This piece was first published on Urban Digs on 2/6/2009.
After touching off quite a lively debate with my last piece on the NYC housing bubble, I wanted to do a follow up piece that answered some questions and explored the issue of appreciation based on number of bedrooms. I also wanted to go as far back in time as the data permitted and look at price appreciation versus inflation to get a feel for how much "excess" return was generated in the New York City market as the result of animal spirits above and beyond inflation.
I like to be transparent about my methods to highlight the limitations of my primitive analyses, so let's go through the drill again. I used data from Miller Samuel on the Upper East Side market that extends back to 1989. I used the Upper East Side market because it has not been a transitional neighborhood and should not reflect appreciation based on greatly improved quality of life as some emerging neighborhoods in New York may. Note also that, as in my last piece, I interpolated the data for 2005 in the graph below because Miller Samuel didn't have the data (although I understand Jonathan Miller does have a note from Epstein's mom to explain why he didn't show up to work that year).
Purists will be relieved to know that I calculated compound annual growth rates for this study (CAGRs), and separated them out into 3 time categories; 1989 - 2007 (full period), 1989 - 1999 (stagnate market) & 1999 - 2007 (robust market).
You may be surprised to know that during the period 1989 to 2007, 1 bedroom apartments appreciated more rapidly than either 2 bedroom or 3 bedroom units:
CAGR of UES Median Price Gains Coops/Condos 1989 - 2007
1BRs - 6.7% per year
2BRs - 6.2% per year
3BRs - 6% per year
The same did not hold true, however, in the rather moribund 1989 to 1999 period:
CAGR of UES Median Price Gains Coops/Condos 1989 - 1999
1BRs - 2.2% per year
2BRs - 2.8% per year
3BRs - 3.1% per year
In contrast, during the robust 1999 to 2007 period:
CAGR of UES Median Price Gains Coops/Condos 1999 - 2007
1BRs - 12.7% per year
2BRs - 10.6% per year
3BRs - 9.6% per year
I was surprised by these data and wondered if it was peculiar to the Upper East Side, so I did the same analysis on the Upper West Side data from Miller Samuel.
CAGR of UWS Median Price Gains Coops/Condos 1989 - 1999
1BRs - 3.2% per year
2BRs - 6% per year
3BRs - 4.8% per year
Interestingly, prices for 2BRs led the way during this time period. For the more bullish years of 1999 to 2007, however, 1 bedrooms played a little bit of catch-up:
CAGR of UWS Median Price Gains Coops/Condos 1999 - 2007
1BRs - 12.3% per year
2BRs - 8.9% per year
3BRs - 14% per year
Furthermore, on the Upper West Side as one might have expected, the increasing population of families pushed up the median price of more scarce 3 bedrooms by 14% per year. This drove 3 bedrooms to the leading position over the full 19 year stretch, with an appreciation of 8.8% per year, versus 7.3% for 2 bedroom units and 7.2% for 1 bedroom units on a compound annual basis; more in line with what you would expect for larger apartments that are in less supply.
The chart below shows the Upper East Side apartment figures graphed against owner equivalent rents. As in my earlier piece, I just took the 1989 price of a 2 bedroom as my base and inflated by the annual rate of growth of owner equivalent rents for the New York area from the Bureau of Labor Statistics. Some folks complained that I only looked at data back 10 years to the beginning of the boom in my last piece, albeit without intent to deceive (potentially making the bubble look worse). So here you have a "full cycle" picture, which I think is very telling. After underperforming inflation for the 1989 to 1999 period, the market raced ahead of it for a number of years and got far above the trend line in the last couple of years. We can see that this may be part of a normal "full cycle." It doesn't detract from the idea that a regression to below the mean may be quite painful, however.
Noah and I recently discovered this jiffy display tool for Urban Digs which I will utilize to let you look right at the raw data on the various apartment sizes for the Upper East Side, here (View image) and for the Upper West Side, here (View image). Additionally, you can pop up the chart above and see it more clearly if you click here (View image).
I also want to note that in comments on my last piece someone accused me of over-dramatizing the run-up in prices by presenting average annual growth numbers (in addition to total appreciation figures). They then presented their calculations of the compound annual growth rates for the various neighborhoods in the study. The numbers looked too low to me, but I didn't get a chance to calculate them until I sat down to write this piece (and I really felt my point was valid regardless of the start point or growth rate calculation method). But we at Urban Digs are always open to dissenting views and constructive criticism. So let me give you the correct compound annual growth numbers here.
From 1998 to 2007, the compound annual appreciation of 1 bedroom condo and coop median prices for the following neighborhoods discussed in my last piece were:
CAGR MEDIAN PRICE OF 1BR CONDO/COOP FROM 1998 - 2007
Greenwich Village - 12.4% per year
Upper East Side - 13.4% per year
Upper West Side - 13% per year
Clinton - 15.4% per year
Harlem - 23.1% per year
Washington Heights - 31.9% per year
The popping of the New York City residential housing bubble has negative implications for anyone doing business in the City and the many lenders to the New York City real estate market be it commercial or residential. Companies with exposure include VNO, ALX, AKR, SOV, HCBK, FCY, COF, SBNY, AF, and SLG among others.
Disclosure: The author has no positions in these securities.