Housing in the New York Metropolitan Area – February 28, 2009
The turmoil in the housing markets has been a prolific topic for the media, professional journals, and politicians. The origins of the problem lie with the regulators, politicians, as well as mortgage and real estate brokers, and some would say with Joe Homeowners who allowed themselves to be flattered into thinking they could afford more than they actually could. Who’s fault? Remains a big question. A more important and practical question, however, is how low will prices tumble before they stabilize. And what can a community and the nation do to ensure that the real estate markets recover?
Demand for housing in a given neighborhood is driven by population, number of households, employment and income in that particular market. In the New York Metropolitan area, prices have been falling at an accelerating rate that is expected to continue into 2010 and maybe beyond. Unemployment has been increasing, with major layoffs starting at the end of 2008. As a result, the impact on housing in Manhattan and the surrounding suburban areas will escalate throughout 2010.
Let’s look at the basics for the Long Island market which is directly impacted by the economy of New York City to the west.
History of Housing Price Changes
The following chart combines information showing the changes in conventional interest rate and the average prices in Nassau and Suffolk Counties on Long Island. The housing data is based on information developed by George McCarthy, MAI and MacCrate Associates LLC, using the multiple listing records of the Long Island Multiple Listing System.
The chart illustrates several common themes that are important to understand. Though prices remained relatively stable during the 1990’s, they began to increase in 1998 and into the 21st Century. As the Federal Reserve lowered interest rates after 9-11 and underwriting rules relaxed, as witnessed by the re-introduction of low doc, no doc loans and the proliferation of adjustable rate mortgages, prices began escalating quite rapidly until peaking in 2006. These subprime and Alt-A types of loans have been more difficult to obtain as lenders tightened standards in 2008.
Who benefits the most from relaxed lending rules? One must remember that employment, population and the number of households on Long Island have been relatively stable, so the primary increase in demand illustrated in the charts during the period from 1998 to present was most likely coming from first-time home buyers or renters looking to own. This may be true in Nassau County more than in Suffolk County, since population growth in Suffolk County has been slightly higher. So relaxed lending rules appears to have contributed to a direct decline in one segment of market demand: the first time buyer. This segment of housing demand, renters becoming owners, has effectively disappeared.
Median Cost of Housing
Historically, housing costs have ranged between 28% and 36% of the prospective homeowners’ income. The following chart indicates the changes that took place in the Long Island housing market during this housing bubble.
The median cost of housing on Long Island escalated to more than 37% as homeowners took on more debt, real property taxes increased, and utility costs escalated. In fact, some reports indicate that cost of homeownership on Long Island is in excess of 40%. For the entire state the ratios are not healthy. While utility costs have subsided, real estate taxes, insurance and the other costs associated with homeownership have continued to escalate. If we excluded the wealthier communities, especially along the North Shore of Long Island, the cost of home ownership far exceeds the standards recommended by Fannie Mae and other government agencies.
Prices are not expected to stabilize until they fall to a point where the cost of homeownership is in line with the long-term average housing cost. This important realization on the housing economy has to be combined with the economic realization that real incomes have declined in the US since the late-1990s. What are the structural implications of these conflicting situations?
Another Way to Look at the Data
PMI elevated the market risk of mortgage lending on Long Island during the last quarter. The following charts were based on the U.S. Census data. The average and median sales price were compared to the median household income on Long Island in Nassau and Suffolk Counties.
The ratios are skewed by the higher ratios indicated between 2003 and 2007. We can observe that historically when prices were more normal, the average and median sale prices were between 2.84 (in Suffolk County) and 3.55 (in Nassau County) times the income. Based on the reported estimated census household income on Long Island, the following chart indicates that Long Island median home prices in 2007 more than 20% higher than they would have been had banks relied on normal lending standards.
This is not a pretty picture for the Long Island market if the federal bailout programs fail. One can apply similar calculations in New York City and the outer boroughs to understand the risks associated with investing in these residential market. The indication is that this is not just a cyclical situation.
Note: Special thanks to Noreen Whysel who contributed to constructing charts and comments.
Participate in a short survey on land value. If you take the survey and would like a copy, you must email Jim.MacCrate.MAI.CRE@gmail.com to obtain a copy of the results and the analysis. We will be writing analysis and forecasting the estimated drop in land prices based on this information and other data that we have collected.