Real Estate in Manhattan - Using median property prices as a guide

An awful lot of real estate agencies, both in the luxury real estate segment of the market and the “base” market, claim that their particular sector is immune to whatever downturn is affecting the rest of the real estate market – and base this assessment almost solely on median property prices. When considering real estate as an investment, median property prices serve a function, that is for sure, but assessing the state of a particular market based solely on this metric can be misleading in a down turning market.

The Manhattan luxury condominium market for instance was largely touted as immune to the credit crunch because all through 2008, median prices were rising. On the surface, this is an accurate assessment, but looking more closely at the volume of sales, as median prices were rising, volumes were dropping. And they were dropping most heavily in the lower priced segment of the market. This translated into rising median prices for the simple fact that no homes at lower prices were selling. The fact is that the more expensive homes that did sell were invariably sold at a discount off the asking price – so prices were falling; yet the median property price rose.

With any statistical analysis, the amount of data available is crucial to drawing any conclusions.  Sales of homes in Manhattan fell around 40%  in 2008 compared to 2007, and in the first quarter of 2009, sales are down between 47-58% compared to 2008 (depending who you ask). And median prices are still rising. Until such times as sales pick up and a reasonable amount of data is available, this particular metric is almost worthless as a gauge. Buyers are holding out for the market to correct itself, and sellers are hanging on for unrealistic prices.

The other thing to take into consideration when looking at the market is the distortion caused by an ever-increasing inventory of over sized apartments. Much of the inventory hitting the market recently and in the short term future are larger than average condominiums which were built to take advantage of the easy money days which  are now behind us. Most developers were unable to react fast enough to change the size of the apartments and condos in the pipeline. The commercial sector is seeing much the same distortion - sales of office properties fell 69% in 2008 – and more than 60% of the sales that went through were distressed sales where the seller either provided financing or the buyer took over outstanding debts.