Is the housing bust about to take Manhattan?

By Helen Chernikoff - Analysis

NEW YORK (Reuters) - New York City real estate prices are looking increasingly shaky as instability in two of the city's sexier submarkets -- second homes in the Hamptons, and new condos in Manhattan -- register the latest signs of a housing downturn.

Property prices in the Hamptons, a fabled playground of the rich on nearby Long Island, rose steadily for almost two decades, but the prices on almost 1-in-3 of current listings have been cut an average 11 percent from the initial asking, said Sofia Kim of real estate website StreetEasy.com.

Back in town, the number of sales in new developments dropped a whopping 71 percent in April from a year earlier as condo developers enmeshed in complicated financing arrangements have been slow to slash prices even as the market corrected all around them, Kim said.

But if prices on these new condo towers do not fall to match the rest of the market and stay empty as a result, then it could eventually trigger foreclosures of entire properties, forcing much bigger price cuts as lenders seek to reduce their liability.

"If you have a property not priced at market, is it going to sell? Something has to give," said Jonathan Miller, author of real estate broker Prudential Douglas Elliman's market reports.

The intensifying of the malaise afflicting New York City comes as housing in parts of the country that got hit hardest by the bust are showing signs of life. Home sales in California, Arizona and Nevada -- states known for risky lending and speculation during the boom years -- have risen as foreclosures and short sales lure buyers into the market.

In New York, it's the opposite.

When the rest of the country was watching new neighborhoods begin to disintegrate into foreclosure ghost towns in 2007-2008, Manhattan landlords would still publicize new buildings by hosting parties featuring pop stars, sushi and girls twirling hula hoops in a bid to convert still-airborne Wall Street bonuses into down payments.

Today, that bonus pool has dried up amid job and compensation cuts in the financial services sector that drives the city's economy.

"Things are much more subdued," Kim said. "There's no money for parties."

The elite in the real estate industry had once hoped Manhattan could escape relatively unhurt as other housing markets suffered. But the collapses of financial powerhouses such as Lehman and Bear Stearns destroyed such thinking.

"What ended up killing us was the foreclosure crisis because that's what killed Wall Street," said Rick Hoffman, a regional senior vice president in the Hamptons for the Corcoran Group, a high-end brokerage. "It bit us in the end."

A BACHELOR'S KITCHENETTE

Glass towers designed to appeal to finance industry hotshots had been shooting up across Manhattan as Wall Street's bonus boom powered a surge of new development, said Barry Hersh, a former developer and a professor of real estate at New York University's Schack Institute of Real Estate.

Now many developers are struggling to secure lender approval to cut unit prices, he said. Without that, they could face foreclosure and bankruptcy, he said.