The Morgenstern Report - Volume II June 4, 2007

THE MORGENSTERN REPORT

Quick Stat*
1st Quarter 2007 - Average Sale Price of a Manhattan apartment - $1,290,391
Down .8% from one year ago – 1st Quarter 2006
up 5.4% from prior qtr. – 4th Quarter 2006

As discussed in the last Morgenstern Report, the market got off to an impressive start in 2007 with a substantial increase of 5.4% in the average price of Manhattan apartments in the first quarter. We witnessed the kind of buying frenzy and bidding wars typically associated with massive inflows of money without a significant increase in inventory. The second quarter showed continued strength, and I expect another increase in the average price when the second quarter results are published.

As has always been the case in Manhattan, the strength of the real estate market is being driven by the financial markets. The Dow Jones Industrial Average has been hovering above 13,500 for the first time ever, IPOs are on the rise and M&A activity is robust. As a result, early forecasts suggest another season of big bonuses. No matter that interest rates might inch up, oil prices soar and the sub-prime mortgage market is in crisis mode. With hefty bonuses on the horizon, the Manhattan real estate market is poised for another good year.


The Gap Widens

The gap between the Manhattan real estate market and other real estate markets around the country continues to spread. The outlook for the residential market nationwide remains bleak. Inventory outside Manhattan exceeds demand, the lead times between listings and sales are lengthening and discounts from asking prices have become widespread. The sub-prime mortgage problem has yet to bottom out as defaults and foreclosures continue to rise. I believe the real estate market outside Manhattan will get worse before it gets better.

The good news for Manhattan owners is that we have not witnessed any of those problems. Worries about the potential effects of the sub-prime lending problem on Manhattan real estate prices are beginning to sound like the worries about the bursting bubble in 2005, a lot of talk with little to back it up. Demand in Manhattan is strong, buyers are bidding and the supply of properties in the most desirable neighborhoods has not come close to meeting the growing demand.

There are two reasons the sub-prime mortgage problem is not affecting Manhattan real estate. One has to do with the financial profile of the typical Manhattan apartment buyer. It is no secret that Manhattan attracts some of the country's wealthiest and most creditworthy homeowners. The second reason has to do with what buyers are actually purchasing. Since cooperatives still constitute more than 70% of the Manhattan real estate market, most buyers purchase coops, which require a minimum down payment of 20%. In addition, coops' board requirements for acceptance are far more stringent than those of any lending institution. Though I disagree with Federal Reserve Chairman Ben Bernanke's recent claim that "we do not expect significant spillovers from the sub-prime market to the rest of the economy or to the financial system," I do believe that there will be no or a minimal spillover to Manhattan residential real estate prices.


Prewar, Postwar, Post-Millennium


Manhattan apartment listings are invariably categorized by the building's period, i.e. prewar or postwar, and by ownership structure (type), i.e. cooperative, condominium or condop. I believe that these categories no longer accurately capture the market and that we need a new category to portray new construction in Manhattan during the past decade.

Prewar is used to define apartment houses built prior to World War II. The term prewar refers not only to the date of construction but also favorably connotes certain attributes of a building's facade, architecture, apartment layouts, ceiling heights and other details that affect resale price. The residual of that category, postwar, is used to describe any building created after 1945. These buildings have more of an emphasis on maximizing space. Layouts were changed, for example, from the “classic 6” (which is a 2 bedroom, with a living room, dining room, kitchen and maid’s room) to a full three bedroom in a similar sized space. Square footage was reallocated, from hallways, foyers and formal dining rooms, to a larger bedroom count. The architect's role in the development process, in terms of the façade, took a backseat. Buyers will get more space for their money as buildings of this vintage tend to sell at a discount to prewar units of comparable size.

But since the mid-1990s, we have entered a new period in Manhattan construction for which the term postwar, with all its associations, is no longer appropriate. Buyers have become more educated as the supply of new apartments continually increases throughout Manhattan. Architects have again become more significant in New York Real Estate, often acquiring star status. Perkins Eastman, Cesar Pelli, Robert A.M. Stern and less well-known but equally talented architects have placed their stamp on the city to everyone's lasting benefit. Below are some examples of Manhattan residential architecture that is pushing the envelope. This new kind of building must be classified differently from the structures erected in the 1960s and 1970s as the prices of apartments within these buildings are certainly trading in a different stratosphere.

One Beacon Court - Cesar Pelli

15 Central Park West - Cesar Pelli

Many of these new buildings present interesting facades, combining different materials and detail, while the apartments in them enjoy gracious foyers, flowing layouts, abundant closet space and inviting windows, allowing light to flood the space. How, then, can we categorize a building like 170 East End Avenue or the Time Warner Center? Once the units are resold, they can no longer be called "new construction." But if not "postwar" or "new construction," then what? There is no perfect date to use as a watershed since several groundbreaking new condominiums were built in the mid and late 1990s, but I think that this new, architecturally driven type of building should be dubbed "post-millennium." That category will cover most buildings exhibiting a commitment to architectural excellence and homeowner comfort built in the late 20th and early 21st century. Have a wonderful summer.


Any questions, contact me.

Warm Regards,

Robert Morgenstern

*Statistics obtained from Miller Samuel 1st Quarter 2007 Report, available at http://www.millersamuel.com/

** For an online version of this and prior issues, visit http://www.morgensternreport.com/

The Morgenstern Report - Volume I, February 27, 2007

THE MORGENSTERN REPORT

Quick Stat*
4th Quarter 2006 - Average Sale Price of a Manhattan apartment - $1,224,840
up 3.2% from one year ago - 4th Quarter 2005
down 5% from prior qtr. - 3rd Quarter 2006

My Stance
The NYC housing market has turned a corner after a dip in the summer and fall of 2006. The market was spectacular in 2004 and 2005 as prices rose to unprecedented levels. Late in 2005 and early into 2006 sellers began to price their homes assuming the market would continue to grow at that same 20% annual rate of growth, and as a result the market became flooded with overpriced inventory.
As the national housing market slowed through the fall of 2006, the media became enamored with the term ‘bubble’ in describing the Manhattan market. However, it was clear to me that the listings that were priced correctly were still selling. Alternatively, the listings that were priced too ambitiously by sellers looking to cash out if someone ‘hit their number’ were sitting. This standoff, with sellers not willing to budge from their asking prices and buyers unwilling to increase their bids, created an increased demand for rentals, and therefore a fantastic market for landlords as lease prices skyrocketed.

There is nothing like $24 billion to get the market moving again! Since early December, the announcement and subsequent influx of Wall Street bonus money has devoured much of the reasonably priced inventory in prime locations. At the same time, it seems that the housing dip which occurred in the summer and early fall was a wake up call to overzealous sellers and brokers insistent on overpricing their apartments. They began to realize that pricing their apartments accurately was critical to selling a home in a timely manner. The bonus money that flowed into the market this past January combined with more realistic asking prices has heated the marketplace once again.

In fact, a New York Times article published on February 19th quotes Jonathan Miller of Miller Samuel, a leading appraisal firm, who says “The number of contracts signed this January was 19.4 percent higher than in January 2006.”

By the numbers:
According to Miller Samuel, the current average price of a condominium is approximately 39% higher than the average price of a cooperative. I think there will always be a gap due to a few facts: condo buyers don’t endure as stringent of a board approval process; condos generally require lower down payment requirements; and condos allow owners to lease apartments at their own discretion. But the reason the gap has become so large is that the vast majority of buildings being constructed in Manhattan are Condominiums, and the premium that new units command has widened that gap. If new construction were to slow down, I believe that gap could close back towards 30%.


Please feel free to call me with any real estate related questions at 212-371-2525 ext. 234.

Warm Regards,

Robert Morgenstern

*Statistics obtained from Miller Samuel 4th Quarter 2006 Report, available at http://www.millersamuel.com/