Halstead Property

Gregory J. Heym
Executive Vice President, Chief Economist
(212) 546-1069

Wall Street Bonuses Fuel Manhattan Real Estate Surge

By Danielle Reed

While many areas of the country are seeing home price increases slow, New York's real estate market has rebounded - thanks in part to Wall Street.

With a record $21.5 billion in Wall Street bonus money handed out for 2005, higher mortgage rates weren't enough to slow down the Manhattan real estate market in the first quarter of 2006, according to data from several large real estate firms.

The volume of sales was remarkably strong, according to Jonathan Miller of appraisal firm Miller Samuel Inc., the company that provides data for Prudential Douglas Elliman's Manhattan Market Overview. The number of sales increased 27.4% from the prior quarter (after a sharp drop in the fourth quarter from the third quarter 2005).

Miller said he was surprised by the rebound in sales volume, as he had expected sales volume would stay roughly flat versus the prior quarter. "Some of it might have been bonus money," he said, though he also noted that a large number of condo sales took place in the fourth quarter, a reflection of a pickup in real estate development activity.

"A lot of new developments started their closings" during the first quarter, he said. That helps explain the 47.8% increase in condo sales over the prior quarter, which gave overall sales volume (condo and cooperative apartments) a big boost.

But where the Wall Street effect was clearly apparent in the sales of larger apartments, Miller said. Two-, three-, and four-bedroom apartments were 51% of all Manhattan sales in the first quarter, up from 45% in the prior quarter. When Wall Street bonuses are good "we tend to see larger units move," Miller said.

Prices increased as well, in part due to the bigger share of large apartments purchased. The median sale price increased 17% to $825,000 over the prior-year's $705,000 and 8.6% above the prior-quarter median of $760,000, according to Miller's data. The average price per square foot increased 10.3% to $1,004, a new record.

"I think we saw the Wall Street bonus effect really impacting the amount of high-end sales in the first quarter," said Pamela Liebman, chief executive of the Corcoran Group. Corcoran, which has its own data prepared by appraisal firm Mitchell Maxwell and Jackson, reported that sales of large apartments - more than three bedrooms - increased 21% in the first quarter 2006 from the fourth quarter 2005.

The large bonuses may have encouraged buyers who were on the fence about buying a home to go ahead and make the purchase. "I think the environment of the second half of the year led people to be a little hesitant," said Gregory Heym, chief economist for real estate firms Brown Harris Stevens and Halstead.

At the time there was "a lot of fear about interest rate hikes" and uncertainty about the transition at the Federal Reserve from now-retired Chairman Alan Greenspan to the new chairman, Ben Bernanke, Heym noted.

Things turned around in the first quarter, and "the bonus money certainly helped" improve confidence, Heym said. "It's certainly a good shot in the arm to the market."

That said, the major firms generally saw some signs of a buildup in inventory and a slowing in the rate of home price increases. "A year ago, we had such short supply, it led to sort of unsustainable rates of growth" in home prices, in the order of 20% to 25% annually, Heym said. "Now we're closer to 8%, which is a growth rate we can all be a little more comfortable with."

"The biggest story ... has been the surge in inventory," Miller said. "There was a 59.6% increase in the number of units available for sale this quarter versus the same quarter last year."

While there may be some distortion in this figure, as last year at this time inventory was at "an all-time low," Miller said, the trend clearly "correlates with the trend (higher) in mortgage rates, as well as the easing in pace of new development coming through the pipeline."

(c) 2006 Dow Jones & Company, Inc.

Tuesday, April 04, 2006