In Manhattan, ground zero of the global credit crisis, the housing market is beginning to feel the effects of the disaster that Wall Street helped create. While condo prices have risen slightly over the past year, sales volumes have plummeted, and many analysts predict that New York is feeling only the first tremors of what will eventually be a historic real estate meltdown.
According to CNN Money, in the first quarter of 2009, the median price of condos and co-ops in the city rose six percent over the previous year. While this would be a reasonable gain in almost any market, it is a major slump for a city in which double-digit yearly price increases have become the norm. Beyond that, one of the major factors keeping the real estate market afloat is the fact that apartment size is increasing; figure that in and over the past year the price per square foot has actually dropped by more than two percent.
Wall Street's gargantuan bonuses, which only recently came to national attention, poured an amazing amount of money into the city's real estate market over the last decade. For example, when bonuses rose 114 percent between 1998 and 2000, condo prices rose 51 percent. This price inflation created unrealistic expectations; indeed, even now, owners who bought when the market peaked still expect to make a profit on their investments. At the same time, new buyers are increasingly convinced that the market hasn't sufficiently corrected yet, and are either waiting to buy or are making offers that seem obscenely low to the (perhaps delusional) sellers.
Ironically, the profession that fueled the real estate boom has become something of a liability. Hedge fund managers, whose outrageous paychecks sent the prices of real estate through the roof, are now being blacklisted by co-op boards that are concerned about the hedgies' long-term employment prospects.
This also points to a bigger problem: even as real estate firms are dropping prices and offering incentives, they are finding fewer and fewer qualified buyers. Toll Brothers, a Pennsylvania-based home builder that is heavily invested in the New York market, slashed prices by 25 percent and offered a 3.99 percent mortgage interest rate promotion in January -- but managed to find only two dozen interested buyers. Over the past few years, the company heavily marketed its listings to a customer that it calls "hedge fund Johnny"; recently, however, it's finding that Johnny isn't quite the sure bet he was in 2006, when Toll opened its first Manhattan condo tower.
Another problem is tied to quality of life issues. Taxes on fat Wall Street bonuses funded a variety of services, including the city's extensive public transportation system. As bonuses have dried up, New York has instituted what some call a "doomsday plan," threatening to raise fares by 25 percent while cutting bus lines and subway service. For a city that relies on public transportation to survive, the cuts are devastating, and may convince many city residents to seek their fortunes elsewhere.
As New York real estate seeks bottom, firms that are heavily invested in New York real estate are also going to feel the pinch. Audit Integrity's Jim Kaplan has suggested that Goldman Sachs, Morgan Stanley and New York Community Bancorp will be particularly hard hit over the next year. In other words, for both New York homeowners and those who have invested in the city's high-priced real estate, the worst may be yet to come.
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