Sales of luxury apartments that cost $5 million or more in New York City have plummeted more than 31% over the first six months of this year, and sellers are trying to make up for the drop in sales by slashing prices to meet buying demand.

A market report by Stribling & Associates, a New York-based brokerage, noted the fact that sales in this luxury category have fallen drastically year-over-year. It found that the drop in sales was concentrated in newer condominiums, where supply has been overwhelming, according to a follow up on the report by WSJ.

Back in February, we predicted that this would inevitably happen, when we noted that the market was being flooded by supply of higher end apartments while builders neglected sub-luxury housing in favor of chasing higher margins.

The report also found that sales of older luxury cooperatives that were priced over $5 million rose roughly 10% in the first half of this year, but that was based off easy comps, as there had been a slow start to 2017, which was the slowest year for luxury co-ops since 2013. Luxury cooperatives purchases, which include many buildings that surround Central Park, include buyers purchasing shares in a corporation instead of buying the deed to the apartment.

Chart source: WSJ

According to Donna Olshan, a broker who monitors contract activity for high-end apartments, most deals that are getting done in the luxury apartment space are the result of sellers "capitulating to reality" and cutting prices to hit buyer bids, who have enjoyed a flood of supply recently.

"The contracts that are getting done in the luxury end of the market are the result of sellers capitulating to reality."

These apartments, which saw their prices soar in 2014 and 2015, have since stagnated on the market, or simply fallen lower. One such example includes a five bedroom penthouse at 11 N. Moore St. in Tribeca was first listed for $40 million in January 2014, but has since seen its price cut three times, until it was eventually sold for $20 million last Thursday.

This report comes less than two months after we reported a sharp drop in Manhattan apartment rents and less than 6 months after we predicted that a focus on luxury building only could flood the market with supply.

Manhattan rental units with three or more bedrooms accounted for 12.2% of new leases in May of this year, the largest share since Douglas Elliman Real Estate started tracking the data in 2011: a deluge of high end supply. Excluding renewals, renters signed leases for 767 apartments in this category - a 20% increase from a year earlier. Meanwhile, the median rent for these homes fell 5.8% from a year earlier to an average of $5,650. By comparison, rental rates for two-bedroom units dropped 4.6% to $4,295, while rents for one-bedrooms moved ever-so-slightly higher, climbing 0.3% to a median of $3,459.

This is what we observed in February::

There is just one problem: developers are putting up the wrong kinds of buildings, focusing almost entirely on the luxury segment. However, as discussed here recently, the luxury market is by now largely overbuilt, while the shortage of affordable rental housing is growing, as developers remain hamstrung by the now record-high cost of construction. Here are the facts: in 2017, apartment completions in the 150 largest U.S. cities jumped to 395,775 units, higher than 2016 production by a staggering 46% and more than doubling the long-term average, according to RealPage. However, instead of focusing on the mid-range, luxury, upscale buildings accounted for between 75 and 80% of the new supply in the current cycle.

Kirk Henckels, a broker and vice chairman of Stribling & Associates, didn’t seem to know how to make sense of a price correction of this magnitude without a broader recession or stock market fall.

It is generally rare to see falling home prices without a “relatively catastrophic triggering event” like a stock market collapse, Mr. Henckels said, adding, “It is very clear that this market is enduring what is the kindest, gentlest major price-correction in memory.”

There is another way of looking at the problem, Kirk. Perhaps instead of describing it as “the kindest, gentlest" price correction in memory, analysts, brokers and realtors would be better served wondering if this sudden, sharp drop in prices may actually be the canary in the coal mine for a much larger problem.