Mid-Hudson in review, 1991 to 2008

Needless to say, 2008 was a pretty rough year all the way around. We've all heard countless talking heads describe the cause of our current economic crisis and do their best to forecast when we'll get out of this thing. As much as I care about the rest of the nation, I realize that what is most important to me - and my clients - is what has happened and what is going to happen in our local economy - the Mid-Hudson region of New York State.

Over the past few days, I compiled some relevant numbers on the Mid-Hudson region that could have played a role in the 20% decrease in home values we've seen since the peak of the market in 3Q 2006. If you're like me, I get the monthly reports from NYSAR and NYS Dept. of Labor, but I had yet to actually sit down and see what the market has been doing the last few years. What I found was pretty interesting.

As we all know, single family housing prices began to rise in 1996 after about 5 years of decline due to the late '80s/early '90s recession, in which we saw IBM lay off more than 17,000 employees. As the recession was coming to a close, building activity began to pick up in the Mid-Hudson Valley in 1995. This activity continued to grow until it peaked in 2000 and subsequently declined modestly during the 2001-03 recession following 9/11. Coming out of the '01-'03 recession, building activity ballooned in the first half of 2005, creating a mega-bubble of building activity from 1999 through 2Q 2005.

As building activity was increasing, net domestic migration, which measures the total move-ins and move-outs per year of an area, began to turn positive. Following the massive lay-offs by IBM in the early '90s, the Mid-Hudson region lost more than 13,000 people due to moving to other regions of the nation. In fact, in 1994, the Mid-Hudson had a net loss of almost 5,000 people. Yet, in 1998, one year before building activity really took off, net domestic migration turned positive, peaking in 2003 at 6,412 people. This bubble of move-ins created a surplus of demand for housing, fueling the building bubble and sailing the Mid-Hudson through the '01-'03 recession with barely a scratch.

Interestingly, building activity slowed considerably toward the end of 2004 and beginning of 2005, in step with a dramatic drop-off of move-ins to the area. By 2006, net domestic migration was negative and demand for housing was quickly decreasing. Sales volume peaked 9 months later in third quarter 2005 and steadily declined through 2006 - 08. Housing prices peaked one year later in 3Q 2006 and have been in decline since. Obviously, this is a classic case of over-supply. The following graphs illustrate:


Meanwhile, as all this is happening, we have the sub-prime crisis begin in 2007, the banking crisis in 2008, and now the beginning of the fall of the commercial real estate market in 2009. There are multiple theories about how these crises happened, which I will leave to people far smarter than me. What I want to comment on is what it has done to unemployment in the Mid-Hudson. Below is a graph of unemployment vs. median SFR sale price and net domestic migration vs. median SFR sale price. Both graphs show that as unemployment increased in the early '90s, migration and sale price both declined. As unemployment decreased through the late 90's into 2001, net domestic migration increased and so did sale price. As long as unemployment was low, sale price remained high, even though net migration was decreasing. However, once net migration went negative and unemployment rose, median sale price began to fall quickly (12% since June 2008).



So the big question: what does this all mean? We've been down this path before. It took the Mid-Hudson Valley about 5 or 6 years before median SFR sales prices really started to turn around back in the 1990s. As well, what we discovered was much of that turn-around was fueled by a migration bubble, with most of those move-ins coming from the NYC metro area. So here are a few take aways:

1. The Mid-Hudson economy is absolutely tied to the NYC economy. With the amount of people who moved from NYC to the Mid-Hudson over the last 10+ years, you cannot separate the economic engines of the two. As a long-distance bedroom community of NYC, where many of our residents work in the City, the Mid-Hudson goes the direction NYC goes.
2. Until unemployment goes down, housing will not go up. Unemployment and net migration are strongly linked. People will not live in a metro area that does not have jobs. As a bedroom community of NYC, our region has been massively injured by the loss of 65,000 finance jobs in 2008 alone. With such a dependence on NYC and the decline of NYC as the financial capital of the world, our region, as well as NYC, must re-calibrate their economic engines. Until we find a way to increase jobs, people will find more competitive regions to live and work in. In other words, we're somewhat back to where we were after IBM's massive downsizing. As a way to validate this, the Capital Region, 60 miles north of the Mid-Hudson, just saw median sales prices decline in the last two months (1% drop). The reason is due to the Capital Region's strong local economy, which was built over the last 15 years on typically recession proof industries - government, healthcare, and education - and a growing green-tech and nano-tech manufacturing industry (more on local economies in a later post).
3. This recession is going to take a while to get out of. Our initial forecasts show that sales volume will probably bottom out sometime during Q1 or Q2 2009 and will begin to pick up slightly in Q3 2009. However, we expect sales prices to continue to decline as much as 10% more through 2009 and possibly begin to level out in Q2 or Q3 2010.

I wouldn't put money on that last prediction, but the numbers are none-the-less interesting and certainly gives us some perspective moving forward.