NYC Residential Construction Outlooks a Study in Contrasts

By: Gea Elika

These are troubling, bleak times for the national residential construction industry. Financial analysts expect the sub prime mortgage crisis to push approximately 2.4 million homes back on the market, crippling the demand for the construction
of new homes. Lennar, the nation's largest home builder, saw its profits dive 73% in the last quarter. The secretary of the treasury warned recently that we have 'yet to see the bottom' of the housing market.

The supply side of the picture looks equally bleak. Usually, a sharp drop in the demand for new homes like the one the sub prime crisis ushered in would lead to a reduction in the prices of building materials. As oil is expected to soon top $100 dollars a barrel, and the dollar is expected to continue to lose value against all major currencies, most economists do not expect building
materials to decline in price significantly.

The contrast between the national and New York City residential construction industries, however, is a textbook example in the power of financial regulations.

The powerful New York City housing co-ops, which make up 85% of all apartments, have strict rules concerning the credit of those that can move in. So, the co-ops have effectively layered an extra level of financial regulation on to the city's housing market, thus mostly sheltering it from the sub prime crisis.

This extra layer of protection against lending market irregularities has combined with increased demand for apartments in New York City to create a steady and growing a demand for new residential buildings. Spending on new residential construction is expected to grow approximately 14.3% from $4.9 to $5.6 billion during 2007, according to the New York Building Congress (NYBC). Though that figure is expected to fall to $5.2 billion by 2009, it still represents a significant uptick in residential construction spending, and one that can be held in sharp contrast to the dismal predictions concerning the national residential constructioindustry.

Most of the new residential buildings will come in the form of condominiums. Predictions of significant numbers of co-ops converting to condominium ownership structures have not panned out. However, analysts and new home builders are
nonetheless expecting demand for condos - a considerably more liquid asset than the partial ownership of a co-op - to continue to far outpace
the relatively limited supply of condos that New York City currently offers.

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