My father worked as a baker in a bagel store for 30 years with a bachelor's degree he never needed and was able to buy a home in the suburbs of NY. Yet, 20 years later, that same home is beyond the means of his well educated son who has a salary well over the pay his father was making when he purchased that home (even adjusting for inflation).
It is not unreasonable to expect home prices to rise slightly after inflation, but speculative house prices compounded by low interest rates (which make house prices higher) have driven real estate to levels unaffordable to all except those with wealthy families, the very diligent, and the insanely overpaid (read: wall street big-bonus types and their lawyers). The American dream of making a modest living and owning your own land has all but left the NY metro area.
Adam Smith would be puzzled... The population of the NY metropolitan area in 1980 = 17.5 million , and the population of NY state in 2000 = 19 Million -- it certainly seems that demand has increased a bit, but not drastically so. Unless the urban sprawl effect was substantially offset by the destruction of tenements and affordable urban housing, to the tune of ~1 million homes, this indicates a bubble.
I predict we will see the housing market in NYC and its surroundings plummet in the coming years after laid-off financial workers are forced to find employment elsewhere and sell their Manhattan pied-a-terres, Long Island summer homes, and Northern Jersey tax shelters.
Already the renting market has dropped -- several of my classmates indicate rental apartments in their building went from $1600 last year to $1200. This is just the beginning. Once severance packages, savings, and tenacity of the current residents run out, the floodgates of affordable real estate will open. However, it will take at least until the end of 2009 and beyond for the shake out to finish.
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