The fall out from Wall Street’s implosion is just beginning to rain down on Manhattan’s residential real estate market. Reports on activity in the final quarter of 2008 show inventory soaring, transaction volume slowing, and prices of existing units wilting, even as average prices overall posted a modest uptick.

“The strains that we’ve seen in the rest of the country started to show themselves here,” said Pamela Liebman, chief executive of The Corcoran Group, which conducted a survey of the market with PropertyShark.com. “Lehman’s bankruptcy took the wind out of our sails. Market confidence collapsed after Lehman.”

The average price of a Manhattan apartment still managed to hit $1.5 million in the fourth quarter, up 3% from the year-ago period and unchanged from the third quarter, according to another report by brokerage firm Prudential Douglas Elliman and real estate appraiser Miller Samuel Inc. The average price of an apartment in a new development rose to $1.3 million, up 5% from last year and 11% from the third quarter.

But Miller Samuel CEO Jonathan Miller insisted that measure is misleading. He noted that the average price is bolstered by transactions in new developments, where contracts were signed 12 to 18 months ago—well before the city’s economy began to slide.

More revealing are prices for existing units, which fell 4% from the year-ago period and 10% from the third quarter to $732,500.

“Resale transactions are a real barometer of what is going on,” Mr. Miller said.

Sales volumes staged a similar retreat. The number of sales transactions of both new and existing units fell to 2,282 in the final quarter of last year, compared with the year-earlier period, and were down 14% from the third quarter. Sales of existing units fared even worse, plummeting 25% from a year ago.

As a result, inventory surged to its third highest level in a decade, reaching 9,081 apartments, up 39% from the fourth quarter of 2007, according to Mr. Miller’s report.

He predicts that the combination of bulging inventory, skittish buyers and a lack of available credit will force prices lower this year. Brokers note that the impact of Lehman Brothers Holdings Inc.’s bankruptcy, Bear Stearns & Co.’s collapse and the rising unemployment numbers have yet to really manifest themselves in Manhattan’s real estate market because transactions take so long to close. They say the effect is unlikely to show up in earnest until the second or third quarter of 2009, traditionally the busiest selling seasons.

“The market is going to take a longer time to show the impact of what has gone on in the past few months,” said Gregory Heym, chief economist for Brown Harris Stevens and Halstead Property, which also produced a fourth-quarter analysis this week.

Brokers note that while there is still a large gap between what buyers are asking and sellers are willing to pay, the dynamic is starting to change. Sellers received just 95% of their asking price in the fourth quarter, down from almost 98% in the fourth quarter of 2007, according to Halstead.

“This is clearly a buyer’s market and sellers are getting that,” says Diane Ramirez, president of Halstead. “Sellers have to negotiate. We haven’t negotiated in five years.”