Peak Experience

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.

“The fear is that the same pains of contraction that were felt in the public schools of the seventies and the colleges of the early eighties will now start to be felt in the housing market,” says James Hughes, dean of the School of Planning and Public Policy at Rutgers.

There is one little flaw in the eggheads’ predictions, however: They don’t seem to be coming true. Not only is New York sizzling these days, but last year saw national sales of existing homes jump a whopping 14 percent over the previous year, which had itself set a record. “It was a Mark McGwire economy,” says Hughes. “We not only broke the all-time existing home-sale record, we smashed it.”

So all these tweedy Cassandras are simply wrong? Not necessarily.

For one thing, the boomers aren’t quite finished yet. Right now, they’re still in their prime earning years, and lately they have more bags of cash than ever to toss around. “What is driving the market now is baby-boomers trading up in the housing market,” Rutgers’s Hughes says. “Remember, the peak of the baby boom was 1957. That boomer is only 42. So the trade-up market has a ways to go.”

But Mankiw himself offers another, far less sanguine interpretation: We’re enjoying the longest peacetime economic expansion in history, money – in the form of mortgage rates – is cheap, the job market is tight, and Wall Street’s made plenty of us rich. But still, housing prices nationally are up only 22 percent over the past decade. Meanwhile, overall inflation for the same period has been 23 percent, he says.

“One could put two different spins on this,” Mankiw suggests. “One could say, ‘God, these Harvard professors said that housing prices would decline 2 to 3 percent per year, and in fact, we’ve been flat for a decade. They’re wrong.’ But another way to say it is, ‘Despite the fact the stock market has gone through an incredible boom, despite this incredible shock to demand, housing prices have been flat.’ There must have been some other factor keeping them down.’ “

So maybe it does look bad for America, long-term. The question is, does it also have to look bad for New York? Luckily, despite Mayor Giuliani’s best efforts to normalize existence here, Planet Manhattan remains “the biggest real-estate exception in the country,” in the words of one local developer. Our best hope, then, is that just as one megatrend, the baby-bust effect, works to pull us down, another – a genuine urban renaissance that’s particularly acute in New York – will tug even harder in the opposite direction and more than cancel it out.

Unlike Phoenix or San Diego, New York is for all practical purposes already built. Particularly within Manhattan, there is essentially nowhere to expand. When Con Ed recently put nearly four and a half acres of land up for sale to develop on the East River, it was a lead story in the Times Metro section – an event.

“New York’s a very unusual market,” says Michael Carliner, an economist with the National Association of Home Builders. “You have the whole rent-control situation, which greatly affects supply, and it’s also very difficult to build something new. So any change in demand, supply still doesn’t respond very well.”

Indeed not. Last year, permits for the construction of fewer than 9,500 new units were granted, and only 3,700 units in Manhattan – this for a city of 8 million. In 1996, for instance, Las Vegas, with a population of less than 400,000, saw 7,705 permits granted.

“The market is as tight as ever, maybe tighter,” says Paul Stern, who as a managing director for Sonnenblick-Goldman Company, a leading real-estate-investment bank in the city, routinely arranges financing of huge residential projects like, say, a $75 million high-rise. He says that since developers are so eager to maximize their precious plots, most are building luxury housing, leaving little for the middle class. Also, he says, “the trend toward rent deregulation only creates new buyers, as rents increase substantially.”

Meanwhile, demand is increasing weekly. “Everyone’s read Mankiw’s arguments,” says Rae Rosen, a senior economist at the Federal Reserve Bank of New York. “But one of the things that people forget is immigration, which has been a major force in the revitalization of neighborhoods in New York City. Only about five states in the country reap the benefits of immigration, but we’re one of them.”

The country is riding a 100-year high in immigration, and New York City becomes home to one out of every seven newcomers. The city is welcoming around 110,000 a year, up from about 85,000 in the last decade, and from a paltry 30,000 in the postwar forties.

“Immigrants,” Rosen says, “don’t buy in the traditional ways, perhaps. They’re pooling money, and sometimes they have much larger households. But they still end up buying a house. They’re pushing hard to get into the market. And that’s just at the low end.”

Rosen adds that “the Russian sector of Brighton Beach has moved into parts of Bensonhurst. If you drive through the area, you can’t believe the kind of renovation going on.” And it’s not as modest as you might think, either, she says. “There are whole areas in Brooklyn that have million-dollar homes at this point that have been rebuilt by very wealthy immigrant communities. And you have stories coming out of the Hasidic community of extremely wealthy conservative Jews building multi-million-dollar homes in these small ethnic enclaves.”

Then there’s another emergent immigrant group that can’t be overlooked: the huddled masses in Volvos swarming our shores from the distant lands of Pelham and Teaneck.

“The broad national dynamic that bodes well for New York City is that the first decade of the new millennium is going to be the era of empty-nesterhood,” Hughes says. “People tend to leave New York City in the child-rearing stage of the life cycle. But we’re starting to see a slight transition with the empty-nesters in the 3,000-square-foot suburban houses. The kids leave; all of a sudden the grass starts growing faster. They’re rattling around the house. It’s boring. You have this huge baby-boom contingent that is going to be trading sideways in the housing market. They’re going to want amenities, activities, things to do, culture. We’re seeing already that they’re moving back to the city,” Hughes says, adding dryly, “and I am known as the Dr. Kevorkian of the regional economy.”

Finally, there is yet another not-so-huddled mass that’s flocking to our New York – typically, via the Concorde. They come from Europe, Asia, and South America, and they are looking for a Manhattan pad. That sector, loosely defined but quite real, has never been hotter, according to several in the industry.

“At the end of the American economic century, every other place is in trouble. Every other foreign market has been clobbered,” says Clark Halstead. “But if you look at the prices of New York versus London, Paris, and Tokyo, New York’s a bargain. So the ‘flight capital,’ as we call it, is coming here in many ways. First of all, it’s being invested in American securities. But another way for ‘flight capital’ to roost is to buy a pied-à-terre in New York.”

Still, New York’s continued health is not purely predicated on the spending of fat cats, according to Stanley Moses, chairman of urban affairs and planning at Hunter College. Moses figures that even if the middle class has been largely priced out of Manhattan, the outer boroughs can play an increasingly dynamic role in the overall market’s health.

“The fact of the matter is that with the rise of two-income households, both the husband and the wife now need increased access to the labor market of the city. This makes the outer boroughs especially favorable, because there you have cheap transportation and cheap taxes.” Moses points out that local property taxes for, say, a $250,000 home in Nassau County will be two and a half or three times what they would be in Brooklyn or Queens.

Yet even if the baby-bust demographic is in fact a straw man in this city, that doesn’t mean buying here is without hazard. In some ways, owning property here is not just like playing the stock market, it’s almost literally playing the stock market – as if by placing a bet on an Upper West Side two-bedroom, you might as well be going long on Cisco with your kid’s college education. The frenzied stock market remains the real peril. Still, the economics of the new New York seems to be flattening that risk too.

“This boom is built on a better kind of bedrock,” argues Halstead. “There are burgeoning industries in New York that didn’t exist in 1987, such as the new media. These developments have diluted the influence of the stock market. There are a lot of other people driving the engine these days.” Besides, he says, “the market is strong, but the boom is motivated primarily by the florid renaissance that New York is undergoing, the Giuliani Halo, if you will. This is the World City. Now, everybody wants to be here.”

So the news isn’t necessarily bad. In post-Seinfeld America, cities are where the heat is, and New York in particular has rarely had it this good. So relax. Your investment in your Upper West Side prewar is at least as solid as those shares of Dell you just bought.

Peak Experience