Are Prices Crazy?

At a recent meeting at the Real Estate Board, the smart, extremely successful developer sitting next to me asked, “How’s business?” He then shook his head and said, “Prices are crazy.” But are they? Are prices for New York real estate too high? There are a number of ways to look at that question.

First, we can take the comparative approach. According to a number of articles I have read recently, a quart of milk, a tank of gas, a 2 bedroom condo – all are cheaper in New York than in Paris, London or Hong Kong. According to Sunday’s New York Times, even New Delhi’s prime neighborhoods are far more expensive than those in New York. So while it is clearly true that prices are escalating and the market is undersupplied and highly competitive at the moment, New York real estate is apparently NOT that crazy compared to the costs of real estate in other international cities.

Then there is the rent-to-buy ratio approach. In mid-2012, according to Trulia, the rent-to-buy ratio in Manhattan stood at 20, which is on the high side (the rent-to-buy ratio is determined by dividing the average home sale price by the average annual rental price for a particular sub-market). That said, buying still makes more sense than renting in many sectors of the market because the after tax costs are actually still cheaper, since both mortgage costs and real estate taxes remain deductible. Furthermore, while inventory to purchase is scarce, especially in the larger units, inventory to rent is even harder to find.

Prices ARE crazy for middle class people who want to live and work here. One of our city’s most pressing problems is that of middle income housing, and here real estate needs help from the government. As long as rental properties are assessed at a much higher rate than co-ops and condominiums (not to mention single family homes, the most under-assessed part of the market), and there are minimal tax incentives, developers will not build middle income rental  housing. It simply does not make sense for them, with land and building costs as high as they are.  Our industry needs the municipal government as a partner if we are to create meaningful amounts of housing for users other than the super-rich.

In the end, prices simply are what they are. My colleague described above, like me, has been in the real estate business for a long time. We both remember when apartments could be bought for 5% of what people pay for them today. My younger agents, who don’t have such a long memory, accept today’s prices as appropriate and even, sometimes, cheap. They understand that real estate does not have a particular intrinsic value; like any commodity, it is worth what people are willing to pay for it. For the global investor as well as the successful local and national buyers who flock here to buy homes, New York offers stability, beautiful properties, and the always exciting and energizing social and cultural life which make our city great!