Big Drop in LI Luxury Real Estate Prices
Let's look at a few previous Real Estate discussions, and then go to the latest news:
Last August, we discussed why big housing sales drops do not produce big price drops -- at least not right away in the official data.
And, in my own backyard, we looked at all of the high end RE speculation on Long Island.
All of these concepts eventually led to a nice piece on pricing in the NYT: The Hidden Truth About Home Prices (which we discuss in detail here).
So you can imagine that it was no big surprise for us to learn yesterday that "luxury" home prices on Long Island -- defined as those costing $750,000 to $12.5 million -- have slid over 5% last quarter, as Inventory levels doubled from what they were two years ago.
Here's an excerpt:
Luxury home prices slid in New York's Long Island and Queens in the first quarter as more property came onto the market and took longer to sell, appraiser Miller Samuel Inc. and broker Prudential Douglas Elliman Real Estate said.
The median sales price fell 5.3 percent to $900,000 from a year earlier and houses took 25 percent more time to lure a buyer, the companies said today in a report. An oversupply of expensive houses for sale is reducing demand, said Jonathan Miller, president of New York-based Miller Samuel, in an interview.
In the first quarter, it took owners 121 days to sell their homes, compared with 97 days a year earlier, a sign demand has weakened.
You can see why announcements from the NAR such as Home Prices Seen Rising in '07 are so absurd.
~~~
See also:
Why Housing Jobs Have Not Fallen Much
and
>
Source:
Luxury Home Prices Fall in New York's Long Island
Brian Louis
Bloomberg, April 18 2007
http://www.bloomberg.com/apps/news?pid=20601093&sid=aUbPAJksJYEs&
LI Home Buyers Feeling in Control
Carrie Mason-Draffen
Newsday, April 18, 2007
http://www.newsday.com/business/ny-bzhous185175947apr18,0,2697206.story?
Prudential Douglas Elliman
LONG ISLAND MARKET OVERVIEW 4Q 2006
http://www.prudentialelliman.com/MainSite/MarketReports/ReportsMenu.aspx
Thursday, April 19, 2007 | 05:36 AM | Permalink
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Comments
Still Renting / PIMCO
excellent stuff!!!!!!!!!
http://www.pimco.com/LeftNav/Global+Markets/Global+Credit+Perspectives/2007/U.S.+Credit+Perspectives-+5-2007.htm
Posted by: jmf | Apr 19, 2007 6:05:18 AM
I don't doubt the impact on the expensive homes on LI, but I doubt their significance to the overall housing market. Real estate is local. The best, broadest official measure of housing prices is the HPI from OFHEO. The latest numbers, as of 12/06, still show nice gains, broadly distributed across the country.
http://www.ofheo.gov/HPI.asp
Also, I find this quote from the excerpt you posted to be simply incomprehensible.
"An oversupply of expensive houses for sale is reducing demand, said Jonathan Miller, president of New York-based Miller Samuel, in an interview."
I can see how large supply would reduce prices, but that would tend to increase demand, not reduce it. This guy could work for David Lereah.
Posted by: REW | Apr 19, 2007 6:14:19 AM
REW--your observations seem logical, but I might offer up that the demand is on hold (hence seemingly reduced relative to the supply on hand) UNTIL the pricing comes down.
Posted by: Leisa | Apr 19, 2007 6:39:39 AM
REW -- what he might have meant to say was that an oversupply, in face of steady or declining demand, will reduce prices . . .
That should help demand for entry level homes from renters.
The question/problem is what happens to those people who need to sell their homes prior to trading up? They have to drop their prices -- and you get the opposite of a virtuous cycle, as price drops move down the scale from luxury homes to middle class homes to starter homes.
Posted by: Barry Ritholtz | Apr 19, 2007 7:08:12 AM
Real estate is local.
Can you explain this to me? What does this mean? What data is there to back it up? Have you run correlations between sales volumes or price movement? How do you explain the similar price and volume movements taking place across U.S. markets?
I propose a new maxim. Instead of "real estate is local", how about, "financing is global" or "psychology is national"? These appear to be much more meaningful today.
Real estate might have been local 20 or 30 years ago, when financing was also local, and manufacturing was highly regionalized/centralized.
jb
Posted by: James Bednar | Apr 19, 2007 7:42:47 AM
right on, jb. saved me the trouble of rebutting rew, and said it better than I could have.
Posted by: dark1p | Apr 19, 2007 8:00:39 AM
The Pimco URL in Comment #1 was chopped. Here it is:
Posted by: MAS (San Diego) | Apr 19, 2007 8:19:53 AM
Wow....if you don't think real estate is local, go live in Detroit for five years then in the metro Washington DC for five years...any recent five, take your pick. Right after that experience, you'll be saying "wow, real estate IS local". The experiences that people had in the past five years in oh, Palm Beach versus the Midwest vs. Metro Washington, if you think that is one homogeneous national real estate market........It is such an incredibly basic concept, real estate is driven by the local economies, always has been and will be...
Can't believe we are even discussing this, it is like kindergarden economics....
Lewis
Posted by: lewis | Apr 19, 2007 8:22:45 AM
Barry,
Keep up the good work - been coming to your site daily for a long time! Content is great, comments to your posts are thoughtful (mostly - just the chest thumping perma-bulls are annoying), and catch you when you are on Kudlow...
On another note - Anyone have a good site to track the S&P 500 earnings scorecard for 1Q07?
Posted by: Major Tom | Apr 19, 2007 8:23:26 AM
Supply rises approximately 50%. Prices drop about 5.3%. Time to sell increases marginally.
It's more fun to see prices going up than see them go down, especially when it is the value of your own home going up. However, this is not a terrible market, using these numbers.
The housing market must be a lot like the job market in one respect. If your neighbor loses his job, it is a tragedy. If you lose your job it is a recession. Ditto with coming to reality that a seller might not get to keep ALL the inflationary housing gains of the past couple of years, and only get to keep MOST of them, and take a month longer to realize them.
On another topic, is today a good day to take profits? My guess is yes. This year's market will look like a rising series of sawtooths, in my humble opinion. This decline will be a little less than the one in February, and it will rise (after a double bottom) to a similar height to where it is now. I'm going out on a limb and saying that Shanghai is a leading indicator of what happens in the rest of the world.
Posted by: cinefoz | Apr 19, 2007 8:39:00 AM
Wow....if you don't think real estate is local, go live in Detroit for five years then in the metro Washington DC for five years...any recent five, take your pick.
I'm not sure we're talking about the same thing here. Are you talking quality of life, attractiveness, desirability, etc?
I'm talking about pure market movements, changes in sales volumes and prices, nothing more.
As far as cherry picking markets goes, I would have went with the Hamptons versus Baghdad as an example.
jb
Posted by: James Bednar | Apr 19, 2007 8:42:00 AM
i think we ll close that opening gap down and finish strong on the close for a positive day....what are the odds of that happening? we ll see....
Posted by: bigJIMMY | Apr 19, 2007 8:55:41 AM
People who are looking at the average or median price are being badly misled.
First, if you take the bottom end out of the market - which you do by tightening mortgage requirements - the average price per house purchased will go up strongly.
Second, if you drop a couple of million-dollar homes to $500,000 to move them, the average price will go up because they are still above the average price... but somebody got a house for half the original price.
Here in Minneapolis prices of homes now coming on the market are generally priced much lower than last year (using ask price compared to assessed market value as the standard).
Posted by: wally | Apr 19, 2007 9:07:56 AM
Think of this as being an opportunity for Mrs. Ritholtz to buy an even bigger, better house, this time on sale!
Posted by: Nova Law | Apr 19, 2007 9:23:47 AM
I thought RE never went down.
Posted by: Mike M | Apr 19, 2007 9:24:25 AM
Real estate is local in the sense that prices in other cities play no part in my personal housing decision. Google "cost of living" and you'll see plenty of website calculators to show you that the cost of living differs from location to location. Identical items such as a loaf of bread vary from town to town. Housing is even more local. If it wasn't, a 3BR/2Ba would cost the same around the country.
I have not and will not run correlations on housing price or volume movements. These numbers would be subjective (the link in my original post for example shows home prices still climbing, which many here seem to doubt) and irrelevant (I only care about the trend in my particular market).
BR, your follow up post is correct, but again I think the impact will be less than you seem to think. For those who must sell, because of a financial crises or a job change, the vicious cycle can be real. But most people do not NEED to sell their home. If the market isn't going their way, they can and do wait. Inventories rise, prices stagnate, but a collapse does not materialize.
Posted by: REW | Apr 19, 2007 9:26:15 AM
Reality creeping into the Hampton's?? Before Summer??? OMG we just may have to lay off the secondary staff...
Ciao
MS
Posted by: Michael Schumacher | Apr 19, 2007 9:42:21 AM
Let's see...19 consecutive days of below average volume that is augmented by a Fed money drop every single day since Feb 27th. Sometimes twice a day. Lotta shopping going on.....LOL
I find it ironic that they still call it "temporary open market conditions".
Why not just make it permanent....oh that would not look good to the bull arguement. But since there really has been no arguement then WTF....
Love options week expiry.
Ciao
MS
Posted by: Michael Schumacher | Apr 19, 2007 9:57:05 AM
Barry or Reader!
Any Recommendation of Japan Real Estate Funds REITS?
I think since Japan is wayyyyy deflated for wayyy many years, think maybe time to buy some Japan REITs? Especially Japan deflation seems coming to an end with economic recovery on good foot since last year.
Added the fact that when yen-carry-trade unwind, huge money has to flow back to Japan to repay the yen-debt, good for yen appreciation.
Strange that I could not find any Japan REIT fund listed heren in USA. Any comments is appreciated!
Posted by: shawn | Apr 19, 2007 10:21:18 AM
wally said First, if you take the bottom end out of the market - which you do by tightening mortgage requirements - the average price per house purchased will go up strongly.
Second, if you drop a couple of million-dollar homes to $500,000 to move them, the average price will go up because they are still above the average price... but somebody got a house for half the original price.
I second this as it was the same thing I was gonna post.
Posted by: Michael C. | Apr 19, 2007 10:45:21 AM
shawn said:
Any Recommendation of Japan Real Estate Funds REITS?
Reply:
Just use the toilet for your cash. Betting on the Japanese consumer will get you to the same place, only it will take longer, be more hurtful, and provide far less satisfaction.
Posted by: cinefoz | Apr 19, 2007 10:46:42 AM
I would add a little caution in evaluating averages and medians in subsets. Real Estate is not normally distributed. One would assume there a fairly straightline with a high number of $750K homes and a low number of $12.5M homes. The median of $900K pretty much confirms this, actually indicating a fairly strong curve. Not to get boring here, but a 5.3% drop would have pushed every house that had been valued at $750K to $789K out of the statistical pool. I would have also added every house previously priced at $12.5M-$13.1M into the market. In short, for every end home that entered the statistical frame, at least 10 probably left it. This skews the median higher even if the median price falls absolute terms. (1, 1, 3, 4, 5) set drops by 2 removing 2 and adding 1 (1, 2, 3, 5).
Posted by: M.Z. Forrest | Apr 19, 2007 11:20:29 AM
It's been at least a year since the end of the housing boom was in the headlines, yet people still don't seem to understand the basic outlines of what's going on. House prices don't simply reverse course and immediately fall after reaching a peak. They plateau for a while, usually 12-18 months. During that time, buyers are becoming wary, supply is building, and sellers are in denial, thinking they might still get the price their neighbor got. Eventually, buyers are in control, there is a supply imbalance, and sellers start undercutting each other's prices in a rush for the exit. If the run-up was substantial, the slide down takes years, not weeks or months. Four years of decline is normal (e.g., New York and Boston in the early 90s, or Houston after the oil-patch bust). We're only just beginning to see year-over-year price declines in the markets formerly known as hot -- probably because they peaked highest and latest.
Posted by: TKL | Apr 19, 2007 11:49:34 AM
this mawket is awesome! down big in premarket to close the gap. see if we dont end positive. thanks ben!
Posted by: bigJIMMY | Apr 19, 2007 12:04:43 PM
Forget Detroit, DC. How about South Central DC and Georgetown? Try East Orange and South Orange, New Jersey. Those two towns are in the same state, in the same county; in fact, they are right next to each other, but one contains million-dollar mansions and the other does not. So housing prices aren't perfectly uniform across the country. What's the point? The historic real estate run-up of the last five years was a national phenomenon, and it's unwinding will also be national.
Posted by: Paul | Apr 19, 2007 12:06:46 PM
