Business Week: Manhattan RE Still Going Strong

Read the details:

"What's driving the prices up is the closing of high-end condos."

The data are for closings in the 1st quarter, skewed by new developments. Meaning that the contracts were signed a year or more ago, before the Wall Street crash.

Know what you're reading.

7,467 listings available in Manhattan on streeteasy.

The article notes that the market is still strong at the lower end as well.

There is some time lag in any data. The amazing thing is that it is May 2008 and things are going as well as they are, in spite of the efforts of a vocal few to talk down the market.

Im betting prices will stay strong for most of 2008...yet, street level, inventory has clearly risen and sales vol clearly slowed. Take it for what its worth.

First comes the slowing sales volume.

Then comes the swelling inventory.

THEN comes the price chops.

We just saw this happen with the rest of the nation. Sales slowed, then inventory swelled.

And after a while, over many months, prices finally started to decrease, then accelerate downwards which is where we are today.

Manhattan just barely entered the swelling inventory phase. You know what comes next. It always happens. I have never seen data that shows swelling inventory that is not eventually followed by price decreases.

If anyone here can show me data otherwise, I'd like to see it, because it would go against the basic laws of supply and demand.

I could understand that lower ends and higher ends are not gonna be affected that much, the ones in the middle though are definitely getting affected. As they said, most of those things in the higher end, you basically need to be rich to qualify...or filthy rich, so money is not a factor :). And the ones that get sold first in the new devts (like in Brooklyn) as far as I can tell are the studios and one-bedrooms, because that's mostly what people can afford. Those penthouses in most of the new devts in Brooklyn, they're still there...and good luck with that :).

I am not expert on Manhattan real estate. But I feel on the street level it does seem like there is price drops and inventory increase. An agent from a property in midtown I bidded on 2 months ago called me back today after lowering the listing price by 40K on a 760K apartment. Personally I am glad I did not commit to anything in the past 2 months. This may just be my personal experience and not represent the entire market.

i have been looking at a few of the new developments and townhouses in chelsea. it is slightly concerning when you look at the amount of new devs that are sitting empty. it was an easy sell for developers about a year and a half ago but not the case at the moment. a lot of these buildings are not selling.

i suppose there is a standoff at the moment but you have got to believe that the developers and brokers who support them are going to want to get paid this year. equally a number of large buildings are closing over the summer which could rattle things up.

Mmafia -- that's a supply side shock. prices could still go up if there were a demand side shock to compensate. but obviously, that's not the case that we're looking at here. but i suppose it's possible in some alternate universe of manhattan RE where supply goes up, and demand goes up as well. i'm just saying...

I find one bedroom pricing going up and they are refusing to negotiate.

julia, let them not negotiate. That's Phase 1.1.

MMAfia is correct, that's what's happening everywhere in the country. We're late along the curve, that's all.

Property bulls always cite supply and demand. Unfortunately, they don't know anything about economics, because the real equation is supply and demand AT WHAT COST? Developers developed a lot because the cost of development was unrelated to the cost they could sell units at. As always happens in real estate - it's a cyclical business - that led them to overdevelop. And all the inventory is coming on line right at the time when demand is plummeting.

urbandigs is probably right: prices will stay high because people refuse to believe that what was worth $2 yesterday is suddenly only worth $1. Again I point to Miami: I sold my South Beach place 2.5 years ago for $1 million. The people above me refused to accept that offer; they held out for $1.1 million.

Well lo and behold, 2.5 years later that apartment is on the market for $750k, and it's been at that price for 6 months, and still no one will buy it.

And inventories rise.

My crystal ball shows regular gas at $7.25/gallon by 2009 in Manhattan.

Manhattan sure isn't immune from recession. Interesting article, thanks for sharing!

I spoke today with a highly-seasoned Manhattan broker. I was told clearly that nothing is moving in the under ten million market as potential buyers are not getting loans.

Nothing is moving indeed. The bid-ask spread is just too wide, based on my expereinces. I submit my first bids based on comps and the sellers are refusing to negotiate.

One of the major problems are these dam co-op boards. They are way to strict in their financial requirements. I mean asking a mandatory 20%, 30%, 40%,50% and in some cases 100% down. I mean with those strict requirements how in the world can we get some nice financially weak owners so they can become desperate sellers.. Dam it. Why couldn't these co-op boards let people in at 0% down and 100% financing without good credit or earnings potential just like the rest of the nation. Why did Manhattan have to so dam strict so we can have a nice collapse. At this slow rate I hope the economy doesn't recover that would be just horrible for those who want to get in at fire sale prices.
Fortunately there aren't any people who have the financial resources to buy into the Manhattan market.

Spunky, I just posted the same thought on co-op reference thread.

I just saw an apartment very similar to mine go to contract at a price 20% higher than what I paid 6 months ago (actually, the layout and location are both slightly worse and it has a smaller terrace, but I won't quibble)

I am not saying that I expect apartments to be up across the board - in fact, I fully expect some softness in the overall market with the macro backdrop and tough job market on wall st

But I still maintain what I have said all along - there are a very limited supply of new condo buildings in my neighborhood (east village / LES) as well as desirable areas south of 14th st (like the west village, soho and nolita). If you expect to be able to negotiate buyers down substantially, or are waiting around for a huge drop in prices, I don't think you're going to be successful.

Why would anybody put down less than 20%?

Or more?

stevejhx, I'll flip the question to you - why shouldn't you put down more than 20%, especially if it gets you under the jumbo threshhold?

evillager, I fully appreciate the fact that your screenname can be read as "evil lager." If I ever start my own microbrewery, I may have to borrow that name (and give you a cut, of course).

"urbandigs is probably right: prices will stay high because people refuse to believe that what was worth $2 yesterday is suddenly only worth $1."

Exactly stevejhx- this is what happened around the nation.

Stubborn sellers didn't want to believe reality, so they waited.

"Nothing is moving indeed. The bid-ask spread is just too wide, based on my expereinces."

Sales volume plummets. Inventory rises. UNTIL...

Stubborn sellers get past the 'denial' phase and lower prices.

bjw, if it's 21% to get you under the jumbo threshold fine, or 22%, but 50%, why? And if it's a buyer's market - which it is - the seller should price his unit so that it falls under that threshold. Especially b/c co-op loans aren't covered by the new "conforming jumbo" loans, so there's pricing pressure on condos.

If you have to put down to much just rent - it's half the price anyway - and put your down payment in the stock market.

If the market slows down considerably, new developments will be switched to rentals, which will drive down rentals and therefore purchase prices. Once the cycle starts, it takes a long time to stabilize.

The worse thing that can happen is for the stock market to go up in positive territory for the year. That would suck for it may give the sellers a false impression that the economy may get better. Let's all hope this scenario doesn't happen and the economy remains weak.

bjw, that's great! I never noticed that.

although is there such a thing as an evil lager? as far as I'm concerned, (good) beer is sent straight from heaven. now tequila on the other hand...

Wow, spunky, I can't tell sometimes if you're being serious and empathetic or still sarcastic. :)

Below is a quote from a Nobel Prize winner.

I tell you. It's nice to find out that I think like a Nobel Prize winner. Then again Al Gore won one as well. LOL

The housing downturn is an even worse economic factor than casual observers realized, Stiglitz said. He explained that during the real estate boom, Americans were able to withdraw billions of dollars from their home equity.

"[But] with housing prices coming down, it's going to be difficult to do that anymore," he said -- drying up a spending source. And within that problem, still another complication: people typically spent the money they drew off their home equity on consumption, rather than investment -- garnering no return on the spending.

"The savings rate as we go into the recession is zero. Which means [savings] will go up, " he said -- decreasing consumer spending and weakening retail further.

dco let's all hope that people don't save this way they won't be able to invest and this way we can keep down Manhattan RE. I think the government should pass some legislation requiring all co-ops to accept nothing more than a 5% down payment and that co-ops should not be allowed to review ones financial record.
Let's loosen the standards just like the rest of the country.

evillager: also, there's NO supply of quality pre-war highrises. Another niche that will not budge, rightfully so. They are beautiful and built with different sensibility.

How much looser can the standards be anywhere. My guess is that the majority of the new condos in the last 3 years were bought with less than 10% down. That's why I laugh when I hear people say that Manhattan has such a financially strong buyers. I know some people that bought with 5% down. We will see in the next year how smart a move that was.

dco, one thing is for sure it is extremely difficult for speculators to infiltrate Manhattan's market. Investors are not allowed in coops and need at least 20% down for condos. In addition there are numerous ratios banks require for condos such as no one person owning more than say 15% of the buildings units. High rise vs low rise conditions. Financials have to meet certail criteria. Banks underwriters make it difficult for investors to buy in.

Actually, spunkster, the co-op where I used to live at one time allowed 15% down - they just changed it back to 20% because they're afraid of a "real estate bubble," to use their words.

http://350bleecker.com/newsletters/html/210.html

One of the worst things that happened in the last boom is that many co-op boards refused to authorize sales of apartments if they thought the price was "too low." I know someone this happened to - now deceased - who had a commercial space on tony Park Avenue, where he was a dentist. The Board turned down 3 bids because they didn't want the per-share prices to go down.

Now, of course, we're faced with all this new construction - all (more desirable) condominiums, which can be financed with jumbo conforming loans, whereas co-ops cannot, creating a further downward drag on all prices. Plus the near death of rent stabilization has allowed for many market rental buildings and many investor-owned properties, all of which are in direct competition with sales.

The last figure I saw said that in recent years 80% of jumbo mortgages made in Manhattan were ARM's. They don't need to be subprime or Alt-A: they are still resetting to far higher rates, especially if nonconforming.

And many of the new condos not only allowed, but encouraged a high degree of leverage to get the prices they wanted. There are no figures, however, that I know of.

Although there are many similarities between today and 1988 - falling building permits, hype about "lack of space in Manhattan (which doesn't affect prices over time, and which miraculously disappeared in about 1998), stubborn sellers, etc. - there are many differences, as well, all of which favor falling prices: market rentals, investor-owned properties, different financing terms for co-ops and condos, lessened effect of rent control and stabilization, new condominium development, market transparency (publishing co-op prices, the Internet), none of which bodes well for the near-term future.

And just to be balanced: I don't think there's a recession or anything like it. I and my clients have never had so much work. Ever.

Which, of course, when occurring over the whole city helped exacerbate the glut of apartments.

stevF, before the banks started cracking down and it was just up to the developers, almost every new construction condo I saw had only a 10% down payment requirement, some had less. I thinks there's been plenty of speculation in new construction.

flippers!

Steve,

Can you please provide a link for the source of the 80% of jumbo mortgages in Manhattan being ARMs? I have been looking for information on the extent of ARMS in Manhattan but have been unable to find it.

It has been my suspicion that there are many ARMS in Manhattan but I have not been able to find that information. But I believe if there have been many, then Co-op boards will be less likely to allow this financing going forward which will be an additional downward driver on demand due to less buyer who can qualify for financing.

tenemental- I agree 100% with you. I don't have any idea where steveF gets his information. The last 3 years speculators have ruled new construction condos all over the boroughs. Just so were clear I see the definition of speculators different then most. Flippers are the obvious ones. However I also consider people who decided to get adjustable rate mortgage's as speculators. In my mind you were just betting that the rate will decrease. If you put 10% down with a adjustable rate loan you are definitely a speculator. I don't even care if you are living in the unit. By definition an adjustable rate mortgage is 100% speculation. Also consider all the people over the last few years that put down payments on units nearly 2 years later with the speculation that it will be worth considerably more at closing. This market was and still is flooded by speculators. The next 2 years will do a good job at correcting this market condition. Markets always find a way to correct them selves over time. During that time unfortunately many speculators will lose a ton of money.

There's no way to quantify it, so take it for what it's worth, but the strong feeling I got talking to people and attending open houses in 06 and the first half of 07 (maybe a little more than half) was that a) They didn't want to miss out on the kind of appreciation that people who bought in 02, 03, 04 were enjoying. People they knew had doubled their money and they wanted to get in on it. Even with a risky loan, the value would be going up so they'd always be able to sell or refinance. b) They really did want to get in now for fear of being priced out for forever.

If you didn't have enough for a 20% down payment plus X months of monthly costs, or you knew you had no hope of passing a board, a new construction condo was your only choice. With most buyers now not expecting a) or worried about b), and with 10% no longer an option, I would think there's a significant shift in demand. The overall drop in transactions would seem to prove it, as would the dramatic drop in building permits.

I know I've mentioned it before, and I can't find the link to the article, but when I read some months back that condo liens were up 26% because buyers had stretched themselves so thin they couldn't make their maintenance payments, it made perfect sense to me.

Pez I published it a while back it should be on some thread but you can google it - it was from an interview with a mortgage broker, so it wasn't "official" information.

SteveF makes things up - most of what he says is not true. Especially, how can he say "Banks underwriters make it difficult for investors to buy in" yet claim that in Manhattan, it's Foreigners To The Rescue!

Foreigners must be investors, since by definition they can't live here. Unless you want to plunk down $10 million on a fancy condo and use it once a year, rather than staying in the much nicer Waldorf Astoria.

That's still an investment.

Also guys, don't forget the huge prevalence of subprime mortgages in the outer boroughs in recent years. Prices there go up, prices here go up.

Heaven help us all.