If you’re a reader of the New York Times, or any real-estate site that focuses on the Big Apple, you have probably spent some time over the last few years marveling about the city’s seemingly infinite demand for eight-figure apartments. Well, apparently even developers are starting to wonder if this can last. They’re downsizing their ambitions to smaller units that go for a dainty seven figures, or shifting out of residential development entirely.

This seems related to something Washington-area buyers have noticed: The local real estate market is softening. Oh, it’s hardly collapsed; you can still pay well north of half a million dollars for a former crack house. But the crazed bidding frenzies of last year seem to have abated; fewer listings are going above their asking price, and I’ve noticed that the asking prices, too, are a bit lower than they were last spring.

Why do I think these two things are related? Because New York and Washington both had the same problem: Real estate development basically came to a halt in late 2008, and it didn’t get going again for several years. The whole national financial apparatus for writing those loans had essentially stalled out. I’m not talking about residential mortgages, mind you; I doubt people who are plunking down $20 million for a penthouse are really worried about getting an approval letter from their credit union. Rather, the problem was on the supply side: Developers couldn’t get a bank to give them a construction loan, particularly for condos.1

In most areas, that wasn’t much of a problem, because the market was a teensy bit oversupplied with housing. But in the downtown cores of major metropolitan areas, demand was still strong, thanks to what Alan Ehrenhalt has dubbed The Great Inversion. Steady or rising demand combined with plummeting supply to create higher rents, and higher home prices.

Over the past few years, developers have rectified the situation; a great deal of new housing is coming on the market. Which means the end of double-digit rent increases and housing appreciation in those cities. But we seem to have reached the end of “making up for lost time” and headed toward “glut.”

I’m not predicting some sort of collapse in either real estate market; people still seem interested in buying Washington homes, albeit at less of a premium, and I expect the same will prove true of New York. What it does mean is that we’re still experiencing the aftershocks of 2008, even in areas where the housing market is fully recovered.

1 Which is why Washington now has an oversupply of luxury rentals in “emerging” neighborhoods; those were all condo projects that had to be converted because they could only find financing for rental housing.

[Cross-posted at Bloomberg View]

Megan McArdle

Megan McArdle is a Bloomberg View columnist.