Not all is well in the luxury segment of the US housing market, manifested best through Manhattan's luxury condo segment, where as reported here over the last few months, there has been a sharp deterioration. A quick sampling of recent stories on the topic reveals that the situation is indeed bad, and getting worse:

Yet while all these external observations are troubling, nothing compares to the perspective of a real insider. Overnight we got just that, courtesy of Barry Sternlich, CEO of the Starwood Property Trust. As a reminder, Starwood Property Trust isn't a traditional mortgage REIT plowing its capital into mortgage-backed securities, but instead, its primary business is the direct financing of real estate projects, and as such it is far more familiar with the nuances of a given real-estate market than those who transact in bulk.

It is what Sternlicht said during yesterday's STWD conference call that caught our attention, and which confirms that while the market may be at all time highs, that optimism is now very far removed from the one sector that has traditionally benefited the most from a soaring S&P500: Manhattan luxury real estate. This is what he said about the state of the retnal market:

New York City rental market is going to be weak. It is weak. It is going to continue to be weak. You saw that in our earnings statement. Similarly, parts of South Florida, particularly only really our focus on Miami has a similar situation with a lot of condos coming online with a much different structure than any market we have seen before, because in most cases the individuals have up to half of the cost of the apartment paid for as a deposit.

And then the Manhattan high-end condo market:

... there is one market in the country which is quite weak, but where the weakest market is where there is almost no loans at all. So we are looking at places like Manhattan. The condo market at the high-end, you know, is a catastrophe and will get worse. The hotel market is weak, not terrible, still profitable, but you are not seeing RevPAR increases year-over-year, in part because of the dollar and also because of supply.

Needless to say, if the economy - and especially the upper segment, the one that benefits the most from a record stock market - was running smoothly, none of what Sternlicht said would be applicable, which begs the question: what is the source of this "catastrophic" disconnect.