Gea Elika

As the subprime crisis only gets worse, the nation's housing market is set to suffer the same ignominious fate as it did in 2007. Last year was the worst year for the national housing market since the Great Depression, and the subprime crisis is beginning to give America's financial markets a reputation as the world's chief exporter of recessions. 2008 is expected to be as bad, if not significantly worse.

A number of housing markets, however, have remained strong during this time. That being said, the Manhattan real estate market is the only major market that could still feasibly be characterized as a bull market.

Even here, most of the market has reached a standstill, neither advancing or retreating in a particularly stark way. However, the highest of the high end New York apartment market has continued to push forward, with a number of positive developments and new buildings coming on to the market.

The significant growth in real value of the New York City apartment market is largely thanks to the housing Coops that most free market-loving economists typically deride. Their stringent regulations effectively sheltered the market from the direct impact of the subprime crisis. As such, the rest of the market has held steady, allowing the advances in the high end market to create a significant uptick in the overall value of the Manhattan real estate market.

The statistics showing this large increase in average value during the first quarter of 2008 are not particularly important unto themselves. In the context of Bear Stearns' collapse, however, they were a surprising piece of positive news that has kept confidence – the life blood of any market – alive and well in the New York City apartment market.

The rest of the New York City market, however, is not faring as well. While high end markets outside of the borough are doing well, more middle class neighborhoods are feeling the effects of the national economy more acutely. Queens, for instance, saw a 12% year-over-year decline in average prices for the first quarter.

The Bronx and Staten Island, meanwhile, saw smaller declines in average prices.

As the national economy worsens and the rest of the city begins to be pulled down by the national real estate market, the resilience of the Manhattan market will be tested.

Whether or not it passes that resiliency test remains to be seen. If any place can, it's Manhattan. The result of that test seems to be dependent on the fate of the city's vaunted financial services industry. If there are more Bear Stearns, no market can hold up against that pressure. If we've seen the worst that Wall Street incompetence has to offer, than Manhattan may just be an island of steady value in a sea of turbulent prices.

The first quarter numbers are in for the Manhattan real estate market, and old records have yet again been broken. While the numbers seem surprisingly positive, the overall picture is more complex.

Average home prices were up roughly one third, or 33.5%, over last year's numbers. All told, the average price of a Manhattan apartment has risen to an astounding $1.7 million.

There are several warning signs for the New York apartment market, however. There is a growing disparity between Manhattan prices and the rest of the city's real estate market. More importantly, while prices have remained high, sales have slowed significantly.

Furthermore, Manhattan's record average price comes largely from several new luxury condominium buildings that went on the market last month. In all, 71 apartments were sold on the island for more than $10 million during the first quarter – a number that far outpaces the average figure for Manhattan.

However, what is most troubling about the numbers is the timing of it all. While the first quarter was a surprising success in terms of average sales prices, inventory was starting to increase significantly before the Bear Stearns episode, which presumably put a significant chill on immediate demand for luxury New York City apartments.

Indeed, the very presence of record average prices in the 1Q may end up causing some alarm when the 2Q numbers are released.

A significant problem in analyzing the potential impact on the New York apartment market of the evaporation of Bear Stearns lies is in the differing empirical data sets from Manhattan's major real estate brokers. According to Prudential Douglas Elliman, the number of sales declined 34% during the first quarter. Two other real estate firms recorded a drop of low single digit percentage points.

If the Prudential Douglas Elliman’s number are correct, then that could spell trouble for the market: a sharply declining rate of sales is then combined with a major disaster like the closing of one of the city's largest private employers. Whereas if the less dire assessments prove true, then it seems likely that the downturn will not lead to a full scale retreat of prices.

In all, the 1Q numbers are more positive than many predicted. However, unmistakable signs of a slowing market can be seen in all three of the major reports released so far. How the Manhattan apartment market reacts to Bear Stearns will be the next major determinate of the near-term future of the market.

If you are looking to buy a New York apartment – especially a luxury apartment – you are already familiar with the disconnect between Manhattan's real estate market and the national market. While most markets are currently in free fall, Manhattan's prices have remained both incredibly high and incredibly resilient. Though some of the market has faced downward pressure on its prices the luxury New York City apartment market seems almost fully separated from the rest of the economy.

Everyone that works in the luxury New York apartment market already knows that, and it's nothing new.

That being said, the fed's “beige book” – published last week – almost makes that separation official. Talking about the entire country's real estate market in its general introduction, the report singles out Manhattan: “Districts that reported home prices all saw overall declines; one exception was the Manhattan co-op and condo market, where prices increased 5 percent compared with a year ago.”

This is held in stark contrast to the rest of the country. Indeed, even most of the other typically-hot markets took hits recently: “Residential real estate markets were generally weak over the last couple of months,” according to the report. “Sales were low in every District with very few local exceptions. Sales declines were particularly large in the Boston, Minneapolis, Richmond, and St. Louis Districts; at least some respondents in each of these Districts reported drops in home sales of more than 20 percent year-over-year.”

The beige book – or “Current Economic Conditions” report, as it's officially called – is based on interviews by each of the twelve Federal Reserve Districts with bankers and industry leaders in each of district's most important sectors. Tighter credit and worries about the subprime crisis effected the vast majority of industries.

Eschewing the typically guardedly optimistic language of the report, the first sentence is a simple, brutally honest statement of fact: “Reports from the twelve Federal Reserve Districts suggest that economic growth has slowed since the beginning of the year.”

As the national economy worsens – about 90,000 jobs were lost in the past two months alone – the stark separation between the New York City Real Estate market and the rest o the country is good news for the city as a whole, if not for those who are seeing declining wages but still-huge housing bills.

Those interested in the luxury apartment market, however, should feel exceptionally lucky: They are in the hottest market in the country right now.

While the Manhattan real estate market has sustained itself incredibly well over the past several years, the second half of 2008 is facing a significant possibility of a notable slowdown in market activity.

As signs of the city market's connection to the national market began to show in late 2007, the fall off in demand mainly effected secondary factors like negotiation times and frequency of bidding wars. However, as 2008 continues on, and the national market shows no signs of improving – and, indeed, may even worsen further – prices in the New York apartment market may begin to lag.

Furthermore, the very success of the NYC real estate market has led many sellers to conclude the market is near-invulnerable. This may lead to “sticky” prices – an economic term, surprisingly, that refers to a situation where suppliers do not adjust prices to shifts in demand with adequate speed.

This price stickiness could lead a further drop off in market activity that could adversely effect demand levels.

Last quarter's numbers soothed much of the worry about the Manhattan apartment market. Though much of it was concentrated in the luxury market, significant growth in prices was seen across the board.

However, the likelihood of a downturn has grown significantly in the past several months. For instance, one analyst, quoted by Reuters, said that the market is “definitely going to see weakness.”

Fortunately for those interested in the luxury market, it is doubtful that values would recede considerably. While there certainly will be a significant reduction in the growth of average prices, it is doubtful that anything but a very deep recession would could lead to an actual drop in average prices.

The luxury market, for instance, shot up roughly 17.6% in value last quarter. This is compared to just under 7% for the market as a whole.

Furthermore the luxury New York City apartment market, even more so than most luxury markets, is relatively immune to the national business cycle.

This general strength is counter-balanced, however, by the current dire straights of the US financial industry centered in the city. Of course, profits would have to be truly terrible in 2008 in order for it to curtail the salaries and bonuses of those in the financial industry that make up so much of the demand for luxury apartments here.

It is unlikely this will happen. More probable, however, is that some financially savvy employees at financial firms will try to wait out the recession before buying a home.

At any rate, demand will drop of significantly. Not however, critically: Luxury home values, buoyed by the weak dollar, will probably see little if any decline in during the year.