As momentum continues in Manhattan’s real estate market, with record setting prices the focus of media and cocktail party attention, shouts about a possible bubble are turning to whispers.  In 2004, prices across the nation rose faster than in any other year since the 1970’s.  Despite disappointing employment and corporate numbers, declining consumer confidence, high oil prices, sagging U.S. and global stock, and worldwide uncertainties, prices in New York surged in a tight market amid heightened demand and frenzied activity.  High incomes and low interest rates fueled ever-rising values.  In nearly all segments of the real estate market, bidding wars drove prices up by leaps.

 

Doomsayers declare that today’s housing is as overvalued as yesterday’s tech stocks.  But comparing the real estate market to the stock bubble is inaccurate for a variety of reasons.  Unlike stock buyers, real estate purchasers buy shelter that provides tax advantages.  Changes in home ownership occur slowly.  There are costs associated with property transfers, and when a property is sold, usually it must be replaced by another.  Unlike stocks which can be disposed of in a single phone call, it takes time, emotion and considerable expense to sell and move from a home.  Flipping investments is far easier to accomplish in the equity markets than in the real estate markets.  Most property buyers, even buyers of second homes, stay for the long haul.   

 

In the past few years, as homeowners took advantage of low rates by refinancing, they used the extra cash in their pockets for additional spending.  However, the windfall created by refinancing is coming to an end, and a slowdown in price increments is coming.  By 2006, economists forecast that interest rates will approach 7%.  It’s unlikely, however, that real estate prices in Manhattan will plunge.  A more likely scenario is that they won’t rise much or will remain flat.  Morgan Stanley’s chief U.S. economist predicts, “Home prices will rust, not bust, for the next few years.” 

 

According to the National Association of Realtors, a better balance between supply and demand is expected by year end.  Throughout Manhattan, new conversions and new construction are in the works.  As this latest supply of product becomes available, price gains are expected to slow but still remain above historic norms. 

 

Certainly, there are cycles in the real estate market.  Price fluctuations, however, matter less to home owners who are purchasing shelter than to those who seek pure investment.  A more balanced level of trading lies ahead.