Continuing on in response to James’ viral article NYC IS DEAD FOREVER… HERE’S WHY
part 1, part 2, part 3, part 4
James argues that people will stop buying homes in anticipation of lower prices, hence causing prices to fall further, and thus people will wait even longer in anticipation of even lower prices, ad infinitum.
This is called a deflationary spiral. People wait. Prices go down. Nobody really wins. Because the landlords or owners go broke. Less money gets spent on the city. Nobody moves in so there is no motion in the markets. And people already owning in the area and can afford to hang on have to wait longer for a return of restaurants, services, etc. that they were used to.
Except in reality it never works that way, not even close. Prices may fall, but they do not spiral anywhere close to zero, at least not in wealthy areas, and and prices do not stay down for that long. By James’ logic, home prices should go to zero. That is obviously illogical. Yes, I suppose, in theory, if Manhattan was to become like Detroit, then James would probably be right, but more likely, prices will follow the same trajectory as they have in the past, which is that prices fall , stabilize, and then surge when everyone least expects it. When the market hits peak pessimism, inexplicably, prices surge, similar to after 911 , during the New York City real estate crash of 1991, and then in 2008-2010 during the financial crisis. There are several factors that prevent such spiral. For example, the intrinsic value and scarcity of coastal land, and also the labor. But also, the surrounding areas act as a sort of barrier for how low prices can fall. If homes in nice parts of Manhattan are selling for $2 million, and homes in worse areas are selling for $750k, and national home prices are $400k, then for prices in the nice parts of Manhattan to spiral to zero would imply that the US housing market, overall, goes to zero. It would imply that Soho real estate becomes cheaper than Washington Heights, which is very improbable although in theory possible.
Answer: Maybe. Maybe not. Some people can afford to hang on but not afford to sell. So they wait. Other people will go bankrupt and there will be litigation, which creates other problems for real estate in the area. And the big borrowers and lenders may need a bailout of some sort or face mass bankruptcy. Who knows what will happen?
Speculators who took on too much debt may be bankrupted. Whether or not this leads to economic contagion and a repeat of 2008 remains to be seen, but my prediction, imho , is that it will not. It is possible the state of New York will need to be bailed out, in which I predict that if things get bad enough, it will happen, especially under a Biden presidency. States cannot really go bankrupt. They can default on bonds, which is what happened to Puerto Rico in 2016 when it missed a $1 billion payment to creditors, but New York, in spite of all its problems, is in vastly better shape.
Will they require remote learning? Will kids be on campus? It turns out: a little bit of both. Some colleges are waiting a semester to decide, some are half and half, some are optional.
Similar to the aftermath of 2008 crisis, I predict a boom in college attendance and a continued widening of the college wage premium, made worse by increasing economic inequality as a consequence of Covid (and those $600 checks have stopped coming). College attendance will rise due the unemployed attending college in the hope of acquiring the necessary credentials to gain an edge in an increasingly competitive labor market, in which even the lowest-skilled of jobs have tons of competition. The media narrative is that Covid is supposed to bad for colleges, but I think it’s a windfall. Online/distance learning means higher profit margins for colleges, by keeping tuition unchanged but cutting costs by moving classes online, in addition to generous federal college bailout programs. For the past 10 years or so, so many people have tried to predict a bursting of the college bubble or the decline of the importance of college, and they keep being wrong.
Finally, James gets to the crux of his argument about why NYC is never coming back, unlike before. The reason? Bandwidth.
But this time is different.
One reason: Bandwidth.
In 2008, average bandwidth speeds were 3 megabits per second. That’s not enough for a Zoom meeting with reliable video quality. Now, it’s over 20 megabits per second. That’s more than enough for high-quality video.
There’s a before and after. BEFORE: No remote work. AFTER: Everyone can work remotely.
This is why his article went so viral, because the explanation he provides seems simple and obvious, yet somehow eluded all the experts.
The difference: bandwidth got faster. And that’s basically it. People have left New York City and have moved completely into virtual worlds. The Time-Life Building doesn’t need to fill up again. Wall Street can now stretch across every street instead of just being one building in Manhattan.
But the majority of jobs in NYC (or any city) are not office jobs, but rather jobs that involve hands-on work (such as trades work, landscaping, etc.) or interacting with people (waiters, psychologists, doctors, lawyers, etc.), and such jobs are difficult to perform remotely, if not impossible. And not all office jobs are going away. Twitter, in a highly publicized move, may move a large chunk of its workforce away from the office, but this is hardly representative of the labor market as a whole.
Everyone has spent the past five months adapting to a new lifestyle. Nobody wants to fly across the country for a two-hour meeting when you can do it just as well on Zoom.
But again, this is hardly representative of the overall labor force. The vast majority of workers, even in New York City, do not have high-paying office jobs that involve flying for 2-hour meetings at a whims notice in the job description. I think James is showing how out of touch he is if he thinks the economy only revolves around office jobs.
The technology for remote office work has existed for a long time–all you need is a decent internet connection and a remote desktop protocol to login to the work server from anywhere–at least since the late 90s, but it never really caught on. The office never went away despite many predictions over the past 2 decades of an office-less work environment.