You Say Tomato …

I am sure we all know the Chinese exhortation “May you live in interesting times.” Well, whatever else our times may be, interesting they certainly are! For many in the ranks of buyers and sellers of real estate, however, interesting, at least insofar as it means unpredictable, is not so good.  And it is hard to remember an event the results of which seem more unpredictable than the Standard and Poor’s downgrade of U.S. Treasury debt from AAA to AA+ which occurred last Friday.

The downgrade won us a stinging rebuke from China, which is understandably concerned since it actually holds so much of our debt. But beyond being a source of frustration to the Chinese, and a source of anxiety for the European Union, what does the downgrade actually bode for the future? Some economists already opine that it means little, as the other two rating agencies have not seen fit to alter their perception of U.S. debt. Some economists feel the S & P overstepped its bounds in discussing and factoring into its review the political logjam which took us to the 23rd hour (and 59th minute!) without a deal to raise the debt ceiling.

For buyers of real estate, there are likely to be some consequences, most particularly in the costs of financing. Lower bond ratings mean higher bond interest rates. Inflation, which seems to be gradually creeping back into our lives  (highly visible in the price of both food and gas), also generally leads the Fed to raise interest rates. So, much as the government may want to keep interest rates at rock bottom levels to stimulate the economy, the likelihood is that sooner or later rates will begin to creep upward.  Since monthly payments are at least as important as purchase price for most buyers, this means that the same $500,000 purchase price will probably cost more in a year than it does now.

Warren Buffett famously said, “I am nervous when people are buying, but I like buying when people are nervous.” Few of us possess the courage to act this way, but it is not a bad rule of thumb to question rather than blindly follow conventional wisdom. As life in the suburbs becomes both more costly in terms of taxes and less reliable in terms of schools, more and more people are opting to stay in the city if they can.  While our real estate, like any commodity, will fluctuate in price, it IS a hard asset and it DOES have enormous intrinsic value.  That is why we have a rental vacancy rate of under 1% and why property for sale is scarce in so many categories. And if interest rates rise, your money as a buyer will go less far, which will offset the potential benefit of price fluctuations which may or may not occur. In the last three years, our prices here fell less far and recovered more quickly than anywhere else in the nation. That tells us something about the intrinsic value of New York.