By Candace Taylor and Katherine Clarke

Nov. 29, 2018 11:29 a.m. ET

 

Reprinted from a paid subscription to the Wall Street Journal.  See the entire article with illustrations here.

 

When actor Brian Kerwin decided to sell his longtime Manhattan home—an 1880s Romanesque townhouse he and his late wife had carefully restored—he was hoping it would go for about $12 million, based on similar sales in the neighborhood. When he and his agent, Kim Mogul Wright of Douglas Elliman Real Estate, agreed on a price tag of $8.5 million, he thought there would be “five takers within a week,” said Mr. Kerwin, 69, who has appeared in movies such as “The Help” and “27 Dresses.”

So he was shocked when the Upper West Side listing got “absolutely zero interest.” Finally, after a year on the market and several price cuts, the redbrick house is now in contract for about $5.5 million.


Accepting that the home would sell for far less than he had imagined was a gradual—and emotional—process, said Mr. Kerwin, who bought the house for less than $1 million in the early 1990s and raised his children there. “It’s like hitchhiking; after standing there for 10 hours you’ll take anything,” he said.

A Bird’s Eye View of the Housing Market





Condo flyover

Mr. Kerwin is one of many Manhattan homeowners struggling to accept the new reality of the New York City real-estate market, as prices slide after a decadelong boom.

This year has brought into sharp focus all the pressures on the market. The slowdown began at the time of a stock market rally and record-low New York City unemployment—factors that typically accompany strong real-estate sales in the city. For that reason, many owners are reluctant to accept lower prices, even as buyers determinedly seek bargains.

New York is facing the convergence of several large economic forces: an oversupply of new condos, a drop in international buyers as some countries impose capital controls, changes to the tax law that cap state and local deductions, and rising interest rates. There is also a shift in taste from uptown to downtown.

As Lee J. Stahl of the design/build firm the Renovated Home put it: “It’s a crazy Bermuda Triangle of forces that have lined up against people trying to sell and buy these properties.” The Upper East Side luxury co-op market in particular is “a train wreck,” said Mr. Stahl, who often works with agents listing properties in need of renovation.

In August, for example, financier Ramesh Singh sold his sprawling Park Avenue duplex for $13.75 million—far less than the $20.365 million he paid in 2008, according to public records.

That’s a far different scenario from 2016, when New York City real-estate prices climbed to new heights as moneyed buyers from all over the world stashed cash in ultraluxury megatowers.

Just two years ago, “the units sold themselves,” said agent Ann Cutbill Lenane of Douglas Elliman Real Estate. “We were like Vanna White pointing at the letters and they magically turned over.”

In the third quarter of this year, the overall number of Manhattan home sales dropped 11%, according to a report from Douglas Elliman. Some sellers of Manhattan apartments have taken losses of up to 30% or more from what they originally paid for them at various points in time, according to a data analysis for The Wall Street Journal by the real-estate listings website StreetEasy.

Other boldface names who lost money on recent deals include U.S. Commerce Secretary Wilbur Ross, who last year sold his four-bedroom Midtown Manhattan penthouse—with a dining room that comfortably seats 30—for $15.95 million, down from the $18 million he paid for it in 2007, according to public records.

Rolling Stones guitarist Keith Richards sold his Greenwich Village penthouse this fall for $9 million, four years after buying it for $10.5 million.

One factor is the dramatic oversupply of high-price, new construction condos. Some 1,775 new Manhattan condos are forecast to hit the market by the end of 2018, according to Corcoran Sunshine; in 2011, there were 277. Of the active condo listings on the market, nearly 800 are listed for $5 million or more, up 61% from 462 in 2013.

Manhattan condo builders paid record prices for land and built increasingly tall towers, leaving the city with a huge pool of expensive supply. “People started doing these developments with pricing expectations that were insane,” said New York developer Ian Bruce Eichner.

Now many of those developers are cutting prices and offering incentives such as paying buyers’ transfer taxes, says Stephen Kliegerman, president of Halstead Development Marketing.

Real-estate agent Tal Alexander of Douglas Elliman said he also sees agents promise sellers unrealistic prices to secure listing exclusives, so properties linger on the market for years and undergo price cuts. “It leads buyers to believe that the market is weaker than it actually is,” he said.

John Iacono, co-president of New Jersey-based car dealership Bram Auto Group, said that when he and his wife listed the Financial District condo they bought in 2009, they encountered stiff competition from new developments.

New buildings “are now very negotiable,” Mr. Iacono said, and buyers are “not afraid of asking for a reduction in price.”

The couple switched real-estate agents and cut the price, and finally, in October, they sold the apartment for $2.32 million, compared with the $2.97 million they paid in 2009. Mr. Iacono said he preferred to cut his losses and move on rather than wait for the market to rebound.

“If it comes back, how many years is it going to take?” he said. “Am I willing to gamble? It’s not worth it.”

But agents said the slowdown extends beyond new condos, hitting every segment of the market. While the cooling is more significant at the high-end, smaller units also are affected. In the third quarter, the median price for a one-bedroom Manhattan home was $815,000, down 4% from the same period in 2017. The volume of sales fell 12.7%.

“What’s most significant about 2018 is that even the sub-$1 million market is slowing because of rising mortgage rates,” said appraiser Jonathan Miller. Rates for a 30-year mortgage averaged 4.81% in late November, up nearly a full percentage point from the beginning of the year, according to Fannie Mae and Freddie Mac.

Takk Yamaguchi, an agent at Compass, said he has been sitting for hours at Sunday open houses at his sub-$1 million listings across the city, waiting for buyers who never show up. “Last year, there would have been a bus load of people waiting for me to arrive,” he said. “Now, it’s just me and a bunch of brokers standing around.”

Some agents predicted there would be an oversupply of luxury condos after the building boom. Many new towers were built for the ultrawealthy, with few options for middle-class New Yorkers or first-time home buyers.

The drop in international buyers shopping for Manhattan homes is another reason the market has slowed. Kelly Kennedy Mack, president of Corcoran Sunshine, said the number of international buyers has fallen roughly 10% in buildings the company represents. She attributed the decline in part to tighter capital controls overseas, which have made it hard for some to buy in the U.S. The Chinese government, for example, has been cracking down on individuals making overseas investments—tightening restrictions that curb capital outflows and making it harder for its citizens to move large sums of money to the U.S. for real-estate purchases.

“When the market was really robust and there were all these deals above $20 million, everybody jumped into that pond,” said Pam Liebman, CEO of the Corcoran Group, about developers’ rush to build expensive units. “They forget that absorption of these units, even though it was at its highest levels in history, is still not hundreds of units a year.”


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Digital-media entrepreneur Javier Saralegui and his wife, Angela Bedoya, recently slashed the price of their Upper East Side townhouse to $11.995 million, the latest in a long series of price cuts since they first listed it for $19.995 million in October 2017.

“We know that it’s a gorgeous townhouse, but there’s a certain point where you have to just leave your ego at the door and accept that the market has changed,” she said.

In all, there are now more than 100 Manhattan homes actively listed at more than $20 million, and those are selling at a rate of only about four a month, Ms. Liebman said.

Industry insiders also blame the 2017 tax-reform package that limits deductions on federal returns for state and local taxes. In high-tax states like New York, the result is significantly higher tax bills for some residents.


“That change in the tax law really infected the real-estate bloodstream in New York,” said Manhattan real-estate agent Donna Olshan. Many of her clients pay six or seven figures in city and state tax bills each year and can no longer deduct the lion’s share, she said. That has pushed some buyers to move to lower-tax states, she said, or to reduce their purchase budget.

Other buyers are simply unsure what their tax bills will be.

“At the moment, it’s like this fear,” said Hall Willkie, president of Brown Harris Stevens. “And it’s another reason to delay a decision if you can.”

When the tax changes were announced, Allegra and Morgan Eifler were in the midst of looking for a larger apartment near their prewar one-bedroom co-op in Yorkville on the Upper East Side. Ms. Eifler, a 33-year-old interior designer, said the young couple was “really worried” about how the changes would affect them. For that and other reasons, they took their time with their home search. When a two-bedroom unit in their building came on the market, they made an offer well below the $1.975 million asking price.

“We went in with what we truly believed it was worth,” said Mr. Eifler, 31, who works in finance, noting that the unit needed work.

When they didn’t get a counteroffer, they continued with their search and were surprised when, four months later, the listing agent called to say their offer had been accepted. They closed, paying $1.55 million, and plan to start renovating soon. Meanwhile, they have listed their one-bedroom for $739,000.

Mr. Eifler said the experience of buying in this climate was far different from when he purchased his first apartment in 2013. Back then, “everybody was like ‘You have to make an offer that day or you’ll lose it,’ ” he recalled. “Whereas now you don’t feel the pressure to pull the trigger.”

Real-estate advice is increasingly in demand. When agent Jason Haber of Warburg Realty mentioned his profession at a recent Columbus Circle cocktail party, he was “accosted” by fellow guests demanding to know whether they should buy now and lamenting that they hadn’t sold a year ago. “I felt like I was in the White House briefing room,” Mr. Haber said, who said he spent so much time fielding questions, he hardly got to touch his pan-roasted chicken and broccoli rabe, and had to grab a slice of pizza on the way home. “Next time I’ll tell them I’m a juggler, maybe they’ll leave me alone,” he said.

Manhattan homeowner Laurence Strubing, 73, a retired executive, has been trying to sell his Upper East Side co-op for a year. Initially listed at $2.65 million, it is now priced at $1.8 million—less than he paid for it. “You never think about real estate as depreciating,” Mr. Strubing said. “The thought is that it always appreciates in value, especially in New York.”

Mr. Strubing and his wife, Kathryn, live primarily in Connecticut but bought the two-bedroom, Upper East Side pied-à-terre for $1.9 million in 2014. The couple liked its location close to museums.

They enjoyed the apartment, staying overnight after trips to the Metropolitan Museum of Art or evenings at the theater. But recently they bought a beach house in the Hamptons and decided to sell the Manhattan apartment.


They and their agent, Ellen Devens of Brown Harris Stevens, were surprised when it sat and sat on the market despite multiple price drops. Buyers seem deterred by things that were never an issue in the past, like the fact that the laundry is located in the basement rather than in the apartment itself.

Still, experts don’t expect this downturn to be as severe as the one in 2008, because banks have continued lending and buyers still want to purchase homes in New York City—as long as they feel they’re getting a good deal.

“Pretty much everything sells” eventually, said Mr. Eichner, adding that he has been negotiable on prices at his building on Madison Square Park. “The question is how long does it take and how much discount do you have to give.”

Other parts of New York City, such as Queens, might see a boost from the announcement that Amazon is opening a new headquarters in Long Island City. However, insiders say the move is unlikely to be a major factor for the Manhattan luxury market, especially because the average wage of the jobs created from the move will be $150,000.

Hedge-fund billionaire and Milwaukee Bucks co-owner Marc Lasry recently sold his Beaux-Arts townhouse on the Upper East Side for $31.95 million, after putting it on the market last year for $39 million. He said he didn’t mind the reduced price. He bought the house for $11 million in 2001. He and his wife had moved into a new apartment and simply wanted this property off their hands.

“It is what it is,” Mr. Lasry said. “If the market was $50 million for it, great. If it was $30 million, that’s fine too.”

Uptown vs. downtown: Changing Tastes

The real-estate slowdown affects all areas of Manhattan, but high-end homes on the Upper East Side and Upper West Side have been particularly hard hit, agents said.

“Uptown is not considered hip right now,” said Manhattan real-estate agent Royce Pinkwater.

Over the past five years, she said, wealthy buyers have increasingly gravitated away from the famed prewar co-ops of Park Avenue and Central Park West—New York’s traditional bastions of the moneyed classes—and moved to Lower Manhattan neighborhoods, such as Tribeca and Chelsea, closer to nightlife.

“They think it’s cooler to live downtown,” said Ms. Pinkwater.

Many Uptown buildings also have strict co-op boards, which complicates matters in a soft market.

“Park Avenue has definitely suffered,” said Corcoran CEO Pamela Liebman. “There are a lot of other choices out there.”

A case in point: After buying a $33.6 million penthouse at the new West Chelsea condo tower 551 West 21st Street, Goldman Sachs partner Armen Avanessians and his wife, Janette, listed their apartment at the El Dorado, the twin-spired prewar apartment overlooking Central Park. They had bought it from the actor Bruce Willis in 2015 for $12.75 million, but ended up selling it for $9.9 million.

The lucky buyer who scooped up the discounted apartment? Mary Solomon, the wife of new Goldman Sachs CEO David Solomon, according to public records.

The Avanessianses also took a loss on another El Dorado unit they owned, selling it for $3.85 million in May of 2017, two years after buying it for $6.5 million.



Luxury Supply Is Still Growing as Sales Cool

• So far this year, more than 50 Manhattan owners have sold their properties for less than they paid, according to StreetEasy. The biggest loss recorded was $6.61 million.

• There were more than 100 Manhattan homes listed for $20 million or higher at the end of the third quarter, according to the Corcoran Group. On average, these homes sell at a rate of fewer than four a month.

• Some 1,775 new Manhattan condos are forecast to hit the market by the year end, said Corcoran Sunshine; in 2011, there were 277. Of the active condo listings already on the market, nearly 800 are listed for $5 million or more, up 61% from 462 in 2013.

• By the end of the third quarter, Manhattan apartment inventory rose 15% year-to-year, to 12,186, according to Corcoran Sunshine.

• By the third-quarter end, there were 992 Manhattan condo and co-op listings above $5 million, up 48% from the 2013 quarter, according to Corcoran Sunshine.

• The median sales price for a Manhattan home was $1.117 million in the third quarter, down 4.5% from the 2017 period. The median price of a new condo unit fell 9% to $2.55 million, according to Miller Samuel.

Write to Candace Taylor at Candace.Taylor@wsj.com and Katherine Clarke at katherine.clarke@wsj.com