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April 2002

A Hot Market: Real Estate Is The New Comfort Food

There are a lot of people-particularly economists-scratching their heads these days trying to explain the strength of the residential housing market.

How is it possible that this is the only sector of the economy that has bypassed the recession? And why for the first time in my 23-year career am I witnessing a true disconnect between what is happening on Wall Street and the residential market? The Manhattan housing market seems resilient to unemployment on Wall Street and slashed bonuses, shrinking stock portfolios and a soft economy.

Without question, certain economic factors have paved the way: low interest rates and low inventory. Builders are more cautious now so we are not seeing the excess inventories of the late 1980s and early 90s. But there are other factors which are not quantifiable.

All of a sudden, people are looking at real estate differently. They are seeing it as an investment-safer, more stable than the stock market and with a better return than a treasury bill or mutual fund. People are out buying with a vengeance the likes of which I have never seen. This is a sociological force that I believe in part has been generated by recent events: the stock market decline, The World Trade Center collapse, the collapse of Enron and Arthur Anderson, turmoil in the Catholic Church, war in Afghanistan and war in the Middle East. These events have had the opposite effect on the housing market. People are looking for refuge in these times---a safe haven for their money, a port for their family and psyche. Real estate is comfort food. It is as if the entire sector is the beneficiary of some kind of global traumatic stress disorder.

Truthfully, I was quite worried about New York real estate after the World Trade Center collapsed. We got a spate of calls from people thinking of bailing out. Things were very quiet until December 2001. But lower interest rates jump-started the market under $1 million and the trend crept upwards. By that time, people started coming around to the notion that that they were not going to be terrorized into a different lifestyle. They were staying. They believed in the strength and vitality of New York. We've had some Sunday open houses where over 200 people showed up.

I have now come to the conclusion that there is a collective conscience about HOME which now means more than ever before. It is the oasis soothing America's financial and spiritual soul. About 66% of Americans are homeowners so it is no surprise that it has become the anchor and beacon of the economy. I am convinced that this trend will last for quite sometime.


This is not a short-term blip. Prices will be at least 10% to 15% higher at the end of 2002 as inventory continues to evaporate. Buyers will become increasingly frustrated and sellers will become more greedy. The tendency to overprice by some sellers still will not build up inventory enough to cause a slow down.


If you are a buyer with a budget you are in grave danger of being priced out of the market unless you move quickly and decisively. If you need a mortgage you should have a pre-approval letter from a bank and be ready to purchase not contingent on a mortgage. Your cash and attorney must be able to move quickly. You should set a time frame in which to buy because waiting will mean seeing new inventory at higher prices. What you turn down today, you may not be able to afford tomorrow.

For the seller in this market, be smart but don't be greedy. You can be a little aggressive on the price but if you are accurate, you have a chance to create a frenzy and drive the price even higher. Clean and remove clutter. Make the minor cosmetic repairs you have ignored. Be disciplined and have an experienced broker price your home effectively for this market. There is a delicate balance between pricing correctly and making a huge mistake. Other than hiring the right broker, price is the most important decision a seller can make.

Are there any good buys in this market? Yes. The apartment that needs work. Good locations provide the biggest returns. My customers who have profited the most have done so because they bought a wreck in a great location. And stretch for the bigger unit. Larger units appreciate faster than smaller. No guts. No glory.

Donna Olshan

Emily Chen
Private Wealth Real Estate Services
Chief of Research


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