance is generally less than 1%.  Figure that T&I add up to another 2%.  Therefore, total payments = 7% + 2% = 9% of the amount borrowed.  Plugging that into the old formula: .28 x gross income = .09 x amount borrowed.  In other words,

.28 / .09 = amount borrowed / gross income = approximately 3.

Consider what that means for places like the Miami suburbs of Coral Gables and Pinecrest, or many of the suburbs around New York City, like Westchester County.  The median home price in all these communities is still about $600,000, and the median household income ranges from about $70,000 to $100,000.  Traditional lending standards would say that the median household should borrow no more than about $210k to $300k.

Where would the other $300k to $390k come from to pay for a $600k home?  Savings?  In a country where the savings rate is near zero?  Think about it: A household with income of $100k would have to save 10% of that income for 30 years to come up with $300k.  (Yes I know, savings appreciate, but over a 30-year period, house prices appreciate too.)

It’s really been a sort of Ponzi scheme in which prices continued rising faster than incomes as long as people were willing to borrow more aggressively.  Inevitably, the time was reached when a greater fool could not be found, and the scheme exhausted itself.  Mr. Ponzi, meet Mr. Minsky.

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