The myth of the housing bubble in New York City.

Recently, published local and national news reports have been creating uncertainty in the housing market by declaring the country is in the midst of a housing bubble. These articles proclaim the bubble can pop at any time, causing prices to fall and leaving sellers unable to unload properties.

However, in New York City, when considering the data, there is no bubble, but rather the refinement of the pricing structure and reflecting the strength of New York's economy.

There are a number of key factors when searching for an explanation of New York's constantly increasing residential real estate prices.

Overall prevailing issues include the growing demand and limited supply of housing constructed between 1970 and 1980 and the dearth of housing constructed since 1980. Between 1970 and 1980 New York's population decreased by 823,159 people; a significant 10.4% loss, leading many to believe the market was in a spiral of decline.

However, the population increased by 249,925 people from 1980 to 1990 and then by more than by more almost 800,000 people since 1990, but did not result in developers or the City building more housing to accommodate all of these new residents. Since 1990, the City's population has grown substantially--a 14.1 percent gain--to over eight million and only a fraction of the necessary housing has been constructed in a city with a serious housing shortage.

The shifts and growth in population over the last decade include nearly three million first and second generation immigrants who are having a profound effect on the housing market, a significant aspect in the increased demand. These Americans are not only supporting the City's economy, but are actively purchasing homes as well. Another demand on New York's housing supply is empty nesters leaving the suburbs and opting to move to the City to benefit from the diversity and services available to seniors. Joining the influx of empty nesters are thousands of young professionals flocking to New York to begin careers.

As a result, the housing market is being simultaneously subjected to demand for both luxury and affordable housing and the result are increasing prices which, considering the cost and time involved in constructing housing means that prices will continue to appreciate until the demand for housing can be satisfied and an equilibrium between supply and demand established.

In the past, when the market was hot in Manhattan and prices were escalating, those who could not afford Manhattan prices would move to Brooklyn and Queens. However, this time the outer boroughs are also experiencing explosive growth and a changing demographic landscape, which is resulting in prices being unaffordable for New Yorkers seeking a lower cost of living. It is these population changes, more than low interest rates, driving today's booming markets.

While the growing and diverse population is undoubtedly influencing the current demand, limited availability is also affecting today's marketplace. New residents have only private homes, cooperatives, condominiums or market rate apartments to choose from, which make up only half of the available housing stock. The other half consists of government assisted, public housing, rent-controlled and rent-stabilized housing with occupants who are unwilling to move, regardless of whether they still require the assistance today.

Private and public housing stock is so limited, a recent New York Times article reported that even with the construction boom occurring across the City, the housing shortage is so severe that all the construction will only add approximately 50,000 units--just a 1.6 percent increase. The problem stems from the small amount of building over the last decade, which in no way corresponded to the City's dramatically increasing population.

The primary reason for the limited development of new housing is the extraordinarily high costs involved in developing and constructing new properties, the delays involved in obtaining the necessary consents from the government and the objection of community groups, who already have homes, to building housing for others. These expenses range from existing tenants rights to high labor costs and lengthy approval processes, which have hindered construction unless rent or sales prices could support the price of development. At the present time, approximately 20,000 units of new condominium housing are being constructed or converted, adding .66 percent to the housing supply, a first step in alleviating the housing shortage.

When considering the possibility and reality of a housing bubble, if there was ever a time for it to burst, it would have happened after September 11, 2001. Immediately following the terrorist attack, the expectation was people and businesses would be leaving the city in droves, but instead appreciation on private housing stopped for about three months and then has continued to escalate ever since. Even the national economic recession between 2001 and 2002 scarcely affected New York, and in the last few years there has been another influx of buyers, the unprecedented increase of foreign investors.

These considerations--from limited housing stock to a multitude of investors--all support why the current market is not a myth, but a new reality. Unlike traditional bubbles, increasing housing prices have a rational basis and are not the results of irrational exuberances or lower interest rates. So when interest rates do rise, there may be a slowing appreciation in the value of homes, but it will not cause prices to depreciate. Furthermore, the construction and conversion of units may alleviate some of the distortions in the market caused by the unabating demand and limited supply, but it will not cause prices to collapse. In light of these considerations, it's not surprising the housing market has skyrocketed over the last few years, and it's this continued interest by so many parties that will continue to sustain and drive the residential market in the year to come.

STUART M. SAFT, ESQ. PARTNER AND CHAIRMAN, WOLF HALDENSTEIN ADLER FREEMAN & HERZ LLP CHAIR, NCB FINANCIAL CORPORATION