Real estate in the United States usually boils down to two dialectics. One is the adage about the value of purchasing versus renting a home, and the other is finding the right time to buy. Before the 21st century, most Americans believed that buying a home had greater economic benefits than renting, regardless of the buyer's financial situation. A similar belief was that buyers should not wait to buy a home since residential properties always appreciate.
When the real estate windfall of the early 21st century came to an end, many Americans realized that the adages about homeownership can prove incorrect during hard times. When the housing market in the U.S. dried up, millions of homeowners got stuck with expensive mortgages and depreciating properties that cost too much to maintain. Most regional housing markets went on the decline, thereby making them unattractive to invest in.
Not all housing markets, however, exhibited the same behavior. The Manhattan apartment market, one of the most lucrative in the nation, presents a unique paradox in the sense that both rents and prices have increased considerably over the last few decades, and yet a home purchase in the heart of New York City comes at a high premium to own that is simply not justified by the price-rent ratio.
Real Estate Dynamics in Manhattan
According to a recent study published by the Federal Reserve Bank of New York, apartment prices in Manhattan did not suffer the huge price drops seen in other markets like Los Angeles and Miami. Rents have risen considerably, following an even pattern of supply and demand. Such is not the case with apartment prices, however, as they are not commensurate with monthly rents.
The true value of apartments in Manhattan is woefully diluted by speculation. The rise of monthly rent payments in New York, except for those subject to rent control, is supported by fundamentals such as housing supply, demand from renters and affordability in terms of the renters' wealth and income.
The Manhattan price-rent ratio used as a metric by the New York Fed is the result of taking the property market price and dividing it by the price of the annual residential lease contract. In this calculation, the costs of apartment ownership such as property taxes, mortgage principal and interest, municipal fees, and maintenance must be taken into account. A high price-rent ratio is indicative of overvalued properties, which is noticeably the case in the Manhattan apartment market.
Sustaining Apartment Prices and the Housing Recovery
The high price-rent ratios of the Manhattan apartment market is of particular concern due to the ongoing recovery of the U.S. housing market. Lower mortgage rates and property taxes in New York City have some responsibility in the high price-rent ratio phenomenon, but real estate speculation has played a stronger role.
The appreciation of Manhattan real estate over the last two decades has been largely speculative and artificial, at least according to the price-rent ratio research conducted by the New York Fed. This should not have a significant effect on the burgeoning U.S. housing recovery, however, since data in 2012 suggests that apartment prices are stabilizing while rents are gradually increasing.