A new report prepared by Miller Samuel for Prudential Douglas Elliman paints a pretty picture for those that bought into Manhattan real estate at the start of the “noughts” but gives plenty to ponder for those picking the market’s bottom. According to their co-op and condo report, 2000-2009 has been a decade of most impressive growth: median sales prices in 2009 more than doubled, rising a whopping 113 percent from $399.000 in 2000 to $850,000 in 2009. So did average price per square foot, going up 105.2 percent, from $522 in 2000 to $1,073 in 2009. Average sales prices came close, surging 96 percent from $710,778 in 2000 to $1,393,001 in 2009.

And now for the less happy news: median prices were off 11 percent from their 2008 peak, average price per square foot dropped 14.2 percent from a record $1,251 in 2008, and average sales prices were down 12.5 percent from a high of $1,591,823. The report points out that this is the very first time all three price indicators showed year-over-year declines since the last century–1996, to be precise. Are the declines sufficient to consider this a good entry point?

It depends, the report seems to show. There’s been a smaller concentration of high-end sales in 2009, as well as new developments, while entry-level apartments’ share of the market rose. Then there’s the inventory falling, from the decade’s peak of 9,081 listings in 2008 down 25 percent to 6,851 in 2009. This is normally accompanied by the number of sales rising. But in 2009, the number of sales was the lowest in a decade, down to 7,430, 28 percent below the 10,299 sales in 2008 and even 19 percent lower than the 9,184 sales in 2000. The inventory numbers could be in part due to many developers keeping units off-market or unadvertised, and many sellers taking their units off-market in hope of re-listing in more favorable times, while the sales numbers took such a massive hit in large part due to the credit crunch and banks’ unwillingness to loan.

Furthermore, Manhattan apartments spent more days on market than in the prior decade: 179, compared to 143 in 2008 and to the 133-day average for 2000-2009. Meanwhile discount rose to the highest spread in a decade, up to 10.2 percent, compared to 4.1 percent in 2008 and the decade’s average of 3.7 percent.
Of course, certain neighborhoods fared better than others. The exhaustive report breaks the city down and reveals some interesting irregularities: the average price of a condo in the Union Square/Gramercy/Kips Bay/Murray Hill area, for example, actually close to tripled in price, from $504,177 in 2000 to $1,432,505 in 2009–while the drop from 2008 was a more digestible 3.4 percent. In the same period, Greenwich Village did not lose any of its appeal amid a collapsing world economy: average sales price for condos actually rose 22.2 percent from 2008 to 2009, from $2,046,932 to $2,501,284.

The townhouse report for the same period shows starker fluctuations from 2008 but a more even keel over the whole period: average sales prices rose 52 percent from 2000 to 2009, to $5,012,736 but fell 32 percent from 2008’s $7,372,987. Interestingly, days on market fell from 169 in 2000 to 142 in 2009, and inventory is about the same — 406 in 2000, 402 in 2009, but 24 percent lower than when the smart money was trying to get out in 2008, listing 530.

Market Report [ Prudential Douglas Elliman ]

While buyers don’t have the sway they held a year ago, prices are still down an average of close to 25 percent from their peaks, developers continue sweetening deals on new condos to complete construction, inventory is diminishing on paper but plenty of new projects are still not listed. As 2010 gets rolling, many in New York are finding that this is the right time to buy new condos. Beware of rhinestones when looking for diamonds, warns an article in the New York Times.

The first potential downer on buying new construction is the developer’s financing. The problem is two-fold, as pointed out by Steven Wagner of the real estate law firm Wagner Davis: if a building ends up being taken over by a bank, or fails to sell the units and switches part of the properties to rentals, it “creates problems with financing, refinancing, buying and selling, but it also creates issues in quality of life,” Wagner told the Times. All of a sudden your neighbors are not upstanding citizens but recent college grads with a penchant for Tuesday-night parties.

The second problem is the direct result of too many developers, not all of them savvy, experienced, or scrupulous, jumping in at the peak of the boom to throw up anything and everything, advertising all of them as luxury and state-of-the-art. And if a Frank Gehry building can spring a leak,  that LLC building in Brooklyn is not immune either, as evidenced by reports over the last year and a half of safety code violations and leaks all across the city.

Then there’s the credit tightness: banks are scrutinizing potential buyers more than ever before, particularly those aiming for new developments, not only looking at credit scores but evaluating ability to pay over time. Melissa Cohn, president of mortgage brokerage Manhattan Mortgage, told the Times that while previously a 660 credit score could get a buyer in, the banks now require over 700. Furthermore, getting the building approved in the first place, and even selling 15 percent of it, still means that the first few buyers often have to come in with cash, through portfolio lenders, or, for the well-heeled, through private banks. And the more buyers wait, the less the discount: higher risk, at earlier stages, is rewarded with more generous offers.

At 30 percent-sold, developers have access to Federal Housing Administration loan program–which, although requiring as little as 3.5 percent down, in turn limits the loans to just under $730,000 in New York and come with extra fees that are expected to get even higher this spring, according to the Times.
It’s not until the building is 70-percent sold that Fannie Mae guarantees mortgages and other lenders are willing to come in–but at that point getting something at a discount is improbable. Finally, not all buildings can offer lowered pricing, the article points out: banks are sometimes willing to just sit on a building rather than writing it down, at least for now.

Advice for the new condo buyer, then? Talk to the residents, find out what it’s like. Look at the developer, make sure they’re reputable and well funded, and find out about their other buildings. The Times further suggests buyers beware of buildings partially owned by investors; getting a mortgage contingency so the buyer can recoup the deposit in case financing falls through; find out about any construction stoppages, which may have exposed the building to the elements; and, before closing, a walk-through with an engineer or inspector.

A clear majority of foreign real estate investors see the United States as the best place to seek capital appreciation. At least according to a survey conducted in the fourth quarter of 2009 by the James A. Graaskamp Center for Real Estate, Wisconsin School of Business, and released by the Association of Foreign Investors in Real Estate (AFIRE). This is an influential bunch: according to AFIRE, the respondents own more than $842 billion worth of real estate worldwide, $304 billion of it in the U.S.

Fifty-one percent of respondents to the survey said they see the U.S. as providing the best opportunity for real estate investment, compared to 37 % in 2008 and 26 % in 2007. The U.K. trails in second place, with 40 percent of respondents, and China picks up 10 percent. The last time there was such an overwhelming desire to buy American was in 2003, according to AFIRE. And as foreign investors became more cautious in the economic climate of the past 18 months, they have primarily focused on two U.S. cities: Washington, D.C., and New York.

This is surely in part due to the continuously weak dollar, but apparently the average 25-percent discount from peak levels in the price of an average Manhattan apartment has attracted value seekers, of which there are plenty: AFIRE found that two-thirds of respondents plan to raise their investment in the U.S. this year compared to last year.

Globestreet.com rightfully points out, however, that both of AFIRE’s last year’s surveys showed “showed similar sentiment–but with little corresponding action.” Furthermore, in another question, one slightly differently phrased, only 44 percent of respondents thought the U.S. as the “most stable and secure real estate investment environment, - down from 53 percent in 2008 and 57 percent in 2007, and the first time in the survey’s history that the number went down below 50 percent.

But the survey’s respondents say they want to raise their U.S. allocations above 2009 holdings by 62 percent for equity and 83 percent for debt, and half report a stronger appetite for both equity and debt here in the U.S. than elsewhere. As a portion of global real estate, U.S. 2010 allocations for debt represent 80 percent of the global pool; equity is lower, at 49 percent of the global pool, unsurprising considering the recent tightness in credit markets.

Multi-family homes are the preferred property, followed by commercial properties. The least-favored product, according to AFIRE’s chief executive, is hotels, and the gap in interest between multi-familiy and hotels is at its widest since 2000. Foreign investors are exactly gushing about the current real estate market, but 33 percent did say they are more optimistic about it than they were in June 2009. Sixty-three said they felt the same, and a sour 6 percent said they were more pessimistic than before.

New York City Real Estate

Real estate is seeing mixed signals from several reports that came out this week regarding the health of the market. A bumpy ride is certain, but how bumpy, and how long?

On the one hand, the National Association of Realtors’ pending home sales index for contracts signed in November fell 16 percent from October. Alarmingly, the index dropped highest, 25.7 percent in the Northeast, on par with Midwest. In the Northeast it’s still 14/7 percent above November 2008 levels. On the other hand, that’s 15.5 percent higher than November 2008, prompting NAR’s chief economist Lawrence Yun to say that “the market has gained sufficient momentum on its own.” Yun predicts another surge in the spring, as buyers again rush to take advantage of the tax credit, which which was extended to April. According to NAR, in addition to the 2 million people that have already used the credit, another 900,000 first-timers are expected to qualify, as well as 1.5 million repeat buyers.

Yun also offered that “mortgage interest rates cannot remain at rock-bottom levels for a sustained period and will likely inch higher in 2010.” But just two days later, on January 7, Freddie Mac revealed in its weekly survey that the 30-year fixed-rate averaged 5.09 percent for the week, down from the 5.14 percent of the preceding week. Fifteen-year averaged 4.5 percent, down from 4.54 percent the week prior. FIve-year Treasury-indexed hybrid adjustable-rate mortgages remained unchanged, however, at 4.44 percent. One-year Treasury-indexed ARMs were down to 4.31 percent from 4.33 percent. Yun, of course, is almost certainly right in the long-term, as the Federal Reserve is likely to raise its overnight rate in 2010–but Freddie Mac’s chief economist warned that no Fed action is likely until the second half of the year.

Meanwhile, the Mortgage Bankers Association’s weekly survey found that the week ending December 25 has a 22.8-percent decrease in loan application volume, and the week ending January 1 the index stayed “relatively the same,” increasing a half a percent. Seventy percent of all mortgage activity, the report noted, was refinancing. The drop in loan applications may be due to holiday vacations for some–others, however, stayed as busy as ever all through the holidays, We certainly did here at Elika.

The end of the 2009 showed some positive signs for the industry, according to fourth-quarter reports published today by several different brokerages: while prices continued slipping, the rate of decline slowed, activity rose sharply, and inventory diminished. Some industry analysts are expecting prices in Manhattan to rise in early 2010–but another dip later in the year is also likely, many say. We’re still an average 25 percent down from the peak, but numbers released by Prudential Douglas Elliman, The Corcoran Group and Halstead Property/Brown Harris Stevens show average sales price in the region of $1.3 million in the fourth quarter, down 9 to 19 percent from fourth quarter 2008. Elliman and Corcoran showed declines of 2 and 5 percent, respectively, from the third quarter.

The Real Deal also found that price drops in sales have decreased by 29 percent from the third quarter, and are 14.4 percent lower than in the fourth quarter of 2008. There was even an increase in sales happening above original asking price–20 percent more often than in the third quarter, and close to 50 percent more than in the fourth quarter of 2008. Meanwhile, activity is up across the board 9 to 10 percent compared to fourth quarter 2008. Elliman had 2,282 closings, or 11 percent more than in the third quarter. Halstead/BHS did 2,519, and Corcoran, meanwhile, reported a whopping 48-percent increase over the last quarter of 2009 (attributing to a different methodology in an interview with The Real Deal). Inventory is slowly being eaten up: Elliman had 6,851 listings in the fourth quarter, or 25 percent down from the third quarter.

Most of the apartments finding buyers are smaller–65.2 percent of fourth-quarter closings were under $1 million, according to The Real Deal–despite figures showing that larger apartments have fallen more steeply in price compared to 2008. This can be attributed in part to the demand surge among buyers availing themselves of the first-time buyer credit, usually seeking smaller starter homes, as well as the tightening in the mortgage market.

What happens in 2010? Unemployment is expected to climb, after all, credit is still tight, the first-time homebuyer tax credit is due to expire in April, and a weak dollar will most likely prompt the Fed to raise the interest rates at some point. However, here at Elika we’re finding that foreign buyers, spurred on by the same weak dollar, are stepping up to the plate, and buyers willing to come in with cash are often able to secure better deals, quicker. With uncertain stock, commodities and currencies markets, New York real estate may attract the more cautious investor to come in and scoop up well-priced apartments.