This past year of 2007 will be remembered as the year of pervasive and far-reaching credit and debt woes—the year when Manhattan real estate sidestepped a severe nationwide housing slowdown with few, if any, scars. Originating in the subprime financing markets, the crisis underscored the complexity of interconnected financial markets worldwide and the resilience of our city’s residential marketplace.
In the last half of the year particularly, as the credit meltdown deepened, widespread reverberations contributed to layoffs and bankruptcies and caused huge swings in stock prices. A decided shift in buyer mood and activity emerged. Uncertainty led to indecision and often to inaction, and the pace of trading slowed. As exuberance and urgency exited, some waited on the sidelines in no hurry to purchase, not wanting the distinction of being the last to purchase at the top of the market. Other buyers, always conscious of value, stepped up cautiously to seize opportunities. There are scores of recent examples of properties being absorbed quickly and going to contract at top prices in competitive bidding: consider the 12 room prewar at Park and 78th Street that sold in 24 hours over the $12 million ask; or the 3 bedroom on East 79th Street with a $5 million price tag that attracted more than 10 bidders; or the 2 bedroom West 70’s 1920’s co-op that realized greater than 10% over the $995,000 ask.
Unlike the rest of the country, on the island of Manhattan, the pivotal issue at hand is less about mortgage rates and obtaining a loan, and more a concern with what the big bonus picture will look like for financial professionals this winter. Last year, those in the financial services industry collected spectacular sums, exceeding the bonus bonanza of 2005 by nearly threefold.
This year, according to a recently released compensation report by The Options Group, a global strategic consulting firm, bonus payouts will be lower for fixed income professionals as well as for mortgage-backed securities and structured credit professionals; but they will be about 10% higher for investment bankers and equity derivatives traders, and as much as 20% higher for commodities traders. While some have suggested that bonuses this year will include more restricted stock in lieu of cash awards, The Options Group predicts that many companies will raise their stock compensation component to motivate top performers and keep them from leaving for competing firms or hedge funds.
This January when financial professionals gather specific information about their bonus amounts, their focus will clear. Those who have been sidelined since August will prepare to act. If inventory remains low, it won’t take many buyers to absorb the existing scarcity of product, and the laws of supply and demand will continue to govern the economics of real estate transactions in our city.
A close look at the marketing history of recently sold properties demonstrates a number of compelling realities: if a property sold within its first 6 weeks on the market, then the price realized was either close to asking, at asking or over asking; however, if a property failed to sell within its first 6 weeks on the market, then there were 2-4 price reductions before it closed two or as many as eighteen months later. From this, one can infer that today’s buyers are not bidding if the asking price is a stretch, and they are not reaching beyond their budgets, even though money remains cheap, with rates holding at about 6.5%.
Now that reckless lending and excessive spending are things of the past, perceived value is more important than ever. Sellers are counseled to set realistic prices and to adjust their expectations for how long it takes to sell a property. In many cases, an average 120 days on the market, while stressful, is not unusual. Confounding conventional wisdom that says a property that lingers on the market tends to devalue itself, are those examples of properties that have stayed on for months, and then when two buyers become interested, the property achieves the asking price or very close to it.
Because prices are no longer accelerating, the number of U.S. investors in our market has declined, as more patient money is required. In their stead, foreign buyers are displaying huge appetites for Manhattan condos, and increasingly, Manhattan real estate is an attractive vehicle for investors from Asia, Russia, Europe and the Middle East. With gold at an all time high, oil approaching $100 a barrel, and an already battered dollar decelerating even more, New York proves to be relatively inexpensive compared to other international cities like London and Paris.
Despite an inventory pile up and a rise in foreclosures across the U.S., the Manhattan market remains steady, and analysts forecast that prices will gain a modest 5% a year for the next three years. This month as we return from holiday recess, which for some began with an early Thanksgiving, we look forward to new offerings and to those properties returning to market after a temporary respite. Barring the unforeseen, we expect a balanced trading season ahead.