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.”