Is The Manhattan Real Estate Bubble About To Burst?

November 20, 2002

 

    Twenty years ago I asked a friend who was a gold trader at Goldman Sachs, "How on earth do you know when gold prices will go up or down?" Obviously he was making a lot of money so I just assumed he had special powers to predict the gold market.

    He looked at me for a few seconds, then said, "Are you kidding? I have no idea. I just trade up when the market is going up and trade down when it is going down." When I recovered from such an obvious answer, I sputtered out an awkward, "Oh."

    It took me a little longer to see how that applied to me in my life. Obviously my friend did very well trading gold and he had no idea when the market was going up or down. So in any marketplace, are we at an advantage if we have a lot of information about the market?

    Maybe not. We do know that the best and brightest Wall Street analysts did not predict the Wall Street bubble bursting. They may have grudgingly predicted a slow-down, but most well known Wall Street analysts did not tell us that the bubble would burst. So if they don't know - or even if they know but aren't telling - how are we supposed to operate?

    As of today, I just read that four of the top investment strategy cheerleaders, most of whom made seven figure incomes, have been fired from major investment firms. It looks like more firings are on the way, since whether through ignorance or corporate self-serving, the high visibility analysts did not call it right. The investment firms themselves decided that the market strategy gurus were expendable.

    So let's talk about Manhattan real estate today. Are we watching a bubble about to burst? Most experts say that real estate bubbles don't burst like the stock and bond markets burst but that they slowly fizzle. Other experts have been saying recently that the 2nd Quarter of this year was the peak of Manhattan real estate prices and now residential apartments over all are selling for 15% less. So that's what some people are saying.

    What I am saying to you is that whatever information you find, make sure that you know how it applies to you and your very specific real estate needs. It helps that you get accurate information, of course, but once you determine that, how do you know what to do with it? There are scads of people out there telling us what the numbers mean.

    Let's look at what some of the real estate cheerleaders are saying. One statistic is that since 1945 United States overall real estate prices have increased every year with no exception. The head economist at Freddie Mac, one of the two organizations that provide mortgage financing to tens of millions of Americans (Frannie Mae is the other organization) says that the housing market has been so strong over the last decade because the market has been fundamentally sound with low mortgage rates, only a mild recession, a modest inventory of homes and rising demand for housing from immigrants and "Echo Boomers," adult children of Baby Boomers. He says further that home prices are not going to fall.

    We also know that Arthur Greenspan by manipulating interest rates seemed to keep the Wall Street bubble from bursting for years. Even now, low interest rates seem to be keeping the residential sales market in play. It certainly seems to be true in New York City. Can Arthur Greenspan keep the game going?

    More to the point, what should you do? What about your particular situation? I am assuming that you - like me- do not have a crystal ball for the future. Will we ever have enough information to sell or buy at the right time? Well, of course not. Only by sheer luck. So how do we operate successfully in the Manhattan real estate market without feeling like we are playing the lottery?

    I say we would be wise to operate like my friend the gold trader who I mentioned in the first paragraph. You need to operate for your own account and be crystal clear on what your "trading" goals are. Do you plan to buy or sell real estate primarily as an investment? Or does real estate to you mean your home first and foremost and not a whole lot more?

    Depending where you are as a Manhattan real estate buyer, seller or renter, here are some obvious solutions. Is real estate an investment for you? If so and you own your own home whether it is an apartment or a brownstone, and it has increased in value since you bought it, sell it now. You want to make a profit, do it by selling now. Will the market go higher? Maybe. But why make yourself crazy? If you can make a decent profit by cashing out now, do it.

    But what if your home that you own is your home first and foremost and not an investment as your stocks and bonds are investments? Then keep it as long as you love it. Too simplistic for you? Maybe. But maybe you are making the whole thing too complicated.

    How about hedging your bet? If you think that this is the end of the long-standing bull market in residential real estate, sell your home now and rent for a couple of years to see how things shake out.

    If you are in the market to buy, no matter what the market conditions, you will find the right property. One thing that is true about Manhattan real estate is that there is extraordinary variety and there is always a property of opportunity. It might take longer to find in some markets but you will find it if you keep looking.