We know well that there’s a huge disparity and even a disconnect between Manhattan real estate and the rest of the country. As an example that is repeated in cities across the nation, a housing boom in Phoenix has gone bust as the number of unsold homes rises and builders pull back. On the news of collapsed earnings, home building stocks have declined sharply, and related job losses in the industry have affected national employment figures negatively. Nonetheless, even as neighboring suburban markets like Westchester prove to be sluggish, New York City real estate is alive and thriving. Prospects bode well for September, the last quarter of 2007, and into 2008.
It’s worth noting a recent “Superstar Cities” theory offered by a trio of economic academics from Wharton and Columbia in a joint working paper issued last July for the National Bureau of Economic Research. Written primarily for an audience of economists, government and business professionals, the 52 page scholarly study, loaded with statistical analyses, concludes, “Living in a superstar city is like owning a scarce luxury product.” Increasingly, rich buyers are concentrating in superstar cities where declining land supplies are causing property price increases. The paper’s premise is that the explosive growth of home sale prices in high cost cities is caused by the scarcity of supply and the rapidly and ever-rising incomes of buyers who are willing to pay a huge premium to live in a superstar city.
In the period between 1960 and 1980, only 2 cities were identified as superstars: San Francisco and Los Angeles. By 2000, twenty more superstar cities had come of age, including New York. The authors argue that with more wealthy people bidding on a fixed inventory, even the price of entry-level homes accelerates. Furthermore, they reason, if incomes continue to rise and the housing supply stays the same, ”over time, the gap in house prices between cities can keep increasing.”
The superstar borough of Manhattan hasn’t experienced a cooling off period like the rest of the nation. In point of fact, according to The Real Deal, New York leads the country in the development of multi-unit housing. At the same time, with the rise of construction projects, in the first 4 months alone of 2007, nearly 4,000 related jobs were added to the city’s employment pool.
Some New Realities
Indeed, our market is strong. But at least three new realities must be acknowledged. First, there is fallout from a combination of higher interest rates, stricter appraisal standards and tightening credit—the latter two consequences of the subprime loan fiasco. While the upper end of the market is impacted less by rising interest rates, first time and mid market purchasers who are able to borrow less today than last year are finding they must adjust their buying goals andbudgets.
Second, changes to the 421A tax abatement program, already passed by the New York State Legislature, though not signed into law yet by Governor Spitzer as of this writing, will alter the landscape for new developments. If passed, the law will require that buildings given 421A status set aside 20% of the premises for low income dwellers, significantly affecting both costs and profits for developers and creating new concerns for buyers.
Thirdly, the increasing volume of high end sales is skewing market stats. The distortion in medians and averages comes from record breaking closings on Fifth Avenue and Central Park West, and at new condominiums like 15 CPW and The Plaza where one of the first closings was recorded at $56 million. In the year ahead, as more of the new construction closes, anecdotal evidence will be a better reflector of market activity than pure statistics.
Trading in New York is expected to continue briskly. This month, we’re expecting a new crop of properties to come to market, as the time for active looking and decision making is from now until the distractions of the holiday season. Sellers are cautioned to price with discipline to set realistic prices. Buyers are advised to buy quality.
According to The National Association of Realtors, home prices across the nation are expected to pick up steam in the last quarter of this year and to recover fully in 2008. Fueled by Wall Street and its movers and shakers, New York will continue to outperform the nation.