Why Long Island House Values Must Plummet (Lindenhurst, Lee: real estate market, rentals)

[djdairyp]

The following charts are from Long Island Index: Home. The first chart shows how from 2000-2005 houses went from costing on average 3x average income to 6x average income (in only 5 years), and the second chart shows how incomes hardly changed in that same time.



I will use the housing affordability indicator that for housing to be affordable, the median house value should be 2.5 x the average income.

Referring to the charts, you can see that in 2000 the avg income per earner was 42,000 or roughly an 85,000 average household income for two earners. 85000 *2.5 = $210,000. Based on the second chart, median house values were roughly 3x median household income $250,000. Which was in line with affordability indicies. With the housing bubble, prices inflated to 6x average income while incomes have barely risen in real terms making housing totally unaffordable. My wife and I have an above average household income but are basically priced out of the market as we are unwilling to commit 60% and upwards of our salary to housing and then have zero or negative savings after other expenses which is unwise for anyone, so we don't buy even though we qualify and have the down payment. Instead we rent and save massive sums of money each month. Why buy? And, without first time home buyers willing the make the plunge, people can't sell their starter-homes (shacks) to then buy more expensive trade up homes and the market is at a stand still.

All homeowners think their homes are worth these half million dollar prices as there once were buyers willing to leverage themselved to the max and everyone back then was making out like bandits, but they missed the boat. A home is only worth what one is willing to pay for it and buyers mindsets have changed, so is there any way the market could possibly recover without a massive downturn, it would not seem like it. Even a home 'priced right' in line with neighborhood values is hard to sell because current pricing is way to high. Its a hard pill to swallow for homeowners, and sucks for them, but many are going to have to lose and other will just have to expect less returns ... That 450,000 listing for a 3 br in plainview is probably not going anywhere unless you are lucky or until the whole neighborhood drops to a realistic level more like the mid to low 300's.

Maybe I am wrong, all homeowners hope so, but many buyers are simply waiting to see if it comes true. If it doesnt come true, what a sad state we live in where we have to basically become house poor for homeowership while 10 years ago salaries were nearly the same and we would not have to become 'poor' to be homeowners and require two wage earner to boot

My opinion

[suzook]

sounds like wishful thinking. prices may dip more, but i would think in 2 or 3 years from now start to go up again.

[leetchie69]

Originally Posted by suzook

sounds like wishful thinking. prices may dip more, but i would think in 2 or 3 years from now start to go up again.

yes but not at the same pace during the boom.

Houses are suppose to appreciate year after year but at a pace with income, inflation etc etc...

[suzook]

Originally Posted by leetchie69

yes but not at the same pace during the boom.

Houses are suppose to appreciate year after year but at a pace with income, inflation etc etc...

I agree, it will be a long time before we see the pace during the boom

[ShouldIMoveOrStayPut...?]

I would not bank on any further signifcant slides in the L.I. housing market. Most people's largest investment and source of equity is their home and it is what they use to do anything from send their kids to college to taking a home equity loan to do a multitude of other things.

The powers that be (government, big business, etc.) know this and will take strides to insulate the environment of same. Also, if you look around the country prices of homes are not that far off or even exceed ours with what I deem as far less to offer than the L.I. Tri-State area. This was part of the housing price boom that occurred after the downturn caused by Black Monday on Wall Street back in the late 80's.

After years of a supressed market we became a relative bargain when people assessed our home prices in relation to other markets in accordance with our employment opportunities, proximity to major metropolitan centers, recreational activities, arts and culture, etc....and the market started to appreciate......

History can have a habit of repeating itself in Real Estate markets....whether or not one learns from history is a horse of a different color.....

[WildCardSteve]

For the longest time, baby boomers/Gen Xers were buying houses, while their parents were living longer and wanted to stay in their houses.

Now, the former already have houses. Or, they got fired and aren't in the market. And, the latter are passing away, or headed for a retirement home in Florida. The result is an overall decrease in demand.

You're never going to see the prices come back to where they were, not for a decade or more at least.

[djdairyp]

[quote=ShouldIMoveOrStayPut...?;7880010]I would not bank on any further signifcant slides in the L.I. housing market. Most people's largest investment and source of equity is their home and it is what they use to do anything from send their kids to college to taking a home equity loan to do a multitude of other things.

====

This is one of the major problems with the market, people think homes should be investments when historically, pre-boom, they were actually not investments at all and simply kept place with inflation (Though it is agreed that they can be used to borrow against with equity). When the bubble inflated, housing became a stock market and people thought real estate can never decline and started flipping. The housing bubble was in a way a ponzi scheme that could obviously not sustain itself. Now, new buyers are leary. Most of the people in these homes that are 400,000 and up could probably not afford to buy if you took them from their situation 15-20 years ago and brought their then monetary situation to present value terms, and these homes have simply aged and become much more expensive with property tax increases. So something is out of line.

There is almost a 2 year inventory of homes available already and they are not moving. As more baby boomers retire and want to sell to avoid the inevitable 20,000 property taxes, or simply move away, the glut of homes becomes even larger. What happens then, where are the buyers coming from? The youth is leaving long island, the main influx is illegals and they certainly cant afford to buy these overpriced homes? So what is the future of the long island home? Its an interesting thing to consider and makes me want to never become an owner.

[tomonlineli]

Homes are usually one of the worst investments you can buy. I know that Real Estate agents, mortgage lenders, and everyone else in the Real Estate business will try to argue this fact, but it is just that. A Fact! Housing over the past 100 years has appreciated at an average of 4% nationally. Well, most people take out a mortgage at a rate higher than that. So, you're paying 5-8% for something that appreciates 4% on average. This is not good financial planning on most people's part, since they see their home as an investment. It's kind of like borrowing money from the bank at 7% and buying a CD at 4%. Not smart!

Let me give you a real world example. My grandparents bought their home in Lindenhurst in 1943 for $8,300. It's now worth approx 250k. That's an appreciation rate just over 5%. That same amount of money in the in the S&P 500 would have been approx 1.5k at a rate of return just above 11%. This doesn't include all the upkeep on the house and taxes paid each year.

Long story short. Housing is one of the worst investments you can buy for a passive investor. It doesn't rebound like the stock market does, it appreciates at a poor rate, it has huge upkeep and tax exposure costs, and it exposes someone to huge diversification risk.

Additionally, if the housing market acts like it has in the past when it's boomed then you will see 10-15 years of housing prices staying constant on LI. But, my specualtion is based on solid reasoning. Let me give you reasons why:

1. LI as a community is getting older and people are moving away after retirement. This means you will always have a constant supply of houses on the market. Not many people retire in NY anymore.

2. High taxes actually depreciate housing prices. If someone can afford 2.5k per month for mortgage and 1k goes to the taxes then 1.5k can only be left over for the mortgage.

3. NY as a region has been decimated by the financial crisis. It will take years for the damage to be measured, but many of our most lucrative jobs (i.e. banking, financial, hedge-fund, legal) have disappeared with little to no chance of coming back. Leehman, Bear Sterns, and many other large employers have disappeared or been bought up by companies that have their headquarters outside NY. Less high paying jobs will cause a trickle down effect in housing prices.

4. Alternatives! Conneticut, Westchester, and New Jersey all offer suitable alternatives to NY with lower taxation levels. The transit systems used to be set up so that anyone who seriously wanted to commute to NYC would only think about LI as their only option, but the past 20 years have opened Southern Jersey and Conneticut as viable commuting options. The High Speed Rail line that is in the Stimulus package will actually hurt LI as a competitor for commuters. This is illustrated by the number of younger people that move out of the city, but go to NJ or Conn as compared to LI.

5. Tightening lending standards. The real reason we saw such a boom in housing prices on LI is because the loosening of lending standards allowed people to borrow more money with less credit. The tightening of standards means that less people will be in the market to buy a house. Because, let's face it. A family earning 50k per year can't afford a 300k mortgage and 10k taxes on LI. They've got no business buying a house on LI.

6. The dumping of homes that is inevitable. Jobs are being lost in NYC at a huge rate. LI has a huge reliance on NYC jobs since we have very little industry of our own. The jobs being lost are very high paying skilled jobs that pay very well, and as a result demand for property is dropping heavily. Rents are projected to drop 50% in Manhattan this year along. This will have a trickle down effect. Rents are a more responsive indicator of the housing market because leases are typically one year. It would be amazing if rentals drop 50% in NYC and housing in the commuter areas doesn't drop equally over a more prolonged period.

All of this leads to over supply and decreased demand for housing on LI, and what do you get when you have more supply than demand. You get suppressed prices.

The only thing LI has going for it is the beaches and the fact that land is scarce.

[mathjak107]

one thing over 20 years as an investor has taught me is anytime you think you have this stuff figured out with logic your probley going to be wrong...

markets never have memories of what they once were or should be...

im listening to all these financial talking heads on cnn about how they wouldnt buy bonds because inflation and interest rates are going to be soaring from all this spending..

makes sense right? well think about this, at the end of WWII for the first time america owed 2x the gdp.. analysts and economist wrote entire thesis's on the coming hyper inflation and soaring rates.... well today we are at 800% x gdp and rates and inflation have been quite low except for a few spikes.. they just defied all logic for decades

in fact reasoning says that just the spending since the reagan era should have seen us soaring into being a 3rd world nation....

guess their charts were wrong.....well at least to now ha ha ha

[hotkarl]

Home prices are a little more realistic now.
Property taxes are not.