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News Page   The Froth is Off the New York Market

By Jeffrey Jackson
October 1, 2005

First Quarterly Price Decline in Two Years - Sales Volume Drops Sharply

NEW YORK, NY October 3, 2005 Mitchell, Maxwell & Jackson Inc., (MMJ) reported in its recent Market Measure that the Sales Volume Index in 3Q05 showed a 27% decline from 2Q05. This sustained drop off in demand led to the first price decline seen in 10 quarters. (2Q05 volume dropped 10% from 1Q05). The average apartment sale price declined 3.9% to $1,090,000 in 3Q05, from a record high of $1,134,000 in 2Q05. (volume index revised 10-7-05)

While at first glance this may appear troublesome, we would point out two things 1) the New York residential market has been atypically strong over the past 10 quarters, sale prices are up 56% on average. And 2) the third quarter is typically a slow period in the cycle. As a result, prices in 3Q05 are still up 21% over a year ago. However, we do believe that the third-quarter's results clearly indicate that the froth is off the market.

The last few quarterly trends suggest supply and demand have reached parity throughout most of the city. This is good news for buyers, as slowing sales volume and leveling prices have swung the barganing pendulum out of sellers hands. The main concern going forward, however, will be whether the market can find a sustained period of equilibrium or will a wholesale correction in pricing result in a bursting of the bubble. We believe if the underlying economic fundamentals remain stable, prices should enjoy a soft landing. At this point, however, it is too early to call. The answer should become clearer in the fourth quarter as year-end bonuses are announced. Obviously, the greatest risk for a bursting bubble would be increasing inventories with rising interest rates and weak year-end bonusing. These three factors are the key to discerning where the market is headed, and we will be monitoring them closely.

Third-Quarter 2005 Highlights:

Larger Apartment Sale Prices Decline* Sale prices of larger apartments spiked in the 1Q05 to an average of $7,000,000 (see our 1st Quarter 2005 Market Measure). This represented a 66% increase from 4Q04 to 1Q05. We attributed this dramatic gain to strong year-end bonuses in 2004 combined with pent up demand and a price disparity. Given this jump, we had not expected these trends to be sustained. The declines in 2Q05 and 3Q05 have essentially resulted in a give-back of earlier returns in this segment. While the average price in 3Q05 is down 15% from 2Q05 and 24% 1Q05's high, prices are still up 33% from a year ago.

Sale Prices By Neighborhood Level Off

The average sale price in all neighborhoods was basically flat to down in 3Q05. The West Side appeared to experience the largest decline, down 9%, to $1,385,000, while Downtown held on to a slight 0.4% gain. We would note, however, that the West Side also has experienced the greatest gain this year, rising 28% from 4Q04 driven primarily by the large number of very expensive sales at AOL/Time Warner .

*Larger apartment sales price index includes apartments with 4 or more bedrooms.