Supply of homes has plunged nationally for a number of reasons. New home construction came to a standstill following the bust. Foreclosure activity has declined reducing the inventory of existing homes in the market. Some homeowners cannot sell their homes because they continue to owe more than their homes are worth. Others can't sell because they can't qualify for the loan they would need to "trade up" to a bigger home, owing to tight credit conditions.

In Manhattan, however, there are other factors at play. Unlike the rest of the country, there are relatively fewer underwater borrowers in the city and foreclosures are also low.

The shortage of supply stems from two factors. Post crisis, almost all new construction has taken place at the high end of the market. Many projects that were originally meant to be condos were also converted into rentals because they were seen as safer bets in the depths of the recession.

But as Jonathan Miller, CEO of Miller Samuel points out, this explains only part of the problem as new construction accounts for only 10% to 20% of supply.

The real reason why there are not enough listings, he says, is because potential sellers are staying put in their homes due to lack of supply. "When sellers sell, they become buyers or renters," says Miller. "If you are a homeowner and you want to trade up, but can't find anything to buy, even though you still have plenty of equity in your home, what do you do? Nothing." says Miller.

Perlson of says the inability to trade up to larger homes has dramatically reduced the supply of middle-tier housing, effectively freezing the market.

Some of the market dynamic also has to do with changing demographics. Previously, people moved to the suburbs once they had children. Now more and more families are opting to remain in the city, one reason why competition for larger three bedroom apartments is particularly stiff.

Then there has been a steady flow of demand from rich foreign buyers from countries such as Brazil, Russia and China who see New York as a safe haven for their second or third home. Teplitzky of Douglas Elliman says about 40% of her clientele tend to be international buyers.

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