Manhattan real estate in freefall

This week’s Barron’s magazine highlights the abysmal state of the Manhattan real estate market. Manhattan was one of the last bubble markets to burst. Now, things are unraveling quickly, particularly at the high end. Some experts see another 30% down before the carnage is over. The trigger for the bubble’s bursting came in the form of Lehman Brothers, making the NY real estate market another reminder of how badly the Lehman situation was handled by Paulson, Bernanke and Geithner.

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., 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.

Expect very steep declines in the future as this related video predicts.  The following passage from the Barron’s article, quoting Ivy Selman gets to the heart of why prices must decline.

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.

Manhattan on Sale – Barron’s (subscription site)

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