By ANDREW JEFFERY

This post first appeared on Minyanville.

From expansive estates in the Hamptons to mansions on the Malibu cliffs, the rich are watching their vast real-estate wealth evaporate before their eyes.

Perhaps no market epitomizes the ultimate surrender of high-end real estate than the island of Manhattan, where housing prices had held relatively stable until quite recently, despite broad declines across the country.

Turmoil on Wall Street, the collapse of Lehman Brothers, and layoffs at big employers like Citigroup (C), JPMorgan (JPM), Morgan Stanley (MS) and Goldman Sachs (GS) have finally taken their toll on the once-proud market for overpriced, undersized refuges from the concrete jungle.

The Wall Street Journal reports housing inventory in Manhattan jumped 39% in the fourth quarter as sales plunged – even as prices managed to eke out a 3.1% gain from a year ago.
Meanwhile, condominiums and cooperative apartments currently under contract to be purchased are selling at a whopping 20% below the prices paid just last summer. As sales data reflecting those transactions emerge in the coming months, Manhattanites may finally wake up to the reality that their housing market is no longer immune from the afflictions the rest of the country knows all too well.

Compounding the effects of an abysmal bonus season throughout the financial industry, ongoing job cuts, and generally weak economic conditions, lenders continue to scale back the availability of so-called jumbo mortgages. These loans, too big to fit within the ever-narrowing lending guidelines of Fannie Mae (FNM) and Freddie Mac (FRE), don’t qualify for a government guarantee.

Banks take on more risk by originating these loans, and charge higher rates for the pleasure. Bankrate.com (RATE) reports jumbo rates remain more than 1.5% higher than their smaller, conventional counterparts.

Since most Manhattan condos and co-ops are purchased with jumbo loans, these persistently high rates mean prices on the island are being only marginally supported by recent, aggressive moves by the Federal Reserve and Treasury Department to spur home buying.

Wells Fargo (WFC), now the nation’s largest mortgage lender after completing its acquisition of Wachovia, isn’t helping matters for high-end buyers. The California-based bank announced yesterday it would stop offering jumbo loans through its wholesale (or broker-originated) channel. MortgageDaily.com reports Wells cited low market demand and higher risks in its decision to suspend jumbo offerings for mortgage brokers.

The ongoing financial crisis, which arguably originated in the narrow winding streets of Wall Street, has now come full circle. The same bankers, traders and financiers who levered houses up beyond all rationality are now seeing the dark side of structured finance gone awry.

Some will wisely sell now, while they still can, take their lumps and move on. Others, stubbornly clinging to their former glory, are likely to go down with the ship.

By ANDREW JEFFERY

This post first appeared on Minyanville.

Constrained supply, continuous demand and wealth beyond imagining: There’s a reason New York City real estate is the most expensive in the country.

Easy lending, a weak dollar and gobs of Wall Street money pushed already sky-high Manhattan property values into the stratosphere during the housing boom. Now, finally, after the rest of the country has succumbed to the housing crisis, the city that never sleeps could be facing a real-estate crash of its own.

According to Bloomberg, commercial real-estate transactions plummeted more than 60% this year; lending has dried up and buyers have backed off. Despite all the fundamental reasons for New York real estate to remain strong, it’s Pollyanna-ish to believe it will remain an island of calm in an economy deteriorating by the day – especially when the epicenter of the economic calamity can be found at the southern tip of the island.

Tuesday, Toll Brothers (TOL) CEO Robert Toll issued a dour outlook for Manhattan property prices: “Up [till now], New York City was a nice stand-alone, and a beacon, but it has now joined the ranks of the rest of the country… I would expect the financial business in New York to probably lose 100,000 people.”

Toll went on to explain that “The foreign market, which supported in large measure the pricier condos in New York City, is not there in force as it was… what with the euro going down in comparison to the dollar lately, and with their own economic crisis.”

And when New York City real estate goes, it goes big.

The last housing slump in Manhattan began in at the end of 1987 and lasted for nearly 10 years. During that time, according to data compiled by quadlet.com, prices fell 40%. Adjusted for inflation, they tumbled almost 60%.

The New York Metro area is poised for a similar fall. According to the S&P Case/Shiller Home Price Index, home prices have slipped just 6.9% in the last year, compared with 26.7% in the Los Angeles area, 27.3% in San Francisco, and 9.8% in Chicago.

As the housing slump spreads into previously strong markets, these pockets of strength are starting to crack.

The longer credit markets remain under duress — and when firms like Goldman Sachs (GS), Morgan Stanley (MS) and Citigroup (C) are laying off ever more employees in their ongoing cost-cutting efforts – the deeper the slump is likely to be. A strengthening dollar and floundering economies around the world will continue to keep foreign buyers away.

What goes up, must come down.