August 12, 2004

Reports from the NYC housing bubble

When I moved to New York in 1997, it didn't take me long to develop a taste for real-estate porn. I'd read the Manhattan Transfers column in the New York Observer, collaring anybody within earshot to ask idiotic questions like "2-bed 1,500 square foot ground-floor apartment on 74th and Lex – how much?". The key number was the square footage: you knew that seriously swanky Upper East Side apartments broke the $1,000-per-square-foot barrier, the Upper West Side was a bit less, and Soho was more in the $500-$700 range.

Nowadays, of course, Soho and Tribeca have long since left $1,000 in the dust: fully-fledged Gold Coast neighborhoods in their own right, they're just as desirable, in their own way, as almost anywhere on the Upper East Side. But there are still bits of downtown which still retain a certain amount of youthful vibrancy and dirt, areas which, even though they're gentrifying, haven't yet reached the status of antiseptic design mall. At the very heart of those areas is the storied St Mark's Place, the three-block street which has long been a byword for countercultural excess.

It's with no little apprehension, then, that I point you to a real-estate listing for a 2-bedroom apartment on St Marks's Place, 1,000 square feet offered at $1.1 million (plus $896 a month in maintenance). Yes, we have now officially reached the point where an East Village walk-up is more than $1,000 a square foot. No elevator, no doorman, no terrace, no roof rights, not even more than one wall with windows: just the apartment, with one exposure, a living room upstairs, a bedroom downstairs, and a small-to-medium spare bedroom at the back. Naturally, the listing describes it as "great for a family of 4".

But at least it's directly opposite the Physical Graffiti building.

Posted by Felix at 04:43 PM GMT
Comments
#1

I'm not sure where the capital keeps coming from for these purchases. Consider it - the monthly payment on a 30-year mortgage at 5.5% for $900,000 works out to $5,110. What's the Manhattan Premium worth to people? Lifelong enslavement to a mortgage?

Posted by: Sterling on August 12, 2004 04:57 PM
#2

Wait, Sterling, didn't you cash out bigtime from the Boro6 divestment?

Posted by: Lock on August 12, 2004 05:30 PM
#3

Much of it is in the form of affluent parents providing 'starter homes' for their kids. Given the number of multi-millionaries in this country and worldwide, owning a chunk of the capital of the west is the apex of new money aspiration. It can be done for the purpose of generational wealth transfer, or it can simply be more foolish bubble investing. Since 2001, year-over-year, returns on real estate in Manhattan outperfrom pretty much anything that isn't a hedge fund. Getting 40% return in 24 months with an account minimum of $200K (cost of down payment and closing on $800,000 apartment)? Where else can you find that kind of action?

Posted by: miss representation on August 12, 2004 05:31 PM
#4

Yes, Lock, I did enjoy an approximate 380% return from my Boro6 sale. But that was purely speculative investment to begin with - and I had to live in a slum for four years to make it work.

Miss Representation makes an interesting point about generational wealth transfer, although a "gift" of $500,000 - $1,000,000 would have significant tax implications. An estate planner would probably advise a trust of some kind that generated income, rather than a simple transfer of wealth.

I doubt that Manhattan residential real estate pricing is a bubble, but it may well be at a peak due to affordable mortgage rates. In other words, $5,500/mo may be near the absolute maximum a certain class of affluents is willing to pay. So as interest rates climb to 6% or even 8%, values may drop to reflect the smaller principle that can be covered by that payment.

Posted by: Sterling on August 12, 2004 05:59 PM
#5

If $5.5k is "near the absolute maximum a certain class of affluents is willing to pay", then how do you explain, say, the west village, or Chelsea? Here, for example, is a 2BR apartment on 24th and 7th -- nice, but hardly the center of the universe -- with, again, one exposure, and the grand total of three windows, asking $2 million. The crazy thing about Manhattan real estate is that there really is no limit to how far you can go -- there's no shortage of apartments for $2m, $3m, $4m and up even from there. Here, for example, is a one-bedroom Soho loft for $8.2 million. Although you do get a "massage room" as well.

Posted by: Felix on August 12, 2004 06:54 PM
#6

I had the unfortunate experience of buying a 1,500 sq ft classic six on West 71 at the height of the last big Manhattan bubble, 1989, for the then high price of $389K. I'm an ad guy and I lost my job in the "mini-recession" of 1994. Fell behind in my payments and ultimately the apartment was foreclosed on me because I neither sell it at all or rent it for anywhere near my monthly payments. (The real estate agent told me that no one would be interested in an apartment -- one block from Central Park -- because it was a low floor!)Using elementary school math, if mortgages go from 5% to 7% that means payments will rise by 40%. And then that will be the end of the bubble. If I still owned my old apartment, I'd be so out of here!

Posted by: gary barnum on August 12, 2004 07:31 PM
#7

Well, there's all sorts of grades of affluent persons, Felix. But there's still an equilibrium of sorts - I don't have good access to data right now, but there are at least a million households in the US worth in the vicinity of $5 million. So $60,000 a year in rent for a town residence might be all they'd be willing to spend, when added in with a country or vacation home somewhere else of similar encumbrance.

Posted by: Sterling on August 12, 2004 07:36 PM
#8

I sort of agree, Gary, but I think we're too prone to using the word "bubble". Bubbles pop, they collapse. It's a relatively rare thing for real estate values to collapse, probably because most people won't panic-sell their residence. A 2% increase in rates might cause some people some problems in disposing of real estate they can no longer afford, but it won't cause an established property owner to panic - he'll just wait it out. It WILL, however, pull prices down.

Posted by: Sterling on August 12, 2004 07:44 PM
#9

First and parlor floors? Very noisy.

Posted by: la depressionada on August 12, 2004 09:54 PM
#10

There is no bubble there have never been one. Real estate in Manhattan is a strng BUY

Posted by: mark on August 15, 2004 03:57 AM
#11

New analysis of the Manhattan real estate market suggests that it is undervalued. This surprising results comes from a 25-year assessment.

More information is available at http://www.business360.com/realestate.asp

Posted by: John Marchant on September 23, 2004 10:02 PM