Gregory J. Heym
Executive Vice President, Chief Economist
By Leslie P. Norton
In the next few weeks, real-estate brokers will release a report on the median price paid for a Manhattan apartment during the second quarter. Those who've been waiting for a decline -- like the one most big U.S. cities are suffering -- will be sadly disappointed. Driven by extraordinary gains in luxury co-op and condo prices, this quarter is likely to be even better than the bang-up first quarter, when the median sales price was $945,276, 13.2% above the year-earlier level and 11.2% above the 2007 fourth quarter's figure.
But bargain hunters -- or at least those who can't afford multimillion-dollar digs -- shouldn't despair. More rational prices already have begun to take hold in lower price ranges. And because New York real estate tends to lag behind other cities,' it's possible that any coming price decline in Gotham will mark the start of the last phase of the latest national real-estate debacle.
A rash of price reductions now skitters across the columns of the New York Times real-estate classifieds, testament to diminished expectations. "We have dramatically reduced the price of this 1BR in prime West Village," blares an e-mail from a broker for a small, light-filled apartment at 295 West 11th St., not far from the chic Meatpacking District.
That's not the story on the extreme high end, which is supporting the overall Manhattan marketplace. The New York City borough's luxury apartments start at about $8 million and account for roughly 5% of the market. This segment is disgustingly healthy, particularly in trophy buildings like the refurbished Plaza Hotel and tony 15 Central Park West. (At the latter, a venture capitalist recently listed his four-bedroom, 61/2-bath apartment for $90 million -- $60 million more than he paid for it the previous month.)
Because of such excesses, "It will be in '09 when you see prices below a year-ago levels," says Gregory Heym, chief economist for Terra Holdings, the parent company of real-estate brokers Brown Harris Stevens and Halstead Property. Heym also maintains ValuExchange, the most comprehensive database of residential property sales in Manhattan and Brooklyn. "The biggest effect will be the loss of those two special buildings [as the Plaza and 15 Central Park West sell out]. That alone can bring you down, even if the market doesn't."
More reflective of the middle market is the experience of an Upper West Side couple, Kathy and John Knudsen. Pressed for time because of the pending birth of twins, they cut the price twice on their pretty two-bedroom, one-bath apartment at 102nd Street and West End Avenue after listing it in late January.
Having bought and sold property in preceding years, the couple felt they were well-informed sellers. The fourth-quarter numbers "showed the market going up," Kathy recalls, and "there aren't many two bedrooms at this price point." Their co-op had low monthly maintenance fees and was priced more cheaply than a similar apartment in the building that needed work.
Yet there were no bids. "We got a lot of positive feedback. But there's definitely a lot of market anxiety," Kathy says.
In April, the Knudsens caved and hired a broker who promised them listings on more than 50 Websites, and moved in new furniture that made the apartment look brighter. The Knudsens' apartment finally went to contract, for $694,000, down from their initial asking price of $765,000 and their final ask of $699,000. In the first quarter, Manhattan apartments generally fetched 97.5% of their initial asking price.
The Knudsens, who are moving to Forest Hills in Queens, are hardly taking a bath on their investment. They bought the property just two years before, for $570,000, so they've registered a nice gain. That has pretty much been the story of New York real estate over the past eight years. Not even the recession of 2001 slowed things, as investors sold tech shares and bought real estate with cheap financing. Since then, the median value of a Manhattan apartment has jumped 136%.
But life -- especially for middle-priced properties -- has changed. Gains surely will be tougher to sustain as Wall Street lays off highly paid workers. In March, 6,194 Manhattan apartments were for sale, up from 5,133 in January, according to Miller Samuel, a residential-real estate appraiser. On Streeteasy.com, a Website that tracks all broker listings, some 530 apartments have cut prices by at least 5% in the past 30 days.
The biggest headwind is financing. Melissa Cohn, president of Manhattan Mortgage, the area's largest residential mortgage broker, says banks now insist on smaller loan sizes ("80% is the new 90%," she quips.) and personal-credit scores of more than 700, whereas 660 would have been acceptable a year ago. Lenders are also demanding complete income verification, versus virtually none a year ago. Cohn won't approach banks till she's sure the loan will be approved. Even so, "I'd say 10% to 15% of our borrowers have to go to more than one bank to get the deals. A year ago, it was less than 5%. And the terms are not always what the buyer originally wanted."
For the New York metropolitan area, the S&P Case/Shiller index of residential housing prices, is down 7.4% from a year earlier as of late March; that's about half the overall 14.4% decline for the 20 markets in the U.S. that the index follows.
As always, location is important. According to Streeteasy.com, the popular Chelsea, Flatiron, Soho and Lincoln Square neighborhoods are seeing median sale prices decrease, which research director Sofia Kim deems "surprising since these are not fringe neighborhoods, but this does possibly reflect an oversupply in these areas."
On the other hand, neighborhoods like the Upper East Side, the Financial District and Tribeca are still reaping big increases. The average listing discount (the gap between asking price and sale price) for Manhattan in May was 1.67%, versus 1.05% a year earlier, according to Streeteasy.com.
For New York's middle class -- bread-and-butter buyers looking for apartments priced below $1 million -- it's reason to procrastinate. Such buyers are an anxiety-prone lot to begin with, worried about terrorist attacks or more mundane quality-of- life issues ("If I buy this apartment, will the school across the street sell its air rights, blocking my light?") As they wait, rental prices are rising in Manhattan.
Says Jonathan Miller, an appraiser New York Magazine dubbed "the Wikipedia of Manhattan real estate": "Logic says we'll see things move sideways for the moment.
There's no external stimulus. I'm more worried about '09 than the next six months."
How far the softness spreads is unclear. The loss of a single Wall Street job is said to translate into the loss of three others in the real economy. That means 40,000 finance layoffs could lead to 120,000 others getting pink slips. But that's less job loss than in the depths of the 2001 recession or the early 1990s after the 1987 stock-market crash triggered fire sales, and lots of co-op owners discovered negative equity, Heym notes. One caveat: Many of those laid off this time around are likely to be more highly paid than the back-office workers who lost their jobs in earlier bear markets.
The very top of the market may not feel a thing. The first quarter saw a 318% increase in the number of closings for apartments costing more than $10 million, buoyed by two $40 million-plus sales at red-hot 15 Central Park West. And despite the dire headlines, Wall Street's bonus pool fell just 2% this year over last, hardly a sign of imminent crisis.
Manhattan has a substantial list of other measures of support. Its housing stock is 70% co-op, whose notoriously scary management boards usually insist on decent credit quality and impose draconian rules about subletting. And the city remains a world capital, drawing many wealthy foreigners eager to take advantage of the cheap dollar.
If Manhattan real-estate prices do fall, the rest of the country may have reason to applaud. "We typically go into a slowing economy later than the nation does," economist Heym says. So any weakness in Manhattan could mean the rest of the country is on the road to recovery.
Monday, June 16, 2008