Is there another real estate bubble? I am reading and hearing this question all that, in the last few months, the market has grown extremely hot in certain areas, the differences between what is happening today and what happened six years ago are substantial. While no one can predict the future, my sense is that neither the national nor the local New York markets are in a bubble, although it certainly can feel like one if you are a buyer competing against seven others for a two bedroom apartment on Third Avenue or a house in Fort Greene. Here is my thinking:
• The economy is expanding gradually. There is no talk of a “new paradigm” or a “new economy” in which unlimited
expansion is possible. Improvement is cyclical, and real economic growth continues to be slow. Part of the interest in real
estate actually hearkens back to one of its fundamental benefits: bricks and mortar. In spite of the stock market’s
precipitous rise, most people are still fundamentally cautious about their longer term future. In such an environment,
hard assets like real estate have a particular appeal.
• Inventory in Manhattan and Brooklyn is at a historic low. Over the decades of the 20th century, America became
increasingly urbanized. Jobs and quality of life both drew more and more people into cities. New York has always been
a particular magnet for transplants from around the country and around the world. Because of the recession,
and changes in tax development, few buildings were begun over the last five years (although there is certainly more
of a mini-boom in building today). So we are a city with an expanding population and a relative paucity of
newly constructed places to live.
Add to that the changes in the capital gains tax laws enacted in the beginning of this year, dis-incentivizing
long time owners from selling their highly appreciated homes, and you have a perfect storm of scarcity. As people
become more accustomed to the new tax laws, and as more mid-range properties reach the marketplace,
I believe much of the urgency will become tempered and a more balanced market will resume.
• There are three different market dynamics in the New York real estate scene, and each is created by differing
realities of supply and demand. They are the internationally driven high-end new condominium market,
the market for older co-ops and condominiums priced below about $5 million, and the higher end co-op market.
Each of these is behaving quite distinctly.
1.The high end new condominium market continues to set records, albeit at price levels considerably lower than
the world’s other most international cities such as London, Paris, and Hong Kong. The U.S. remains a safe
haven into which flight capital continues to flow. I don’t foresee major changes in this dynamic in the years ahead.
2. Lack of inventory continues to drive the market for properties under $5 million. The two-bedroom markets in both
Manhattan and Brooklyn remain the most competitive, particularly for units costing less than $1.5 million or those in
mint condition. Affluent singles, young couples, and empty nesters returning to the city all vie for these properties.
As one gets to the upper end of this market segment, condition and location become increasingly significant factors.
It is actually still possible to pick up excellent buys on beautiful six and seven room apartments if they need work and
lie outside conventional neighborhood boundaries.
3. The higher end co-op market is uneven. While park views and top addresses continue to draw buyers,
this market shows price sensitivity not at all characteristic of its counterpart in 2007. There is no longer an army of
mid-level investment bankers flush with bonus cash snapping these units up. The buyers of today, whatever
the origin of their funds, pay close attention to relative value. Many of these units, if not correctly priced,
linger for months on the market.
• Finally, a market which is driven from the bottom up feels healthier to me than which is driven from the top down.
Young professionals all over the city, from the Upper West Side to Prospect Heights to Long Island City,
are investing in homes and making a long term commitment to New York. They are, for the most part, fiscally cautious.
They qualify for financing in today’s much more restrictive mortgage environment (or they get help from the
Bank of Mom and Dad), they send their kids (when they have them) to local public schools in which they become
activist parents, and they build their neighborhoods with like-minded colleagues. Today’s buyers in the critical $1 million
to $3 million dollar marketplace are generally not investors. They are not looking for a quick profit. Their purchases reflect
not froth, not a fantasy of real estate as a get-rich-quick vehicle, but a decision to participate in and continually
re-activate New York as a series of vibrant, inclusive, multi-generational communities.