New York Feels the Crunch

(page 2 of 2)

Real Estate: Robust Demand

The fate of New York real estate prices is especially hard to predict. While the subprime mortgage crisis has taken the air out of housing markets across the U.S., demand for housing in New York has remained strong. The falling dollar helps here, too, making New York properties cheaper for foreign buyers. "There has been tremendous demand from outside the city" for co-ops and condominiums, says Jonathan Miller, president and chief executive of Miller Samuel, a real estate appraisal and consulting firm.

As a result, real estate prices have risen rapidly in New York City, by double-digit percentage-point gains since 2004. In 2007, the average sale price for all homes throughout the city increased 15% from 2006, to $732,000, according to the Real Estate Board of New York. Manhattan led the five boroughs for home sales overall, with average sale prices rising 11%, to $1.27 million.

Luxury apartments, co-ops, and condominiums in Manhattan have remained particularly robust. The upper 10% of the price range for residential housing appreciated 28% in the fourth quarter of 2007 compared with the same period in 2006, vs. a 6.4% gain for the rest of the market, according to Miller. He adds that few properties are coming onto the market, especially at the top end.

"Going forward we'll see demand back off a bit and some affordability improved," says Miller. "But there won't be significant price declines." Demand hasn't fallen in the upper end of the market because many of these buyers, who have seen five years of solid trading profits and generous bonuses, are cash purchasers.

That's not to say the housing woes won't catch up with regular New Yorkers. Megamillionaires, whether from Europe or Wall Street, don't generally buy single-family homes in Queens or Brooklyn, and prices in those and other boroughs outside Manhattan could tumble. Already, real estate brokers notice some changes. "Buyers don't have the urgency they have had," says Pamela Liebman, president and CEO of the Corcoran Group, the largest residential real estate firm in New York. "Some are negotiating harder and others are playing 'wait and see' to see if prices come down."

Like Miller, Liebman remains optimistic that prices won't crater. Even if they did, she says, the bargains wouldn't last. "If the real estate bubble ever burst in New York, we'd be flooded with buyers who'd run prices right back up again," says Liebman.

Such confidence may be admirable—or misplaced. Even more than the rest of the country, New Yorkers are holding their breath to see if Ben Bernanke & Co. succeed in calming the financial waters.

Herbst is a reporter for BusinessWeek.com in New York.