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NEW YORK CITY-Manhattan apartment unit sales prices continue to hover near record levels, but it seems that they may be steadying. After reaching a peak in the first quarter, the average price of a local apartment dropped 2% to $1.66 million in the second quarter. Still, that figure is up 36% over the second quarter of last year, notes Brown Harris Stevens.

In compiling the study, BHS obtained transaction data from ValuExchange, a proprietary database of the Manhattan residential market. The data from this report came from 2,988 recorded apartment sales in the borough, an 18% decrease from sales reported during the same period in 2007. The findings, says James M. Gricar, executive vice president and director of sales at the locally based firm, is a continuation of trends of the past several quarters.

“When you’re talking about real estate, you really cannot get too far from supply and demand. At the end of the day, it’s an inventory-based business. One of the things that have made Manhattan so different from the vast majority of markets in the US, is a consistent shortage of inventory in the past 10 years,” he says. “Tight inventory is pushing prices a little upward, particularly in categories where there’s very little inventory, such as three-bedroom units or larger. However, the zeitgeist of the market is the fear that we’re heading into a potentially very difficult economic period, and that’s reduced the number of transactions. So we’re seeing a reduction in the number of transactions and simultaneously, the average and median prices increasing slightly.”

But what about the 2% quarter-over-quarter dip? Gricar attributes that to inventory, calling it a normal cyclical dip in an overall upward curve. “I hesitate to say there’s a peak or valley,” he explains. “What tends to happen in real estate, and certainly has been the case for the past 10 years, is a series of peaks and valleys, but the macro line goes up. What seems to be happening every time is when we get into a little valley, it’s often related to something external like interest rates or inventory issues.”

The performance varies by type of property and size of unit, he points out. One and two-bedroom units traded for $799,066 and $1.79 million, respectively, at midyear. That’s compared to $743,594 and almost $1.48 million last year. Larger units saw a greater leap: $2.77 million to $3.66 million for three-bedrooms and $6.56 million to $7.68 million, from Q2 2007 to Q2 2008. Meanwhile, the average price of a unit in a Manhattan cooperative apartment rose 38% from $1.06 million at midyear 2007 to $1.92 million a year later. At condominiums, which tend to be new product, the increase was 22%, from $1.43 million to $1.98 million.

“One and two-bedroom buyers, they tend to be need buyers,” says Gricar. “Because of interest rates, there’s nothing attractive about renting. There’s something quite attractive about moving to Manhattan as a young professional and buying an apartment, and with prices going up, you can make some money on it. Or you could rent an apartment for the same amount of money or slightly less but receive no tax benefit and build no equity. That’s what keeps the one and two-bedroom market alive. But at some point, I think you reach a tipping point in terms of inventory, and then there become not enough buyers for all the inventory. Conversely, there are fewer three to five-bedroom apartments, and fewer buyers, but the ratio is still in the market’s favor.”

Apartments in new projects–particularly at 15 Central Park West and the Plaza–accounted for more than a third of all closings in Q2, which also helped to keep prices up. Removing sales at those communities, the average per-unit sales price for the city would fall to $1.49 million, but it would still be 21% higher than midyear 2007. Don’t expect projects like these to continue to prop up the market, however; the impact will shrink as the sales of these units are closed on.

Indeed, unit purchases at new developments also helped to bring the median price up 23% over the past 12 months to a record $979,000. And it seems that large price tags on some deals pushed the average price up significantly; BHS notes that more than half of the transactions that closed in Q1 were in the six figures.

One does question the sustainability of the Big Apple’s residential real estate boom, especially when the national market has been taking a nosedive for the past several months. According the Gricar, Manhattan is somewhat isolated from the woes of most parts of the US. One of the biggest concerns these days, he says, is the general public sentiment over the economy, mainly due to rising energy prices. “We in Manhattan feel the national economic effect less than the national market,” he says. “Our cost for heating oil is divided among 70 to 100 of our neighbors, and in terms of gas, most of us use mass transit and don’t drive. Oil is not as much of an immediate concern as it is for most people in the rest of the country.”

A larger impact, however, is massive layoffs. “If that happens, we will see a definite shrinking of the market and a reduction in both pricing and activity,” he says. “That generally means Wall Street layoffs, and although they only make up 15 to 20% of the buyers, they have a huge psychological impact on the market.”

BHS points out that even with the concern over Wall Street, conditions should remain the same for some time. Prices have remained so high, the firm notes, because there is a lag time of closing deals of several months. The transactions that comprised this Q2 report, for instance, were initially put under contract in June of last year, before the credit crunch. Plus, with the New York City employment rate at 4.8% in May–below the US average of 5.5%–the overall economic conditions of the city are strong.

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