(Photo: James Leyne/Corbis)

Entry-Level Apartments
You can blame everything on these little guys. “The small apartment has been the little engine that could,” says Frederick Peters, president of Warburg Realty. If the market tanks, though, expect the locomotive to stall. For starters, says Bellmarc Realty president Neil Binder, the low end is particularly vulnerable when there’s a downturn. (The average sales price for a studio dipped from $134,783 in 1993 to $108,830 in 1995.) Plus, entry-level apartments attract more first-time buyers who capitalize on low interest rates and claim a small piece of turf. To “shoehorn themselves into the best apartment they can afford,” Binder explains, many take on adjustable-rate mortgages. “But if there’s an earthquake in the economy”—and interest rates spike—“they’re putting themselves in a perilous position.” Agrees appraiser Jonathan Miller, “If you had to pick buyers who’d be more mortgage-rate sensitive, it’s them.” Besides, “jobs drive the values,” says fellow appraiser Jeff Jackson—and young people are more likely to get fired and sell off their single major asset. Get enough of them selling and there’ll be a glut; as it stands, studios and one-bedrooms already make up the lion’s share of the market. If you have a condo, you always have the option of renting it out, as many investors do, but this safety hatch only works if you can find tenants. “I know someone who got caught in the downswing in the 1990s, and she couldn’t rent her studio out because there were too many available,” says co-op lawyer Steve Wagner. “She finally had to sell it at a loss, because she had to go to California.”

Risk Factor: 8.0