Mayor Michael Bloomberg shook members of the real estate and finance communities with his prediction that city housing prices would likely drop 10 percent and that sales would fall 14 percent over the next few years. His late January speculation was accompanied by the announcement that he would downsize budget projections accordingly.
Bloomberg, a favorite in real estate circles, first jolted the landed set by raising property taxes after September 11. He rattled part of his base again with his potentially chilling pronouncements about the state of the market and with the creation of a task force to reevaluate tax abatements given to some residential developments. Another high-profile real estate battle for the mayor is his increasingly bitter clash with World Trade Center landlord Larry Silverstein.
“The real estate industry is accustomed to having its way without having to endure a lot of questions,” said task force member Brad Lander, executive director of the Center for Community and Environmental Development at the Pratt Institute. “But the mayor has always been willing to take unpopular stances,” he said, due in part to Bloomberg’s ability to finance his own campaign and eschew contributions from special interests.
Bloomberg spokesman Jordan Barowitz disagreed that the mayor’s proclamations had soured his relations with the real estate community. “The mayor’s intent is not to anger anyone,” said Barowitz. “He is trying to do what is in the best interests of the people of New York City.”
The mayor’s prognostications are backed up by reports generated by economists at the Office of Management and Budget. For 2006, real estate taxes constitute $12.8 billion of the $52 billion budget, said Barowitz. The city’s kitty is currently flush with a $3.3 billion budget surplus, derived largely from commercial rent taxes, mortgage recording taxes, and real property transfer taxes.
“It is not clear to me why the mayor would put himself in the position of predicting the future in such precise terms,” said Jonathan Miller, president of appraisal firm Miller Samuel and a member of the city’s economic advisory panel, who characterized the mayor’s relations with real estate interests as “neutral.”
Though the mayor’s figures are generally sound, “on one side, it is a refreshing perspective provided by someone who has the reputation of being informed in financial affairs,” he said. “On the other hand, it can become a self-fulfilling prophecy.”
As interest rates rise, housing prices will undoubtedly cool, said Miller. “Part of the housing boom is all about the mortgage payment and the Fed’s loosening of monetary policy after September 11,” he said. “The rate of price appreciation is easing, so it’s going to single or flat gains, down from double digits a year ago. He may be trying to lower expectations of people who want to spend the surplus.”
Talk of a real estate bubble is obviously nothing new, given the dramatic gains over the last several years, said Greg Heym, chief economist at Brown Harris Stevens.
Though Bloomberg is no Alan Greenspan, capable of causing the market to shudder with mere words, “he’s always been the kind of mayor who speaks his mind and being that he’s a billionaire, it does have more impact.”
Heym, also a member of the mayor’s economic advisory panel, argues that although the breakneck pace of real estate prices is unsustainable, property owners need not fear a crash. Unlike stocks, “real estate is a tangible asset with a proven track record of growth,” he said, citing the tax benefits of home ownership. “Selling a home takes time, and if you’re not happy with the price you’re getting, you can continue to live there.”
The city’s economy is sound, moreover, and there are no signs of a prolonged down market, where people are forced to sell, which drives prices down. “In the late 1980s and 1990s, the city lost jobs, but today the economy is growing,” Heym said. “Interest rates are relatively low and haven’t risen sharply. It will be a soft landing back to historical rates of growth.”
On the rethink of the tax abatements, known as 421a exemptions, Bloomberg is trying to redress a piece of history. The exemptions, which date to 1971 and give tax breaks for certain residential developments, are long overdue for revision, said Lander at Pratt.
“It’s understandable that real estate interests do not want this to be scrutinized, but it’s a program that nearly everyone agrees is outmoded,” he said.
Bloomberg’s least controversial beef with city landowners constitutes his fight with Larry Silverstein over the World Trade Center site. If the mayor wins, and Silverstein does not get to develop the entire parcel, which seems likely, other interests will benefit, said Lander.
Many factions are frustrated over the lack of progress at Ground Zero and the real estate community is willing to overlook the mayor’s hardball tactics as long as business remains buoyed, said Eric Deutsch, president of the Alliance for Downtown New York, a Business Improvement District composed of landlords, tenants, and retailers.
“If you put one or two issues aside,” he said, “overall the real estate industry is happy that the economy is doing well in the city.”