Thursday, February 10, 2011

Triple Whammy - 3 Interesting Articles from the Wall Street Journal

Who is it that says "buy when everyone else is running away, and run away when everyone else is buying" ? I found this trio of articles - all published the same day by the Wall Street Journal - quite interesting.

The first two involve the financing of real estate. The titles say it all - many people find the mortgage process to be the most confusing part of the real estate transaction, and more and more deals in the past year or so have not had financing.

Cash Buyers Boost Battered Housing Markets -

In New York, all cash deals are not uncommon. We are blessed with many high net worth individuals, and often older couples will trade down into a smaller residence bought with all cash.

Cash also has been a stabilizing force in the New York market in the form of the high down payment requirements instituted by cooperatives. Even condos tend to require at least 10% down here in NYC, although more condos have gotten FHA approval to qualify for the 3.5% down payment minimum.

The article's analysis points out that all-cash deals are stabilizing markets that are hurting pretty badly. All cash buyers can close quickly and don't require mortgage contingencies. And, well, they have that much cash, right? Somehow they got it. That means they often know how to make it. And they're deciding to invest in real estate. Remember, real estate = lagging indicator. Are these cash investors the early birds?

Which brings us to the third, in some ways most interesting article from the WSJ: their article on the affordability index.

This article's method for measuring prices is housing prices (average) to household income (average). By the height of the bubble, housing prices averaged nearly 2.5 times household income. That's pretty expensive.

To quote the great Inspector Clouseau: "Not anymore". Housing prices have sunk far enough in enough of the country that the overall average is now below the pre-bubble affordability.

WSJ kindly pointed out that that is not so true in New York (state or city not specified). The housing to income ratio is still higher here than in most of the country.

Why? I can think of a few reasons:

1) NYC has a wide range of housing types, locations and prices. There are boroughs where you can still buy a 1 bedroom co-op for $80,000. In Manhattan, you'd be spending at least $200,000, and that's in the northernmost part. And there are many multimillion dollar properties in Manhattan and Brooklyn. However, the median income of a New Yorker is still below $100,000. So that skews the average upwards.

2) There is more pricing stability in New York thanks to the higher down payment and investment rates required by both co-op, and to a lesser extent, condo, boards.

3) Many of the cities mentioned in the article as being below pre-bubble era prices are the hardest hit for manufacturing jobs. New York is still a vibrant city - our tech sector is just getting started even as other industries may be changing or phasing out.

4) New York's pricing strata do not move in lock step. From 2008-2009, luxury properties were doing terribly. Some brokerages that specialized had to close because of the lost business. The news since November 2010 is that the highest end properties are moving again, and in some cases (15 Central Park West for instance), prices are going up at that level. And let's face it, a 3% increase in a $5 million property is a lot more than a 3% increase in a $600,000 property. Meanwhile, studios - the most entry level of properties - have been lagging. However, studios were the fastest selling property type from 2006-2008.

The last paragraph of the article was interesting too - singling out my hometown of Washington DC as a market where prices, though falling, would likely not fall below the pre-bubble levels "due to structural changes in that market". What does that mean? Essentially it means people want to live in the city again, the infrastructure has (somewhat) improved, it's safer than it used to be, and it will experience higher population growth than other parts of the country which will eventually push prices up.

Reminds me of another city just up the coast.

Bottom line: you can read this any way you want.

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