New York Housing Market

By Tejvan R Pettinger on September 7, 2007 in UK housing market

Today, a question from a reader:

Hey.. what is your take on the housing market and how is it affecting New York. I don’t know too much about the topic.. is there anyway that you could summarize whats been going on with housing prices.. Thanx.

In the Years 1995-2005 there was a record increase in US house prices. Adjusted for inflation house prices increased by 150%. This meant that house prices have increased significantly faster than income and is above the long term average.

Reasons for very high growth in House prices.

1. Very low interest rates.

Inflation has been low. Also after the dot com bubble burst the Fed reduced interest rates to avoid any recession. The historically low interest rates meant that many people could afford to get a mortgage, who previously couldn’t. This increased demand.

2. Growth in Sub prime mortgage lending.

With increased confidence and lower real interest rates, banks have been lending to a greater range of homeowners. In particular they lent more to people with bad credit histories and recent immigrants. This increased the number of people buying, pushing up prices

3. Speculation – Confidence.

Rising house prices creates its own momentum. Because house prices were rising so rapidly people thought it was a good investment. Rising capital and income from renting. Many people who bought at the beginning of the boom did very well.

Problems in Housing Market and Falling Prices.

In 2006, problems started to appear in the US housing market as the number of mortgage defaults increased. This led to several sub prime mortgage firms going bankrupt. This had the effect of reducing confidence. In 2007 house prices started to fall.

e.g. The S&P/Case-Shiller US National Home Price Index fell 3.2pc up to the end of 2007

However, it is worth noting that house prices have varied significantly between different cities. Booms have been evident in Miami, Tampa, Las Vegas, Washington and Los Angeles. In New York, house prices have nearly doubled between 2002-2006, so we can say there has been a bubble effect in New York.
Why House Prices have started to Fall

Collapse of Sub prime mortgage industry. Mortgage lenders are becoming much more strict in who they lend to.
Rising Interest Rates. Interest rates have been increased from their historical lows to combat inflationary pressures and deal with the imbalances in the economy.
End of introductory deals. At the height of the housing bubble, many bought mortgages with teaser deals. This means you get a very low interest rate for the first two years, but then your repayments increase. Many are now coming to the end of their introductory period and so are facing higher payments.
Change in expectations. Market sentiment has shifted. People are now very gloomy about the prospects of the housing market. Therefore, investors are looking to sell rather than buy.

Things could get worse before they get better. The impact of high interest rates and inappropriate mortgages means defaults are likely to remain high. However, I would suggest that the market isn’t like the dot com bubble. Most people buy houses to live in them. When house prices fall they don’t start selling, but continue to live their.

Related

Some statistics