Stuck in the woods

While New York City brokers may be relieved to be doing deals again after the deep freeze of the recession, not everyone is optimistic about the state of the recovery.

Experts, from former Federal Reserve chairman Alan Greenspan — who recently said a second recession was possible if residential prices go down — to New York City appraiser Jonathan Miller have indicated that both the U.S. and New York City are not economically out of the woods yet.

For one thing, while residential prices in New York have stabilized since the worst of the downturn, experts say substantial price increases here are unlikely anytime soon.

Miller, CEO of appraisal firm Miller Samuel, whose quarterly reports are the most widely followed barometer of the New York City residential market, also noted that there’s been slim progress on the job creation front, which is widely considered the key to a true recovery.

“Little, if anything, has been implemented to improve the employment situation in any meaningful way. So it’s hard to imagine housing prices will rise in the next couple years,” Miller said.

“The best-case scenario seems to be moving sideways, with some markets [around the country] seeing declines, though nothing as pronounced as what we just went through.”

Hiring has rebounded more quickly in the financial services industry than in the economy as a whole. In February through May alone, financial services companies in New York hired 6,800 people, driving the city’s financial services workforce up to 429,000, according to the New York State Department of Labor.

“The hiring on Wall Street is encouraging, and layoffs there only ended up at half of projected levels,” said Miller.

However, employment is still not up to pre-recession levels.

Overall, New York City is still down 131,000 net jobs since August 2008, just before the financial crisis struck in earnest.

Still, the housing numbers in New York paint a much brighter picture than they do in the “sand states” of Arizona, California, Florida and Nevada, where the crisis hit hardest.

Yet many are concerned about the transition of New York City into the so-called post-stimulus housing market.

Sales activity in the city has rebounded dramatically from last year. According to Miller Samuel data, sales volume shot up 79 percent in Manhattan in the second quarter compared to the year-ago quarter. For the metro area, it jumped 44 percent in May from a year earlier, according to the most recent data from real estate research firm Radar Logic.

However, much of the increase resulted from the homebuyer tax credit that expired April 30, experts said. So volume is likely to fall back, said Quinn Eddins, director of research at Radar Logic.

Indeed, preliminary data show metro-area sales dipped 8 percent in June from the previous month, Eddins said.

What’s more, even at the elevated levels, sales activity remains far below average. Sales activity in May, according to Radar Logic, was still 32 percent below the average of the last 10 years.

Meanwhile, median residential prices in Manhattan jumped 7.6 percent to $899,000 in the second quarter from the prior-year quarter. But that’s still 12.3 percent lower than Manhattan’s median price of $1.025 million in the second quarter of 2008.

Nationwide, home prices are down 24 percent from the peak, according to real estate research firm Zillow.

“In a sense, housing is more stable in New York City than the U.S. as a whole, though it will still take a while to ride out the bubble,” said Sam Khater, senior economist for research firm CoreLogic.

New York City didn’t have nearly as many exotic and subprime mortgages as were written elsewhere, he said. So it’s not surprising that only 11 percent of metro New York mortgages are underwater compared to 24 percent for the nation as a whole, according to CoreLogic. But more mortgages are expected to tip into default here.
And there are other dark clouds looming.

For example, the new financial reform law, which will restrict some of the profit-making operations of big banks based in New York, could restrain hiring and salaries on Wall Street.

“The direction we’re going with financial reform means lower risk-taking, and that means lower profits; lower profits mean lower bonuses,” Miller said.

He noted that Wall Street should end up being a significant contributor to regional recovery, “but probably won’t carry the same weight it would have a few years ago.”

Eddins agreed. “More new units are being sold by developers in Manhattan, and the pickup in financial services may have something to do with that,” he said. “But I don’t think that will be enough to start home prices ratcheting up quickly, or even at a normal pace.”

The overall economic and employment outlook is weak, and that should keep a lid on home prices. “People feel insecure about their jobs, and whether their income will grow,” Eddins said. “There’s also insecurity about the price of their potential new homes. They’re worried prices won’t rise, so they’re hesitant to make an investment.”

Nationally, the economy is likely to stay weak for the next year or two, said Khater. While the economy may not meet the formal definition of a double-dip recession, “it will feel like we never left the recession for the average person,” he said.

Khater said he sees New York City home prices climbing just under 1 percent for the next year, compared to a decrease of about 1 percent nationwide.

Some expect the stagnation to continue far after that. Nationally, home prices will bottom later this year and then stay flat for three to five years, said Stan Humphries, chief economist of Zillow. He noted that New York City “is in many ways tracking the overall trend, so it’s likely to be similar.”

Within the city, areas with a high concentration of foreclosure activity will cause more price declines, Miller said. That’s largely portions of the outer boroughs, including eastern Brooklyn and Queens. As of late July, 45 Manhattan homes were in foreclosure and 383 in pre-foreclosure, Eddins said.

In Manhattan and brownstone Brooklyn, the biggest downward price pressure will come on small units priced under $1 million, and on the most expensive homes — $15 million and up, said Frederick Peters, president of Warburg Realty Partnership.

The low end should suffer, Peters predicted, because there are so many of those homes on the market.

As for the top end, “There is no fever in that market. Buyers are very value-conscious and don’t want to be ostentatious. The culture has changed considerably,” Peters said.