The Lessons of Manhattan Real Estate History

Wall Street created a crisis in the Manhattan real estate market in 1929Easy credit, rapid development, rising values, rising demand, resales aplenty: does this sound familiar? The Manhattan real estate boom of 2007 and 2008 for luxury sales exhibited all of these characteristics in spades, but this was nothing new for Manhattan. During the roaring 20’s, the exact same boom took place, although everyone knows how that scenario played out. The stock market collapsed, the real estate market followed suit, and property prices (when measured by square foot) declined for a decade. While the parallels are undeniable, very few people are willing to draw them, and for good reason - the real estate market depends heavily on consumer confidence. Nonetheless, the similarities between now and then far outweigh the differences.

Here’s what we know so far: Property values per square foot fell from $1,531 in the last decade to $1,070 in this one, and the other only time in the past 100 years Manhattan real estate values declined was during the Great Depression. Even more tellingly, the days of easy credit are long gone; even mortgage rates below 4% haven’t helped the credit crunch. It’s hard to overstate the importance of credit to the boom and bust cycle. The New York Times reports that, “We never would have had our boom without easy credit.” With even the most well-qualified applicants struggling to obtain loans, and developers having had this same difficulty, the odds that property values for luxury Manhattan real estate will increase remain slim. Will they decrease for a decade like during the 30’s? Probably not, but it may take them a long time to surpass pre-recession levels.

Many will object by raising the point that Manhattan sales prices for luxury apartments - while far below the prices of the boom period - have gone up over the past 3 years. The reasons that the sales market is doing well are twofold: lack of inventory and foreign buyers. The shortage of quality units to buy has naturally led to higher prices because the demand is still there, but the strength of the sales market is much more indicative of the want of property than increased consumer confidence. And this lack of inventory is a manifestation of a lack of new construction. Moreover, the reason that demand is so high is largely due to the increased presence of foreign buyers with deep pockets; native New Yorkers have been much more hesitant to buy expensive properties. Yes, rents have gone up since the beginning of the recession, but a large portion of renters are actually buyers who either can’t or won’t buy an apartment in Manhattan, even in coveted neighborhoods like the Upper East Side and Tribeca. They’re afraid of the future, forcing many luxury building owners to lease rather than sell.

This brings us back to the uncomfortable comparisons between the current Manhattan real estate bust and the Great Depression. This is the crux of the matter: without a recovery in credit and increased consumer confidence, no substantial real estate market recovery in Manhattan is possible. What the coming years hold is still up for debate, and despite our comparisons to American history, we shouldn't presume that the Manhattan sales market will follow the same path. As sales continue to rebound and our economy slowly recovers, New York City may yet surpass pre-recesson heights soon.

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