Is This the Year the Bubble Burst?

Photo: Joe Zeff

If the threat level forthe 2002 real-estate market was Code Yellow, crank upthis year’s to Code Orange. Driven by the weakeconomy and terrorism fears, prices and rents felllast year by double digits in some neighborhoods, butrecord-low interest rates, and no actual terrorattacks, kept prices surprisingly strong—evenrising—in other parts of the city (see“Welcome to the Neighborhoods,” for prices, new developments, and predictions on 25prime neighborhoods). What do the best minds in realestate see ahead—other than war with Iraq?Depends on which one you ask. On the one hand, a long,messy war, a fresh round of corporate layoffs, or,say, smallpox in the subway could send pricesplummeting. On the other hand, Osama could lie low,the economy could begin to turn, and theunpleasantness with Saddam could start and end withsurgical swiftness. People could get comfortableagain, and real-estate prices could line up and resumetheir reassuring climb. Since the experts are justabout as divided on this as you and your spouse areabout duct-taping the windows, we’ve assembledthe best evidence on both sides. Read on, andpick the outlook that suits your anxiety level.

Photo: Kristine Larsen

By Deborah Schoeneman

1. Because the market already corrected.
In 2002, the market finally slipped, as economic woes and terrorism fears finally got hold of buyers’ psyches. The thing is, the drop wasn’t as bad as people feared (prices rose in many neighborhoods), and now it’s over. Take it from a guy named Trump. “I have never seen the residential market better!” booms the Donald. Okay, that’s Trump. But plenty of comparatively sane people agree. “January is always a slow month, but this January has exceeded all of our expectations,” says Corcoran Group COO Scott Durkin. Adds Corcoran broker Sharon Baum, “I’m not pessimistic; I’m realistic. And I’m bullish.” She has reason to be: She sold $30 million worth of property in January.

2. The economy is turning the corner.
Read all the gloom-and-doom headlines you want. The truth is, we’ve probably bottomed out. “I’m generally positive,” says JP Morgan Chase senior economist Jim Glassman. “The worst is probably over.” Glassman thinks the lower-Manhattan revitalization will be a “dynamic magnet” and that Wall Street is finding its footing after two years of downsizing. He also says interest rates are likely to stay low. “And if they don’t, that means the economy and Wall Street are picking up again.”

3. Speaking of interest rates …
Just about every week seems to bring a historic low. This week, the rate for a five-year adjustable-rate mortgage stands at 41⁄4 percent—the lowest in more than 40 years. More than one observer suggests that another year or so of low interest rates will act as a bridge, keeping the market from really tanking while the economy picks up. And rates aren’t likely to go up soon, “unless the government wants to kill the economy,” says Trump.

4. There’s no perfect storm.
The last time the market tanked, in the early nineties, the real-estate market faced a triple whammy: A flood of new condos glutted the market, the murder rate skyrocketed with the crack epidemic, and the economy and the stock market were reeling. This time around, we don’t have the crime and overbuilding problems. On the demand side, that means people aren’t flocking out of town. On the supply side, “there’s not a lot of product out there,” says real-estate consultant Yale Robbins. “That will keep prices up.”

5. Wall Street money has to go somewhere.
Yes, the Street is in a slump, but that can be good news for real estate. Money pulled out of stocks and bonds doesn’t just evaporate, and many people are putting it in homes. The reasoning: “Interest rates will remain low, and the real-estate market will outperform the equities market,” says Melissa Cohn, president of the Manhattan Mortgage Company. Then there’s the emotional factor: In these anxious, post-Enron times, home and hearth appeal to people more than a stock certificate.

6. The high end is holding.
Jet-set buyers can be an indicator of larger market trends (because they have more money at stake, they scare easily). And at least some of those premium buyers are writing checks. Kirk Henckels, director of Stribling’s private brokerage, points out that since November, there have been seven deals for $10 million– plus co-ops. In all of 2001, the entire real-estate industry had only ten co-ops sell for more than $10 million. Louise Sunshine, CEO of the Sunshine Group, which markets the AOL Time Warner building, says sales in the building since 9/11 have totaled more than $400 million. Ricky Martin, for one, paid $8 million for a condo overlooking the park.

7. Brokers see optimism.
Take James Lansill of the Sunshine Group. He says sales in Tribeca, one of the neighborhoods hit hardest last year, have been picking up. Since Christmas, contracts have been signed for 7 of 33 units at 7 Hubert Street, a new condo building, and he expects another ten purchasers to jump in by the end of the month. “There seems to be an optimism,” says Lansill, who had about four appointments per week with prospective buyers last fall and now has twenty or so. “Around Christmastime, we seemed to clear a hurdle.”

By Carl Swanson

1. Just ask the sellers.
Especially if they live in areas like Tribeca and Chelsea, where prices have already taken a dive. In 1998, Richard Laermer, a hyper-jolly publicist for such Websites as and, paid $315,000 for a 1,050-square-foot Chelsea loft. He then lived happily as the value of his property soared—peaking last spring, when brokers told him he could get $1 million for his place. That was then. And now? The place just went on the market for $665,000. That’s almost a 33 percent drop from $1 million—in less than a year. Sounds like the bubble has already burst.

2. The economy is worse than you think.
The city has lost 176,000 jobs in two years, and a good portion of them may never come back. Bloomberg has to slash the city’s budget to break even, and the cash-strapped Feds and the state won’t be running to the rescue. Wall Street has laid off 23,000 people in the past two years, and bonuses for those still working have dried up: $19.4 billion was handed out in 2000 and only $7.9 billion last year. Those bonuses were the down payments that fed much of the housing orgy of the past two years. They’re gone; the party’s over.

3. Alan Greenspan can’t float us forever.
The only thing keeping the market from hemorrhaging is the Band-Aid of monetary policy. But low rates will work for only so long. If people don’t have jobs, or they’re worried about losing them, they won’t buy a home no matter how cheap a loan they can get.

4. We’re seeing the world through orange-colored glasses.
While Alan Greenspan puts it politely (“The intensification of geopolitical risks makes discerning the economic path ahead especially difficult”), others put it bluntly: dirty bomb. “A home is the most important investment that most people make, and traditionally, it’s the one thing you could count on,” says Bruce Ehrmann of Stribling & Associates. “But if there’s serious concern about biological attacks … ” He trails off.

5. The high end is not holding.
Super-rich buyers can be an indicator of market trends, all right. And while some are still buying, they’re making smaller bets than before. A $28 million, 11,000-square-foot apartment at the Ritz-Carlton at 50 Central Park South has been split in half (the pieces will sell for $12 million and $16 million). Half of the 10,000-square-foot penthouse at the AOL Time Warner Center is now available as well, for $16 million. “The show-off factor is out,” says Douglas Elliman broker Dolly Lenz. “It’s become about price.” While the Ricky Martins of the world may be buying, the market is also seeing plenty of Rosie O’Donnells who bought high—and can’t get their money out. Rosie paid $6.5 million in 1999 for her five-story Upper West Side brownstone. Now she’s trying to sell it for three quarters of a million less.

6. Not all brokers are optimistic.
As Bruce Ehrmann put it, “About two months ago, we all realized, It’s over. The market is over. A lot of brokers had never seen a market where there were more apartments than customers in Manhattan.” While brokers have seen some increases in foot traffic, that doesn’t mean anyone’s buying, says Ashforth Warburg president Frederick Peters. In fact, little is selling unless the price has been reduced and the buyer thinks it’s a bargain. “People are calling; they’re looking to buy. The big difference is that when you leave a showing, the broker will say, ‘They’re really looking to sell—they’re negotiable.’ ” Does that spell a crash? “It’s a challenging market,” says Corcoran’s Wendy Sarasohn. “It’s a challenging world.”

Is This the Year the Bubble Burst?