Friday, October 07, 2005

Is there really a real estate bubble? By the evidence, in Manhattan, NYC, the answer is "no", "no", "no".

Zooming home prices in places like New York, Florida and California have caused many to proclaim a housing bubble has formed that's bound to burst at great cost to us all.

But how does one define "bubble"? It's more than just a price rise. It is: (1) an exceptionally great appreciation in prices, that (2) is visibly unsustainable in terms of established market fundamentals (such as homeowners' sustainable income-to-mortgage payment ratios), and which (3) is thus sustained by speculation as buyers expect to profit from appreciation carrying forward on its own momentum, with each wave of buyers planning to "flip" the item to the next for a profit while the flipping is good -- until the last wave can find no greater fools to flip to, the bubble bursts, and prices plunge back to reality.

But do these conditions really exist here where I'm sitting, in the steaming hot Manhattan, NYC, real estate market, where prices have near quadrupled in the last few years?

The New York Times this week asked this and got empirical about the answers -- showing that when its reporters stick to reporting it still has resources no other newspaper can match...
Reading the Signposts

The Manhattan real estate market can be a bewildering place, with stratospheric prices and a chorus of warnings about speculation and bursting bubbles. No wonder anxious buyers are gasping for breath.

But what is the true state of the market here? Is it fueled by speculation? How much do low interest rates increase buying power? How are people able to afford double-digit price increases? ...

An analysis of sales going back to the mid-1980's found little evidence that flipping property is common.

The study, done at the request of The New York Times by the appraisal firm Miller Samuel, which tracks both co-ops and condos, found that of 4,339 condo sales in Manhattan last year, 5.9 percent involved apartments that had been bought and resold within 18 months. Since 1997, that number has remained relatively constant, ranging from 5.9 to 7.5 percent annually...

"The way I characterize the market flip phenomenon in Manhattan is that it's a non-factor," Mr. Miller said. "It's not influencing the way projects are being developed, it's not influencing the way properties are being marketed, it's really incidental to the overall market activity."

That makes Manhattan very different from markets in South Florida or Las Vegas. A study last month by First American Real Estate Solutions, a provider of real estate data, found that 36 percent of all home sales last year in Miami-Dade County, Florida, and 40 percent of sales in Clark County, Nevada, where Las Vegas is located, were for homes sold in less than two years....
Nope. No flipping. Not here, anyway.

But what about the extraordinary price rises?

Data from Miller Samuel shows the median price per square foot for all Manhattan apartments reached a high point in 1987, at $305 a square foot for co-ops and $413 a square foot for condos...

Prices bottomed out by the mid-1990's, losing about 44 percent of their value in real terms, and then they started to rise again. By 2002, prices had passed their 1987 levels, measured in inflation-adjusted dollars and by the first six months of 2005, the median co-op price was up 37 percent from 1987, while the condo price was 35 percent greater.

Averaged across the entire period, the cost of a Manhattan apartment has risen at a rate of about 2 percent a year above inflation....
Just 2% a year real appreciation since 1987? That doesn't seem like such extraordinary effervescence. (Heck, at the Nasdaq's post-bubble-bust bottom in 2002 it had returned more than that, 3% real, over the 15 years since 1987.)

But still, prices are going up -- can they be sustained by today's weak incomes?

... a group of economists argues that, despite the galloping price increases of recent years, real estate on the island has actually become more affordable.

The group, Business360, an economic consulting firm, compared the increase in apartment prices per square foot with increases in personal income for Manhattan. While real estate prices rose and fell and rose again, average personal income in Manhattan, reported by the federal government's Bureau of Economic Analysis, rose at a fairly steady pace, increasing 87 percent in real terms since 1981...

Average income has grown faster than average prices, which since 1981 are up 50 percent for co-ops and 37 percent for condos. Because of that, the study concludes, housing is more affordable for the average Manhattanite than it was in the early 1980's or at the peak of the last real estate boom...
More affordable? Hey, "buy low" they say, I'm going out to buy another apartment right now!

Of course, all real estate markets are local -- so if you're in San Diego, Las Vegas or Orlando you'd better check out the local market for yourself.

But here in NYC the bubble tests come back "negative", "negative", and "negative" -- so let's buy two!