I’m told quite often by friends that this is the time to buy real estate in New York. I disagree. The way I see it, next year is a better time to buy.
Why? (and I’m not being poetic)
Robert Shiller, of the S&P/Case-Shiller Home Price Indices, writes a compelling piece on why home prices have still some time to go.
HOME prices in the United States have been falling for nearly three years, and the decline may well continue for some time.
Even the federal government has projected price decreases through 2010. As a baseline, the stress tests recently performed on big banks included a total fall in housing prices of 41 percent from 2006 through 2010. Their “more adverse” forecast projected a drop of 48 percent — suggesting that important housing ratios, like price to rent, and price to construction cost — would fall to their lowest levels in 20 years.
Such long, steady housing price declines seem to defy both common sense and the traditional laws of economics, which assume that people act rationally and that markets are efficient. Why would a sensible person watch the value of his home fall for years, only to sell for a big loss? Why not sell early in the cycle? If people acted as the efficient-market theory says they should, prices would come down right away, not gradually over years, and these cycles would be much shorter.
But something is definitely different about real estate. Long declines do happen with some regularity. And despite the uptick last week in pending home sales and recent improvement in consumer confidence, we still appear to be in a continuing price decline.
There are many historical examples. After the bursting of the Japanese housing bubble in 1991, land prices in Japan’s major cities fell every single year for 15 consecutive years.
In New York, rentals are falling. The fall in rentals is further aggravating the severely imbalanced price-rent ratio, one of the key housing indicators mentioned by Prof Shiller in his article. A fall in rents is generally followed by a fall in rents.
Besides, most of the job losses in New York city were from Q3 2008 to Q2 2009. Severances are only just going to start running out. The impact of the job losses on real estate are going to be felt in the latter half of 2009, preparing the way for a correction of home prices for 2010 and later.
Full link to the Prof Shiller’s article in the New York Times
Why Home Prices May Keep Falling