It’s Got to Be a Bubble

The New York Times published an article this morning that described the rise in the prices of consumer goods in the New York region during the past year. The article quoted John Catsimatidis, the chief executive of the New York City-based Gristedes supermarket chain, complaining about low profit margins in the food business. He said, “I would be better off getting rid of all of my stores based on the value of the real estate alone.”

Holy schneikes! You can kiss goodbye to the quaint notion that real estate is theoretically as valuable as the activity it supports. Supermarkets fulfill the single most basic human need: food. Now I’m no expert, but if the real estate assets under a chain of supermarkets are more valuable than food the supermarkets distribute, how is the real estate market not overvalued? Put another way, if people are willing to pay more for land than for food, something seems amiss.

In a similarly portentious bit of news, Curbed and Brownstoner are showing a chart from The Wall Street Journal that shows the annual appreciation of housing prices in 10 yuppie-heavy urban ZIP codes where the median income is $40,000 a year. The non-New York nine of the ZIP codes, places from Danvers, Mass., to Philadelphia to Phoenix to Kirkland, Wash., showed a modest average increase of 9.7%: $315,599 in 2003 to $350,007 in 2004. But in Manhattan’s East 80s and 90s, prices jumped an incredible 85.6%: $505,790 in 2003 to $938,560 in 2004. New York’s ZIP code was already the most expensive of the bunch in 2003, and in ’04 it was WAY more expensive than the others. If construction had started on the first phase of the Second Avenue Subway (.pdf), I would agree that the core value of real estate on that part of the Upper East Side really had increased that much more than statistically similar areas across the nation. But that didn’t happen. Could it be that these gains are the result of temporary perception and hype?

All right, that does it. I am convinced. Note the date: January 20, 2005. officially acknowledges that we New Yorkers are living in some kind of real estate bubble.

Noel Sheppard has his own rationale on why a bubble exists: Has Greenspan Over-Pumped the Real Estate Bubble?

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3 Responses to It’s Got to Be a Bubble

  1. aaron says:

    We are definitely in a bubble and lord help us when it pops. Read “The Dollar Crisis” for a bit of an understanding of what’s going on with the dollar.

    Also, I wonder if some of the NYC bubble is also due to the simple fact that suburban American life has become so opressively unappealing to so many people. There just aren’t very many other real urban (or even town) environments to live in in the US anymore.

    So, I think part of the high cost of living in NYC is bubble. Part is real demand. But your point about the real estate costs of supermarket land is really great….

  2. futurebird says:

    I’m not going to sit here and tell you: “it’s not a bubble.” (Instinct tells me that it’s got to be somewhat inflated. These prices just *feel* wrong.) Like many who have been watching this market I lack a justification for these sentiments. I cannot say for certain– and even the evidence you’ve presented fails to convince me.

    Two key facts:
    1. More people than ever want to live in the city.
    2. There is a critical housing shortage.

    The demand for housing and the shortage of housing combine to create uniformly outrageous rents. This, in turn, has made the housing market explode since there is a lot of money to be made collecting rent. If the housing shortage persists then so, I say, will this bubble. If the demand for living spaces increases at the same rate as housing the bubble will also, I tell you: stay around.

    The truth is that upper-middle-class people want to live in the city again. The city is simply not equipped for such a huge influx of residents. I imagine the bubble will disappear once heavy, dense, new construction alleviates some of the pressure caused by the disparity between demand and supply. This also explains the great difference in percent increase you mentioned. I think other American cities will see these kinds of jumps once they follow New York’s lead and begin to gentrify the maliciously neglected and often poor neighborhoods nearest to the city center.

    As for gristedes? Those stores take up a lot of space. The new residents may buy everything from anyway.

  3. Anonymous says:

    i’m a reporter at the new york sun newspaper doing a story on real estate bloggers, and i’d like to interview you – can you contact me? 212-901-2665. thanks, julie satow

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