From the Wall Street Journal:
New York, Boston Prices Expected to Fall Further
By JUSTIN LAHART and CONOR DOUGHERTY
DECEMBER 31, 2008
Although New York has been at the epicenter of the financial crisis, housing prices in the city haven’t dropped nearly as fast as cities elsewhere. The same is true of the financial hubs of Boston and Charlotte, N.C.
But that doesn’t mean these cities are skirting the worst of the housing bust. Rather, markets where price declines have been slightest may be in worse shape, because prices still have further to fall before enough buyers step in to bring housing activity to normal. Meanwhile, heavy foreclosure activity in hard-hit areas like Phoenix, Las Vegas and San Diego are bringing prices into equilibrium. Those cities may be closer to a turnaround.
In October, single-family-home prices in the New York metropolitan area were down 12% from the all-time high they reached in 2006, according to the S&P/Case-Shiller home-price indexes. That is roughly half the decline registered by the 20-city index and well short of Phoenix’s 41% drop. A separate index of New York-area condo prices was down just 4% from its peak.
Part of the reason New York housing prices have held up is that lot of New Yorkers are holding on to their homes rather than selling for less than the Joneses got last year. Esty Lobovits, a 31-year-old lawyer in Manhattan, has been looking to buy an apartment since the summer but says she isn’t willing to pay what she considers to be inflated prices. Many apartments she has viewed are empty or filled only with staged furniture, and brokers are more aggressive, sometimes following up with her broker even if Ms. Lobovits hasn’t placed a bid.
In the language of Wall Street, with asking prices not dropping to levels where bidders like Ms. Lobovits will pick them, the market isn’t “clearing.” The Federal Reserve Bank of New York noted in its “beige book” survey of regional conditions this month that many would-be buyers have opted to rent out their apartments rather than sell, driving rental prices lower — particularly in higher-end buildings.
While New York is probably an extreme example, its inertia is being repeated in many of the other housing markets that have yet to see sharp declines. Some owners with hefty mortgages can’t face selling their house for less than they owe, but also, many don’t want to sell at a steep discount to what a house down the street might have fetched two years ago.
New York’s slower adjustment is a more typical housing-market decline, with a deteriorating economy grinding down values over time. The last time prices in the area fell, starting in 1988, it took three years before they hit their trough, at 15% lower.
This time, the price decline may be far more severe. While subprime mortgages didn’t play as big a direct role in the New York real-estate market as elsewhere, there were plenty of Wall Streeters who made their living off of packaging those loans into the complex securities and trading them. Even last year, with the housing market fraying, Wall Street pulled in record bonuses.
“Right now, people are still living on last year’s bonus,” says Barclays Capital economist Ethan Harris, who is based in New York. “You can sort of feel the local economy on the edge of a cliff.”