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Three Cents Worth: Co-ops Move and Shake With Rates

[This week, our market expert Jonathan Miller analyzes the impact of mortgage rates on co-op sales prices in three categories?entry-level: studio/1 bedrooms (59% market share 1Q 06); mid-level: 2 bedrooms (35% market share 1Q 06); and upper-end: 3-4 bedrooms (7% market share 1Q 06). The full rundown below. Click on the image to expand.]

Consistent with the theme of the last 2 week's charts, I looked at co-op housing prices by category and showed how they respond to changes in mortgage rates (understanding that mortgage rates are not the only influence on appreciation). I wanted to show how the different sizes of apartments were affected, so I created 3 size categories and tracked their price changes over time using the percent change in average sales price from the prior year quarter. I selected the 30-year fixed as a basis of comparison only because the 1-year ARM's were not as significant in market share during the early 1990's as they are today.

Although an element of their volatility is the small (7%) market size, the Upper-End (purple) shows more volatility in price changes than the other 2 segments during periods of sharply declining rates. The Entry-Level (orange) and Mid-Level (pink) markets moved together with the exception of the period immediately following 9/11. Entry-Level apartments spiked during this period as they were the only segment that showed any significant sales activity for the next quarter. As the name suggests, the Mid-Level market was true to form and showed the most consistency in pricing over the past 15 years.

The trends seem to be:
· When rates rise sharply, the disparity between apartment categories decreases, which is generally what happened in 1994, 1995 and 1996.
· When rates fall sharply, the disparity between apartment categories increases, which is generally what happened in 1993, 1997 and 2001.

Over the past two years, we have seen mortgage rates flatten and then see modest increases. At the same time, there has been a steady rise in appreciation for the lower 2 segments and continued volatility at the high end.
· % Change in Nominal Co-op Sales Price [Miller Samuel]