A very effective guide for long term home values is actually median home price to income. Houses actually don’t gain in value over the long haul. Urban density and usage shifts can dramatically change the value of real-estate, but outside of that real estate is just a flat asset. Here is an academic paper showing the value of prime real estate in Amsterdam over a 400 year period, its a break even proposition.
A home is only worth what people can afford to pay for it. If you can squeeze more people onto a given area of land and create more homes then you can maximize the value of the land such as in Manhattan over the last few decades.
Over time the utility function of real estate is scarcity relative to the available income of those seeking the homes. I mention this relative to an article posted in June 2007 which anticipated a 20% nationwide property decline using this metric.
Historically relative to growth and all things being equal homes are worth about 3 times the median income of a household. Please note this includes adjustments for cultural shifts in 2 income households over time. Economists see real estate more as a positional scarce good. Housing capital with a life of 50 years for example has a replacement rate of 2% year. If a housing market starts growing beyond that rate and the increased population something fishy is going on. Securitization magic anyone?
The US grand daddy real estate market is the metropolitan New York area which has been relatively immune to decline. The excuses for why New York real estate is special equates to the number of residents in the city. Unfortunately the quantity isn't equitable to quality. Because people want to believe they are special they parrot messages they have heard to that effect. Such ethnocentric or industry centric myopia is the nectar for those wonderful bubbles that pop up every 10-20 years.
According to the BEA, the MSA metropolitan statistical area known as “New York-Northern New Jersey-Long Island, NY-NJ-PA” has an average per capita income of $53,428 as of 2007. If one assume 1.8 wage earners per household we end up with a household income of $96,170. Using the crude 3:1 rule of thumb, housing should be priced at $288,510. The reality according to Realtor for Q3 2008 is a $452,500 per home. Reversion to the mean indicates a 36% decline is reasonable to expect.
Sadly the decline in financial jobs which ballooned to a ridiculous percentage of S&P 500 earnings means a drop of %50 from peak to trough is not unimaginable in the New York MSA.
The same figures if plotted for Manhattan are even worse as the distortions of increasing density and influx of high flying finance jobs which was a positive force for property values is now going to go in reverse with a multiplier effect. Predicting Peak to trough declines of 60% does not seem egregious, especially when one considers the shift in desirability for certain neighborhoods as services diminish and vacancies increase.
The tide of hip, cool or gentrified that crested after the Starbucks arrived on the corner is now ebbing rapidly. The city has a 23% poverty rate. Grande Latte soy moccachino anyone?
Although dangerous, to put a number and a date to an opinion, my guess is a 60% peak to trough decline in 12-16 months for Manhattan residential property. As things decline rapidly in the metro area. We are all living faster now, still not sure what the rush is about, but we if we keep those Blackberry's and i-phones humming we feel connected and thus must be winning.
The only caveat I put on this prediction is please keep it in nominal terms as the printing presses are humming at the fed. Oh and if you liked paying for bankers bonuses you’ll love the catch phrase “Tarp for Trump!”