11/21/08

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Will high-end be next to fall?

The luxury real estate market in New York City has been credited by some for bolstering the rest of the market in the five boroughs, but economists and real estate experts disagree about how long the phenomenon can last.

While some point to double-digit percentage price gains in the multi-million-dollar apartment market, others say the reporting lag time is distorting those increases — and predict that the credit crunch will put the brakes on the activity, if it hasn't already. So the question remains: Will the luxury market take a hit anytime soon?

Jonathan Miller, executive vice president and director of research for Radar Logic, called reports of a demise in any sector of the Manhattan market a "tremendous mischaracterization."

The numbers, he claimed, just don't back that up. He noted that the overall median home price for the fourth quarter in Manhattan rose 6.4 percent over 2006, from $799,000 to $850,000. The numbers were even more dramatic for the luxury market, which Miller defines as the top 10 percent of the market, currently apartments selling for $2.76 million and up.

Median luxury prices were up a whopping 28.4 percent, at $4.3 million compared to $3.35 million for the fourth quarter the prior year, he said. What's more, those apartments sold faster, staying on the market just 117 days, compared to 151 days in 2006.

Average marketing time for the overall market in 2007 was 131 days, Miller said.

"A tremendous amount of money is still flowing into the real estate economy," he said. "As far as the luxury market goes, whatever indicator you use, whether it's average price, price per square foot, whatever — it's all up about the same. That means it's not a fluke."

The resilience of the luxury sector probably won't surprise most long-time New York City real estate watchers. It's traditionally been among the market's strongest segments and has been known to prop up overall numbers even in bad times.

But some warn that things may not be quite as sunny as they seem. And, they say, the city is unquestionably headed for a fall.

Robert Von Ancken, executive managing director at Grubb & Ellis, noted that statistical data inevitably lags behind what's happening on the ground by a couple of months, since sales numbers are recorded at closing, not when the actual deal is made. That would make the fourth quarter numbers a more accurate reflection of September and October than of November and December.

Von Ancken said that market activity has slowed since the fall, though prices have not yet dropped.

"We haven't been able to discern any downward movement, but I'm sure the number of units on the market has dropped," he said. "People who own these particular apartments don't have to sell. They could sell, but they don't have to. So they don't want to drop their prices."

He added, "Until this credit crunch is over or moderates, I don't see a lot of action in the super luxury market."

Nouriel Roubini, a former treasury department official and a professor of economics at NYU, predicted New York City's housing market is heading for a fall across the board.

"A lot hinges on what's going to happen in the economy," Roubini said. "We're now facing a national recession. And this recession is going to be much more ugly and protracted than the one we had in '91, which lasted for eight months. I expect it to last four to six quarters."

He predicted that job losses on Wall Street will "accumulate over time," demand will falter and prices will fall. In fact, argued Roubini, the impact of adverse conditions may already be taking hold.

Roubini said that because prices have "risen so much in recent years, people can sell for more than they bought their homes for. But compared to peak or shadow price a year or two ago, price has fallen."

Still, a number of factors continue to work in favor of the market. Despite widespread reports of impending layoffs, last year's bonus pool on Wall Street was down a mere 2 percent, making it the second highest bonus pool in history. The weak dollar, meanwhile, has continued to feed an influx of foreign money from buyers looking to take advantage of the exchange rate.

Perhaps the biggest advantage is a limited inventory for high-end homes. Jacky Teplitzky, an executive vice president at Prudential Douglas Elliman, argued that there's a "huge shortage of apartments in the $5 million-and-up price range."

"I have a foreign buyer landing tonight looking to buy anything $8 to $10 million and, basically, I only have five apartments to show him," she said late last month. "A lot of people have the misconception that we have hundreds of apartments at that price, but we actually have very few apartments."

Sharon Baum, a senior vice president at the Corcoran Group, echoed that point. "The main word for the prewar luxury market, the very high end, is just that we cannot get enough apartments," she said. "I have several clients who would spend anything for an apartment on Fifth Avenue, 5,000 square feet or bigger, clearing the trees, with unobstructed views of the park … we cannot get these. There's so few of them."

Even for the $2 to $5 million homes, Baum said, "we still have everybody wanting to own something in Manhattan. Will that change? I don't know. But interest rates are so favorable now, and there are still plenty of people getting good Wall Street bonuses. So I think that we will end the first quarter strong, and we'll end the second quarter strong."

Barry Hersh, associate director of the Steven L. Newman Real Estate Institute at Baruch College, said he expects conditions to change and that "no market is immune."

"I think there are going to be fewer bonuses on Wall Street," he said. "Yes, there's foreign money. But the European and Asian money coming in is completely discretionary. It's not somebody who wants to live here, so they have a negotiating strength. They could say, 'I'll just stay at the Waldorf.'"

That prediction doesn't worry high-end brokers like Baum and Teplitzky.

"Even thinking back to October 1987 when the stock market crashed," said Baum, "everything went down, but the luxury market, the high end, went down last, went down least, and then when the market started turning around, as always, brought the rest of the market up with it."