Homes to Blow Your Bonus On

For lucky Wall Streeters and top-performing execs, a new home is a holiday bonus idea that can be both practical and luxurious

If you are an investment banker, hedge funder, private equity player, bond trader, corporate lawyer, or a senior executive in the oil & gas or technology industries, chances are you'll be finding your bonus check a little heavier this year. Now, of course, not everyone can expect a payday like Morgan Stanley (MS) chief executive John Mack, who reportedly scored a record $40 million thank-you from his board of directors; but with the stock market hitting new highs on a regular basis and the real estate market continuing to soften, now is a great time for those with a little extra cash to go house hunting.

Splurging on a lavish new property has a particular appeal to traders and bankers, who are, by nature, always looking to diversify their investment portfolios, says E.J. Ridings, CEO of New York-based Trump Mortgage. Finance workers tend to spend long hours at the office, so when they actually have free time, be it at an apartment close to the office or a vacation home, they want nothing but the best.

This year, they will certainly be able to afford it. You can bet luxury real estate brokers are eagerly awaiting phone calls from Goldman Sachs (GS) employees, who are expected to receive a total of $16.4 billion in compensation this year, with some reportedly getting as much as $100 million each thanks to record-breaking fourth-quarter profit (See, 12/13/06, "All That Glitters Is Goldman").

"We're dancing around here," says Greg Heym, chief economist and senior vice-president of research and communications for privately held Terra Holdings, parent company of top-end Manhattan real estate broker Brown Harris Stevens.

A Million Reasons to Celebrate

Investment banks are profiting from this year's wave of mergers-and-acquisitions activity—2006 is currently the fourth largest year for M&A in history. U.S. stock markets have edged higher, with the Dow Jones Industrial Average index closing over 12,000 in recent weeks.

Overall, financial-services bonuses, which can constitute up to 80% of an employee's total compensation, will come out an estimated 15% to 20% higher than last year, according to executive compensation consultant Alan Johnson Associates. Managing directors at Wall Street banks are expected to receive an average of nearly $2 million each, and top-tier bankers may get $20 million or more.

Employees at Charlotte (N.C.)-based banks Wachovia (WB) and Bank of America (BAC) can expect pleasant surprises in their bonus envelopes. Executives at technology companies near Seattle and San Francisco should make out all right. But the real lucre will be doled out in New York City, where Wall Street comprises 20% of all income.

In fact, many high-end New York realtors notice a marked increase in sales in the wake of bonus season. "We don't live and die by it, but it certainly has a trickle-down effect," says Heym.

Bogus Bump Theory

But despite the buzz surrounding the New York real estate "bonus bump" each year, the actual correlation between rising bonuses and sales activity is weak. While Wall Street holds much of the money, it constitutes just 5% of all jobs in Manhattan—not enough to have a quantifiable effect on overall sale prices.

Manhattan real estate appraiser Miller Samuel has tracked the median sales price on a Manhattan apartment vs. the average Wall Street bonus per person since 1989, and the results show a loose connection at most.

The problem is, there are too many other economic factors that blur the effect of bonuses, says Miller Samuel's Jonathan Miller. Miller expects to see an increase in sale prices on Manhattan apartments in the first half of 2007 due to low mortgage rates, stabilizing inventory, and the weakening dollar—in addition to a strong bonus season.

Tidings of Comfort and Joy

So what's all the fuss about? "It helps lay the groundwork for a change in buyer and seller psychology," Miller says. Rising bonuses are a sign of favorable economic conditions. In addition, Miller says big bonus years tend to have a cumulative effect, as recipients may not always spend the money immediately.

So bankers will be beaming this holiday season, but what about the rest of us? You may not receive enough for a second home in the Hamptons, but you can start saving for one. "I would expect that bonuses will be pretty decent for 2006 across American industry," says Jan Koors, managing director of executive-compensation consulting firm Pearl Meyers & Partners, citing "relatively strong" economic trends.

There is one exception. After this year's steep decline in home sales, "real estate bonuses are going to be low," Koors says.

For disheartened realtors, a few $10 million home sales to bonus babies may be the perfect remedy.

Had a good year? Looking to blow your bonus on a new house or just want to fantasize about it? Click here for a roundup of bonus real estate buys around the country.