With the bankruptcy filing by Lehman Brothers and Merrill Lynch heading to North Carolina under the banner of Bank of America, Sunday presented New York City a tough blow. The real estate market that has been propped up by Wall Street’s million dollar bonuses has now hit the proverbial wall.

We have been amazed how Manhattan’s real estate prices have remained so high. The combination of limited housing and a huge influx of bonus money paid out to Wall Street employees has provided much of the cushion for market factors that has hampered the national real estate market.

An interesting factoid about New York and Wall Street’s relationship: While the Wall Street provides only 5% of the jobs it creates 25% of the wages paid in the city at an average salary of $300,000.

As recently as April we were writing about the strength of Manhattan real estate pricing. “With slowing sales on the low end the average price of New York City’s real estate is seeing amazing heights. The average price of a Manhattan dwelling is up 41 percent, while New York City as a whole is up 28 percent.”

Of course, it does make me wonder how deluded some of the Wall Street companies were paying bonuses like they did when their bottom lines were such a mess. Think about it, it is like a homeowner buying a hummer when they can not pay their mortgage.

But now the piper will be paid, the bonus money that has kept Manhattan afloat is severely diminished. The huge influx of tax money is going away for state and local services. And New York City is going to be facing some very tough times, especially if housing prices drop as the Wall Street bubble evaporates.

In Manhattan _ where the median-priced home cost more than $1 million _ prices were actually up 14 percent in the second quarter from a year ago. And prices in desirable suburbs are holding steady.

But Monday’s cataclysm on Wall Street could be the event that finally pushes Manhattan property values downward, said Jonathan Miller, president and chief executive of real estate appraisal and consulting firm Miller Samuel Inc.

“There’s an expectation that we’re going to see a weakening in prices,” said Miller, who declined to give a specific forecast, but did say that any price declines are likely to be moderate.

Potential homebuyers with Wall Street jobs have already been looking at smaller houses or putting off their real estate search, said Lina Panza, a real estate agent for Re/Max in Montclair N.J., who has several clients at Wall Street firms. via CNN

Tags: New+York+City, Manhattan+Property+Values

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