New York could see a double dip in residential market

While prices and sales activity have picked up in New York in the last couple of months, a number of analysts are predicting a second round to the downturn here, with prices likely to fall. Estimates range from a drop of a few percentage points to up to 17 percent.

Barry Ritholtz, the New York-based CEO and director of equity research at Fusion IQ, an online quantitative research firm, noted that “there’s still some downside to prices” in New York.

“The good news is, the worst of the bloodbath is probably behind us in terms of falling prices,” he said. “The bad news is, unemployment continues to tick up and foreclosures continue to ramp up. I do not think New York is at a bottom quite yet.”

Financial analysis firm Fiserv predicted last month that the New York City metro area will underperform the nation as a whole over the next two years, with prices falling another 17.4 percent by June 2011.

The biggest problem New York is facing is unemployment. According to the state Comptroller’s office, the city shed 115,700 jobs as of June and is expected to hit 328,000 jobs losses — 47,000 of them in the securities industry — by the third quarter of 2010, boosting an unemployment rate that has already hit 10.3 percent.

Jonathan Miller, the president of appraisal firm Miller Samuel, said there has never been an economic recovery in New York at the same time that the finance sector was suffering.

“Employment on Wall Street in New York City is still falling,” he noted. “There has not been an economic recovery in New York City, ever, when Wall Street employment was declining — even factoring in bonuses.”

Miller also noted that one factor behind the recent reported uptick in Manhattan activity — sales jumped 45.6 percent in the third quarter compared to the second quarter, while the median price rose 1.7 percent in the same time — is seasonality.

“Though [prices are] adjusted for seasonality … I still think seasonality is playing a role,” he said.

With Manhattan prices already off roughly 20 percent from their peak, Miller predicted either mild housing-price erosion of a few percentage points or, at best, a few years of “moving sideways,” which would mean flat prices.

Meanwhile, there are also
homeowners in New York City, mostly in the outer boroughs, who have been able to hang on until now, but, like their counterparts nationally, are expected to default on their mortgages and see their properties go into foreclosure. More foreclosures tend to increase sales activity, but also put downward pressure on real estate prices, Miller said.

About 11.6 percent of mortgage borrowers in the New York City area are underwater, according to data from Deutsche Bank. And, as The Real Deal has reported, a recent report by the bank offers a dire prediction that 77 percent of borrowers with outstanding mortgages in the New York City area will be underwater by the first quarter of 2011, well above the bank’s projected national average of 43 percent.

Nationally, some of the more bearish economists predict a round two on the recession in housing prices as well.

At The Real Deal’s annual forum last month, leading economist Nouriel Roubini said he expects home prices to fall another 7 to 10 percent nationwide over the next year. Roubini, who has been called Dr. Doom for his dire (and largely accurate) forecasts, predicted an extended recession or “U-shaped” recovery, and said there might even be a “W-shaped” recovery, meaning that there could be a second financial crisis ahead.

Fiserv predicts an additional national price drop of 11.3 percent by June 2010.

Other analysts predict that the number of foreclosures — which as of September had been up for 43 straight months — will continue to increase through 2010.

“Prices will resume declining again early next year,” predicted Mark Zandi, the chief economist of Moody’s Economy.com. “The bulk of the price declines are over, but I think we’ve got another 5 or 10 percent to go. The principal reason for that is a pick-up in foreclosure sales early next year.”

The loan modification program created by President Obama, which has taken loan servicers a while to figure out and apply to qualified homeowners, has simply delayed pushing other homeowners through the foreclosure process to sale, Zandi said.

“As the loan servicers figure out who’s qualified, they’ll resume pushing loans through, and those foreclosure sales will pick up again,” he said.

Real estate experts point to rising national loan delinquency rates as an indication that foreclosures will grow. For instance, the serious delinquency rate on homes backed or held by Fannie Mae, the government-backed mortgage finance behemoth, topped 4 percent in July for the first time in history.

The possibility that today’s historically low interest rates might rise is also a cause for concern. The federal government has prompted homebuyer activity by keeping interest rates artificially low, primarily by purchasing more than a trillion dollars of undesirable securities through Fannie and Freddie. Those purchases will continue through March 2010, Zandi said.

“If the government ends its commitment at that point in time and doesn’t continue to buy, then mortgage rates will rise more quickly,” he said.

Miller agreed, saying, “Who’s going to buy those securities? If banks have a hard time selling them to investors, that means mortgage rates are going to go up.”

That rise in the cost of money, experts said, should place additional stress on the housing market as well.

Though he’s not predicting a second financial crisis like Roubini, Ritholtz predicted a “W” shape to the housing market’s recovery, since markets tend to overcorrect in recovery.

“I wouldn’t be surprised to see homes continue to get cheaper over the next two to three years,” he said. “Although it won’t be the 25 to 30 percent drops we’ve seen so far, there’s probably another 5 or 10 percent … to go in some regions,” including New York. And up to 15 percent in some parts of the country, he said.

Still, the exact timing and extent of the home price contraction is difficult to predict, he said. Much of the discussion about national housing prices doesn’t necessarily apply to Manhattan or brownstone Brooklyn, for various reasons, said Frederick Peters, the president of Warburg Realty Partnership, the Manhattan-based brokerage.

For instance, Manhattan and brownstone Brooklyn have not suffered from a high rate of foreclosures, primarily due to residents taking out fewer of the Alt-A and exotic home mortgages, but also due to the rigorous process used by co-op boards to assess potential buyers, Peters said.

Peters said he anticipates that Manhattan and brownstone Brooklyn will hold onto the price gains seen in the last quarter — barring an unforeseen calamity, such as another large round of layoffs in the financial sector. Peters said he expects prices to remain flat for the next three to six months. He resisted predicting beyond that.