The Real Deal New York

Residential market holding its breath

September 15, 2007
By Lauren Elkies

The country’s mortgage crisis has left prospective buyers and real estate watchdogs wondering how hard it will hit the Manhattan residential real estate market.

The second half of the year is traditionally slower for sales, and the anticipated first-quarter bump from Wall Street bonuses will suffer as those checks are predicted to be smaller in early 2008. In short, there could be some serious ripple effects.

“I think we’re in a somewhat uncertain time now,” said Diane Ramirez, president of Halstead Property. “People, in situations that are uncertain, tend to get a little gun-shy.”

While Manhattan buyers and sellers hadn’t rushed to the sidelines in August, this month could usher in a significant drop-off in sales activity.

“I think in the fall, there will be a heightened sensitivity to the availability of credit and how that will affect housing. I think it’s more of an issue in other parts of the country, but it certainly has people wondering here,” said Jonathan Miller, president of appraisal firm Miller Samuel.

Manhattan is protected somewhat from mortgage woes because co-ops, the majority of for-sale housing in New York City, maintain strict financial standards, often requiring buyers to make large down payments in cash — usually about 20 percent of the sales price. Nationwide, the Federal Reserve also took steps last month to ameliorate the situation by infusing liquidity into the market and cutting discount rates.

Co-op buyers “are very strongly buffered against these variations in mortgage rates. It is more of an inconvenience or an annoyance,” said Meredyth Hull Smith, a senior vice president and associate broker at Sotheby’s International Realty.

The fact that Manhattan’s condominiums have not been attracting investment buyers, who depend on hefty mortgages, will help keep the market sustainable for a while, Ramirez said. But marginal buyers might have a hard time getting a home if mortgage money is slashed.

“Your margins are just going to become a little more great,” she said.

Meanwhile, the fallout could actually benefit an already hot rental market and rental development.

“If someone is uncertain about where this is going, they might want to step out and go into the rental market, and that’s already pretty tight,” Ramirez said. “Maybe you’ll see more developments going more toward a rental product.”

Miller said that he expects a slow September followed by an even slower fourth quarter, regardless of the fallout from the financial crisis.

Historically, apartments languish on the market at the end of the year, and that figure has risen over the course of the several past years. The number of days a unit sat on the market between the third and fourth quarters increased 3.1 percent from 2001 to 2006, to 798 days from 774 days, Miller Samuel data indicates.

That’s partly because of the surge in inventory that comes online in September.

The total number of listings increased 8 percent between August and September for the six years starting 2001, Miller Samuel data shows. The only drop in the two month-period occurred between August 2003 and September 2003, when there was a 7.1 percent decline.

Seasonal trends aside, inventory has dropped dramatically in the Manhattan market this year. There was a 35.8 percent year-over-year drop in listings from July 2006 to July 2007, to 4,712 from 7,339.

The influx of new inventory in early fall does not necessarily translate into more sales.

Leonard Steinberg, an executive vice president at Prudential Douglas Elliman, focuses on the downtown luxury sales market. He said that over the last few years, he has received fewer inquiries about properties and has seen a dip in contract signings after Labor Day, a trend he expects to continue.

Manhattan home prices rose this year, but assuming 2007 follows the same pattern as the previous six years, the average price of a Manhattan home will drop in the fourth quarter. Between the third and fourth quarters of every year since 2001, prices decreased (except for 2003, when prices between the quarters rose to $1.15 million from $1.13 million, a 1.8 percent uptick), Miller Samuel data shows.

For the six-year period between 2001 and 2006, the average sales price dropped more than 5 percent between the third and fourth quarters to $1.19 million from $1.26 million.

Some brokers expressed optimism about the amount of business they expected to do this month.

Barring catastrophe, “I think we’re going to have a strong September. I think our whole fourth quarter will be strong,” Sotheby’s Smith said. “I see the fourth quarter setting itself up as a very strong close to what was already a great year.”

Miller of Miller Samuel said he believes third-quarter data will show no sign of summer blues. It would likely be too soon to see effects of a mortgage crisis in third-quarter data, he said.

“The third quarter, we’re still looking at the expectation of an active market and a brisk level of sales activity, but tempered somewhat from the tightening credit situation,” Miller said.

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