Only in America: real estate is still breaking records in Manhattan and the Hamptons
Summer, in New York, is defined with conscientious specificity: it runs from Memorial Day, the last weekend in May, to Labor Day, the first weekend in September.
Summer, in New York, is defined with conscientious specificity: it runs from Memorial Day, the last weekend in May, to Labor Day, the first weekend in September. Sixteen weekends, many or all of which, for the monied set, will be spent in the Hamptons, that exclusive enclave of beaches and eight-bedroom ‘cottages’ 100 miles east of Manhattan.
Come Memorial Day this year, however, a surprisingly large number of desirable homes stood uninhabited and on the market – including a five-bedroom waterfront home for $350,000, and an 11,000 square-foot mansion in East Hampton for $500,000. Locals were unsure what to make of all this excess inventory: after all, radio shock-jock Howard Stern paid a full million last year for his 6,000 sq ft summer home in Southampton.
Yes, those are the rental prices, just for the summer (although rumour has it that Stern’s $1 million got him the rest of the year as well). In the Hamptons, it’s far from unheard-of for Wall Street types to pay more than $30,000 per weekend for a house with water views – plus $2,000 minimum for a table in East Hampton’s hottest nightclubs. It seems real estate in the Hamptons is mirroring the housing market in Manhattan: the pace of deals might be slowing, but there’s not much sign of prices falling. On the contrary, they continue to rise. Back in 2005, Rupert Murdoch closed on the most expensive apartment ever to sell in New York: $44 million for Laurance Rockefeller’s Fifth Avenue penthouse triplex, with 20 rooms plus 4,000 sq ft of terraces.
How things have changed: three years later, venture capitalist Lindsay Rosenwald has put his duplex on the market: it totals just 5,900 sq ft, with a mere 1,100 sq ft of terrace. What’s more, it’s on the déclassé western side of the park in a post-war (read less desirable) building. The asking price? $90 million, or more than $15,000 per sq ft.
Fun fact: you can fit seven £50 notes into a square foot, which means that at current exchange rates a square foot of £50 notes is worth $690, and that the asking price for Dr Rosenwald’s apartment is equivalent to covering its floors in 22-deep wads of £50 notes. And Dr Rosenwald’s is a very long way from being the most desirable apartment in New York: it’s not even the most desirable apartment in its building. Hedge fund manager Dan Loeb has a penthouse there with over 10,000 sq ft of space; multiply that by $15,000 per sq ft, and it’s worth $150 million. Probably substantially more, since in New York price per square foot nearly always goes up as apartments get bigger.
There’s something strange going on here. New York, one would think, is being hit by a double whammy: monster job losses on Wall Street, combined with the deepest nationwide housing recession since the Great Depression. Given that Wall Street professionals tend to be the marginal price-setters in the Manhattan housing market (everybody else has been priced out to Brooklyn or beyond), how can New York real estate still be setting new records?
But that’s exactly what it is doing, and not just at the very top end. In the first quarter of 2008, the median Manhattan apartment sold for $945,276, up 13.2 per cent year-on-year. The average Manhattan apartment was $1,722,991, up 33.5 per cent year-on-year. Every component of the market set new records: uptown, downtown, pre-war, post-war, you name it. The only hint of a slowdown was a decline in the number of sales – but even that only fell back to its long-run average, from an unusually busy 2007.
This is not (or not mainly) a symptom of the falling dollar. Yes, there’s anecdotal evidence of Irish speculators buying mid-town condos to let, but the overwhelming majority of sales are still to Americans. Rather, what we’re seeing is the absence of the formula which has decimated the rest of the US property market: subprime lending leading to skyrocketing inventories and a nasty credit crunch.
There were never any subprime borrowers in Manhattan to speak of. That’s because subprime lenders operated by bundling bunches of similar mortgages and securitising them – but in Manhattan, all mortgages are unique, and for a slew of reasons it’s pretty much impossible to securitise either co-op or condo mortgages. As a result, Manhattan lenders generally retain ownership of the loans they originate and bask in extremely low default rates. In turn, those low default rates mean there is no glut of foreclosed properties on the market – even as demand from people wanting to live in Manhattan is as strong as ever.
What’s more, the round of Wall Street bonuses that arrived in January and February was even larger than the record set in 2007. Bonuses are likely to fall substantially next January, but that won’t show up in house prices until well into 2009. And the latest estimates from New York City comptroller William Thompson peg total Wall Street job losses at just 15,000 to 25,000 – much lower than feared, and probably not enough to make a serious dent in the housing market.
The main reason why Manhattan prices haven’t fallen, however, is cash. In the rest of the country, house prices were governed by what subprime lenders were willing to lend: buyers paid the maximum that they could persuade someone to lend them, but right now no one’s willing to lend them anything. In Manhattan, by contrast, very many apartments are either bought for cash or bought by people who could pay cash if they needed to. If you’ve been pulling down $5 million bonuses for several years, it’s not hard to rustle up $4 million for a Soho loft. Which means that in housing, as in so many other things, that small island off the east coast of America known as Manhattan seems to be behaving in a most idiosyncratic manner. Or, as the gossip columnist Cindy Adams puts it: only in New York, folks, only in New York.
Felix Salmon blogs for Portfolio.com and Spectator Business