Surprising some analysts, prices continued to rise in the 3rd quarter, according to recently released numbers. The average sales price in Manhattan climbed by 8.1% to roughly $1.5 million. The average price per square foot increased 4.1%.

The disparity between the two numbers is a reflection of the fact that new luxury apartments fueled much of the price increase in Manhattan.

These numbers however, are incidental in comparison to the changes in inventory and the number of sales.

Manhattan saw a decrease in sales volume of 24.1%. While some of this decline is surely buyers sitting on the sidelines while the macroeconomic situation sorts itself out, the larger portion of the decline likely comes from a longer-term softening of demand.

The national recession and the current financial market madness plays are both major factors in the reduced demand the New York real estate market. Today the Dow briefly dipped below -800 for the day before rallying back to close at a 3.8% loss for the day.

It is hard to imagine many buyers seeing a -800 next to the sign for the Dow Jones Industrial Average on CNBC getting up from in front of their TVs and saying, “Well, honey, let’s go real estate shopping.”

Similarly, today was especially bad news for NYC real estate market in terms of foreign demand, with the euro falling to its current level of $1.35.

Still, it’s important to not confuse the dramatically horrid news of the past two weeks with the current state of the New York City real estate market. Today’s events were not in response to new events so much as the world’s financial markets waking up to the fact that Europe’s major economies are also in serious trouble, just as much as the US is.

No one – other than, perhaps, John McCain – would say the “fundamentals of the market are strong” when talking about the short term of the NYC real estate market. In many measurements of the market’s 3rd quarter performance – especially those including surrounding suburbs – the year-over-year numbers saw a significant increase, but the quarter-on-quarter numbers showed an equitable decline. That’s always a bad sign in terms of the capacity for prices to fall at a rapid pace.

Looking beyond 2009, however, the picture does not look especially bad, so long as no near-depression breaks out on the national level.

As the government begins its bail-out program in full earnest, many of the jobs lost in New York City’s private sector financial industry will be absorbed by a government which will need thousands of new financial analysts to manage its expanded role in the financial markets.

The macroecononmic picture is indeed bleak right now, but New York City will do far better than most cities in the coming years.

It’s widely agreed upon that the sale of Bear Stearns was the pivotal transition moment in the New York City Real Estate market. Over the previous six months or so, things had been gradually shifting away from the strong seller’s market mentality that had pervaded Manhattan and New York City as a whole.

Even immediately before Bear Stearns, a buyer’s market in NYC was subtly beginning to show itself. However, the general perception still held of a market that had reached something akin to what the New York Times called a “buyer-seller detente.” With the astounding collapse of one of the Big Five, however, that mentality was instantly dashed, and talks of an actual dive in luxury market prices became commonplace.

Fortunately, that hasn’t happened yet. Inventory has shot way up, though, and it is likely that the market will soon be seeing not just the precursors to negative numbers, but actual negative numbers themselves.

Forbes, which does particularly strong New York real estate research, has put together a list of the ten sections of Manhattan that have seen the greatest increase in average on-the-market time spans.

Sales times are only a rough indicator of future price changes, at best. Sometimes it just means an unusually hot market has calmed down a bit and returned to its normal, fast-paced growth in value. Nonetheless, Forbes’ list is particularly instructive, because they have analyzed the market by dividing it into two different eras, pre and post-Bear Stearns. So, it should do a good job at capturing some of the most recent market dynamics – dynamics that are likely to be only exacerbated by this week’s market activity.

The Lower East Side comes in at number ten, with a 35% increase in average days on the market, from 146 to 198. Grammercy and Chelsea are both tied for the eighth position, with a 45% increase . Similarly, the TriBeCa region showed a 56% increase. At number six, though, the numbers become more extreme. Apartments on the Upper East Side (10028) used to be on the market an average of just 100 days. Now they are typically on the market for 175 days: an increase of 75%.

The Upper West Side saw largely the same change, falling from a shorter 82 day average sale time to 146 days; an increase of 79%. Soho and Murray Hill both had similar increases, of 82% and 84% respectively. Another Upper East Side area code, 10128, saw the second largest increase, growing an average of 89%. Finally, the West Village saw the single biggest difference, with massive 90% change, from 132 days to 250.

So, expect sellers in these areas to start seriously re-evaluating their price schemes in the downward direction, and soon. The events of the past two weeks have shaken nearly everyone in the city to some extent, and it’s doubtful that agents that have seen average sales times increase dramatically will be too resilient against price drops in the context of 700 point drops in the Dow. Especially for the areas on the top half of that list, price decreases are likely coming, if not already here.

Where Manhattan Real Estate Sales Are Slowing [Forbes]
In Depth: Where Manhattan Real Estate Sales Are Slowing [Forbes]

The bad news for the global economy that has been coming out of New York City has been good news for those looking to buy apartments in the city’ real estate market. Long a seller’s market, the recent downturn has finally given buyers a chance at finding apartments at more reasonable prices, and on less difficult terms.

The credit crunch has curtailed demand in more ways than just reducing the financial sector’s employment levels, though. More importantly, it has become considerably more difficult to find loans without a near-perfect credit score.

Indeed, even those with flawless credit histories have been turned down just because their credit histories aren’t long enough. This practice is especially prevalent in New York City banks.

For those who already own, it has become especially difficult to use their current home as collateral for a new mortgage without having already sold it.

Co-op boards have similar standards. Many are even more stringent than the banks. The co-op boards have saved the city from the considerable economic harm resulting from the subprime crisis by effectively erecting a second, private layer of regulation on top of the federal guidelines that “missed” the subprime problem. (”Missed” is put in quotes here as it was a regulation that was intentionally overturned in 2000.)

Now however, the co-ops are harming the city’s economy by denying many potential buyers who have perfectly valid credit history and collateral. By demanding they sell their homes first, they have effectively trapped a number of buyers in their current homes.

A particular source of harm for many potential buyer’s credit score is credit cards sold by gasoline companies. These often have very low limits. Banks are wary of credit card users who are beyond 35% of their total credit limit. So, even if you have never passed your limit, cards with very low limits can make you look less attractive vis-a-vis mortgage applications.

For younger buyers, banks are now in the practice of requiring full financial disclosure from parents that act as co-signers.

Fortunately, it seems likely that prices are not going to hit bottom for a considerable amount of time. The third quarter numbers will be fascinating, but they won’t tell us much about the full impact of the recent credit freeze that began with the bankruptcy of Lehman Brothers.

As the federal government spends around a trillion dollars in what amounts to a socialization of financial risk for the world’s wealthiest citizens, it won’t be until the end of the year numbers come in that we will be able to tell if the market is really in a free fall, or if the adjustment within the city’s lines will be more mild.

Financial writers are getting morbid with their prose. It’s like the time of real danger has passed, and we’re now sitting around the funeral pyre of the free market, talking about just how awry things are these days.

Take, for example, an opening to an article on Bloomberg: “The London-New York tug-of-war for bragging rights as the world’s preeminent financial center is now a race to the bottom.”

To be sure, that’s a harsh truth, but a truth nonetheless. That being said, do we really need to portray it as some sort of sick-headed race? “Regretfully lurching” would work just as well as an image of a group bankers actually vying for the low spot.

The general darkness of the mood, furthermore, is more ideological and what-if based than having to do with the actual state of things, at least in terms of the New York City housing market. Yes, a bunch of corrupt, foolish financial corporate heads have basically stolen thousands of dollars from every taxpayer in this country.

And yes, the federal government – both a thoroughly corrupt Republican Party and a corrupt Democratic Congress – have been the one’s to let them do it. And yes, any statement contrary to that would be like saying, “Well, when I was pulling the trigger/When I was sitting there watching him load the gun, I was really hoping the other guy would be able to dodge the bullet, so therefore, I’m not guilty of murder.”

It’s truly a disgusting state of affairs. Morally, patriotically and in every other feasibly ethical dimension, it is the worst thing to happen to this country since the Iraq War. There’s no debate about that.

That doesn’t mean, however, that the economy is doomed, and the same goes for the New York City real estate market. In fact, the macroeconomy may be hurting for at least the next year, but the financial industry in New York City – the industry most important to the New York housing market – is not going to lose nearly as many jobs as people think.

According to Moody’s economy.com, for instance “the New York metropolitan area is forecast to lose 64,000 positions, or 13.5 percent, by the second quarter of 2010.”

Certainly, that is a dour forecast for the city. Should it happen, its effects on demand, especially for the luxury market, would be huge.

But let’s look at part of the language of the Bail Out Bill that is now in front of Congress, and will almost be part of the final bill:

(b) Necessary Actions.–The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation:
(1) appointing such employees as may be required to carry out the authorities in this Act and defining their duties;
(2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts

As a colleague of mine put it today, an alternative title to that section of the bill could just as well be, “The Bankers and Lawyers Full Employment Act of 2008.”

That is to say, the Moody’s numbers are roughly accurate, if the massive action by the federal government beginning with this bill are not accurately taken into account. Times will be not be as glee-filled as they usually are for the industry, but when the wealthy and well-connected – re: the New York City financial industry – are in real trouble, government intervention happens. More than a trillion dollars of it.

Let us take a step back: The proposed government bail out will involve at least half a trillion dollars of the public’s money; the AIG bailout was $85 billion; Bear Stearns, around $20 billion; the Fed has pumped in well over half a trillion into the credit markets by this point; interest rates for treasury bonds are significantly lower than rates for bank-to-bank loans.

A lot of that money will be gotten back to the taxpayer eventually. The opportunity cost – that is, the metric economists use to analyze the true cost of all that money – however, will be huge. In the end, the taxpayers will almost certainly end up spending thousands of dollars for every man, woman and child in this country.

It’s an infuriating situation, largely because it doesn’t have to be this way. The executive branch of this country has nationalized a significant portion of the financial industry. It will continue to do so for some time. However, congressional Democrats have huge leverage over the process at this point. With or without their help, the federal government could end up turning many of these forced purchases into solid investments that pay large dividends for the American taxpayer.

That’s not going to happen however. And the scale of the loss is beyond criminal. We’ve entered a realm of importance and damage to our national and collective well-being wherein the offending actors could be accurately characterized as treasonous. Within the confines of what is possible for any given actor, it is almost like, at each step of the way, the executive branch’s actions have been directed by the world’s largest financial firm, Goldman Sachs. It is little wonder, then, that the Treasury secretary is the ex-CEO of Goldman Sachs.

What does all this have to do with the New York City housing market? There are two major points to be made: First, the government has to spend so much on activities that will have a negligible levels of stimulative effects – in comparison to, say, a major public works project – that the economy will almost certainly enter a full recession.

This will lead to a significant decline in housing prices, even in New York City.

However, the picture for the city’s real estate market has brightened significantly from yesterday. The doomsday scenario for the New York City housing market was that the city’s financial industry would be largely on its own to absorb the damage it has done to the world’s economy. Life’s not fair, however, and the country as a whole is going to absorb those losses, not New York City’s most important industry.

So, the market will do much better than many people thought at the beginning of the week. Many expected the Fed to blink and eventually cave to the industry’s demands, at least partially. Few foresaw, however, the government’s complete and total retreat from its earlier position.

In short, the bail out is a horrible thing for the country, but a very, very good thing for the New York City real estate market.

Already deals abound. My favorite is a quote from a New York Times article earlier this week: “Mr. Petterson” who purchased an apartment in the Aura for under $600,000, “said ‘it was an upgrade’ from a studio on the Upper East Side to a one-bedroom with a balcony in a sleek modern building of glass and brick with a gym and a garden with a hot tub.”

Time to start looking for deals.