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How long will downturn last?

The residential real estate market in New York City is showing clear chinks in its armor. The average Manhattan apartment sales price in the second quarter fell for the first time since the fall of 2006, and some analysts expect the bumpy ride to be a rather long one.

"Manhattan held up better than most other places," said Mark Zandi, the chief economist and co-founder of Moody's Economy.com. "Long Island is being hit, as is Northern New Jersey. I do expect Manhattan's housing market to weaken measurably over the course of the coming year."

A combination of less demand, due to the lack of available credit for potential buyers, and more supply, due to a surge in foreclosures, has given the national housing market a wallop, he said. But the weak American dollar has spurred even stronger global demand for Manhattan apartments, propping up the local market.

However, dire predictions among financial analysts and fund managers of a European recession could weaken foreign demand considerably. And the hit being sustained by the financial services sector should make itself apparent in the coming months, Zandi said.

"The fallout from the problems on Wall Street is taking some time to manifest itself in the housing market, but it will as people lose their jobs and bonuses are significantly cut back," he said. "I expect that fallout to hit the Manhattan housing market later this year and in 2009."

As for the national housing market, Zandi, who recently published a book titled "Financial Shock: A 360° Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisis," said he anticipated home prices bottoming in the summer of 2009 — by which time they will be 25 percent off their spring 2006 peak — with no appreciable gain in prices for another year.

"It won't be until well into the next decade that we start to experience measurable price growth," he said.

Other analysts agree with that national perspective. Paul Krugman, writing in the New York Times, has said U.S. home prices have fallen 17 percent in the past year, and probably still have "a long way to fall," such that the housing slump may continue to 2010 or later.

Other analysts in New York City, such as the appraiser Jonathan Miller, the president of Miller Samuel, expect a rut in the Manhattan housing market, including a drop in prices, and suggest it will last into 2009 and beyond.

Frederick Peters, the president of Warburg Realty Partnership, a residential brokerage firm, said any slowdown in the Manhattan market that might occur is pinned to the credit crisis.

"In June, Federal Reserve Chairman Ben Bernanke was commenting that he thought the worst of the credit crisis was behind us, but July has clearly proved that that's not the case," Peters said. "And in fact, [August is] the anniversary of when this all kind of hit the fan.

"What I'm saying to my brokers is that the national economy is probably going to be very challenging, and credit issues are probably going to still have an impact on buyers' psychology through the balance of 2008 and the first quarter of 2009."

Peters was careful to say that any downturn he has seen in the Manhattan housing market has been in sales volume, not in pricing. According to Prudential Douglas Elliman Real Estate's second-quarter Manhattan market overview, there were 3,081 sales in the second quarter of 2008, which was down 21.8 percent from the 3,939 sales seen in the prior-year quarter.

"In this case, we've experienced a volume downturn, for sure," Peters said. "One has to be much more specific in parsing prices."

He said the length of time that apartments are staying on the market has grown, which will increase pressure to lower prices. According to the Douglas Elliman report, Manhattan apartments stayed on the market an average of 135 days, an increase of 15 percent from 117 days in the prior-year quarter.

"For a number of years, we had a marketplace in which many listings typically remained on the market for two weeks," he said. "We're not seeing much of that any more. Everything is on the market for months. Obviously, that creates a deeper inventory pool in many marketplaces, which then brings price pressure to bear."

There is price pressure, especially on smaller units, which is being offset by price increases on larger, luxury apartments, Peters said.

"There's downward price pressure probably on the Upper East Side east of Third Avenue," he said. "Also, in certain parts of Tribeca, where there's been a lot of new development. Certainly, there's been some price pressure in new development in Harlem."

Luigi Rosabianca, a managing member of the law firm Rosabianca & Associates, said developers will do anything to keep from cutting prices, even agreeing to hold the note for those who can't obtain mortgages. Still, he said he anticipates a "natural correction" to the Manhattan housing market to the tune of a 5 to 10 percent price decrease.

"Things did go a little haywire, so if there's a natural correction, maybe that's healthy for the market," Rosabianca said. In terms of sales volume, he said, "I think we'll see this summer being quite quiet, and you may have gradual improvement over the fall and winter. And then we'll see a spurt in sales next spring."

But Rosabianca pointed out that the elections this fall may also play a role in spurring the economy, which could boost the housing market.

"It's amazing what elections do to an economy," he said.

Stuart Saft, a real estate partner at the law firm Dewey & LeBoeuf, said he has not seen a price cutting thus far among developer clients, largely because many canceled or postponed development plans two years ago.

"A lot of developers, when they saw the market starting to soften two years ago, pulled out and decided to wait," Saft said. "So we never had that kind of excessive development that exists in other parts of the country."

Still, Saft said the residential real estate market "will soften and probably continue to soften through the end of the year."

Even if some developers postponed their plans, there were enough projects that went forward to keep at least one business watching. Philadelphia-based Korman Communities owns four AKA properties, which specialize in extended-stay lodging converted from failed condominium projects. It aims to add as many as a dozen more properties in the next five years, said co-president Brad Korman.

"We are starting to see some incredible opportunities for growth," he said. "Buildings that broke ground 18 to 24 months ago are starting to come online, and owners that are very nervous are starting a sales effort in this market."

While the residential market downturn is more a reflection of the credit crisis than market fundamentals, that could change if the banking industry is further weakened, leading to further loss of consumer confidence, he said.

"Nobody is certain where the bottom of the market is, and everyone is afraid of paying too much in a falling market," Korman said. "This attitude will keep velocity down just as many new condo projects are starting their sales effort."

Korman predicted that while international buyers will continue to fuel the luxury apartment market, the mid-priced sector will need 50 percent more time than expected to sell its inventory. The real exposure in Manhattan will be Downtown in the Financial District, where a price drop is almost inevitable.

"The Financial District was solid in selling condos in the $700- to $900-per-foot range," Korman said. "Too many new buildings came online trying to sell at $950 to $1,300 per foot. When the investment banks stopped the bonuses, these buildings lost the majority of their buyers. I think these buildings will have to rely on foreign purchasers, and I believe prices will come down to compensate for the location."