As we begin 2005, the question on most minds is whether or not the residential market has reached its peak, and if so will prices begin to decline or plateau?

A glance at prices over the past year seems to indicate that a peak may have been reached in the second quarter, although prices remain substantially higher than a year ago.

In order to form an opinion on the market's future, we should analyze what has driven the current boom and which factors will play the biggest role in the future.

The biggest part in the market's ascension has been played by interest rates. Never before have rates remained so low for so long.

This environment has allowed many first-time buyers to purchase their home, and owners of small units trade up in size.

Now that the Federal Reserve has begun its "measured" pace of rate hikes the market's greatest ally may now become its worst enemy.

I should point out that although the Fed has hiked the overnight rate in each of its last five meetings, this has yet to significantly affect mortgage rates.

We must remember that a rise in short term rates does not always correspond to a similar rise in mortgage rates.

In fact the recent Fed hikes are helping to keep long term rates low by pulling the reigns on inflation.

There is no doubt that mortgage rates will rise during the year. The important question is how much rates will have to rise before prices start falling significantly.

The key will be to keep any rise at a gradual, expected pace.

Any spike in rates could seriously hurt the market, as the shock value alone would probably cause prices to fall. I don't see a strong likelihood of this, at least through the first half of the year. It's also important to remember that even 30-year rates of 7% are low by historical standards.

The availability of non-traditional financing such as adjustable rate and interest only loans will also help buyers afford the home of their dreams.

Looking to the City's economy provides reasons to remain optimistic that prices can still rise, albeit at a slower rate than the past year. For the first time since 2000 the city is adding jobs. With 26,000 new workers added last year, and another 40,000 expected to be added this year, demand for housing should remain fairly strong.

Another positive factor will be Wall Street bonuses, which according to the State Comptroller are expected to total about $15.9 billion, the second highest total ever.

Many of these recipients will likely look to put this new found money into real estate as they did in the beginning of 2004.

Another factor destined to keep prices from falling is the lack of available units for sale. The number of new listings coming on the market in December was down 7% from a year ago.

Without a noticeable increase in the supply of available apartments, it's hard to imagine prices can fall unless something drastic shocks the market.

Also playing in the market's favor are a few intangibles. The greatest of these is the increased desire for homeownership and the tax advantages thereof.

The record levels of homeownership across the country prove the increased appeal of the security that comes with owning your own home.

It also shows that lack of faith in alternative investments treat really began after the stock market bubble burst. This combined with the ever falling crime rate in the city continue to make people want to buy, and buy here. All of this means we will probably see moderate growth for at least the first half of the year, with too many unknowns to look any further into the future.

Gone are the times of 30% annual price gains, but there is no clear indication that prices will begin to fall as long as rates do not rise sharply.

I look for a growth rate more in line with historical trends, and certainly more sustainable than recent levels. The key is certainty, something every market likes to have.




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