New York Real Estate: Boom or Bubble?

New York Real Estate: Boom or Bubble?

Because of the housing bubble that increased greatly the number of homes and residences across the country in 2008 to an artificial degree, were mostly left untouched after the bust occurred, the actual supply of homes in the NYC area is not artificially low. Thus, the low supply rule that generally governs conditions that could be described as a “bubble” is not in effect. Today, the supply of homes, condos and other residences seems to be only slightly behind the overall demand, which is normal considering the current rise in economic conditions. Therefore, it can be concluded that there is no artificial or very low supply of homes in the tri-state region in general.

Increase in Speculation: Speculation is created by a number of different people from real estate experts, economists and others who predict the rise and fall of the real estate market. In essence, a speculator may set expectation levels in the minds of consumers, which can have an artificial effect on the price. For example, if speculators were to focus on the value of “widgets” as being too low, then it may create a reaction in the public that now is the time to purchase widgets which in turn artificially raises their prices.

The same is true of homes when speculators focus on what they believe the price will be as opposed to their actual value. Once the discussion shifts from value to price, that helps set the conditions for a bubble to be created.

Currently, speculation in the NYC real estate market is more focused on the intrinsic value of homes and condominiums rather than predictions of their future prices at least for the moment. This is because speculators are taking into account the burgeoning economy, which is now seemingly steadier and rising over the past several months. However, much of the speculation on the economy itself is still rather guarded and that includes the real estate market in the NYC area.

So, there does not appear to be the rampant speculation that often accompanies “bubble” conditions. Naturally, this may change in time, but if so it generally takes time for the prices to start going up as public demand rises.

Is the NYC Real Estate Market Sound?

The answer to that question is one that does require more analysis, but there is no indication of an NYC real estate bubble at this time. While the prices for homes and condos are rising and in fact are considered quite high compared to most areas of the country, they are not sharply rising due to artificial factors that generally drive bubble conditions.

If anything, the fundamentals of the real estate market seem to indicate that the current conditions are normal and expected for this area of the country. The basic factors of supply and demand are still in place and dominating the current market which include the following factors;

  • Rising stock market
  • Low mortgage rates
  • Easy loan approval
  • Retiring baby boomers
  • More foreign investment

When all of these factors are taken into account along with the pace of rising prices, New York City appears to be well within the conditions that are better described as booming rather than forming an artificial bubble.

S&P:Case-Shiller 10-City Composite HomeS&P:Case-Shiller NY-New York Home Price JUN 30

Naturally, there are concerns over the low mortgage rates and better loan approval numbers, but this is not like the early 2000s when many people who did not qualify for such loans were being approved. Instead, this appears to be a relaxation from the very tight loan standards that were put into place after the housing crash of 2008.

The rising stock market is causing more investors, particularly ones from other countries to start moving their resources into the real estate market. This is because the stock market is being influenced by artificial methods of the federal treasury, creating billions of dollars in a program known as Quantitative Easing. This has helped to bolster the stock market and allowed it to reach new heights, but the program will be ending in 2015 which is now fostering fears of a drop. So naturally investors are looking into other markets like real estate as alternate investments.

With baby boomers retiring and moving out of their homes for a variety of reasons, this will actually help support the supply of new homes to the market in a gradual way. Because the Baby Boomer generation is the largest in the US, the number of homes over the next two decades will gradually grow and have an impact on real estate prices. However, the impact will be so gradual that it should not affect the current boom in the foreseeable future.

When taking the current conditions into account, there is no indication of a NYC real estate bubble forming. Instead, it appears that the rise in property prices is part of a natural economic process when coming out of a recession. This is good news for those who are interested in purchasing a new home for themselves or investors who are looking to earn a profit over the long term.

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