Cranes frozen in place high above abandoned construction sites; houses boarded up and branded with foreclosure signs. The images of the nationwide housing crisis are indelible.
Now, as the economic downturn roars through New York City, it’s tempting to conclude that Manhattan’s real estate market is still somehow different from the rest of the country.
“I don’t think we’re going to see the same degree of problems that are taking place in the rest of the country,” said Douglas Durst, CEO of the Durst Organization. “New York is completely unique. People want to be in New York, and that’s going to draw demand for housing here.”
While it’s clear that New Yorkers are seeing the effects of the downturn, there’s a widespread belief that it will be milder here than in other cities — that the flood of new inventory coming on the market will be absorbed, the downturn will be shorter and the price cuts will be less severe.
However, some leading economists and industry experts say, “Not so fast.” They predict that the downturn in Manhattan will likely be just as severe as that of the rest of the country, if not worse.
While the inventory of new construction likely will not pile up as quickly as it has in Las Vegas or Miami, New York faces other challenges that those cities don’t, including its dependence on Wall Street and a spectacular — and some say unsupportable — escalation in prices in recent years.
“Let’s be realistic — the bubble’s bursting,” said Brad Inman, the publisher of Inman News, the residential real estate news site. “New York was the last holdout. The prices were insane. I don’t think there was enough prosperity on the planet to support it.”
Manhattan real estate is often viewed as invincible due to its attractiveness to foreign buyers, a high concentration of very wealthy residents and the fact that it’s an island with a limited amount of housing.
New York’s allure is such that economists Joseph Gyourko, Christopher Mayer and Todd Sinai named it on a list of “superstar cities” in a July 2006 study. The study posited that high prices in cities like New York and San Francisco are driven by an “inelastic” supply of land in some attractive locations, combined with an increasing number of high-income households. Scarce land leads to buyers bidding up land prices, so more high-income families end up in “desirable, unique, low housing construction markets,” the study said.
However, Manhattan’s uniqueness cannot save it from the economic factors at play: a shrinking employment base and a decline in demand, said Gyourko, a finance professor and the director of the Samuel Zell and Robert Lurie Real Estate Center at the University of Pennsylvania’s Wharton School.
“You’re decreasing the number of rich people through job losses,” he said. “Unfortunately, Manhattan is going to have a very severe down cycle.”
While it’s tempting for brokers to be optimistic, the idea that New York is somehow less vulnerable to the downturn is “naïve,” Inman said.
“My sense is New York is probably in denial,” he said. “There is a combination of factors that puts New York in a precarious position. It will follow the path of other cities across the country.”
New York City has been exhibiting the classic signs of a housing bubble, which will inevitably burst, said Ben Jones, a blogger who made headlines recently for predicting the nationwide housing downturn as early as 2005. Historically, he said, typical housing prices hover around 2.5 to 3 times the buyers’ annual incomes.
However, that’s not the case here. “Prices are wildly out of whack with incomes,” Jones said. “New York is probably overvalued by 50 percent.”
He added that the oft-cited reasons why Manhattan’s market is different were also common utterances in other cities now facing massive real estate price cuts. “Every market goes through a phase where they say, ‘local people can’t afford these houses, but rich Europeans can,'” he said. “They said that in Miami. They said that in Vegas.”
An easy way to tell if there’s a housing bubble is to measure the relative cost of buying versus renting, according to Tim Harford, author of “The Undercover Economist.”
“When you start to worry about a bubble is when the mortgage payments are much more than the rent would be,” he said.
According to the third-quarter market report from Prudential Douglas Elliman, the average price of a one-bedroom condo in the city is $1.8 million. According to StreetEasy, a one-bedroom condo in Midtown on sale for $1.75 million would cost roughly $8,126 a month in maintenance and taxes with a 40-year fixed-rate mortgage. But according to Citi Habitats, the average rent for a one-bedroom apartment in the same neighborhood is $2,832 a month.
Prices that high indicate speculation, Harford said.
“People will always want to live in New York,” he explained. “But the proposition that people will always want to live in New York at any price is not true.
“It’s not going to turn into Detroit — there aren’t going to be loads of empty buildings. But prices are going to fall.”
New York’s housing bubble was bound to burst sooner or later, experts said. But the financial crisis on Wall Street and accompanying layoffs have accelerated the process, they argue, and may make the downturn here even worse than in some other cities.
“There’s another view that says New York is particularly vulnerable,” Harford said. “Because what is the New York housing boom built on? It’s built on the finance industry.”
In addition to price drops, Inman said, brokers’ cheery predictions that sales will pick up in 2009, once President-elect Barack Obama takes office and the government bailout kicks in fully, are likely far from the truth. He pointed out that the housing slump began in 2005 in some parts of the country — and will likely be just as long here.
“We’re three years in,” he said.
New York, on the other hand, “is just beginning the cycle, just beginning to face the music of housing market doom.”
However, there are some areas where New York may be better off than other cities.
One area where the city, and especially Manhattan, will likely fare better is in the number of foreclosures, Inman said. Because of the city’s high number of co-ops, which often require large down payments, there were fewer subprime mortgages here, and so there are likely to be fewer foreclosures.
And where inventory is concerned, New York City’s building boom — now coming to an end — was small compared to that of cities like Las Vegas and Miami, due to the high price of land and other factors. “There are a lot of restrictions in New York, unlike Las Vegas, where anything goes,” Jones said.
In the face of all this bad news, the best way for brokers to prepare themselves is to recognize that the market has changed and quickly find ways to adapt, Inman said.
“Everything starts with awareness,” he said. “Admitting what the market is really doing is important, so brokers can deliver intelligent advice to their customers.”