Sales in the third quarter of '08 are down about 24 percent, developers are cutting prices, signed contracts are being canceled and unsold listings are increasing. Tighter credit standards decrease the number of potential buyers.
Perhaps most importantly, the city is expecting a cut of about 40,000 financial jobs, the impact of which will be felt next year. Yes, these are tough times for Manhattan real estate and things will only get worse before they get better.
Only a year ago, Manhattan was thought to be insulated from the nationwide real estate crisis. While California, Florida and Nevada were experiencing double-digit price declines, Manhattan prices kept increasing. According to Miller Samuel appraisers, average price per square foot in the first quarter of ‘08 increased to $1,289, up nine percent compared to the fourth quarter of ‘07. This was partly driven by demand from foreigners who came to buy Manhattan real estate because of the weak US dollar. All of a sudden they could afford Manhattan and people from Europe were taking weekend trips to shop for real estate. Manhattan is regarded as a brand in itself. It’s the Louis Vuitton of real estate. The latest data by Miller Samuel shows average price per square foot has decreased to $1,193.
Number of sales decreased 24 percent compared to a year ago. Given pending job cuts and list of factors mentioned above, I expect further price declines over the next year.
So how much does the Louis Vuitton of real estate cost? For readers overseas, the median price of a studio condo in Manhattan is about $600,000, a one-bedroom about $850,000, a two-bedroom about $1.6 million. In context, the average price of a house in the United States is only about $190,000. Some question whether the current real estate crisis means a return to the late 1980s when inventory was at a high and sellers could not give their properties away.
However, there are several differences that make this crisis different from the late 1980s. Firstly, interest rates now are very low compared to the double-digit rates back then. This is a positive sign for businesses and potential buyers requiring financing. Inventory right now is also much lower than in the 80s. Also, the low crime rate now makes Manhattan a more desirable place to live relative to back in the late 1980s, when subway trains were filled with graffiti.
Why Manhattan is So Desirable
Firstly, Manhattan is an island, which means there is a limit to how much new supply can be built. In other parts of the country like North Carolina and Texas, abundant land means developers can keep building further and further away from the city center. Here, supply is limited because land is limited.
Secondly, owning a piece of Manhattan is a status symbol. In this status-conscious city, having an apartment in Manhattan creates a positive perception. The vacancy rate here partly reflects the desirability. As result of this crisis, a major firm reported that vacancy rate increased to 1.7 percent. In context to the U.S. average apartment vacancy of about 6 percent and single family housing vacancy rate of 10 percent, Manhattan’s 1.7 percent is still quite low.
In conclusion, Manhattan real estate is experiencing a downturn. A lot of finance jobs, the driver of the Manhattan economy, will be lost and the worst is yet to come. Contrary to previous beliefs, Manhattan is not immune to the larger economic factors. For fortunate ones with ample funds to invest, the coming year may present an opportunity to buy Manhattan real estate at favorable terms. In the next year, after the real estate market really feels the impact of the job losses and sellers overcome their state of denial, prices will come down further. Another reason is that the real estate cycle typically lags behind that of the stock market. We saw the Dow reaching lows not seen in years. Manhattan real estate will be next and I see prices decreasing in the near future.
Weimin Tan is a real estate entrepreneur involved with investments, brokerage and property management.