Buyers beginning to say 'enough' to high prices

Real Estate Weekly, Feb 24, 1999 by Emily Tannen

The residential real estate market has had a tremendous run, with years of consistent demand fueling continuing, often double digit increases in residential prices. Can we anticipate more of the same for 1999?

Market conditions look very much like 1998, with favorable interest rates, strong competition among lenders, demand outstripping supply, a healthy economy and consumer confidence. It would be easy to forecast that 1999 will be another banner year for price increases and record sales, but there are other forces at play in the residential market.

The balance between supply and demand will remain stable. New residential construction, though evident, will not create a more competitive marketplace. New York's fixed amount of land means there will always be finite amount of housing. Add together all the units coming onto the market, primarily luxury rentals on the West Side in Midtown and super-luxury condominiums scattered about the Upper West and East Sides, and there are not enough to make any significant difference.

The vibrant job market, healthy economy and desire to live in the "Capital of the World" will keep consumer demand for rentals and sales strong.

Since today's buyers have the same motivations that have driven the market the last few years - the satisfaction of owning a home and financial opportunities to build equity and tax deductions - the great equalizer in 1999 will be price resistance. Like housing stock, there are a finite number of people who can actually afford and are willing to pay the ever-upward asking prices of residential properties.

A survey undertaken for residences in one building in a prime location in the Gramercy Park neighborhood showed increases of 24 percent from 1997 to 1998. How long can double digit increases be sustained in a market where property prices rise so much and so often that there are frequently no comparables? Regardless of the powerful desire to own a home and the financial benefits of doing so, whether it is intellectual resistance or financial shortfall, buyers have begun to signal "enough."

What that means for 1999 is a continued healthy marketplace, but one in which prices will not continue to rise at the levels we have experienced in the past few years. The "unaffordability factor" will also give rise to development of borderline residential neighborhoods that offer less expensive living spaces.

The old joke about Manhattan being a wonderful place if they ever finish it continues to reflect reality, as gentrification and conversion envelopes commercial and industrial areas, as it already has in SoHo, TriBeCa and the Downtown financial district, and indicates it will in far west Midtown and the meat packing district. Will less expensive housing in previously borderline areas attract buyers in resistance to prices in established residential neighborhoods?

More than a hundred years ago, in 1896, some enterprising real estate marketers of the day decided to boost land values in the upper reaches of Eighth Avenue by renaming it Central Park West. Although The Dakota had been built some 10 years earlier (named for its remote location, which was derisively called "Dakota Territory"), the magnificent apartment house built by Edward S. Clark was long known as "Clark's Folly." How long then did it take for Central Park West to become "The Gold Coast," one of New York's most select, expensive neighborhoods?

What is evident from examples like Central Park West and, more recently, SoHo, is that turning an area into a real, desirable residential community supported by shops and services is a slow evolution.

Look at the financial district, where all the conversions of office buildings to residential properties have yet to create a viable area in which to live. With the rise in commercial rents, the financial benefits of conversions have, at the moment at least, been negated without having achieved the sheer mass of neighborhood residents and pedestrian traffic that would attract retailers, restaurants and other consumer services that would bring true vitality - and value - to the area.

The surge to convert the substantial industrial buildings of TriBeCa to luxury, large, loft residences has rather quickly changed the nature of a neighborhood, although even TriBeCa, with its close proximity to Wall Street, has yet to reach the level of acceptance and prices that were forecast.

People still prefer established neighborhoods, seeking to purchase in the best location, with recreational facilities, shopping, services and restaurants, convenient transportation and, if relevant, good schools, all within their price range. Just as upper Eighth Avenue become Central Park West, we may rename the Meat Packing District the North Village, but whatever we call it, it will not be competition for Gramercy Park in the foreseeable future.

1999 may well be the year when buyers stay put rather than pay what they consider tO be exorbitant or unaffordable prices, or become residential pioneers in marginal neighborhoods. Buyer resistance to, and their ability to afford, today's asking prices will stabilize the residential market, making it a good year, but one without quantum price leaps.