As i noted in an entry the other day, Deutsche Bank issued a report on June 15, 2009 in which they projected an additional 40% slide in the NY housing market. I have now reviewed the report, entitled "Update: The Outlook for U.S. Home Prices". It was prepared by a team at their global markets research group.
The first note is that the report is organized by MSA (essentially metro or part of a metro region), not by city. For NY, as for every other city, their projections are for the whole MSA (in this case the 5 boroughs, Westchester & northern NJ. The census bureau broke off most of the rest of the region into their own categories after 1980).
In their own words:
The first note is that the report is organized by MSA (essentially metro or part of a metro region), not by city. For NY, as for every other city, their projections are for the whole MSA (in this case the 5 boroughs, Westchester & northern NJ. The census bureau broke off most of the rest of the region into their own categories after 1980).
In their own words:
"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... including model risk factors beyond just affordability, we are projecting a
40.6% decline, from Q1 2009.
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.... (paling) in comparison to what has already been experienced in
many other regions of the country, particularly in parts of California, Florida, Arizona and
Nevada. Our total, peak-to-trough forecasted decline in New York is 52.1%"
First Comment/criticism
Again, this is a broad wash of the whole region....average or median incomes from at least seven counties and average prices from the same. Who knows what inaccuracies come from applying two sets of averages to just manhattan or brooklyn.
Or for that matter, including neighborhoods where nearly every purchase was sub-prime versus those where only multi-millionaires bought. Hard to say which would be impacted worse-- depends on a lot of things doesn't it?
Deutsche Bank's Methodology
They reference all 3 major price indexes, although it's not clear how each is used:
S&P/Case-Shiller Home Price Index
FHFA House Price Index
National Association of Realtors (NAR) House Price Index
None of these cover Manhattan well at all, but since they were concerned with the whole region, perhaps it will 'average out'.
From studying their report, they start with a base affordability index. Of course there's no reason to assume affordability will go back to the "historic high" that they assume. Most of us agree that NYC has had poor affordability, particularly in the last few years . Nothing says the city has to go back to "affordability levels" of 1998. No reason to believe it will return to 1998 specifically, although it is reasonable to assume that affordability levels do need to improve further.
Second comment/ criticism
In one sense, they're on the right track in that affordability needs to improve, but this level of precision (which they can't possibly have ) is highly misleading. Who knows what level of affordability will the city return to. On a national basis such an idea works better. But the composition of individual cities changes all the time--moving up and down in terms of income levels of residents (e.g. decay and gentrification).
[btw, I watched the condo market carefully and remember 2003 as relatively affordable compared to now. 98 is asking for a lot!]
More methodology
They then add more parameters to their formula, by creating inputs for unemployment & its rate of increase/decrease; recent home price changes (i.e. 'momentum') and excess distressed inventory.
All of this is reasonable on the face of it but it is a bit of a "black box".
Third Criticism
Just a hunch, but i doubt DB is picking up a couple of these statistics correctly --especially excess inventory and correct pricing statistics. And they're obviously making assumptions (unknown assumptions) about the relative importance of momentum.
The upshot?
A fancy package of statistical models-- no real insight.
ALSO--THEY ARE QUOTING A DROP FOR THE REGION, NOT THE CITY SPECIFICALLY
But are they wrong?
According to the WSJ and NY appraiser/ guru Jonathan Miller
Miller and some noted economists (including Doctor Doom) believe the local market has further to fall.
MILLER stated on his blog Matrix:
Despite my doubts about the reliability of the results, my takeaways are:
Stay tuned for what i have to say
restore affordability to its historic high (1998), as has already occurred in 74 of the top 100
markets... including model risk factors beyond just affordability, we are projecting a
40.6% decline, from Q1 2009.
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.... (paling) in comparison to what has already been experienced in
many other regions of the country, particularly in parts of California, Florida, Arizona and
Nevada. Our total, peak-to-trough forecasted decline in New York is 52.1%"
First Comment/criticism
Again, this is a broad wash of the whole region....average or median incomes from at least seven counties and average prices from the same. Who knows what inaccuracies come from applying two sets of averages to just manhattan or brooklyn.
Or for that matter, including neighborhoods where nearly every purchase was sub-prime versus those where only multi-millionaires bought. Hard to say which would be impacted worse-- depends on a lot of things doesn't it?
Deutsche Bank's Methodology
They reference all 3 major price indexes, although it's not clear how each is used:
S&P/Case-Shiller Home Price Index
FHFA House Price Index
National Association of Realtors (NAR) House Price Index
None of these cover Manhattan well at all, but since they were concerned with the whole region, perhaps it will 'average out'.
From studying their report, they start with a base affordability index. Of course there's no reason to assume affordability will go back to the "historic high" that they assume. Most of us agree that NYC has had poor affordability, particularly in the last few years . Nothing says the city has to go back to "affordability levels" of 1998. No reason to believe it will return to 1998 specifically, although it is reasonable to assume that affordability levels do need to improve further.
Second comment/ criticism
In one sense, they're on the right track in that affordability needs to improve, but this level of precision (which they can't possibly have ) is highly misleading. Who knows what level of affordability will the city return to. On a national basis such an idea works better. But the composition of individual cities changes all the time--moving up and down in terms of income levels of residents (e.g. decay and gentrification).
[btw, I watched the condo market carefully and remember 2003 as relatively affordable compared to now. 98 is asking for a lot!]
More methodology
They then add more parameters to their formula, by creating inputs for unemployment & its rate of increase/decrease; recent home price changes (i.e. 'momentum') and excess distressed inventory.
All of this is reasonable on the face of it but it is a bit of a "black box".
Third Criticism
Just a hunch, but i doubt DB is picking up a couple of these statistics correctly --especially excess inventory and correct pricing statistics. And they're obviously making assumptions (unknown assumptions) about the relative importance of momentum.
The upshot?
A fancy package of statistical models-- no real insight.
ALSO--THEY ARE QUOTING A DROP FOR THE REGION, NOT THE CITY SPECIFICALLY
But are they wrong?
According to the WSJ and NY appraiser/ guru Jonathan Miller
Miller and some noted economists (including Doctor Doom) believe the local market has further to fall.
MILLER stated on his blog Matrix:
Despite my doubts about the reliability of the results, my takeaways are:
- The New York region is NOT done with price corrections. We have a ways to go.
- Spring market uptick was seasonal and more robust due to the release of pentup demand after the dearth of activity Dec-March.
Stay tuned for what i have to say
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