Real Estate Matters, Winter 2004

Real Estate Matters, Winter 2004

Market Matters, New York Real Estate Markets, 4th Quarter 2003
Joshua Kahr

The run-up in prices for residential real estate shows little sign of stopping. Prices have continued to rise in the wake of 9/11 and are now approximately 10 percent higher than they were after the disaster. Whatever damage the events of 9/11 did to the city's infrastructure, finances and economy, there appears to be little that can deter New Yorkers from buying homes. Nonetheless, much of this run-up is inherently unsustainable as the cost of new construction remains far below the sales prices of new units. There will be a readjustment when development eventually catches up with the market. The question is how long will it take for this readjustment to occur. In New York, the same city that has remained in a perpetual housing crisis since the establishment of the rent control laws approximately 60 years ago, the meaning of the word "eventually" can be measured in decades.

While the housing crisis has continued unabated and prices have continued to rise, the overall economy has changed. The Dow Jones is now comfortably above 10,000 and the economy is making small steps towards recovery. This will have an effect on the local housing market and it will most likely not be positive. There is a consensus among market watchers that the housing bubble can only be deflated by a rise in interest rates. Over the past six months, the two most likely suspects for raising interest rates were an improving economy (which, in theory, the rise in the stock market is a sign of) and increased borrowing by the Federal Government to pay for the ongoing conflicts in Afghanistan and Iraq. These two factors could burst the housing bubble with a dramatic rise in interest rates.

However, while a burst is possible, those two key events keep being delayed. The Federal Reserve has recently stated that it intends to keep its low target of 1 percent for the federal funds rate and it believes that it "can be patient" in keeping the rate at its current level (January 28 2004 Press Release from the Federal Reserve). It believes that any recovery will be slow to occur. Additionally, the planned transfer of power to some form of local Iraqi government by July 1, 2004 suggests that regardless of whether the conflict in Iraq turns into a "long, hard slog" (to use the words of Donald Rumsfeld from October 2003), the current administration has little interest in remaining involved.

For New Yorkers, any slide in housing prices will be restrained because it is extremely difficult to build new units in the New York City area regardless of high prices and strong demand. The overbuilding of the late 80's and subsequent collapse of housing prices from the beginning of the 90's is most likely not going to occur again in this cycle.