NEW YORK—Since subprime borrowers—with low income or bad credit history—across the nation started defaulting on their mortgages in 2006, the country's financial forecast has gotten rather cloudy, with calls of recession on the horizon.
Although New York City's real estate market, with its characteristically high prices, has so far been unscathed by the subprime mortgage fallout, unlike housing markets across the nation, a new report from the City's Independent Budget Office (IBO) finds that New York City's overall financial future is also looking pretty grim.
"After five years of growing surpluses, New York City's fiscal outlook has dimmed. Due primarily to weakening economic growth and the rising cost of recent municipal labor settlements, IBO projects a budget gap of $3.1 billion in 2009—roughly $360 million more than the Bloomberg Administration estimated in October," says the IBO report released earlier this month.
The IBO's gap projections only increase for the following years, including $4.6 billion in 2010 and $6.3 billion in 2011. And this, they say, is optimistic.
"There is ample reason to be concerned that if the financial industry's condition worsens or the local housing market slumps more than expected, the city's fiscal picture could become even darker."
The economic situation is that the financial woes of the subprime mortgage fallout are hitting the financial services industry, which largely drives the New York City economy. As the financial services industry loses money and lays off employees, the city's tax revenues will significantly decrease.
Last November, Citigroup announced plans to layoff up to 45,000 employees. Also, many people employed and un-employed will likely spend less, leading to less revenue from sales taxes.
Employment in the NYC financial services industry (securities, banking, and insurance) is projected to decline by 5,900 jobs in 2008 and another 4,000 in 2009, according to the report. In addition to job losses in the financial services industry, IBO forecasts declines in information, construction, and manufacturing over the next two years.
"In contrast, professional and business services, leisure and hospitality, health, and education will continue to add jobs, although at a slower pace than in recent years," the report says, on a positive note.
IBO expects the local commercial real estate market to remain strong, in large part due the continued tight supply of modern office space until after 2011.
"Our forecast for Manhattan office rents is for continued growth, although at a slower pace than in the past two years as slower employment growth eases demand. Residential prices are forecast to remain flat, with moderate growth in Manhattan offsetting price declines elsewhere in the city."
Industry reports indicate that one factor sustaining Manhattan apartment prices has been the cheap dollar relative to European currencies, which has attracted foreign buyers and is expected to continue doing so, according to the report.
However, as Wall Street bonuses decline and banks start to shed jobs, the New York City real estate market could suffer, and it could be a buyer's market, if the financial services industry's woes worsen.
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