Credit crunch: Much ado about (almost) nothing

By Lauren Elkies | October 10, 2007 11:32PM

 While residential buyers and sellers question the fate of the real estate market, some brokers report that in Manhattan it’s much ado about (almost) nothing, at least in the short run.

“The credit crunch is expected to temper sales activity as tighter underwriting standards knock some people out of the market,” said Jonathan Miller, executive vice president and director of research for Radar Logic, which reached a deal last month to purchase Miller Samuel, the residential real estate appraisal firm co-founded by Miller in 1986. “However, to date, there is no real evidence that sales activity is down relative to typical August/September market periods.”

Sellers are still selling and buyers are still buying.

In the third quarter, the number of sales decreased 11.2 percent to 3,499 from the second quarter, but rose 65.6 percent from the third quarter of 2006, according to data prepared by Miller for Prudential Douglas Elliman. The average sales price saw a 2.7 percent uptick to $1.37 million from the second quarter and a 6.3 percent increase from the third quarter of 2006.

Fall came on the heels of a solid August when demand continued to chip away at inventory.

Co-op and condo units and townhouses on the market were “all down from last year, but they’re coming from a high place,” Miller said. The number of unsold Manhattan co-op units dropped by 41.9 percent to 2,077 in August; condos decreased 31.2 percent to 2,569; and townhouses dropped 46.8 percent to 251, Miller found. Together, they sunk year-over-year to 4,897 units from 7,784 units, a 37.1 percent decline.

There was little change in co-op and condo inventory between the second and third quarters, the Elliman statistics indicate, but together they dropped 31.7 percent from a year earlier.

Barak Dunayer, president and founder of Barak Realty, said that business has been on track.

“In New York we really don’t see that much of a difference,” Dunayer said.

But not all market watchdogs have such an optimistic view.

“It’s very simple: As of the beginning of September, the market has totally stopped creating the level of activity as it had before … and it’s not because of the Jewish holidays,” said Neil Binder, principal and co-founder of Bellmarc Realty.

Open house attendance has fallen off, some brokers say.

At Warburg Realty Partnership, attendance gradually decreased over the summer months from a high of 60 in the spring to between eight and 20 last month, the company’s data indicates.

Also in September, Elliman saw a sharp drop in attendance at open houses. An average of six to 10 people showed up at open houses last month as opposed to 15 to 20 a year earlier, said Steven James, president of the Manhattan brokerage division at Elliman. The percentage of offers, however, was about 20 percent higher last month, James said. In some cases there were even bidding wars. On the flip side, he noted that a few buyers got cold feet mid-deal, which he attributed to the mortgage crisis.

Binder said that at the start of September, closings were on track and open houses were “getting decent activity.”

But he added that open house numbers are not the same as transaction numbers. “No one’s putting money down on the table,” he said.

Some price points are seeing more activity than others.

“High-priced stuff is starting to have problems,” Binder said, referring to properties starting at $3 million. Middle-market properties, on the other hand, are surviving because of a much wider buyer pool, he said.

Brokers said they were not seeing asking price reductions last month or homeowners aggressively unloading their apartments into the marketplace in response to the turbulent economy.

Since Wall Street bonuses drive big real estate purchases, should payouts be substantially less this year than last, high-end property sales could suffer.

But concerns about bonuses this year might be overstated since a single-digit cut from last year’s record figures would still amount to some of the highest allocated in history, Miller of Radar Logic said. Greater harm could come from public perception of a bad year.

Sales in new developments could be harder hit than resales because of the premium they command and the time the deals take to close. A qualified buyer today could become an unqualified buyer by the time the closing rolls around.

Developers seem to be preparing for the ripple effect of the mortgage crisis as they employ public relations tactics like wining and dining brokers.

Manhattan’s real estate market is not expected to take the same beating as markets elsewhere in the country because stringent financial requirements make Manhattan buyers less dependent on mortgages.

Still, a mortgage crisis makes buying real estate a game for cash-rich buyers.

“We’re reverting to a higher down payment scenario than we have seen in five years, and I don’t see that changing in the immediate future,” Miller said.

The Federal Reserve attempted to ameliorate the situation by cutting interest rates by half a point to 4.75 percent last month, but marginal buyers still are likely to be pushed out of the market.

“Across the board, I suspect you won’t see the record pace of activity that we saw this year, but I suspect it will be elevated,” Miller said.

Brokers speculated that this month sellers would become more realistic about pricing, in turn spurring more sales.

The market “won’t tolerate wildly inflated pricing,” said Frederick Peters, president of Warburg Realty. “People will want the sense of value because of the credit crunch. I don’t think prices will go down. There will just have to be a clear price-to-value ratio more than there was six months ago.”

While potential buyers cannot anticipate dramatic markdowns, they may be able to take advantage of market uncertainty by seeking concessions from sellers, such as covering buyers’ closing costs.

Not everyone considers the current state of affairs to be a bad thing.

“It’s ultimately good for us because it means that once again money is mainly being loaned to people that ought to have money loaned to them,” Peters said. “I think that’s a stabilizing force in the marketplace.”