Housing market rises to the occasion.

Manhattan's residential market has managed to avoid a New Year hangover with brokers instead celebrating 4th Quarter numbers that seem to herald a strong 2007.

"When you bake a cake, you need all of the right ingredients," said Jacky Teplizky, executive vice president at Prudential Douglas Elliman. "That's what's happening right now. We have a strong economy, low unemployment and a lot of people getting new jobs in well paid positions. That and the number of sellers who had simply been testing the market stepping out of the game."

Indeed, the city's main players universally agree that the drop in inventory and hike in sales, not to mention prices cited in the latest reports, can be credited to buyers and sellers well, basically, getting real.

"The emphasis this year is going to be on accurate pricing. Properties are not going to sell if they are not priced correctly," said Jonathan Miller, president & CEO, Miller Samuel Inc, appraisers. "And there is certainly evidence that sellers are getting the idea that they need to price accurately.

"We have seen a drop in listing discounts. The difference between the last list price and purchase price in the 3rd Quarter was 4% and in the 4th is was 2.8 %. That doesn't mean sellers were becoming more difficult to negotiate, it shows sellers are pricing closer to market and therefore there's less resistance between the buyer and seller."

Miller said the city is also in much better shape than other metropolitan areas thanks to the dearth of investors here. "We never had that investor component, the speculative market where condos were being built for the wrong reasons, basically to flip. Look at Washington DC; what's on that market is taking 40 months to absorb whereas in New York City we are talking 10-11 months to absorb."

The drop in inventory has been particularly significant following months of speculation that the city was about to be flooded by new condo developments.

According to Samuel, the numbers indicate not that new development has decreased, but instead that re-sales have dipped as those halcyon days of heady profiteering from a runaway market become a bit of a distant memory. "A lot of that inventory was overpriced by sellers looking to cash out and were are not consistent with market levels. As a result, the properties really cluttered the inventory landscape. But the sellers didn't receive much interest during the middle of last year and we saw the inventory expire because they were never really serious sellers."

Inventory is still high--the Prudential Douglas Elliman 4th Quarter report prepared by Miller Samuel lists it at 5,934--it has dropped 22% on the previous quarter.

The other silver cloud on the New Year numbers has been the increase in sales when typically there is a downward trend. Much of that may be attributable to co-op data now entering the public domain much faster as a result of city-level policy changes and therefore, primarily, a statistical adjustment.

But Corcoran's figures showed a staggering 56% jump in condo sales on the year and a 7% hike in coop sales.

The return of families to the city has helped push up the price of coops, according to Diane Ramirez, president of Halstead, which reported prices in the four-bed and up range jumping 59% in the past year.

"We are seeing more and more families staying in New York, so more people are vying for the larger apartments of which there are only a set amount," said Ramirez, who credited the city's developers with doing their homework well. "We are seeing a lot more product out there that is giving the family more options and, as long as they want these apartments, they will continue to drive up the price."

Indeed, the families exodus to the suburbs does appear to be reversing as buyers seek an improved quality of life that the city can now offer. School options have grown and parents want to be able to walk to work, or slip out of the office to attend a children's pageant for an hour.

"The convenience of being close to home has become a top priority for a lot of buyers," said Ramirez.

While Ramirez believes the new condo developments coming down the pipeline can only help keep the supply and demand in balance, Miller cautions that it will be the market's biggest challenge in the coming years.

"We have positive conditions economically, which has helped keep us out of trouble to date, but I think the fact that the we have inventory coming on line will temper the market and 2007 will be an up year tempered by the supply issue because, while inventory is down from six months ago, it is still 50% higher than it was two years ago," he said.

In 2005, 110,058 building permits were filed with the city. Last year, the number jumped to 116,647. However, that doesn't necessarily translate into hard numbers as the permits cover the whole spectrum of the building process.

"A lot of emphasis is placed on the number of permits filed, but that can overstate what's coming on," said Miller. "Clearly, though, its not going to stop coming out and that will challenge the market."

Shaun Osher, CEO of CORE Group Marketing, believes the historically high land and construction costs of last year caused a pause in the residential development market that has contributed to today's low inventory. While he predicts that could slide further in the next 12 months as the developers try to catch up, he said, "Relatively and historically speaking, while there are a lot of new buildings coming on, we have such a quick absorption rate because the market is so strong and there's still a large demand for good product."

A weakening US economy has also countered concerns of a hike in mortgage rates, which last year many speculated would have reached 8% by now.

According to Melissa Cohn, CEO and chairman of the Manhattan Mortgage Company, mortgage rates have remained fairly static and show no indication of heading north anytime soon.

She commented, "It's a data driven market at the moment. We are at the mercy of the bond market, which seems to change its mind as different pieces of information become available. The consensus was strong over the last few weeks that there would be weak reports, yet time and time again we have been surprised by positive economic news."

Cohen predicts the ebb and flow of economic information will keep the residential market in a state of flux through 2007, but added, "I don't believe the economy is 100% recovered, but we are not about to go into a major recession. There will be periods when we will get weak data and we will see rates go up and down following the market."

The fact that mortgage rates remain historically low--well below 6.5% --should be the industry's saving grace. While nationally, borrowers are trending towards fixed rate mortgages, Cohen said the same is not true in New York City where half of all borrowers are seeking five and seven year interest only adjustables

"I think buyers should be aware that there's very little difference in rates between fixed and adjustable," said explained. "With the five-year-adjustable and 30-year fixed, the difference is less than half a percent and often with the adjustable you can borrow more at the base rate. Our primary housing stock is co-op and condo and the banks are more aggressive in what they are allowed to lend on adjustable versus fixed."

And as long as the banks are lending, the buyers will be out there. Said Teplitzky, "To be honest, the market is unbelievably great. I am stunned, and it's not easy to shock me."

"I have on the market right now everything from $7.5 million to $599,000 and we are unbelievably busy.

"People are definitely more comfortable with the state of the market and I think we will continue at a healthy pace unless we are either flooded by new inventory or there's a sudden change in interest rates, neither of which I think is on the horizon."