That said, some economists suggest the bottom isn’t even in sight yet. One reason is that the sheer speed and altitude of the recent price run-up—an average of 81 percent in four years—has had virtually no relation to incomes and is thus unsustainable. “There is no economic fundamental—real income, migration, interest rates, or demographics—that can explain it,” says Nouriel Roubini, a professor of economics at New York University’s Stern School of Business. While a Wall Street crash or a sustained spike in interest rates could cause a fundamental downturn, there’s a more immediate threat to the city’s usual supply-demand equation: the construction boom. The supply of new condos for sale has more than doubled in the past two years, notes Miller. What’s more, some 24,000 units have been approved to go on the market by the end of 2006, an astonishing number considering that altogether only about 15,000 condos, co-ops, and townhouses are sold in any given year—20,000 at the market’s peak, according to Jeffrey Jackson of MMJ Appraisals.
High-profile projects like Downtown by Starck (a.k.a. 15 Broad Street), Bryant Park Tower, 99 Gold, and Schaefer Landing are giving discounts, and other condo developers are bailing out before they even break ground. Last week, it was reported that the developers of 485 Fifth, a new designer condo going up at Bryant Park, were essentially abandoning the project because half the units remain unsold, at over $1,000 a square foot. The growing list of casualties includes Williamsburg’s 55 Berry (which is now turning rental) and 133 Greenwich (they’ve put the land up for sale). The glut is affecting everyone in the market, whether they’re trafficking in new stock or a prewar. “If you have more homes on the market than there are buyers, then prices will fall,” explains Yale University professor Robert Shiller, an expert on housing bubbles and author of Irrational Exuberance, which explains how the stock market imploded in the late nineties. “We’ve had the biggest real-estate boom in the history of the city. There really isn’t much precedent. It’s a fad. It can’t go on forever. People have this expectation that prices should rise 10 percent each year.”
Of course, a seller’s sorrow can be a buyer’s opportunity. But with so many reasons to suspect prices may keep dropping, is this a market to buy into at all? The hopelessly unsatisfying answer: It depends. Two major incentives to make a move right now: Money is still relatively cheap to borrow, and rents are soaring. They’re already up 15 percent from last year, to an average of $3,970 a month in Manhattan, according to Corcoran’s most recent report. Rental vacancies are at a historically low 1 percent.
Let’s say for a moment that you currently lease an average one-bedroom on the West Side and pay Corcoran’s average West Side rent of $3,046. Let’s also say that you covet a one-bedroom co-op on the West Side, where the average selling price is $596,000, according to Miller Samuel’s most recent data. Assuming a 20 percent down payment (many co-ops require that amount), a 30-year fixed mortgage at 7 percent, and $600 for co-op maintenance, you’d be facing a monthly nut of $3,772. Factor in the tax benefits of ownership, and you’re looking at practically a lateral move. If you wangled the place for 10 percent off asking—a reasonable possibility in a market flooded with one-bedrooms—you’d have an even better deal, at $3,454 a month. Of course, you could also choose to wait a year. But by then, you will have spent more than $36,000 on rent—and there’s no telling where interest rates will be.
The drawback of buying is that one-bedrooms are quick to outgrow and not so quick to sell in a down market, given their ample supply. The most troubling scenario would be four more years of declining prices, during which time you would have to unload the space for less than you paid. But the eternal verity of real estate is that, by and large, if you stay in the same market, it doesn’t matter when you sell, because the discount of your sale will be offset by the discount on your purchase. Still, there’s no stopping people from worrying.
Carol Candiano is relieved that her building has a liberal sublet policy—she’s already moved to the West Twenties while her Upper East Side one-bedroom awaits a buyer at $425,000. “We had someone lowball the apartment and offer $340,000. I told my broker to tell him to get lost,” she says. “Just because the market’s a little soft doesn’t mean I’m going to have a fire sale. If I have to, I’ll rent it out. I refuse to be desperate.”