04 June 2010

NYC Housing Bubble Not Over Yet

The other shoe still hasn't dropped in Manhattan's housing price bubble:

About 8,700 new condos sit empty in Manhattan, with 75 percent not even listed for sale yet, said appraiser Miller Samuel Inc. Priced at levels the market no longer supports, they’re selling so slowly it would take as long as seven years to find buyers for them all. . . .

In Manhattan, the average apartment, adjusted for inflation, cost 8.1 times annual rent from 1991 to 1997. . . . Then in 1998, Manhattan prices began a decade-long climb, with year-over-year values rising by 10 percent or more in most quarters. By the second quarter of 2008 apartment prices peaked at 22.4 times annual rent. . . . Manhattan’s multiple in the first quarter of 2010 was 19 times rent, even as rental prices fell 6.1 percent from a year earlier[.]

Even with mortgage interest rates at record lows, the NYC market is clearly inflated.

Maybe the most puzzling thing is why prices aren't falling more quickly. This is the home of Wall Street, where asset prices swing wildly in hours, and many of the units are owned by developers and are at any rate, not occupied, so sentimental attachment to a residence isn't driving the market either.

The most quirky thing about the market for NYC condos is rent control, but new units aren't rent controlled and not much has changed in the rent control situation since 1991.

Part of the problem may be that developers think that their failure to sell units is largely a function of a lack of available financing for would be buyers, rather than a lack of willingness to pay the prices asked for the units. "Mortgage-finance company Fannie Mae doesn’t back loans made in new buildings where fewer than 51 percent of the units are in contract." In earlier years, securitized mortgage and bank financing jumped in to get the first half othe units sold. Now, that the private sector mortgage finance market has withered, there is a chicken and egg problem that developers may be betting can be overcome.

Also, all but the biggest real estate developers have to personally guarantee their construction loans, so to short sell a property that is worth less than its loan is to insure the developers own personal financial ruin. Most developers would rather keep open some hope of surviving with their personal assets in tact, even if that means that on average, their loss will be greater. For the most overextended developers, they will be wiped out and have to file for bankruptcy as it is, so holding on even if it means that the bank may suffer a bigger loss as a result doesn't impact them.

Many bankers are also not eager to push to foreclose on a loan quickly when there is any hope that waiting could prevent the banker from having definitive losses. So they aren't looking for execuses to foreclose that are any less obvious that multiple missed payments.

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