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Three Cents Worth: The Long and Winding Road Upward

[What better way to ring in 2006 than with a big, fat chart. This week, Jonathan Miller, brings it with some meat-and-potatoes analysis of the relationship between the average Manhattan sales price (green bars) and the 30-year mortgage rate (red line). The graph runs from the first quarter of '89 through '05. Click on the graph for bigger bars and wider lines.]

We released our 4th quarter 2005 Manhattan Market Overview today (coming soon here) which showed that the price indicators we track (average sales price, median sales price and price per square foot) were up in a range of 1.3% to 3.3% over the prior quarter but were up 20.3% to 28.5% from the prior year quarter. The change in prices from last quarter was just over 9% annualized, less than half the roughly 24% pace seen in the actual annual numbers. The meaning? The market shifted gears between the 2nd and 3rd quarters from double-digit gains to single-digit gains.

All this stat babble got me to thinking about the big picture and asking what was the primary impetus behind the run-up in sales price? Well it's no secret that mortgage rates have much to do with this. There is definitely an inverse relationship between mortgage rates and sales prices because it's all about the payment and how much you can afford as a buyer. What I love about this chart is how steadily mortgage rates have fallen (with a few blips) over the past 15 years and how steadily housing prices have risen.

The rise in mortgage rates at the end of last year have held back price increases but if you remove the spike in 1st two quarters of 2005, the market is basically continuing to rise.
· Manhattan Avg. Sales Price vs. 30-Year Mortgage Rate [MillerSamuel]