11.26.08

New York's Impending Real Estate Doom

A hastily drafted moratorium on foreclosures has kept many New Yorkers in their homes. It's about to change.

New York City has been the big holdout in the U.S. housing meltdown. Wealthy foreigners flush with weak dollars and a finite supply of pricey Manhattan condominiums have kept the market moving.

But the New York hiatus from a harsh real estate market is likely coming to an end – and it’s not just the estimated loss of 48,000 jobs in the city over the next year that will cool home prices. Foreclosures are expected to start heading higher—possibly sharply higher—as soon as next month.

"It is going to be an absolute disaster next month," said Bill Staniford of PropertyShark.com.

The foreclosure rate is important because a rise is traditionally followed by a drop in home values. As a rule, every one foreclosure in a neighborhood lowers home values in that area by about 1%.

The foreclosure rate in New York has been artificially depressed, thanks to a state law passed in August. The trouble is, that relief has been temporary. As the moratorium lifts, the fear is that foreclosures will spike and the housing market will face even tougher headwinds. As more states consider delaying foreclosures to keep people in their homes, what happens next in New York could well be instructional.

“It is going to be an absolute disaster next month,” said Bill Staniford, the CEO of PropertyShark.com, a real estate research site. “We haven't seen anything yet.”

Back in August, state legislators in Albany set a 90-day freeze on foreclosures that’s created a backlog of foreclosure filings. The 90-days are up next month. Banks will be bringing foreclosure filings “by the wheelbarrow,” said one court officer in Queens, where the number of filings dropped to just 60 per week from a rate of 150 per week before the law took effect. Tracy Catapano Fox, a clerk for administrative judge Jeremy Weinstein of the Queens Supreme Court, said the court is reassigning some staff to handle the expected additional work.

New York is one of a handful of states where politicians have acted to delay the foreclosure process for the banks. Others are also considering it, including most recently, California Gov. Arnold Schwarzenegger and Florida Gov. Charlie Crist, who are proposing 90-day moratoriums for their states. Connecticut Gov. M. Jodi Rell last week included a six-month foreclosure moratorium as part of a housing bill she is proposing.

One of the first to enact a foreclosure delay was Massachusetts. It set a three-month freeze in May, creating a backlog in foreclosures that built up to August. In the end, foreclosure filings ballooned 456% between August and September, according to RealtyTrac, a site that tracks foreclosures nationally.

Home prices dropped at that time as well in Massachusetts. In September, for example, the median price for a home dropped 15.6%, to below $300,000 for the first time in five years, according to the Warren Group, a Boston-based real estate data firm. It was the steepest one-year percentage drop since the company began collecting data in 1987.

“Our most recent data for October shows a rather significant decline of 11.3% in home prices across the country compared to last October,” said Jed Smith, a managing director of quantitative research at the National Association of Realtors. “A major reason prices are dropping is because of foreclosures, which pull overall home prices downward. And the foreclosure situation is a result of all the job losses.”

Despite projected job losses in New York, foreclosures have been relatively minor and home prices have yet to decline dramatically. Prices dropped 3.6% in the third quarter compared to the same period last year—half as much as the decline in the U.S. market overall, according to NAR. The Manhattan market has been exceptional, with the average price of an apartment rising 8% in the last year to near $1.5 million, according to realtor Prudential Douglas Elliman.

The New York housing bill took effect on Sept. 1. It requires lenders to wait 90 days from the date they send a notice to a homeowner with any subprime, high-cost or non-traditional mortgage entered into between Jan. 1, 2003 and Sept. 1, 2008, before they can initiate a foreclosure filing.

Housing advocates fret a sudden increase in foreclosure cases next month will put a strain on services.

“This will swamp the court system and the existing resources we have in place for borrowers,” said April Newbauer, the attorney-in-charge of the civil practice in Queens for the Legal Aid Society. “Already, both the existing legal services like Legal Aid and the nonprofit housing counselors are overwhelmed, so we are trying to coordinate a mass effort of the private bar to assist these borrowers,” she said.

Beyond the merits of a law that probably adds only another month or so to a household in severe distress, there is a wider question for people with long experience in the New York mortgage market: will re-working a loan actually help the borrower in the long run?

"These moratoriums don't get at the root of the issue, its just politicians hoping to delay what in most cases will be inevitable," said Richard Moody, the chief economist at Austin, Texas-based Mission Residential.

According to a 2007 report from Fitch Ratings, 35% to 40% of borrowers default again within 12 to 24 months after having their loans modified. “Over the years, I have seen so many mortgages that go into foreclosure that were already modified,” Jessica Davis, president of NYForeclosures.com, said. “So a year or year-and-a-half after a homeowner modified his or her loan, they still can't meet their obligations and are back in court.”

Still until a better solution comes along, advocates like Newbauer from the Legal Aid Society will support any plans that help slow the rate of foreclosures. “We are so glad that the politicians recognized the terrible phenomenon of a declining economy and the shark practices in the lending industry,” she said. “Where there are holes in the new law, we are trying to work on fixing them.”

Julie Satow is a business reporter and editor, whose writing has appeared in Crain's New York Business, The New York Sun, The Newark Star Ledger, Institutional Investor, and Reuters. She is a regular commentator on the FOX Business Channel.