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Three Cents Worth: Looking At Manhattan's Mortgage History

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[This week, real estate appraiser, Curbed graph guru, blogger, and podcaster Jonathan Miller investigates trends in monthly mortgage payments in order to parse the age-old question: rent or buy?]

In this week's column, I thought I'd look at something near and dear to our economic hearts: tracking rental versus mortgage payments in Manhattan. Above, you'll find Manhattan's median sales price for co-ops and condos, as well as median rental prices, plotted against a theoretical monthly mortgage payment. At first I was using this to present the rent-or-buy decision, but the visual became a little more than that.

For the mortgage payment estimation, I used generic defaults of 20 percent down and 30-year fixed Freddie Mac mortgage rates using median sales prices as the anchor—understanding that a 20 percent down payment has not been a constant over the past 20 years. Although I'm only tracking principal and interest on the payment, I'm not factoring in the tax deduction either, so the offset is somewhat reasonable in this simple visual. Here's what I found:

Median Sales Price (purple line): This trend line is the one we've published for years and was the basis for calculating the theoretical mortgage payment. Rising prices lead to a 2008 peak and subsequent correction. Note a bunch of seasonal zig-zags since Lehman collapsed, but it's all pretty much moving sideways despite the hyperbole about trophy sales.

Monthly Mortgage Payment (pink line): This trend line follows nearly perfectly with the median sales price—until Lehman. At first view, that's pretty logical, since it is based on median price, and I'll bet there would be lot more disparity if I included (or had access to) all the other factors during the last boom that I hope to incorporate—i.e. zero-percent down payments. However, post-Lehman, even without the silly financing stuff we had in the prior boom, the mortgage payment fell in relation to median price as mortgage rates fell. With mortgage rates falling to record lows during that time, housing prices only managed to show stability. I think that shows how mediocre the economy is.

Monthly Median Rental Price (green line): Rents clearly responded to changes in housing prices. You can see it in 2002, after the Fed pushed interest rates to the floor. Rental prices basically peaked in 2006-2008, when housing prices and high monthly payments pushed rents up and sales volume fell sharply—low purchase affordability pushed up demand for rentals.

If mortgage rates edge higher—arguably at a slow pace with the economy only improving slowly as it is now—there would be reduced affordability for purchase, keeping the pressure on rents and keeping sales activity from surging like it did last year.

The takeaway? This shows how important it is for the improving economy and easing of credit to make a "soft handoff" from low mortgage rate dependency (even in a cash-heavy market like Manhattan).
· Miller Samuel [official]
· All Three Cents Worth [Curbed]