Several weeks ago, I promised to provide occasional updates about my family’s house-hunting efforts. After nine years living abroad, we’re returning to the U.S. – northern New Jersey, to be exact – in June. As motivated buyers, I figure we’re a rarity in a truly dismal property environment. I’ve just read a column by the WSJ’s Brett Arends detailing the continuing decline in American house prices. In my mypoic view, the most intriguing phenemonenon continues to be the relatively robustness of the New York metropolitan area.
As Arends writes, ”New York is down 10% over the last year, including a 4% decline in the last three months. That is still better than the average. Whether the market can withstand the crisis on Wall Street and widespread layoffs there remains to be seen.” He also notes, “Over the long term, average home prices have tended to track average earnings. And by this measure the market may have much further to call.” One would think so. I find it hard to understand why the bottom hasn’t already fallen out in the neighborhoods within 50 miles of Wall Street. New York’s financial firms and related employers began laying people off by the thousands at least six months ago; those still clinging to jobs surely haven’t seen their average earnings rise during this period. Clearly, NY-NJ didn’t experience a boom-era glut of new housing stock even as shiny new McMansions popped up hourly in the American southwest and mortgage purveyors lured unfit buyers to spend their life savings on five-bathroom, three-car-garage abodes. Do readers have thoughts about why the epicenter of the financial fiasco has held up so well?
April 1, 2009
Since you ask…… it’s an easy call for us control theorists among your readers. The time constant of real estate prices is high – homeowners often prefer to keep a house than sell for what they consider a low offer. Other markets such as commodities or stocks are faster. I believe the time constant for commercial property is also shorter than for residential. (This is why this bubble is worse than the dot.com, which came and went quickly.)
Specifically about NY, well paid professionals are likely to buy based on their estimated average long-term earnings. Most probably figured in that a recession would come sooner or later, and have a cushion of savings. People in the frothier markets are more likely to have made purchases based on current income, and have fewer alternatives to selling. So prices there move down faster. They also moved up faster, which was why there was overbuilding, which in turn pushes prices down.
Conclusion: it is now a question of how wealthy people are, but how far they look into the future.