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Three Cents Worth: Getting Our ARMs Around Studios, 1BRs

[This week, graphinista Jonathan Miller takes a look at the market for studio and 1-bedroom apartments. The green line is the year-over-year change in the price of Manhattan studio apartments. The pink line represents the same figs for 1-bedrooms. And to put it all in perspective, the orange line is the change in the 1-year adjustible rate mortgage (ARM) rate. Click on the image to expand.]

Since the upper end of the market was anointed with a lot of attention in the 1st quarter stats, as it benefitted from record Wall Street bonus income, I thought I would take a look at how the entry-level markets (studio and 1-bedroom units) were doing. A large portion of the demand for these apartments is driven by mortgage rates, with a heavy concentration on adjustable rate mortgages. The percentage change was derived from the change in quarterly price per square foot of co-ops and condos as compared to the prior year quarter. I tracked the entry level market back to 1991 (15 years).

The result? A lot more volatility in studio price levels than 1-bedrooms (yes -- I know I didn't adjust for CPI). Volatility and price declines were the norm until the mid-1990's before the market started to improve as rates trended downward. There was a significant drop in appreciation from the peak at the 2001 recession to trough in 2002 -- perhaps a clue for whats in store if the Fed keeps ratcheting up the short term rates as they did prior to the last recession.

Studio and 1-bedroom price changes have started to ease -- but this is the rate of appreciation, not the direction of the market (at least at this point). ARM rates are clearly rising and this is something to be concerned about since ARM's have been one of the significant factors in the recent housing boom.
· Entry-Level Apartment Prices [Miller Samuel]

BONUS MILLER: Dude's got his own podcast this week, too, at The Real Deal.