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November 2004

Is There A Housing Bubble?

Here's the question I am asked a dozen times a day: IS THERE A HOUSING BUBBLE? Should I wait to buy? Will the market crash?

The answer, plain and simple, is a resounding NO! For all of you data wonks out there (and I'm one of 'em) here's the nitty gritty from Dr. David Lereah, chief economist of the National Association of Realtors:

Why There Is No Bubble

  • Lean Supply of Homes
    • Demand nationwide from 93-03 has outstripped supply by over a million homes
    • New households (many fueled by immigration), plus baby boomer 2nd/3rd home sales will push demand even higher; housing starts are estimated at 1.5 million for the year, and are about 1 million below demand
  • Low Rates have Lowered Ownership Costs, fueling demand
  • Real Estate has become a Safe Haven for Funds, fueling investment
  • Recent price growth partly reflects ?catch-up? with strong income growth of 1980s and 1990s

Why Expansion Will Continue through 2010

  • Economic expansion expected to continue
  • Mortgage rates expected to hover between 5.5-7.5%, due to low inflation projections
  • Strong household growth expected (as seen in 2000 census projections)
  • Boomer children becoming first-time home buyers
  • Baby Boomers will continue to age into peak-earning/retirement years
  • Baby Boomer 2nd/3rd home purchases to grow
  • Large retirement population will be living longer
  • Government and industry wide housing programs aiding first time buyers

10 Year Forecast by Top Industry Economists

  • Home Ownership Rate to grow to 71% from 68%
  • Home Sales to average 7-7.5 million (50% higher than '92-'04 average)
  • Existing Home prices to experience 5-6% annual growth nationally

What's Happening Here in New York?

Prices Soaring
Locally, prices have soared over 20% in the last year. Given the lack of available inventory, low interest rates, the expanding demand for investment property, and the fact that Wall Street bonuses are expected to be favorable this winter, the New York City surge should continue. More people and companies are coming here, yet our housing stock is essentially unchanged. In particular, condo prices have shot up dramatically since late summer; many mid 1980s condos that were selling at $700-$750/ft in June have now shot up to $900+.

Coops are soaring as well, as lack of inventory continues to fuel pricing. I speak from personal experience: I sold my own apartment this year, and between the time I went to contract in May and the time I closed in October, prices in my 1960s postwar building had risen an astounding 11%.

Hot Markets
Personally, my hottest market this year has been for investment condos. Investors -- both professionals and first timers -- are trading their existing property elsewhere in the country for occupied condos in New York. Here they're taking advantage of surging rental prices and strong price appreciation while protecting themselves from prohibitive capital gains taxes. I predict that this will continue to be a strong market for many years to come, especially as more people diversify their investment portfolios.

One more note: as the baby boomers age, we are finding more and more of them coming back to the city as empty nesters, selling the big family home in the suburbs and moving into a more vibrant city life. So this too will fuel our city market over the next 15 years.

Is it a Good Time to Buy?
Absolutely. If you've been thinking of buying, the sooner the better, especially as prices just continue to go up. Smart buyers come into the market in November/December, before they have to compete against the bonus money in the ultra-competitive January -- April market.

Is it a Good Time to Sell?
Yes. People who bought over the last 15 years are essentially sitting on an uncashed lotto ticket; there should be tremendous equity built up in your home that you can use as a significant down payment to upgrade to a bigger apartment, or in a move to a dream home in the suburbs. Your money is then put to work again in your new home; bigger home equals bigger return.

I practice what I preach. I've sold my own home and upgraded, and have already seen significant returns. My investors this year experienced 10% returns before they even closed on their purchases. New York City is poised for continued growth; a strong economy, continued low interest rates, a static housing stock, and an influx of investors and empty nesters all point towards a strong housing market in the Big Apple.

If there's anything I can help you with, or if you have any questions about your home or real estate investment (or where apartments in your building are selling!) definitely give me a shout.

PS -- If you'd like to read some more articles on the subject, click below:$FILE/DLereahResidentialMid-Year04.ppt (this is a FAB powerpoint presentation; detailed housing info starts @ slide #24)

Donna Olshan

Emily Chen
Private Wealth Real Estate Services
Chief of Research


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