Housing bust hits Manhattan

NEW YORK (CNNMoney.com) -- The national housing slump is finally crashing at the shores of Manhattan island, which had its worst quarter in years, according to several industry reports released on Thursday.

The big hit was seen in sales volume, which plummeted 48% in the first quarter of 2009 compared to the previous quarter and year, according to data compiled by Jonathan Miller, of appraiser Miller Samuel, for Prudential Douglas Elliman.

The primary reason given was the gap in expectations between house hunters and sellers. "That's really showing the huge ocean that separates them," he said. "Many sellers left their prices too high for too long. We had a lot of long negotiations that ultimately led nowhere."

Lately, he added, sellers have capitulated but buyers have not: "Now our problem is that buyers have gotten too aggressive. Their offers are unrealistic and that can be a turnoff for sellers."

Meanwhile, the median sales price of all condo and co-op apartments sold rose 6%, to $907,500, in the first quarter of 2009 compared to the first quarter of 2008, according to New York City brokers Halstead Property and Brown Harris Stevens. Prudential Douglas Elliman's report showed an increase of 3.1%, to $975,000.

During the boom years, Manhattan was churning out double-digit price increases, with a 20% jump, for example, during 2005.

The Corcoran Group was the only broker that reported falling prices, noting that the median sales price of apartments tumbled 2%, to $925,000.

Where prices are dropping is in the co-op market, which saw a 13% decline in median sales price in the first quarter compared to the last quarter of 2008, according to the Elliman report. Miller believes this is more reflective of the "real market" because co-ops sales are almost always existing homes, whereas most new home sales in Manhattan are condos.

And, in fact, it was sales of new condos that skewed overall market prices higher. The median condo price rose 9.6%. The average size of apartments in these developments was nearly 1,700 square feet, 40% larger than last year. That, combined with a record market share of 43%, pushed up overall average prices.

The price per square foot, however, declined by 2.3% for all apartments to $1,289, compared with a year ago, according to Elliman. Corcoran reported it dropped 6% to $1,158.

Manhattan prices are still so high that many buyers have to finance their purchases with non-conforming loans - jumbo mortgages. This market segment froze up for months with lenders reluctant to issue loans to all but the lowest-risk borrowers.

"The tipping point was in September and was largely triggered by the bankruptcy of Lehman Bros. and bailouts of AIG, Fannie Mae and Freddie Mac," said Miller. "This marked a sharp contraction of credit, greatly restricting demand as participants had more difficulty obtaining financing.

"Plus," he added, "unemployment related to credit markets affects Manhattan disproportionately because many high-wage earners there work in that industry."

Not only were there many layoffs on Wall Street, there was also a substantial reduction in bonus money paid by investment banks, down 44% from 2007.

Wall Street, even after it recovers, will likely to never be quite the same, which could lead to a permanent restructuring in high-end housing.

"Already," said Greg Heym, chief economist for both Halstead and Brown Harris Stevens, "there's been a decline at the highest end of the market, $10 million and above, a big drop in sales."

Big, indeed, with 87% fewer closings than during the first quarter of 2008.

The Manhattan market's recovery will be driven by first-time buyers and low- to mid-level buyers, those paying $1.5 million or less, according to Diane Ramirez, president of Halstead Property.

"There are a lot of buyers [in that range] who had been priced out of the market and who are making sure they get in this time," she said.

As an example, she told the story of a woman in her mid-40s who previously had not looked into purchasing anything bigger than a studio; it was all she could afford.

"Now," said Ramirez, "she bought a one bedroom and she's absolutely delighted."

The lower prices are giving aspiring New Yorkers reason to hope, according to Corcoran Group's Liebman.

"The silver lining is that people can move to Manhattan again," she said.