Demand high, prices strong in robust NYC market.

As the market began to pick up in late 2006, and unsold inventory began to be absorbed, no one predicted the fevered pace the market would achieve during the first two quarters of 2007. Many buyers continued to wait on the sidelines in the fourth quarter of last year, hopeful that the market would defy expectations and "bottom out", affording them an opportunity to buy housing in New York at a lower price. Exactly the opposite has happened. The buyers who dawdled quickly saw themselves priced out of the market, which has escalated 10-15 percent since January throughout Manhattan and the better neighborhoods of Brooklyn, Queens, and the Bronx. Inventory is low in every housing category, and the new buildings which have popped up everywhere in the past 18 months are selling, and selling out, briskly.

Smaller apartments, which were in the doldrums throughout 2006, have picked up enormously during 2007. The sale of studio, one-bedroom, and small two-bedroom apartments is always more acutely impacted by the rental marketplace than are the sales of larger properties. In early 2006, the rental market was slow and good rental deals were available. As more consumers chose to rent, sales inventory built up and prices dropped. In the latter half of last year, the rental marketplace began to firm up; demand increased, prices rose, inventory dropped. With interest rates still at historic lows, buying became once again a more attractive option. Attendance at week-end open houses began to climb, and as 2006 ended, the first competitive bidding situations arose in the smaller apartment market. In 2007, these trends have accelerated. The rental market is both expensive and tight. Competitive bidding occurs on many, if not most, well-located, well-priced properties. And even with the rising interest rates, prices continue to escalate.

The mid-sized apartment market has experienced a similar trajectory. Although it saw no real drop in prices, transaction volume for six-, seven-, and eight-room apartments stagnated during 2006. Since the beginning of 2007 these apartments have been flying off the shelves. Frequently sold in a week or less, for over the asking price, after open houses with 50, 75, even 100 attendees, the scarcity of these units means there are often three or four buyers for every available property. While good condition is still a highly valued commodity, the strength of general demand also means that properties needing work are selling briskly. The business climate in New York has been so strong that the buyers for these units are optimistic about their prospects. They work late so they do not want to leave the office at 8 PM and still have an hour long commute to get home to the suburbs. So the inconvenience of doing a renovation is balanced by the advantage of remaining in town. And increasingly, neighborhoods everywhere are appealing to these buyers. They love Harlem and TriBeCa with their easy access to parks; they love Prospect Heights and Park Slope for the same reason. Williamsburg is hip, Greenpoint is affordable, as is Long Island City. There is someplace for everyone.

Even as smaller properties lingered on the market, the ultra-luxury sector remained strong throughout 2006. After years of a bottom-up marketplace in which smaller apartments seemed to be the driving force which vibrated upwards to galvanize the entire residential portfolio, we arrived during 2006 at the opposite: a "trickle-down" marketplace in which the health of the ultra-luxury market maintained stability and support for the property beneath it.

That trend, bolstered by increasing optimism in the stock market and generous bonuses at Wall Street firms, has gathered force during the first half of 2007. Brokers are advising their high-end customers to be prepared to overbid to secure a very large apartment or townhouse, and the increments are rising:

In January, 5 or 7 percent was usually enough to secure the property, by March it was 10 percent, and recently we have seen a few ambitious buyers going 15 or 20 percent over the asking price to make certain they win. Many of these buyers have already lost out on one or two properties and they have learned their lesson: Be bold! Purchasing a home in New York City today is not for the faint of heart.

Real estate markets all over the country are struggling. What makes New York so different? Several things: first, co-op board requirements, onerous as they may sometimes appear, keep our residential real estate market rich in equity. Most co-ops have strict financing limits, many do not permit interest-only mortgages, and lately condominiums have increased their financial review requirements as well. Even as banks were eager to lend money in 2003, 2004, and 2005, co-op equity requirements limit the amount of exposure the overall marketplace has to default now that interest rates are rising.

Second, prices are so high in most areas of Manhattan and brownstone Brooklyn that the higher credit-risk borrower (typically someone with a poor credit history and lower assets and income) cannot get into the game. High prices substantially reduced this market's exposure to the subprime borrower. And while upward adjustments in interest rates on loans with brief initial teaser rates may be causing some pain here, we have seen very little default.

Finally, and most significantly, we live in a world financial center. In our increasingly globalized environment, New York bears more resemblance to other great world capitals like London, Paris, Hong Kong or Shanghai than it does to most other cities in the United States. Compared to prices in London or Hong Kong, real estate here is not overvalued. And with a strong economy and relatively cheap dollar, people from every country see New York real estate as an important component of their worldwide investment strategy. Tourism is up, the hotels are full, and the city, with its vibrant business, arts, and cultural communities, has never looked so good or offered its inhabitants so much. As brokers, we are proud to represent our fascinating, diverse, and ever-evolving city!

By FREDERICK W. PETERS, PRESIDENT, WARBURG REALTY PARTNERSHIP