Friday, July 26, 2019

New York City Housing Market vs. Condo Market – Who Wins?

(Click on the image to enlarge)

Michael is interviewing for a Housing Analyst position with a major Economic Research firm.

Question # 1
Interviewer: Though we are using the two Case-Shiller data series, let's assume -- for the sake of this interview -- they represent only the City of New York (NYC). Given that assumption, are these two market segments comparable?

Michael: No. The NYC housing market comprises the outer boroughs, meaning Brooklyn, Bronx, Queens and Staten Island, whereas the condo market represents primarily the Manhattan market, along with some newer condos in Brooklyn. Nonetheless, due to the shared geography, the two data series would be highly correlated. 

Question # 2
Interviewer: Use your best quantitative judgment and guess the level of correlation between these two data series.

Michael: (After a short pause) It will be at least 0.85.

Interviewer: Please give a minute so I can find out how close you are to the actual coefficient. Yup, it's 0.864. You are very close. Very impressive! 

Question # 3
Interviewer: The condo data shows a sharp fall in June-July, 2018. What would you attribute that fall to?

Michael: It's just an aberration in the data and has nothing to do with any drastic change in economic fundamentals. That's the way the data comes in and gets cleansed. That is why, you see a 3-point jump in August, 2018 which is unrealistic too. In any case, any trendline would iron out that aberration in the data.  

Question # 4
Interviewer: Are the demand drivers very similar in those two market segments?

Michael: No. The NYC housing demand is driven by the local economic fundamentals, so it's a natural market. The Manhattan condo market, on the other hand, is heavily dependent on global demand, especially Asia and Europe. Therefore, any slowdown there heavily impacts the Manhattan condo market.

Question # 5
Interviewer: What would be the statistical impact if we remove those two months from the data series?

Michael: Once you remove outliers from the data, stats get better. In this case, the correlation coefficient would jump. 

Question # 6
Interviewer: In that case, can you guess the new coefficient without those outlier months?

Michael: In the vicinity of 0.90. 

Interviewer: Give me 15 seconds and let me find out. Actually, it jumps to 0.913. Very close!

Question # 7
Interviewer: Can you explain why the housing market has been holding steady while the condo market has been trending down?

Michael: The local market fundamentals are good so the housing market has been holding steady. There are two basic reasons why the Manhattan condo market has been trending down: (a) the cap on SALT, and (b) the tumbling of foreign buying.

Question # 8
Interviewer: Would you recommend one or both of these segments to our clients?

Michael: Given the low interest rate, the expected rate cuts, and good local fundamentals, I would recommend the housing market. Considering the reasons I previously talked about, I will not recommend the Manhattan condo market.

Question # 9
Interviewer: So, what is your forecast for these two market segments?

Michael: The housing market will remain sideways in Q2-Q3, declining in Q4+, until the presidential polls start to project some meaningful directions. Of course, a correction is long overdue and is always healthy. The Manhattan condo market will continue to trend downward and I won't be surprised if the January, 2017 level is retested by the end of this year.

Disclaimer - The author is not advocating the Case Shiller indices listed here. Consult your Financial Planner for an appropriate asset allocation model and/or trading strategies for different markets, including housing.

Good Luck!

Sid Som, MBA, MIM
President, Homequant, Inc.
Coming soon: Sid's New Book: Modern Interviewing Techniques and Skills - Live Simulations with actual Market Data

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