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The Stench of '89

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Real estate was the last to recover—the aftermath of the 1990–1992 fire sales continued to depress the market well after the financial meltdown that triggered those sales was over. According to Barbara Corcoran, a one-bedroom postwar co-op on the Upper East or Upper West Side that might have cost $275,000 in 1988 sold for around $160,000 at the end of 1993. By 1994, however, real estate had already embarked on the storied upward climb that would remain virtually unbroken until now.

The moral of the story appears to be that Wall Street money got us into hot water and Wall Street money got us out. And that raises New York’s most pressing question for the rest of 2008 and beyond: Will this time be better or worse than last time?

Between 1989 and 1992, Manhattan home prices dropped by more than a quarter, construction declined by a third, and the city lost one-tenth of its jobs.

Let’s start with the more sanguine of the two scenarios. On Wall Street, those who say we’ll be better off this time point out that there has been no panic-inducing, confidence-shaking single-day crash like Black Monday. Yes, the Dow has already sunk below its 2007 low, bulls allow, but the market, at press time, was still a hair above where it was this time a year ago. And the federal-funds rate is at 3 percent, the lowest it’s been since 2005, which should make it easier for banks to start lending again, which should, in turn, help spur a recovery. Optimists also say that the subprime crisis, brutal as it has been, is limited to the housing and financial sectors and won’t infect he rest of the economy the way the M&A-induced layoffs and the unsound lending practices of the eighties did. Some mention that the city has reduced its historic dependence on the securities industry altogether. The Bloomberg administration has led a drive to diversify New York’s economy, and, indeed, over the past four years, 166,650, or 81.7 percent, of the 204,090 newly created private-sector jobs were in service, tourism, film, and other non-financial industries. City Hall has also, in an unprecedented move, squirreled away $2.5 billion of last year’s surplus to carry us through 2009. “Although I am certainly concerned about contraction of revenues compared to what I’ve been forecasting next June, I’m not in tailspin,” City budget director Mark Page says. “Revenues can slip $2.5 billion before I run a deficit.”

In terms of construction, optimists say, the current building boom is no match in volume for the commercial-building craze of the mid-eighties, so a major contraction there is unlikely. Another key difference between now and 1989 is that developers and contractors have found an enthusiastic co-sponsor in the government. The city, the state, the MTA, and the Port Authority have tremendous capital budgets compared with the eighties, and they’re using them. From the two brand-new stadiums (and a possible basketball arena in Brooklyn) to subway-line extensions, the city is awash in major civic projects. Even Bruce Ratner, who’s using the atmosphere of economic uncertainty to try to expedite Atlantic Yards before the sky falls, is likely just being clever: His financiers at Goldman Sachs had a banner year and appear to be uniquely unaffected by the bad-debt debacle.

Glass-half-full types also note that the New York residential-real-estate market looks better than it has a right to, given the disastrous nationwide slump. It’s almost impossible to imagine the 1990 co-op bust scenario replaying itself today. Co-ops are entrenched and in short supply (there were just two conversions in Manhattan in 2006). Because of the high cost of the average New York apartment, relatively few homeowners here are directly affected by the subprime mess or risk foreclosure (subprime loans were made mostly to high-risk buyers at the low end of the market). There’s also an international angle to New York real estate that wasn’t there last time around: Driven by the cheap dollar, foreign buyers were behind 15 percent of our apartment sales in the last quarter of 2007. The Irish, Russians, Chinese, Saudis, and many others have all been enthusiastically investing in Manhattan pieds-à-terre, and especially in new construction. And unlike in the late eighties, crime is low and families have been staying in the city, instead of moving to the suburbs, when they have kids. One heartening lesson of the early-nineties housing bust, notes Warburg’s Fred Peters, is that unlike in many other American cities, the middle class did not decamp to the suburbs en masse. If the pull of the city proved strong enough in an era of six murders a day, it will be more than enough in the current climate.

In retail, according to the sunny view, the most glaring difference between then and now is the emergence of the ultraluxury market. The recent historic growth at the top end of the economic ladder, or so the theory goes, has created a kind of recessionproof super-spender. What’s more, New York itself has become a global luxury brand, optimists say—a place where people come, from New Jersey or Dubai, to conspicuously consume. That’s true on the retail level (witness the out-of-town throngs in Times Square on a Saturday afternoon), and it’s true on the corporate level (see Saudi Prince Alwaleed’s bailout of Citigroup).


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