City's residential market is gettin' its groove back.

During 2006, a fundamental shift in perception animated the behavior of both buyers and sellers of New York real estate.

Cudgeled week after week by negative reports about the softening national real estate market, the impending crash, and the glut of newly-built residences, many sellers began adjusting their prices downward while buyers, feeling more empowered, negotiated more aggressively than at any time since the post-9/11 period.

Interestingly, sellers had continued to raise their prices throughout 2005 despite the signs of a slowing market. As a result, these price adjustments and negotiations did not yield a drop of any significance in actual sales prices. In fact, in a number of markets sales prices increased, although minimally. After years of double digit growth, however, the flat market of 2006 seemed to be receding, although in most cases it actually was not.

For the last five years the Manhattan (and Brownstone Brooklyn) luxury markets have been driven from the bottom up. A major change wrought during 2006 was the reversal of this trend. The market today is being driven from the top down.

For years, studio, one-bedroom, and small two-bedroom apartments functioned as the little engine that could, scaling one price barrier after another.

Late in 2005, that behavior began to abate. Driven by a combination of susceptibility to negative reports, increasing interest rates, and greater economic insecurity, small apartment buyers began to wait. Even though the rental market had once again tightened, the media assured them prices were coming down just as interest rate increases made a purchase more expensive. Inventory began to accumulate. Sellers were reluctant to lower their prices. Many smaller properties languished on the market.

Meanwhile, during 2006 ultra-luxury property displayed extraordinary strength powering the market from the top. Buoyed by record profits on Wall Street and replete with hedge fund managers, properties selling above $10,000,000 were scarce and popular.

In every price range, proper pricing continued to be the main difference between a quick sale and an extended one. As more and more luxury condominiums reached the marketplace, there was an ample supply of beautiful new homes for the renovation phobic in every price range and part of town. In fact, many of Manhattan and Brooklyn's most exciting neighborhoods have seen a flood of new condominium construction and conversion, much of it setting new price records for the neighborhoods it is redefining. At the same time, so many new units are challenging for the market to absorb, especially in more cautious times.

One of the most interesting phenomena of the latter half of 2006 was the introduction of incentives at a number of new condominium projects.

Unsatisfied with the pace of sales since late summer, many buildings introduced buyer incentives during 2006's last quarter. These range from the partial payment of closing costs to accelerated commission payments for brokers. Even with strong absorption rates (aided by the incentives) there remained a great many new units for sale as 2006 drew to a close. And more are on the way in 2007!

This highlights the third fundamental shift which emerged in 2006 and brings us into 2007: the bifurcation in the market between newly-constructed and resale units.

As the inventory of newly-constructed units rises, they are increasingly competing with one another for the same pool of buyers. At the same time, there still exists a separate pool of buyers who are in the market for resale units in the more established co-op and condo buildings throughout the City. These buyers, while they will consider new construction, nonetheless feel a preference for older apartments with their particular set of amenities.

The supply of these apartments remains scarce. When they come up, especially the larger ones, especially if they are priced right, they are sold quickly, frequently with a number of back-up buyers. Recently, three 12-room, pre-war apartments came onto the market on Park Avenue within three days of each other, all priced at or around $12,000,000. There had been very little inventory in this property size available for several months. Notwithstanding the negative reports and the ostensibly soft market, each had offers at or above the asking price within a matter of a few weeks.

2006 brought the relationship between buyers and sellers back into balance. In today's market, each may need to display flexibility on certain issues in order to arrive at an appropriate conclusion. We at Warburg think of it as a broker's market: one in which the broker's expertise shapes the process towards a successful outcome.

Any market, this one included, can provide excellent opportunities for either the purchase or sale of real estate. And in the Internet age, with information available to everyone at the touch of a keystroke, a broker's guidance is more important than ever to help you through the thicket of data to the outcome you desire.

BY FREDERICK W. PETERS, PRESIDENT WARBURG REALTY PARTNERSHIP