Famous Neighborhoods, Invulnerable Investment

Author: Nicholas Adams Judge
December 12th, 2007

Economics is largely a theoretical endeavor, with the grand law of supply and demand being at the center of incredibly complex mathematical models about how the world works. These models mainly function in the aggregate, with data coming from across whole markets and nations to be inputted into models that usually say little about the geography of that market or nation.

Held up in stark contrast to this conceptual theory of supply and demand, however, is real estate's famous first three laws: location, location and location. This juxtaposition between the the theoretical and geographical is what makes real estate market analysis so fascinating – and, often, frustrating – for so many economists. Aggregate, location-less variables without specific addresses on a map, such as median wages or G.D.P. growth, have to be integrated into economic models with the importance of very physical, geographically specific variables factors like location, location, and, perhaps, location.

So, if a market report states that sales in the national housing market are likely to decline next year, it doesn't mean that that statement about the nation as a whole is going to hurt a given neighborhood or housing unit nearly as much as more localized variables such as developments in the nightlife or restaurant scene.

In large cities like New York City, where opulence often exists just several city blocks from poverty, this is even more true. Indeed, the importance of urban real estate markets was one of the major reasons for the rise in popularity of economic geography as an academic discipline in the mid 1990s. Professor Paul Krugman, who is famous for his op-ed columns in the New York Times, was one of the key academic figures in effectively creating the new academic discipline, which is basically the fusion of the golden rules of supply and demand with real estate's rules of location, location, location.

In New York City, those three rules are even more important. The astute buyer looks less at which direction the market as a whole is moving and more at what neighborhoods will become the next hot spot.

Buyers of luxury apartments have an especially easy time at this. The size of famous neighborhoods, of course, can't increase. However, the longer that a hotspot is a hotspot, the more legendary it becomes. Property on 5th Avenue, for instance, is an incredibly safe investment, if you have the capital for it. Greenwich Village will not become any less famous as time goes on. These areas are largely immune to potential downturns in the wider market.

As reputation increases, so does demand. This aspect of the economic geography of major urban areas is one of the main reasons that the rich tend to get richer, and it is one of the most enjoyable parts of buying a luxury apartment in New York City.

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