Posted by Leonard Steinberg on January 23rd, 2012

A recovery is under way. And now there is absolutely no doubt about it. I hear it from my very wealthiest clients most of whom are scrambling to put deals together before prices rise. I even heard one say the other day he was willing to pay more on a deal he was structuring because he felt the markets were improving enough to give him confidence. I believe many of the buyers in this busier-than-normal January are buying because they believe a hard asset like prime real estate is poised for gains, and may be a safe-haven for wealth in inflationary times.

The housing bubble began deflating almost six years ago; house prices across the US are back to 2003 levels, yet in many areas of the New York luxury real estate market they have surpassed the highs of 2007/2008. After a protracted slump in housing starts, we now look seriously underprovided with apartments and houses, at least by historical standards. In Manhattan this shortage is fueling pricing escalation, which I feel may be a bit artificially inflated in certain areas because of acute shortages.

This January, already we are witnessing the New York luxury real estate market booming: So why aren’t there more buyers out buying across the country? Because the depressed state of the economy leaves many people who would normally be buying homes either unable to afford them or too worried about job prospects to take the risk. This affects the lower end of the market mostly, although the more recent financial markets philosophy of trimming back and cutting costs could affect the higher end too.

The economy is depressed mostly because of the housing bust, which immediately suggests the possibility of a virtuous circle: an improving economy leads to a surge in home purchases, which leads to more construction, which strengthens the economy further, and so on. If you analyze the recent data, it looks as if something like that may be starting: home sales are up, unemployment claims are down, and builders’ confidence is rising.

Furthermore, the chances for a virtuous circle have been rising, because we’ve made significant progress on the debt front. There are four things that stand in the way of a strong recovery:

1)  The oil price is very high: this is a form of high taxation on the masses, making an essential monthly expense (transportation) a bigger chunk of their income.

2) The banks are impossibly incoherent with some of their demands. They blame the government, but where did the government require banks to hire incompetent appraisers to provide valuations that simply do not make sense? I have written on this subject before, but no bank read what I said or cared.

3) Politicians who are committed to power over and above the welfare of the country will continue to fuel divisiveness and claim the economy and country are down the toilet: no-one ever wins an election by saying things are getting better.

4) If the economy improves too rapidly, the Fed will raise rates to curb inflation, and the governments may be too eager to cut spending. Spending needs to be trimmed, and government needs to be made more efficient, but it would be better to fuel this recovery through growth as the priority.