2 Factors Driving Manhattan's Housing Market Recovery

Reports today indicate that Manhattan's housing market is improving. Sales in the first quarter of 2010 were nearly double that for the same quarter in 2009. This gain followed unusually high sales in the fourth quarter. Realtors Prudential, Cochran Group, Halstead and Brown Harris Stevens all agree that prices were up as well in the first quarter compared to the fourth. Why is Manhattan doing so well while home sales in the rest of the U.S. continue to struggle?

Here are the reasons CNN/Money cites:

* Pent-up demand. The financial crisis in late 2008, when Wall Street banks like Lehman Brothers failed, put a stranglehold on sales. Not only did 30,000 well-paid workers lose their jobs, but the ones who retained their positions received lower cash bonuses than in years past. When the remaining banks got through the crisis, workers recovered their confidence.

* The rising stock market. Stocks in the S&P 500 returned a whopping 23% in 2009, restoring investors' reserves and confidence.

* Homebuyer tax credit. The government's tax credit induced people to buy and helped firm up the low end of the Manhattan market. It refunded up to $8,000 in taxes to first-time homebuyers and up to $6,500 to move-up buyers.

* Low mortgage rates. The national weekly average interest rate for a 30-year fixed rate loan never exceeded 5.09% during the quarter. That could have made homes affordable for many buyers.

Only the first point exclusively relates to Manhattan. The other three could benefit any town in the U.S. Yet, since the rest of the country's housing market is not improving at the same pace as Manhattan, it's not clear why these latter three points would have played a major role in its success.

Manhattan Bailed Out

The first point is, however, on the right track. But it should be made more broadly than just assuming more bankers are buying up more condos and co-ops. When the financial industry was bailed out by the U.S. government, it effectively bailed out all of Manhattan.

This argument is covered at length here. The financial industry makes up such a large part of Manhattan's prosperity that when it improves, the rest of the region's industries also do better. Lawyers make more money, boutiques see better sales, restaurants have higher receipts, etc. So the demand for housing increased throughout Manhattan when business on Wall Street improved.

Only The Rich Matter

Manhattan's housing market is also strengthening because the rich have felt the recovery more than other classes. One reason for that relates to CNN/Money's second point. Wealthy Americans generally have larger investment portfolios than others. So when the stock market does better, they benefit disproportionately. This is partially responsible for the increasing ranks of the millionaires club.

This benefits Manhattan's real estate market in particular, because you have to be rich to participate. It's hard to find a half decent studio apartment in Manhattan for less than $400,000. If you want a few bedrooms, you're probably looking at seven-figures. So the borough's sales are likely being driven by wealthy individuals residing there who can afford pricey apartments. Meanwhile, in other markets with fewer rich residents, buying remains weak.

Manhattan's housing market success, while notable, doesn't necessarily suggest a broader U.S. housing recovery is just around the corner. The city benefits from the specific set of circumstances described. For the rest of the nation's real estate to recuperate, consumer sentiment must improve. That will likely require a substantial decline in unemployment.