A New Equilibrium?

Martin Wolf of the Financial Times has put together some hard-hitting analysis of real estate markets, without falling into the common trap of making predictions. It concludes this way:

Either prices have moved to a higher equilibrium level, in which case future purchasers will have to save more and consume less. That would itself have significant economic implications. Or they have reached an unsustainable level, in which case they will fall in real terms. That would have far more significant economic implications.

I would add one more scenario, that may be peculiar to highly specialized market of New York City: perhaps we have reached a new equilibrium, driven by the growing assets and incomes of those who want to live in New York. I regularly see buyers plopping down all cash for multi-million dollar residences, so I would suggest that another possibility is that as purchasers incomes continue to grow by leaps and bounds (witnessed by this years Wall Street bonuses), many will have “extra” money for downpayments as well as the cash for their lifestyles.
In addition, today’s market has produced a much more savvy buyer than the recent past. They are much more aware of overall market conditions and the economic factors affecting price–including the size of the buyer pool and housing inventory. As the market has softened, buyers are less likely to participate in bidding wars and when “forced” to do so often walk away from the apartment that they may have bid over ask for just a year ago.
It remains to be seen how the softening of our market will ultimately play out, but the stabilization that has already taken place is healthy for a housing market that was speeding out of control. Welcome back to reality where people actually make smart decisions about their sales and purchases. It’s a good thing!

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