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Peak Experience

The housing market is cruising to amphetamine highs. The only downer is the fear of collapse - and regret over a middle class priced out of Manhattan.The housing market is cruising to amphetamine highs. The only downer is the fear of collapse - and regret over a middle class priced out of Manhattan.

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If Manhattan has its own state religion, it's the worship of real-estate values. Our common faith that the value of our handsome little flat in a doorman building can climb ever higher -- miraculously oblivious to worldly limitations like common sense -- is our secular creed, what binds us together. And during the astonishing boom of the nineties, those of us who bought in early (or fortuitously) have had our prayers answered. Some premier Manhattan properties are up 100 percent since the big push began. Two-bedroom places on the Upper East Side are up 35 percent across the board since then, according to the Corcoran Group. And last year, Manhattan co-ops spiked another 11 percent, despite the equity-market dodginess of the late summer.

But in this Great Awakening of real estate, not all have been saved: The middle class in Manhattan has finally succumbed, priced out (to the boroughs or the suburbs) by what has become a class of speculators -- those who have the money to stay in the game. The mood around town may not be exactly survivor's guilt, but it is a strange mixture of euphoria and dread.

As founder of the Halstead Property Company, Clark Halstead is happy to celebrate the frothy market. "The conditions in New York are better than I've ever seen them in my life, and I'm an old horse," says Halstead, who has tracked the local market since the early seventies. But he also admits that over the years, the stock and housing markets have mirrored each other -- and that makes everyone in town more than a little jumpy just now.

"Everybody recognizes that the securities market is overinflated, and people expect it to either collapse or at least go sideways for a while," Halstead says. "Most of the people working here remember the agonies of the early nineties." Indeed, Manhattan co-op prices plunged an average of 25 percent, and some more than 50 percent, during the last bear market, eight years ago, he says.

Even more ominous, there are large storm clouds gathering over the entire nation's housing market, a sudden renewal in the arguments by some respected economists that we -- as a city and as a country -- might be experiencing not just a temporary top of the market, as ever-sprinting Wall Street finally begins to wheeze, but an actual lasting, historic top as a result of a far fuzzier culprit: demographics.

First floated in the still-influential 1989 treatise The Baby Boom, the Baby Bust, and the Housing Market, by two Harvard economists, Greg Mankiw and David Weil (who's now at Brown), the idea goes like this: As the baby boom, which peaked in 1957 with 4.3 million children born, rumbled through the economy, the giant demographic mass inflated sales of everything -- Schwinn bicycles, Beatles records, and eventually homes. For 30 years, a vast army of yuppies was always moving through the market. It's this generational bulge that bid up the value of our parents' three-bedroom Colonial as if it were an Internet stock on the day of its IPO.

A Vietnam and a Watergate break-in later, however, it was the "baby bust" that came along to take its place, bottoming out in 1973, when just over 3 million children were born in the country. Soon, the postwar kids will be lurching toward retirement, and there won't be as many home-buyers to follow in their wake. This could be bad news for a whole generation, except perhaps those sitting on a nice little lakeside bungalow in the emerging Shuffleboard Belt down South.

In his 1994 essay "Demographics, the Housing Market, and the Welfare of the Elderly," which itself continues to inspire alarmist stories in the press, University of California, Berkeley, economist Daniel McFadden predicted that the pool of first-time home-buyers would begin to shrink, oh, right about now, and "real" depreciation -- that is, the depreciation of prices that are adjusted for inflation -- would continue at about one percent a year for perhaps three decades. Thirty years go by, our homes have lost 30 percent of their real value. Even if the value of our homes might continue to creep northward in dollar terms, McFadden insisted they were destined to lose the agonizing marathon against inflation. This dismal footrace would perhaps abate only in the middle of the next century, when these real home values would again settle at . . . 1911 levels. We would see, in other words, the undoing of every minute of appreciation we've accrued since the Taft administration.


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