BARRONS: Manhattan market will drop another (!) 30%

Where's the link?

http://online.barrons.com/article/SB123517384563737163.html

its Barrons cover material:

http://online.barrons.com/article/SB123517384563737163.html?page=sp

Full Article:

-------------------------------------------------------------------------------------
Manhattan on Sale
By LESLIE P. NORTON

Manhattan's luxury real-estate market is rotting, as Wall Street layoffs and tight credit squeeze demand. Why prices could slip another 30%.

ON A RAIN-DRENCHED AFTERNOON LATE last week, Michael Shvo, a renowned megabroker of Manhattan apartments, showed up at 20 Pine Street to answer our questions about the troubled development.

A stone's throw from the New York Stock Exchange, 20 Pine once seemed a symbol of the area's post-9/11 renaissance, sprouting Armani-designed apartments with oversized windows, exotic woods and recessed, virtually silent shower heads. Where Chase Manhattan built a vault for its first headquarters, there is now a swimming pool and Turkish bath. But for all its virtues, 20 Pine is starting to look like just another victim of New York's luxury-housing bust.

Reports have circulated that the owner of the 409-unit building, Boymelgreen Developers, may unload 80 apartments for just $652 per square foot, about half the current asking prices. Shvo, 36 and perfectly coiffed, acknowledged the existence of "20-25 offers from bottom fishers," some as low as $600 per square foot. But the offers didn't seem to concern him. "The developer," he sniffed, "isn't interested."

Not yet. First came Miami, Las Vegas and Phoenix. Now Manhattan's high-end housing market is cratering. With Wall Street firms stepping up layoffs, and money for big-ticket mortgages drying up quickly, prices for new york apartments and townhouses of $5 million or more have been falling and may well drop by another 30% before finally bottoming out. That could help turn the Big Apple into the ugliest housing market in America.

While Barron's reported three months ago that the New York luxury market was headed for trouble ("Sand Castles," Nov. 24, 2008), the outlook has become notably worse, with some experts citing the bankruptcy of Lehman Brothers as the breaking point.

The local economy is reeling as the securities industry moves to cut some 46,000 jobs by the summer of 2010. Affluent investors have pulled back from house shopping to nurse wounds inflicted by the stock market. Even that most voracious of buyers -- the hedge-fund manager -- has lost his appetite, as angry investors yank their money from his funds.

PRICE CUTTING HAS BECOME SAVAGE. The 14-room Park Avenue apartment of the late socialite Brooke Astor -- which Barron's highlighted in that earlier story after its price had been cut from $46 million to $34 million -- is now down to $29 million and probably has to be cut further.

But even with dramatic reductions like that, the inventory of unsold luxury housing is ballooning. Streeteasy.com, a Website that pulls together listings and insights from a variety of brokers and buyers, now shows 795 New York apartments offered for $5 million or more, up from 518 a year ago.

Detailed data on that top tier of sales are hard to come by, but the price trends are thought to be similar to those in the mainstream luxury market, defined as the top 10% of home sales. Using that yardstick, the median sales price of a Manhattan luxury apartment topped out at about $5 million in the first quarter of last year -- well after the national housing market came unglued -- and then fell nearly 20% by the end of the third quarter, according to Miller Samuel, a real-estate appraisal firm.

In December, says Jonathan Miller, the firm's president, contract prices were 20% lower than in August, all but assuring sharp drops in closing prices in the months ahead. Nowadays it isn't unusual to hear anecdotes about potential buyers backing out of deals and abandoning down payments as large as $500,000, worried that a property's price could fall by much more.

Buyers clearly were wary of signing on the line. The number of new contracts for luxury properties dropped 40% in the fourth quarter, says Sofia Kim, research chief of StreetEasy. At the same time, inventory rose 65%. "We're years away from full recovery," Kim says.

MAKE NO MISTAKE, PRICES are still staggering. The average Manhattan apartment -- counting all price levels -- sells for $1.6 million. The most expensive for sale, at least publicly, is a penthouse at 25 Columbus Circle, otherwise known as the Time-Warner Building. This is listed for $65 million by the brokerage Brown Harris Stevens. But that doesn't include so-called quiet listings, like the apartment of a Nu Skin Enterprises executive, who wants to sell her penthouse for $80 million through Sotheby's, as the New York Observer recently reported.

Realty brokers, the industry's natural cheerleaders, are now unabashedly glum about the high-end market. "The $5 million-and-above market is inventory-rich and buyer-poor," says Dolly Lenz, a broker to the stars and vice chairman at Prudential Douglas Elliman.

The price of a property, she says, "has to be 25% off the last sale for it to be a bargain. People have no sense of urgency. A sense of urgency is what the real-estate market needs as a stimulus."

In short, the market is almost unrecognizable from a year ago. "People used to call and say 'I have a Russian,' and that meant you were supposed to drop everything," says Leighton Candler of Corcoran Group, another top broker. That's changing: The ruble buckled and so did oil. And the dollar is up sharply, making U.S. prices all the more expensive.

Says marketing chief Louise Sunshine of the residential developer Alexico Group: "We have definitely noticed a switch from international buyers to more of a U.S.-based and local purchaser base."

The damage in Manhattan is spreading well into the suburbs-from Saddle River, N.J., to Greenwich, Conn., to South Hampton, N.Y.

In 2008, the median price of a single-family home in Fairfield County -- Connecticut's most expensive locale -- fell 12.8% to $522,000, while sales plunged by 31%, according to Boston-based Warren Group. On Long Island, the median price fell 10% just in the fourth quarter, including a 14% drop in the Hamptons region, reports Miller Samuel.

In New York's Westchester county, sales of single family homes fell 30% in the fourth quarter, and the median sale price fell 11%, according to the Westchester-Putnam Multiple Listing Service.

The high end of the greater New York market "has been holding up better than that in many of the larger metro area markets," says Celia Chen, the housing economist at Economy.com. But she sees continued drops ahead for luxury and other housing in and around the city.

"House-price depreciation in New York will likely be greater than the national average this year, as the impact of the lost jobs on Wall Street hits" the local economy, Chen says.

Indeed, Ivy Zelman, a former Credit Suisse analyst who was among the first to call a national housing bust, figures that the New York housing market is headed straight down.

"When we look at New York City, we look at a price-income ratio that historically has been four times income, versus three times nationwide," says Zelman, who now runs her own firm. At 7.7 today, that ratio is "significantly higher than normal" because prices have only started falling. "If you want simply to get back to the median, it would be a 46% correction," says Zelman.

She adds: "If I had to pick one market in the country with the most challenge and the most substantive rate of decline [ahead], it's New York City. It has the greatest number of job losses among the higher earners."

Over the years, Zelman's bleak views have earned her the sobriquet Poison Ivy. But other analysts are starting to reach conclusions similar to hers. A recent report by Goldman Sachs suggested New York condo prices would need to fall between 35% and 44% to return to a "neutral" valuation level.

TWO OPULENT DEVELOPMENTS MARKED the apex of the luxury market: The refurbished Plaza Hotel at Fifth Avenue and Central Park South, and 15 Central Park West, a completely new development near Columbus Circle on the site of the former Mayflower Hotel. At one time, both fetched more than $4,000 per square foot, and were snapped up sight unseen on the strength of floor plans, architect renderings, and materials samples.

Both have suffered lately, but one much more than the other.

At 15 Central Park West, one of the most successful launches ever in the city, a 40th floor penthouse owned by developer Amit Ben-Haim recently relisted for $47.5 million. That's down from $80 million last fall when, according to the blog Real Estalker, Alex Rodriguez was interested in buying it. But it's still more than twice what Ben-Haim paid for it last April. And in today's market, that's a strong showing.

Then there's the Plaza. Large, ornate and landmarked -- and beloved by many who read the children's book Eloise by Kay Thompson -- this building has lately been the object of embarrassing litigation. Andrei Vavilov, a former Russian deputy finance minister, sued the building's developer after buying the penthouses without seeing them first and then finding them to be "glorified attic space." The developer, El-Ad Properties, has reportedly settled after a lengthy dispute.

Punch the Plaza's address, 1 Central Park South, into StreetEasy, and you see 29 listings, most above the 12th floor. The price for a three-apartment combination, according to the site, was just cut by $4.1 million, to $42.4 million.

The broker, Carrie Chiang of Corcoran, also represents three other apartments, including a corner-unit for $25.7 million, and two two-bedroom units for $10.8 million each. Chiang claims she has "two major buyers" for the larger apartments, though they haven't signed contracts yet.

A leisurely stroll through open-house showings on the Upper East Side suggests that the inventory in the $5 million-plus market extends well beyond Fifth and Park Avenues. All the way over by First Avenue, for instance, there's the Laurel, a new "green" building with a triathalon center and a $6.1 million penthouse with a dizzying view of the 59th Street Bridge.

Then there's the as-yet-unbuilt Charles, designed by David Collins, architect of the London Hotels. In an office at the site, a buoyant young saleswoman offers cappuccino and enthusiastically displays renderings and touts various amenities like a building sommelier.

The biggest problem is clearly new development, including condo conversions. One such conversion is Manhattan House, an enormous white brick building on east 66th Street that, as its marketing campaign has noted, once was home to Grace Kelly. The developer battled with renters after it bought the building for $625 million in 2005. So far, third of the apartments have been sold.

One of the thorniest issues for the New York market is mortgage availability. Though high-end buyers historically have paid mostly or entirely in cash, more now need to borrow -- just when large mortgages have all but vanished.

Many of the home mortgages in Manhattan are "super jumbo" loans, meaning $650,000 and up. And the key super-jumbo lenders -- Citibank, Chase and Wells Fargo -- have curbed lending because the secondary market for the loans has shut down.

Lenders generally won't extend any mortgage unless half the building's apartments are sold -- an obvious problem for the newer buildings -- and down-payment requirements look to be getting stiffer by the week. For apartments of more than $5 million, it's usually at least 30%, says Melissa Cohn, the president of Manhattan Mortgage, a major lender.

SO WHAT'S TO LIKE ABOUT THE MANHATTAN market? Some extraordinary properties that might not come on the market again for years may be available at cut-rate prices. At 1020 Fifth Avenue, Leighton Candler marked a penthouse down to $39 million; last year, the estate that owned the apartment wanted to price it at $50 million. "We are actually working on a contract," Candler says.

The problem is that nobody knows for sure just how much further prices might fall. "It's a 'cart before the horse' discussion," says Jonathan Miller of Miller Samuel. "Credit has to stabilize and liquidity returned to the market before we can talk about stabilized housing markets and 'bottoms.' ...It will be a multi-year period for things to sort themselves out."

Michael Shvo, the broker for 20 Pine Street, thinks that prices across the city will have to come down further, and credit will have to become more available, before demand picks up. How far will prices fall? "Certain projects will be down 50% from the peak; Certain others will be down 30%." Most, in all likelihood, will be somewhere in between.

Much as sellers might wish otherwise, that's life in the big city.

zelman is a rock star. i love that new york city is at 7.7x price to income. to get to 4x, we need 46% drop. but the interesting thing is that that assumes flat incomes to the peak. i think incomes are going to be impaired for quite a while. so who knows where we end up...

i'll bid $250/ft for 20 Pine...cash!

And this is what I have been saying for how long?

The ratio to rents also indicates a 50% decline.

EVERY indicator indicates the same thing.

Denial is more than a river.

And the foreigners haven't even started selling in mass yet...still the 3rd inning.

Special K, we're, nationally, already below that 4x point and closing in on low 3x. Even at that, we're probably due for another 50%...

http://www.ritholtz.com/blog/2009/02/us-existing-house-price-median-family-income/

Oh yeah, read another good article on a perspective of things in China. Seems they're in the same bubble burst we are; so maybe it's not such a good idea to be waiting for them to come swooping in to save NYC.

http://globaleconomicanalysis.blogspot.com/2009/02/inside-china-sculptors-view.html

And people are still holding on to their dream prices claiming Manhattan prices aren't dropping... let's just all give them a big "I'll see you next year"

I don't know about the rest of you but my deposit money that I had targeted for a condo purchase this year is invested in funds that have decreased by 30% since September. Most condos and banks want 20% down which means that I can't afford the same apartment today as I could last September. Owners are going to have to get real and take the hit just like the rest of us if they expect to find buyers in today's market.

Then: "Buy now or be priced out forever."
Now: "Sell now or get flushed out forever."

vidxprt: If you were going to use that money for a deposit on a real estate purchase, it shouldn't have been in the stock market in the first place. Investment funds with a long time horizon (>5 years) goes into stocks. Money that will be needed in the short term belong in stable, liquid instruments - money market, checking or savings accounts. Duh...

Thanks for your advice iMom, but I wasn't planning on buying something until my current lease was up this coming June. It didn't make sense to pull money out of funds that were doing well at the time. Which by the way have been in those funds for over 6 years now. Don't assume....

Warren Buffett said in 2001 or so that the stock and commodity markets tend to cycle over 15-18 year periods. He implied that the bull market from 1983 was finished for a long time. I don't think it is prudent to use rules like "don't put money in stocks if you need it in 5 years", for example, without taking into account whether we are in a healthy economy and stock market or not. Few were giving that advice in the 90s and for good reason. By Buffet's clock, we could have another six to nine years of lateral stock prices. I'm glad I've paid attention to the Oracle of Omaha.

"don't put money in stocks if you need it in 5 years"

PMG right on target. This simple-to-follow & simple-to-remember rules are made up by people like Suze Orman to teach mostly financially illiterate housewives on the Oprah show. Suze's services are badly needed as we are on our own for retirement & college education, we go from bubble to bubble thanks to greenspan-nomics... women need to be more in charge of their family finances. But those rules are not going to take you far once you know the basics and many are not even true but tend to be better than what otherwise these people would do (shop till they drop).

Anybody knows how is Ivy doing with her own research firm? The news of Meredith Whitney going the same route reminded me of Ivy, she did it more than a year ago already.

Nice article, AnonMan. Thanks for the posting.

One of the interesting things to ponder is whether New York residential prices are just going to what Goldman refers to as a "neutral" valuation level or whether prices go say an additional 15% to 20% below that "neutral" point to an "undervalued" level. Goldman refers to the neutral zone as -35% to -44%. Ivy Zelman refers to the neutral level as -46%.

Real estate "trends" (positive serial correlation) and I'm of the view that it's quite likely that Manhattan values will cut right through the "neutral" zone into the "undervalued" zone. (Prices have obviously been in the "overvalued" zone for a considerable time.)

This'll probably take a long time to play out. I've spoken about the end of 2010 as a possible entry point - but this could easily take a whole lot more time than that to play out. And there's no reason to think thinks will bottom out at "median" valuation levels. The smartest strategy from a "strictly economic perspective" would to actually wait until prices had not only bottomed out but had risen for two consecutive quarters.

I think we've just entered the top of the second inning.

Thanks for the full posting as well, Special K. That helps. (You must be a subscriber.)

i am 250/ft bid cash as well for Pine...

that's a good bid

you should take it...

Median incomes in NYC are skewed unnaturally by rent regulation. There are 1.2 MM rent regulated apartments in NYC that enable school teachers, firemen, cops, etc. to live near their jobs. This is a good thing, but impacts the ratio of median apartment to median income. If you look at the median income of property owners in NYC, not owners and renters combined, I would expect the median income is significantly higher. Not saying we aren't headed for a lot of trouble, just saying that that particular ratio is not as relevant in NYC as it may be in fully market rate regions.

"Michael Shvo, the broker for 20 Pine Street, thinks that prices across the city will have to come down further, and credit will have to become more available, before demand picks up. How far will prices fall? "Certain projects will be down 50% from the peak; Certain others will be down 30%." Most, in all likelihood, will be somewhere in between."

This must mean that Shvo is currently not involved in marketing any projects. By making these statements, he's essentially screwing all the projects he's worked on that still have units left to sell. Get 'em on the way up, get 'em on the way down.

It will be interesting to see how the common charges of the sellers hold up during this lengthy unwinding of inventory. The large price reductions will come from those who want to or can't see the benefit of paying monthly common charges. The developers will be the first to recognize the cash outflow. See The Century and The Wellington on the UES.

"Thanks for the full posting as well, Special K. That helps. (You must be a subscriber.)"

www.bugmenot.com

:)

Its all cap rates. The implied cap rates of the only thing that has price discovery are apartment REITs (some of which own in NYC, but are in general diversified). The cap rates are way up. This means that prices are way down. (Cap rate = current income net of expenses / price).

The NYC apartment prices lag because price discovery takes anywhere from 12 to 24 months for supply and demand to re-equalize at the new price.

Its like someone who's heart has just stopped but their brain doesn't know they are dead yet. It takes time to transmit the information to the brain. The REIT cap rates (and the cap rates for real estate in general) tell you the prices are down. The market will follow with a 12 to 24 month lag.

The rest is just the investors and the brokers giving you marketing hype about how Manhattan is immune, i.e. talking their book.

Interesting article and great comments. I just wonder than, where does everyone predict the cost/sq foot will end up at the bottom of the market?

exactly Budda!

$800 psf or less prime Manhattan - that is, West Village, etc.

2003 prices. 50% below today's unrealistic $1,200 psf or higher.

Wall Street bonuses are NOT coming back like in the past. The party's over.

Very well put, Budda. Had never really thought of it that way.

So, if there's a 12-24 month lag on price discovery, does that suggest that Q1 2010 will be the first point at which the market will be pricing off a realistic set of data?

Manhattan has been stubborn thus far. But the dam is about to break. If you bought over the last 36 months, you are holding onto a depreciating assets that people like Shvo told you would be a appreciating asset.

"The market will follow with a 12 to 24 month lag."

So, any ideas where will prices will be in 12-24 mos?

Buddha- great point, but as you know, some sellers get it now and are trying to beat the downward curve, whereas other sellers are still beating but brain dead.
OTNYC- As a LL in a rent stabilized building, I WISH it were police and teachers and fireman living here. Very few LL in this area (LES) are renting to that type of tenant.

REmama - I am one of the above (with spotless, 820+, credit) and would love to get together with landlords like yourself. Once I can actually afford a studio (and utilities) on a 36k starting salary; that is. Hahaha.

It's looking pretty possible that day is coming back sooner rather than later.

Buddha thank. The question in my mind though is not the delay you speak of, I agree with you on this point, the question is the 12-24 months quoted. Maybe Buddha can fill us in on the source of this information. Is it for instance based on national historical data or local to NYC. Can you give us a bit more Buddha..Thanks...

maybe $260/ft for 20 Pine?

I'll take two thank you AnonMan2002. Does anyone really think that you will be able to buy anything in Manhattan for 2x that amount/sq/ft in 12 months? Unless there is another unforeseen huge downturn besides the anticipated "corrections" over the next 12 months, prices should slowly drop down about 35% from their average highs as people walk away from properties (foreclosures), banks deduct the equity and perhaps take another 10% loss at auction, but not much more than that. They would rather sit on the property before they would take a loss. (in my humble opinion).

I'm writing from California, where a friend has just signed a contract for a little over 300K on a repossessed huge house that sold for 800K a mere 3 years ago. Even in NYC, the banks can only sit on so much property. We have no notion how large the NYC correction will likely be.

OMG! Who wants to live at 20 Pine. It's ghost town down there at night. LAME.

some condos in miami which sold for $500k+ are now for sale around $150 ask.
figure you can prob get it for $130 cash or so

vidxprt - are you saying in 12 months that the price suggested by AnonMan will be at least 520 sqft? Are you referring to the banks when you indicate 'sitting on the property... If you referring to the owner it would depend on whether they can sit on it.

Also need to factor in the declining rental market as it is now getting cheper to rent than to buy which will also affect the ability of owners to hold onto their properties as the current rent rates will not cover their monthly costs.

Most independent owners and investors don't "own" their properties, they let the banks do that for them and generally when the equity in that property is high enough those independents will go for an equity loan. So it would be rare to find someone that owns property with more than 50% equity at stake and enough cash on hand to take a further loss without going bankrupt.
Remember that anyone that purchased property as early as 4 years ago with 20% down have been paying down the interest on their mortgages with very little paid toward the principal, not building equity with cash, just on paper. Yes, purchase prices were lower 4 years ago but aren't we already starting to see sales prices at 2005 rates in places around town?

Blogo,

Some people like the fidi. I loved living down there for the couple years I was there. It's nice to come home to some quiet. I liked nothing better than watching the Yankees game on saturday afternoon with the windows open and hearing......nothing. The world is a 2/3 ride away.

As for Miami and far they fell, look at www.miamicondoinvestments.com he has some good chart porn. He actually created his own index for downtown.