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Three Cents Worth: Gap Between Starter, Luxury Markets Grows

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[This week, real estate appraiser, Curbed graph guru, blogger, and podcaster Jonathan Miller examines the growing chasm between the starter and luxury markets.]

I thought I'd bring out another way to measure the market since we're over-obsessed with "luxury." The starter market needs more analysis since affordability is now a key topic of conversation across the U.S. right now. For the more than 20 years of releasing market reports, and in all the other markets we analyze, I have always defined "luxury" as the top 10 percent of sales in a given period. For the "starter" market, I inverted the analysis and defined it as the lowest 10 percent of all sales in a given period. I've parsed out the past three years of Manhattan apartment sales by quarter and measured the year-over-year change in average sales price for the luxury and starter markets. I selected "average" over "median" to suss out more volatility.

The result? Both the luxury (purple) and starter (magenta) markets have been relatively stable until recently. The luxury market had a sharp spike in the first quarter of 2014, but this was somewhat exaggerated by the year-over-comparison with 2013's first quarter. If you remember, 1Q13 was the quarter immediately following the expiration of the "fiscal cliff" at the end of 2012 when high end buyers and sellers struggled to get their transactions done before we went over the cliff (FYI we survived).

The starter market did see some modest gains over the past year, generally edging more than the luxury market until the last quarter. The starter market benefited from rush of "fence-sitters" into the sales market from the rental market to beat the expected rise in mortgage rates—beginning about a year ago (however 30-year rates are now the lowest they've been since last summer).

Using the starter data, I built a "luxury/starter multiplier" by dividing the average sales price of a luxury sale by the average sales price of a starter sale. For the most part, the multiplier has been hovering around 20x until spiking to 25.9x in the first quarter of 2014. The introduction of more high end closings to the mix is helping the top end of the market to really jump.

In other words, the Manhattan market is becoming more polarized. This post could have been titled "I have to give you 26 of mine to get 1 of yours." Ugh.
· Miller Samuel [official]
· All Three Cents Worth [Curbed]