Is Bonus Bump Bogus? Wall Street's $36 B. Test

In 2005, Wall Street investment houses handed out a record $21.5 billion in year-end bonuses, according to the State Comptroller. This year may be even bigger, with I-bankers and other staid dice-rollers expecting at least $36 billion total in bonuses to be doled out this winter.

Real-estate brokers must be popping champagne bottles. A very healthy bonus season means a very healthy Manhattan home-sales season in the spring, right?

Not really. While bonuses can pump up springtime prices, the effect on the volume of sales is more Wizard of Oz than Master of the Universe.

Barbara Fox, founder and president of luxury boutique Fox Residential Group, remembers the effects of the recent news of this year’s Wall Street bonuses. She was in a meeting about 985 Park Avenue, the seven-unit luxury condo that her brokerage has the exclusive on, when, as she puts it, “the pall lifted” on all that negative talk about bubbles bursting and the Manhattan housing market drifting downward.

“We were going over how many people had come into the sales office during the course of the week,” Ms. Fox said. “The week before [the bonus announcement], there had been four. The week after, there were 14. As soon as they announced that the Wall Street bonuses were going to be really plentiful, business picked up.”

Beyond this psychological boost, the only thing a healthy bonus season seems to mean is that Manhattan home prices will go up in the spring—for those getting the bonuses and for everyone else looking to buy.

In 2002, firms handed out $8.6 billion in bonuses (remember when that was a lot of money in Manhattan?). In 2003, 8,802 Manhattan co-ops and condos traded hands, according to the appraisal firm Miller Samuel; that turned out to be a now nearly four-year peak in sales numbers. So did 2003’s number of luxury sales specifically (849), which Miller Samuel defines as the top 10 percent of all Manhattan sales prices in a given time period.

Home sales dropped from 2003 to 2004, and then from 2004 to 2005. And they look like they’ll drop from 2005 to 2006.

But that’s whole years. What about the first halves of the years—those halves supposedly most impacted by Wall Street bonuses, which are generally awarded from December into March?

The same holds true: A bigger bonus season doesn’t mean bigger sales volume.

In the first six months of 2003 and 2004, despite widely varied bonuses the years before ($8.6 billion in 2002 versus $15.8 billion in 2003), the number of sales floated around 4,070, according to Miller Samuel. From the first half of 2005 through the first half of 2006, sales dropped by 270—despite 2005 being a record year for Wall Street bonuses, nearly $3 billion above the 2004 total.

The Wall Street bonuses appear to affect Manhattan apartment prices much more strongly than they do sales. The psychological boost from the bonuses every year, coupled with the usually slow winter sales season (read: slim pickings on the sales market), typically send springtime prices upward. That’s a reliable reality that reassures brokers, says one industry veteran, regardless of sales volume.

“If you take away our bonuses, our marketplace could be something like Miami or California, where they’re seeing a great deal of price depreciation,” said Christopher Mathieson, the managing partner at luxury boutique JC DeNiro & Associates.

Miller Samuel tracked the number of condo and co-op sales in Manhattan by quarter going back to the second quarter of 1990, and the median sales price for those co-ops and condos.

Both the median sales price and the number of sales went up, on average, only in the first and second quarters—the first halves of the year—spiking especially in the second quarter. Prices dropped in the third and the fourth quarters.

Is it the bonuses fueling the springtime sales and price spikes? Or are other seasonal factors at pricey play, like parents buying for soon-to-graduate children; recent grads themselves buying; couples emerging from the fall wedding season; buyers acting because of a planned summer outside the city?

Many barometers presage the number of Manhattan home sales in a given time period. The Wall Street bonus season is only one.

Is Bonus Bump Bogus? Wall Street's $36 B. Test