New York City Real Estate: If It Double-Dips Here, Can It Double-Dip Anywhere?

New York double dipIs New York City in for another drop in real estate prices? That's one interpretation of the most recent Case-Shiller numbers, which analyze the health of residential real estate.

The prediction, by hedge fund manager Bruce Krasting, claims a drop in consumer spending will be the outcome of the stalled housing market.

It's not all that surprising a prediction, given that a double-dip in the housing market, as well as a double-dip recession was discussed by uber-prognosticator Meredith Whitney in an appearance on CNBC's Squawk Box two weeks ago.

Both Krasting and Whitney have pointed to the fact that a good number of the people whose homes have defaulted on their mortgage are waiting out the foreclosure process, which, in New York, can go on for up to two years. In the meantime, they have not been paying a mortgage.

"There is substantial evidence," Krasting writes, "that these people are buying iPhones and going on vacation with the money they are saving by not paying the debt."
This will end badly for everyone, he says, especially in states where the period between default and foreclosure are highest. New York is one of those states; Florida is another.

He points out that once people are forced from their homes, they will have to find a place to live, and that most likely means paying rent. While rent might be less than a mortgage, it's certainly more than they have been paying while they waited out foreclosure. Whatever spending money former homeowners thought they had will be gone as they learn to live within their means, he noted.

And, as we have all been hearing, if there is no consumer spending, then there is no job creation. If there is no improvement in the job market, fewer people will be looking to buy homes.

Kasting concludes that this vicious cycle will cause "real estate in New York and Florida will tank this fall."

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There are dueling opinions on this dire prediction. For now, New York real estate has been holding its own, even improving recent months, especially in New York City, where the bargain hunters have been spending and the average Manhattan apartment increased in price by 4.1 percent from a year ago.

And Credit Suisse reports that predictions of a double-dip recession are "overly pessimistic," and that the recovery of the global economy will continue, although it will be "very slow."

One thing is certain: Spending is down. According to Gallup, people across the U.S. are spending an average of $67 per day in stores, restaurants and other retailers, which is down from $72 per day in May, and below the $81 to $114 per day people were spending in 2008. What more telling about these numbers is that spending was less in the East, where it dropped from $75 per day to $62 from last year.

So, maybe the doomsayers are onto something.

Whitney's biggest concern, she said, is that with state and local governments cutting jobs, and the federal government cutting spending, more people will be losing jobs, and more homeowners will be struggling.

"How can house prices grow [in this environment]?" she asked. "There's no other way to look at it, they are going down again."

Krasting, referring those who are not paying their mortgages yet continue to live a lifestyle they have become accustomed to, said, "The extend and pretend policy is catching up with us. This approach was a 'buy some time' idea in the hope that things would work out. They have not worked out. We are about to pay the price for that failure."

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