Will NYC experience a second significant slide of home prices? Heading into the end of 2009, here are the arguments for and against a double dip in NYC home prices, with some words of conclusion to wrap it all up.

The argument for a double dip:

Dire predictions: Fieserv (a financial analysis firm) is predicting that NYC metro area home prices will underperform the rest of the nation over 2010 and 2011, price tags dropping another 11.3% by mid ’10 and an additional 6.1% by mid ’11 (for a total of 17.4% before hitting a bottom).

Unemployment: Fueling this argument is the city’s high unemployment rate which doesn’t seem to be stabilizing yet (at 10.3% as per the last reading), and is either exceeding some states by 10% or is matching the 25 year high of others.

Underwater loans: Deutsche Bank notes that 11.6% of borrowers are underwater in NYC, and further predicts that 77% will be underwater by Q1 of 2011 (which is significantly higher than the bank’s national projections of 43%).

Rising rates and a tapped out government: Mortgage rates will have to rise once the government stops purchasing treasuries and poor-quality securities through Fannie and Freddie. Rate increases will likely push prices down even further; unless the credit markets unfreeze, they may well bring sales activity to another standstill.

Distress: Foreclosures will continue rising as sellers who have been able to manage their mortgage situation until now will slip into default, across all price points.

The argument against a double dip:

Less than dire predictions: 1) Fusion IQ (a research platform) believes that the worst is behind us in terms of falling prices, though doesn’t see us having reached a bottom. 2) Jonathan Miller (of Miller Samuel) believes that we’ll see only a mild housing-price erosion of “a few percentage points” or at best a few years of flat prices. 3) Moody’s chief economist sees another 5-10% price drop in the cards, driven by a pick-up in foreclosures.

Foreigners are back: The weak dollar is already attracting foreign capital and investors back in the NYC market, and this will trend will continue gaining momentum in the coming months.

Limited foreclosures: Manhattan and brownstone Brooklyn will not experience the high rates of foreclosures expected because of the relatively few Alt-A and exotic home mortgages taken out AND because of the rigorous co-op board process that weeded out weak buyers. (Note: co-ops still represent a good 60% of the purchase market in Manhattan.)

A committed government: The government has bailed out the banks and the auto makers; considering the key role that real estate plays in this economy, it will not allow rates to skyrocket.

Reinvigorated financial markets: If the stock market is a leading indicator, then all signs point up. We have officially come out of the recession with a decent 3.5% GDP for Q3.

Cash is back: Healthy bonuses are expected to be doled out this holiday season (many as all cash) and will serve as a springboard for Spring sales activity. Buyers are understandably more confident as evidenced by the pickup in both volume and bidding wars, and sellers are pricing their properties accordingly.

Some closing thoughts:

“We have two classes of forecasters: those who don’t know, and those who don’t know they don’t know” – John Kenneth Galbraith
Otherwise said, we believe that no one can truly predict what will happen in the next year or two. What we can speak to is the cyclicality of market movement and that of its driver: human behavior. To that point, we understand that the better a market performs and the higher it rises, the less risk people associate with it. Similarly, the worse a market performs and the deeper it falls, the more risk investors tend to perceive. Both conclusions are, of course, flawed, and are the very building blocks of bubbles and crashes.

What is your perception of risk today?