Deutche Bank put out a report that was reported in
Time Magazine, Bloomberg news and various other media outlets. Deutsche Bank predicted that New York median sale prices would drop another 40% from Q1 2009 figures and 52% from the height of the market in 2007.
Here is their New York analysis:
In New York, prices still have to drop an additional 32.0% from Q1 2009 levels just to restore affordability to its historic high (1998), as has already occurred in 74 of the top 100 markets. But including model risk factors beyond just affordability, we are projecting a 40.6% decline, from Q1 2009.
This is, however, improvement from the projected decline that we published in March (47.4%). The improvement is due simply to the fact that recent price declines have brought New York closer to the trough. Somewhat confusingly, actual home price declines can impact our analytical framework in competing ways. First, all else equal, if prices have declined, then the MSA should be that much closer to its bottom for prices. However, because our model also includes a risk factor score for negative home price momentum, dramatic price declines can also have at least a partially offsetting negative effect.
The peak for home prices in the New York MSA was in Q2 2007, when the median home price hit $552k. As of Q1 2009, the median home price had dropped to $446k, down 19% from the peak. While this is painful, it pales in comparison to what has already been experienced in many other regions of the country, particularly in parts of California, Florida, Arizona and Nevada. Many MSAs in those states peaked earlier than New York and prices have been falling in those areas for longer. Our total, peak-to-trough forecasted decline in New York is 52.1%.
A few essential facts to keep in mind:
The report projects price declines two ways: first, from data produced at the end of Q1 (what they termed “current-to-trough”) and second, from the top of the market – Q2 2007 – to the projected bottom of the market (“peak-to-trough”).
In discussing “New York” the report is actually surveying the “New York Metropolitan Statistical Area” – an area that encompasses Westchester, Long Island, Northern New Jersey, parts of Connecticut as well as the City of New York. So there is a distinction to be made between price activity in Manhattan or Brooklyn or even the Bronx and Queens (which are not broken out by the report at all) and the New York MSA as defined by Deutsche Bank.
It is very probable that the New York MSA’s median price is heavily inflated by Manhattan sale prices, which should make one question the wisdom of adopting a methodology that treats city sales equivalently with Wayne, NJ and White Plains, NY.
The picture Deutsche paints for the New York MSA is bleak because we have had the least improvement in affordability from the historical moment when property in our region was at its most affordable – all the way back in 1988!
(“Our HPA outlook is predicated on the assumption that the home price correction underway will take the form of mean reversion to historic levels of affordability. . . . We calculate an affordability ratio for a given area using the local median home price, median income and an MSA-specific mortgage assumption.”)
In other words, prices in our region would have to erode by 32% just to return the affordability ratio back to par. This is the primary reason why they have singled out New York MSA for extraordinary price contraction.
However, this does not take into account New York’s role as America’s global city and the accompanying boost to the cost-of-living that results from that fact.
Affordability is subjective and relative. It is also debatable whether New York’s price activity is truly comparable to that in other American metropolitan areas or whether it would be more appropriate to judge it in relation to other global centers like London, Tokyo and Hong Kong.
With all due respect to Deutsche Bank their predictions have been wrong many times before. I recall it was the chief economist at Deutsche Bank that predicted a recession, a global market collapse and financial catastrophe around the world due to a Y2K computer meltdown. They spread the fear, but as we all know the year 2000 came and went without a problem.
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