Will the changes in Wall Street, the Dow Jones Industrials and S&P’s recent downgrade of US Debt to AA create a negative impact on the Manhattan real estate market?
The strongest evidence for how the market will fare today will be to look back to the market crash of 2008. After the collapse of Bear Stearns, there was a three to four week pause in market activity, especially from the Wall Street segment of property buyers. After that initial gap, buyer activity resumed for a month before the market’s typical summer lull, but after Lehman collapsed, there was once again a period of very little activity. Real estate sales started from the entry level of the market and only gradually moved to the luxury segment. As the economy began to stabilize and buyers became more accustomed to their new reality, the Manhattan real estate market bounced back – fueled by the 2010 rise of the Dow and the global equity markets.
But what will happen as a result of our current market instability? What I have found in my twelve years of working in Manhattan’s luxury real estate sector, having grown up internationally, is this: when sudden change happens, whether in the world or in local economies, and whether due to a financial crisis or other disaster, the reaction is that people tend to freeze up in fear and wait to see how the situation is going to play out. During these unforeseen times, there is also a general level of disbelief and denial that can occur.
I truly believe that the reaction of the market will depend on the duration of the current negative effects on the Dow and the world financial markets. If the effects are short-term, I expect that 2011’s strong market trends will maintain their momentum. However, should the financial instability of the markets continue, willingness to put homes up for sale and buyer confidence may be negatively affected, and in turn, Manhattan real estate values will adjust accordingly. There have been some short-term adjustments already; for instance, some buyers who are currently in contract are now asking for price reductions. I have also noticed that with the US dollar currently trading at lower points than some other foreign currencies, there are new buying opportunities for foreign investors.
It is too early to tell how the S&P downgrade and current economic state will truly influence the Manhattan luxury real estate market. In general, long term swings in the stock market tend to have an impact on Manhattan real estate, which shapes consumers’ sense of wealth and security. I think we will have a better sense of how things will play out as we move into the next quarter of 2011. At the same time, I still believe that Manhattan will consistently attract long-term buyers and investors and that the limited amount of inventory makes Manhattan real estate an attractive and protected long term investment.