FL crashing now, will Take Manhattan -- For Less

No Longer Immune,
Sales and Prices Slip;
Waiting for Bonus Time
By BEN CASSELMAN
November 30, 2007

Even as the national housing market has been hit by slow sales and falling prices, Manhattan has continued to shine. But now its light may be dimming.


Upper East Side townhouse was listed in July for $24.5 million. Current asking price: $19.5 million.
Fewer apartments are being sold -- 858 went into contract in September, a 9.9% drop from a year ago and the lowest total in two years, according to brokerage Corcoran Group -- and the inventory of unsold apartments is increasing. Prices are also leveling off. The median price of a Manhattan apartment fell 3.4% in the third quarter from the previous one, according to the research firm Radar Logic. The firm says properties are sitting on the market longer, too, an average of 123 days, up from 94 days at the peak of the market in 2005.

Developers used to seeing yet-to-be-built apartments get snapped up sight-unseen are increasingly offering incentives, from help with closing costs to museum memberships, to jump-start sales. "Buyers are more hesitant," says Hall Willkie, president of brokerage Brown Harris Stevens.

One big factor is how much money New York's army of financial executives will make this year, given the wild swings on Wall Street. "Right now, everyone's waiting for bonus time," says Stephen Kliegerman, executive director of development marketing for brokerage Halstead Property. "No one knows what to expect." Many analysts anticipate this year's Wall Street bonuses, which will be paid early in 2008, to be roughly equal to last year's record $36 billion. But individual payouts will vary much more widely than in recent years, with bankers in the mortgage sector receiving much less than last year, and those working in healthier markets making far more.

Trouble in the financial sector will hurt home sales, says Nouriel Roubini, an economics professor at New York University's Stern School of Business. "We're talking about hundreds of billions of dollars in losses on Wall Street," he says. "We could see people being fired, and when that happens, demand will fall."


Manhattan makes up a tiny fraction of U.S. home sales. Its housing market is closely watched, however, because of the city's position at the center of the financial and media worlds. In recent months, the continuing strength of its real-estate market has drawn even more attention, and led many local real-estate professionals to contend that Manhattan is immune to the forces that have battered much of the rest of the country.

But few independent experts buy that argument. Christopher Mayer, a Columbia University professor and director of the school's Paul Milstein Center for Real Estate, says the idea that Manhattan will continue to boom amid a nationwide housing bust is "wishful thinking."

"I certainly don't think Manhattan is recession-proof," Prof. Mayer says. "History just says that's a wrong argument."

Bargains Available

Some buyers are already finding bargains. When hedge-fund executive Jerry Lavish and his wife, Stanka, started looking at apartments earlier this fall, they liked a three-bedroom co-op on East 72nd Street -- but not its $1,775,000 price tag. Two weeks later, however, the sellers cut the price to $1,575,000, and the Lavishes jumped; they're expecting to sign a contract today. Mr. Lavish, who says he did extensive online research before making an offer, believes the same property might have gone for $1.9 million a year ago. "We're getting this apartment for probably 2004 pricing," he says. (The downside: The Lavishes are listing their current apartment for $475,000, nearly 10% below their original asking price.)

To be sure, almost no one is steeling for a crash in Manhattan. Prof. Roubini believes prices will fall 10% over the next two years, substantially less than the 30% or more he predicts will occur in many markets. Nationwide, existing-home prices were down 5.1% in October, and sales were down a seasonally adjusted 20.7%, according to the National Association of Realtors.

So far, fall sales data in Manhattan suggest a flattening out of the market more than a sharp decline. Sales volume in the third quarter was down 11.2% compared with the previous quarter, but that was still well above the level from the previous year, according to Radar Logic. (Those numbers reflect sales that closed in the third quarter, many of which were negotiated earlier in the year.)

Prices remain near record levels. The median price of a Manhattan apartment is $864,397, up 2.3% from a year ago. And broader economic forces may provide an added cushion: While tumbling Wall Street earnings have damped the enthusiasm of some potential buyers who work in the finance industry, the weak dollar has led to increased interest from abroad.

Return to Normal

Some brokers say they haven't seen a drop-off at all. Pamela Liebman, chief executive of Corcoran Group, says the brokerage is on pace for a record year and says that after a September slowdown, October showed an increase in sales. Jacqueline Urgo, president of the national real-estate firm The Marketing Directors, says sales in most of the company's Manhattan properties improved in mid-September after a brief lull. Even many brokers who have seen a falloff say the shift says less about the current market than the frenzied one that preceded it. "We're just seeing the market return to normal," says John Burger, a broker at Brown Harris Stevens.

Even so, as preliminary sales statistics begin to trickle in for October and early November, some New York brokers and potential sellers are growing nervous. So far this quarter, 1,473 sales have been recorded in Manhattan compared with 4,337 for the entire quarter last year, according to Gregory Heym, chief economist for Terra Holdings, which owns brokerages Brown Harris Stevens and Halstead Property. Many sales negotiated earlier in the quarter haven't closed yet, but with December usually a slow month, Mr. Heym says there will almost certainly be fewer sales this quarter than last.

City officials are also predicting a slowdown. In October, the Office of Management and Budget cut its projected revenue from property transfers by $82 million, a 5.9% drop from its original forecast. (The figure includes revenue from both commercial and residential sales.)

Prices, too, may finally be reaching their zenith, after years of rapid increases. While average prices remain high, experts say the numbers have been skewed in recent months by a few record-breaking sales in new luxury-condo projects such as 15 Central Park West and the Plaza. (Among the mega-sales: a 6,744-square-foot apartment at 15 Central Park West that sold in September for $42.4 million, and a 13,000-square-foot Plaza condo that went for more than $50 million in July.)

To get a better sense of how prices are changing, many experts recommend focusing on existing-home sales. In New York, that means looking at the co-op market, which includes few new buildings. The average sales price of a co-op fell 2.8% to $1.12 million in third quarter of 2007, compared with the second quarter, according to Radar Logic. Even when condos are included, prices vary widely in different parts of the island; so far this quarter, the average price on the Upper East Side has risen 11% to $1.7 million, compared with the previous quarter, but prices downtown have fallen 18%, to $1.1 million, according to Terra Holdings.

Sellers and local brokers point to August or September as the start of the shift. Sean Connell and his wife, Patty Klingbiel, listed their pied-à-terre on East 28th Street for $495,000 in May. They quickly accepted an offer for $480,000, but their co-op board rejected the buyer. By the time the apartment went back on the market in August, the market had changed and the price was too high; earlier this month, the couple cut the price to $450,000. "Since the summer, [buyers have] been a little more cautious," says their broker, Carlos Saavedra of Corcoran Group. (Mr. Connell says he remains optimistic they will sell the apartment by the end of the year.)

Tough Co-op Boards

Experts say several factors have helped to insulate Manhattan from the national downturn thus far. The boards of co-ops, which make up about 70% of all Manhattan apartments, are often stricter than banks, requiring much more money upfront from would-be buyers (some allow no financing at all) and scouring their financial records for hints of trouble. As a result, co-ops have seen far fewer foreclosures than the rest of the country. Even in condo buildings, which have looser standards, high prices meant few subprime mortgages. (That wasn't true of New York City's outer boroughs, where subprime mortgages were more prevalent and foreclosures have risen; citywide, foreclosures were up nearly 65% in the third quarter from a year earlier, according to a report by PropertyShark.com.) The weak dollar has also encouraged an influx of foreign buyers, while record bonuses on Wall Street last winter further fueled demand.

Supply, however, is increasing. The city approved the building or conversion of 14,748 condo and co-op units in Manhattan in 2006; citywide, such approvals were up 75.8% from 2005. And more are in the pipeline. "I would not want to be owning a project that's coming on the market in the next year or two," Prof. Mayer says.

The impact of the increased supply is already being felt. A handful of new developments have begun to offer incentives to attract buyers, something nearly unheard of at the height of the boom. Several projects are offering beefed-up commissions, or even gift cards, to brokers who sell units; 45 Park Ave., in the Murray Hill neighborhood, is offering a one-year membership to the Morgan Library and Museum.

The number of price cuts, at all levels of the market, is also growing. Blair MacInnes is handling the sale of her 85-year-old mother's Upper East Side apartment; she listed the two-bedroom co-op in September for $2,095,000, the price recommended by her broker, Dorry Swope of Halstead Property. "We were very worried about putting the apartment on the market," Ms. MacInnes says, "but we had been told by any number of people that the exception to the housing crisis had been Manhattan." The apartment drew little interest, however, and Ms. MacInnes and her mother agreed to cut the price, first to $1,995,000 and then again a few days later to $1,779,000 -- a total cut of more than 15%. Although the new price has generated more interest but no solid offers, Ms. MacInnes says she and her mother aren't in a rush to sell.

"But do we want to wait until the market bounces back?" she asks. "Who knows when that will be?"