Talk continues about a possible bubble in real estate.  In the last year, prices have jumped as much as 30-40%, and the pace of trading has been frenetic.  In the months and year ahead, however, a return to more balanced activity with modest price appreciation is welcomed. 


Inventory has been shrinking steadily.  But with new construction and new conversions in the works, more than 25,000 apartments are scheduled to come into the marketplace in the next 18 months.  For certain, the market will be impacted.  Will the “if-you-build-it, they-will-come” mentality continue?  Undoubtedly, some developments will be more secure in their locations than others, like The Plaza, The Stanhope and The Mayflower Hotels.


Contrary to popular opinion, brokers do not love a sizzling market.  Ours is a business of building relationships, and it takes time to develop and build trust.  In a fast paced rising market, pushing new buyers to bid immediately is bold.  In a market where buyers need to bid without deliberate time to reflect and digest, everyone becomes frustrated and angry.  It’s sometimes tough too when representing sellers, because pricing ahead of the market can be wrong.


In the May 23rd New York Magazine cover story journalist Henry Bloget declares, “For practical purposes, the bubble debate is academic:  You can afford what you can afford, and no one knows what the market is going to do. “  In all real estate cycles—high, low and everything in-between—it’s important to buy smart.  New York Magazine’s risk analysis of neighborhood values borrows from real estate’s three basic principles:  location, location, location.  Neighborhoods that lack services, schools and proximity to transportation are not good risks.  Additionally, values are more solid when there is a blend of residential life and services, and a mix of neighbors who are single professionals and families, both old and young.   


While cautioning against speculative buying, New York Magazine’s cover story contains a serious error in its reporting.  A statistic attributed to the appraisal firm Miller Samuel “says that the median Manhattan co-op cost the same in 1999 as it did in 1981, eighteen years earlier.”  Jonathan Miller, the company’s President, confirms that this is erroneous.  In 1981, when I was a rookie broker with just one year of experience, I well remember selling a family sized Park Avenue 8-room co-op for $500,000, just as these units were beginning to approach the half million dollar mark.  In 1999, the same apartment sold for $1.930 million.  In today’s market, a similar unit traded at $3.4.  New York in 1981 was nearly bankrupt, crime was high, and mortgages were at 16%. 


In recent years, the combination of rapidly escalating prices and low interest rates has contributed to more speculative buying, especially of 2nd homes and new condos.  Some investors have managed to buy and resell even before the new developments were completed.  With interest only and adjustable rate mortgages, first time buyers are also reaching and perhaps over reaching to finance their purchases.  Easy credit is especially risky for entry level borrowers who may be taking on higher mortgage payments than they can afford and who are banking on expectations that property values will continue to soar in the short term.


Alan Greenspan is calling it “froth” and acknowledges that the rate of increase can not be sustained.  Mortgage rates continue to be low, and even if they rise slightly, the effect will be less significant on Manhattan real estate resident owners than on speculators.  The advice to both buyers and sellers is to work with an experienced broker who is intelligent and clear thinking and not to gamble with your residence.  Buy quality, put deliberate limits on your financial exposure and don’t leverage to the max.  Expect a slowdown in price increments and a leveling of market activity.  Barring the unforeseen, stability and balance are ahead.