Renting vs. Buying in this economy

"But what you're talking about is not investing; it's asset allocation. Whether you choose to prepay your rent by buying an apartment or buy a bond and use the income stream to pay your rent."

That quote seems to be the one where you admit I am correct. Your distinction between asset allocation and investing is pretty weak. Investment decisions and inherently linked with asset allocation.

The savings part of my statement was assuming the apartment is purchased sensibly. I am not sure your separation of investing and asset allocation is standard usage. Asset allocation is a part of investing. Even if real estate serves only to lock in a payment in a world with inflation, that is an investment.

"what you need to look at is not so much the allocation of that capital in terms of other asset classes, but the net present value of that stream of prepaid expenses versus the net present value of future rents over the same period of time."

Yes, that's called a cap rate...it can be adjusted for expected inflation in rents.

"That is, it may be that when you look at cap rates real estate looks like a grand investment, but when you look at it compared to the substitute good - market-rate rentals - it is still vastly overpriced."

Cap rates are based on rental prices minus maintenance, so I am not sure how cap rates could be high and the purchase could still look overpriced relative to rentals... The rental price is in the calculation of cap rates.

I guess I amend that last statement...if cap rates are high, but the risk free rate is nearly as high or stocks are trading at a 20% div... then the treasuries are more attractive.

Well I'm glad we're coming closer to an agreement, Rhino, as I've agreed with just about everything you've said in the past. However, I think cap rates include maintenance (as it's an integral part of the cost), exclude load servicing (interest).

Asset allocation is not "investing"; investing can be a part of asset allocation, as can saving, as can a trip to the Bahamas.

Your example, however, is generally correct for investment real estate, though not so much for owner-occupied as it's usually a one-time decision driven by the need for a place to live. Therefore, it's not a decision between buying a place to live or buying stocks; it's a decision between buying a place to live and renting.

With investment real estate - where somebody else pays your mortgage - you can indeed choose between it and stocks and bond and whatever. It's no longer a "need" - which is why most economists consider owner-occupied residential real estate a prepaid expense and not an investment: you need a place to live, you don't need an investment.

LICC - WHERE ARE YOUR NUMBERS?!

"load servicing" = "loan servicing."

LMAO!

"However, I think cap rates include maintenance (as it's an integral part of the cost), exclude load servicing (interest)."

Yes I understand this.

What I didn't understand is how -

"when you look at cap rates real estate looks like a grand investment, but when you look at it compared to the substitute good - market-rate rentals - it is still vastly overpriced."

How can real estate look grand on a cap rate basis and overpriced relative to market rentals...if market rental price is in the numerator?

On asset allocation, you are just wrong. Every investment requires an asset allocation decision. It is still surprising to me that you think owner purchase should be evaluated as "buy and rent to yourself", but yet you do not consider it an investment. If it is not an investment, why have you insisted so vehemently that it be evaluation as such?!?

Sorry, making a down payment can be a decision between buying stocks, bonds or making a down payment. Further, the appropriate 'cap rate' behind your offering price is influenced by the alternative uses of cash in the market place.

I don't think economists generally get hung up on the accounting treatment.

Sorry man, your rent or buy decision changes if a given bond investment is yielding 6% or 12%. Actually, and this may be the clicher, you can't deny that the strength of stocks in the 1990s stole investment dollars from residential real estate.

"How can real estate look grand on a cap rate basis and overpriced relative to market rentals...if market rental price is in the numerator?"

Because you're comparing real estate to the returns on other assets. If other asset classes are depressed real estate could look good, yet still be outside the historical norm.

"Every investment requires an asset allocation decision."

Yes, but every asset allocation decision is not to make an investment.

"I don't think economists generally get hung up on the accounting treatment."

Actually, they do. There is a world of difference between a prepaid expense and an investment. An investment yields income (or should); a prepaid expense does not. Economists treat buying a home to live in as a capitalized rent expense. It is a hedge against future rent increases, and a decision that would rationally be made when the amortized value of that capitalized rent is below market rents.

"why have you insisted so vehemently that it be evaluation as such?!?"

The economic theory of imputed costs. Economists posit that goods are worth their output value, not the value of their inputs. Therefore, because the output value between buying a place and renting a place to live is the same - someplace to live - they should cost the same. They are simply different modes of possession. Just like it should not matter if you hold title as tenancy-in-common or joint tenancy, or whether you hold title or a deed-in-trust: they are merely different modalities of the same thing.

Because renting and buying give the same output, as I said, they should cost the same. But they don't always, and therefore the decision to buy or rent will depend on (among other circumstances) the price. If the amortized purchase price is below market rents, then the decision should be to lock in that value by buying. If it is above rents, then the decision should be to rent.

Cap rate works well in theory, and it is one ratio to look at. But it is designed to look at commercial property, not owner-occupied property. Historically, property does not increase significantly in value because it is tied to incomes and leverage and market rents. No one bought a house with the expectation that it would increase significantly in value. That is a recent occurrence. What makes investment real estate different is that someone else is paying off the mortgage, which adds to the yield.

Also, cap rate excludes the cost of financing. That is not a realistic assumption when evaluating owner-occupied real estate as the cost of financing at first represents the bulk of the cost.

You look at owner-occupied residential real estate as an investment; you are virtually alone in that. It is by its very nature a prepaid expense.

Asset allocation is part of investing. Going on vacation is part of financial planning. Asset allocation is an investing term and principle to choose how to apportion your investments among different asset classes and investment vehicles. steve can make up his own definition if he wants, but he would be inconsistent with the use of the term in the real world and in how it is generally used in economics.

steve, I posted numbers above. You can choose to ignore that and keep ranting to post numbers, but that doesn't help your argument any.

LICC, you didn't post numbers above. Let's see ALL of your assumptions.

And asset allocation IS a part of investing. However, prepaying an expense is not an investment. Therein lies the problem.

The only thing wrong with these stock mkt vs buying apartment discussions is the effect of leverage. The average person can not lever up to buy stocks but they can lever up to buy real estate. This affects the return profile dramatically.

Stevejhx --- you repeatedly state that residential real estate rises in tandem with incomes. What is your basis for this?

Theoretically, it seems implausible that prices could go up anything close to that fast: usually in competitive markets, prices are driven down to marginal cost of production, and it is hard to see why the marginal cost of building/renovating/converting should track incomes (that would imply that the construction industry has no productivity gains over time, which seems unlikely).

Empirically, Shiller shows prices tracking inflation, not income: that is, in real terms, residential real estate shows only tiny increases over long periods, well within the error of the inflation measure, even as incomes rise rather dramatically.

Do you have some other source? Or are you just misstating the truism that prices can't rise FASTER than income for extended periods (or no one would be able to afford housing)?

financeguy, if you look at at Shiller's data you'll see that, until recently, the real annual price increase in real estate was almost 100% correlated to the real annual growth in incomes.

Here is another source:

http://books.google.com/books?id=nq_JqHcR12AC&pg=PA286&lpg=PA286&dq=rental+prices+correlated+to+incomes&source=bl&ots=LeNEieeQFC&sig=MNEuvBYRXYnq7yHxa0ApAADIyh4&hl=en&ei=-6c3SuLZFYyNtgfXspnlDA&sa=X&oi=book_result&ct=result&resnum=5

You are right about marginal costs, but that is not the case in housing, when the bulk of the stock are resold units.

Shiller shows essentially NO real increase in prices for 100 years and 300 years. That doesn't correlate with incomes at all -- real incomes have soared over that period.

Your second point doesn't make sense to me; it seems to defy the law of one price. If resale prices stray from alternatives (rentals, new renovations, new construction), customers will switch. The real estate market is lumpy and slow and trend driven, but it is not exempt from basic market economics. At equilibrium, prices -- new or used -- should reflect marginal cost.

Equilibrium, of course, isn't the only or even the dominant force. Self-sustaining trends can overcome it for extended periods. But right now, both trend and equilibrium are pressing downwards, so it is safe to predict that prices will drop at least to equilibrium (i.e., the lowest of cost to convert rentals, renovate obsolete units or build new ones, where investors are indifferent between holding to rent and holding to sell and holding an empty lot, and financially calculating occupants should be indifferent between renting and owning), but more likely well below.

Allow me to summarize the 200+ previous posts:

1. Prices for NYC RE going down over next 12-24 months.

2. Renting currently cheaper than buying.

3. Much more attractive investments currently available than buying NYC RE.

4. Rent now, buy 18-24 months from now.

Q.E.D.

Steve: the book you cite states that median housing prices tend to rise with median income. This makes sense if people consistently look to spend a similar proportion of their incomes on housing. But it does NOT suggest that prices for the same unit or same quality unit rise with income: far more likely, it suggests that richer people buy bigger or better equipped houses. (And, indeed, as NYC's upper class income rose dramatically in the last couple of decades, the quality of new housing and new renovations rose with it).

But homeowners/prognosticators seeking to predict what is going to happen to their own home can't rely on these numbers. Their home isn't going to magically increase in quality along with incomes. These aggregate numbers predict the opposite of what you contend: EXISTING stock, unrenovated, will rise LESS than the median (since it will continually drop in quality relative to a rising median) and therefore will rise LESS than income.

financeguy, I use the Shiller data from post-WWII. Prior to that the real increase in prices was 0.7% per year. The reason is that under the gold standard there long periods of inflation and deflation that tended to wipe out real gains, as the gold standard was routinely abandoned whenever governments needed more money, such as in times of war.

Your second point is generally valid when there is a perfect market. But the real estate market in Manhattan is anything but perfect. It is in fact a very small market dominated by an oligopoly of real estate agencies (3), opaque information, tax benefits, different forms of ownership, and rent regulation.

If one could keep on building houses until the price equaled the marginal cost of production it would work - but there's no way to do that. It assumes that goods are consumable and interchangeable, but real estate is permanent and unique.

Let me summarize BS's post:

1. He rents so he is wishing for NYC RE prices to plummet for two years.
2. Renting is not cheaper than buying but he rents so he will say this to feel better about himself.
3. See 1.
4. See 1.

Steve, this is good fun.

XYZ Corporation has $200mm of excess cash on their balance sheet. Recently, it has come to the attention of the CFO that the owner of their flagship rental space has gone bankrupt. The lender has offered the property to XYZ at a price of $200mm [imputed cap rate of 10%, assuming 2% rent increases in perpetuity]. The CFO must decide whether to prepay $200mm of 30-year bonds, which have a call provision at a price that implies a 6% yield to maturity, or buy their flagship location from the bank. In evaluating the two uses of excess cash, the CFO is making what type of decision?

"You look at owner-occupied residential real estate as an investment; you are virtually alone in that. It is by its very nature a prepaid expense."

Do you really think I have less company thinking about owner-occupied real estate as an investment rather than a 'capitalized expense'? Please take that back for your own sake. While I appreciate the accounting term, you are the first and only person I have met that has vehemently denied that home ownership is an investment.

PS: A real estate purchase does generate notional income/cost savings, or loss, depending on the price
paid and rental prices at that time and the form and cost of financing.

LICC - still waiting for your NUMBERS!

Rhino - I don't see how your example has anything do to with owner-occupied residential real estate.

Regarding "investment," there are definitions here:

Definition 1
In finance, the purchase of a financial product or other item of value with an expectation of favorable future returns. In general terms, investment means the use money in the hope of making more money.

Definition 2
In business, the purchase by a producer of a physical good, such as durable equipment or inventory, in the hope of improving future business.

http://www.investorwords.com/2599/investment.html

Using definition 1, "favorable returns" would be an accretion of price. Historically that is not true of owner-occupied residential real estate.

Under economic theory, purchasing a home to live in is evaluated as a flow of payments, not as an investment that will produce positive returns. That is how economists look at it; it is, in fact, how housing inflation is calculated: owners' equivalent rent, which is similar to imputed rent:

http://www.bls.gov/cpi/cpifact6.htm

For better or for worse, it's simply the way it's done.

Steve:
1. What does the gold standard have to do with the real price of houses? The real price of houses remains steady because when prices get too high, people build higher or improve transit.
2. Perfect markets, in the economists' sense, don't exist. But none of the elements you list has an obvious impact on the equilibrium price of NYC real estate; they simply are frictions without any clear directional implication. No one is claiming that NYC real estate quickly (or ever) reaches equilibrium prices; equilibrium is just a gravitational force tending to pull prices in a particular direction, much as the sun's gravitational force pulls the earth without the earth ever falling into it.

The important element that stops prices from reaching equilibrium is not "oligopolistic agents" (?!--do you think agents can control house prices?) but self-reinforcing trends: prices going up or down create self-fulfilling expectations that can keep prices moving in a given direction for long periods without regard to equilibrium. Right now, the trend and equilibrium are pulling in the same direction, but the trend will probably keep prices declining even well after they pass below equilibrium.

3. Real estate *is* consumable and interchangeable. Houses need major rehab ever 20-30 years or so. There are plenty of alternatives to any given unit, and indeed to given neighborhoods, as the developers of the LES, Williamsburg, Lincoln Ctr/Columbus Circle, DUMBO, FiDi, Clinton, Tribeca, Harlem etc demonstrated in this cycle. And builders can and regularly *do* keep building houses whenever prices are above the marginal cost of production (and even when they aren't -- that's why we have 'ghost towers'). Why do you think that normal market forces somehow don't apply in Manhattan? Have we suppressed capitalism here?

steve, keep ignoring the numbers I posted earlier and yelling to post numbers. You look very rational doing that.

The worse that steve is losing an argument, the more links he puts in his comments.

"Using definition 1, "favorable returns" would be an accretion of price. Historically that is not true of owner-occupied residential real estate."

No one buys in 1890 and holds to 2009. Real estate has favorable returns when purchased at a discount to rents. You are being an accountant. I'm through arguing finance with an accountant. If you can't relate the CFO in the story to a family deciding how to invest their savings into equity, debt or a home... You are clearly bright enough. Its a perfect analogy and you are simply becoming a pain in my ass.

Steve:
From WWII to mid - 1970s, median income rose rapidly in real terms and housing prices stayed flat. Since then, real incomes at the median have been basically flat; in the second half of that period, real estate soared and then began to decline.

How does that show that prices track incomes?

stevejhx,

But renting has NO return of value at any point. Nada, it's a sunk cost.
When you buy, after the initial tax deductions are over you start paying down on the principal. Over the course of 30 years, how can renting be better off?
In 30 years, the person that rents will continue to pay rent for the rest of his life, but the person that bought will have only tax and maintenance. If the carrying cost are similar between owning and renting today, i can't see how it's even possible for renting to be better off.

Watch our for steve's fallacy that currently the carrying costs are twice as much to own as to rent. Pure nonsense.

LICC admit that valuation relative to rent remains high, and including opportunity cost of down payment its still more expensive to own than buy... And that price to rent ratios can't be at year 2000 levels...because values have tripled and rents are the same.

rents are not the same as they were in 2000 bozo.

Steve: Maybe this will explain Rhino's point:

People searching for housing can rent or buy. Suppliers in each case are largely market actors making market driven decisions using conventional finance analysis. Not everyone, of course, but people who are making decisions on arbitrary grounds usually won't affect the market: they cancel each other out if they are randomly distributed. So most of the time, we can assume that the only important players are in fact looking at housing -- even owner occupied housing -- as an investment. Builders, developers, landlords deciding whether to rent or sell make economic calculations in which opportunity costs are largely interchangeable with real costs and savings are close enough to income.

So even if some people don't think economically, the market price is usually set by those who do. Rhino's analysis is absolutely conventional and correct.

Trends can disrupt this process -- if enough of the non-economic actors conclude that prices are going up (or down) without analysis, they will affect prices regardless of equilibrium theories. Then the pros may conclude that the trend is stronger than the equilibrium, and they will jump in, further emphasizing the trend (it makes sense to overpay if you can sell to someone else who will overpay more). Moreover, down trends make potential buyers (and their lenders) feel poorer and more risk averse, (and vice versa for up trends) so they may overreact even further, thus strengthening the trend.

Ultimately, however, the profits to be made in non-equilibrium markets get big enough to attract economic actors. If it costs $300-$500/ft to build or renovate luxury housing in NYC and it sells for more than that -- someone is going to build more. If builders are willing to pay more for underdeveloped land than it generates as a parking lot or old building, some landowners are going to sell. If existing, empty, condos can be sold for more than the cost of leaving them empty, sooner or later someone will force their sale. If rentals aren't as profitable as selling at current price levels, some landlords are going to sell. That tends to pull prices towards the equilibrium point (more supply, same demand, prices drop).

Right now, both factors -- equilibrium and trend -- point down. Sharply. Only magic, or a sudden influx of highly liquid buyers wedded to magical thinking, can keep prices at current levels.

Rents may be lower than they were in 2000, you effing bozo.

"Rents may be lower than they were in 2000, you effing bozo."
In Manhattan? NO EFFING WAY.

Rhino 10 munutes ago:

"rents are the same."

Rhino 2 minutes ago:

"Rents may be lower"

Sounds like someone is desperately back peddaling from their insane comments. Why don't you just go away? Your too stupid to post on SE.

Infamous: renting and borrowing are just two different ways of financing your purchase. The money you pay in rent is no more or less gone than the money you pay in interest, taxes and maintenance.

The only real financial issues are (1) which is more, and (2) whether investing your downpayment and monthly principal payments in a depreciating NYC apt is a better risk-adjusted investment than the alternatives, whether those be your mattress, stocks, sending your kid to HBS, or buying lottery tickets.

I think you will find that LICC thinks that the answer to (1) is that interest, rent and maintenance are very cheap because of the tax subsidy to mortgages below $1m and that (2) NYC real estate comes with a God-granted guarantee of a 3% increase every year. Most other people on this board think that the interest costs on most NYC apts are far higher than the rent for a comparable rental, and that NYC real estate is almost certainly going to drop, making a highly leveraged investment extraordinarily foolish unless your only alternative is the lottery.

If you are going to give away your money, there is probably a better charity than existing NYC apartment owners and mortgage banks.

"your" too stupid? Hmmm, would I rather have you appreciating my arguments or 'financeguy'... Lets see, I'll review the quality of his commentary vs. yours. Alpine, you are a punching bag on this board.

Hmmmm... Suffice to say that rents are much closer to 2000 levels than values currently. So if you would like to defend LICCs assertion that price to rent levels are similar to 2000 right now, go right ahead and join your pal.

Financeguy....I like your last point...Really none of this matters if there are enough optimistic buyers with dough to absorb the supply. I doubt it.

> "Rents may be lower than they were in 2000, you effing bozo."
> In Manhattan? NO EFFING WAY.

Yes, if you put it in all caps, it HAS to be true.

Great logical, fact-filled comeback!

so the best insult you can come up with today is that he wrote in all caps? Give me a freakin break. Your a loser and will always be a loser.

My buddy recently bought a 1 bedroom in Forest Hills for about 200K recently.
He put down 10% and took out a mortgage at 5.25% for 30 years. His monthly tax & maintenance is about 600 dollars. His overall carrying cost is about 1,593 dollars. To rent a 1 bedroom in the same neighborhood he's looking at about 1,500 dollars. He makes about 110K base salary a year so i'm assuming after tax deductions, his total carrying cost will be below rent.

Now, let's assume he stays in this place for 30 years...are you telling me he would be better off renting? I know there are so many other factors involve but the key is, he is essentially locking his housing cost at 1,593 dollar a month for 30 years.

financeguy - gold standard has to do with inflation, which has to do with the real price of everything. People cite the gold standard as a way to do away with inflation because under it there is zero inflation over time, but they ignore the volatility in inflationary / deflationary periods.

"do you think agents can control house prices?"

In the long-term no, in the short- to medium-term, yes.

Real estate is not a "consumable" - or "input" - in the economic sense. It is a real asset. Once you consume a consumable it is gone; real estate remains.

"No one buys in 1890 and holds to 2009."

I never said they did.

"Real estate has favorable returns when purchased at a discount to rents."

Undoubtedly it can, but if you look at Shiller's data, except for recently, real property prices do not increase much. Rents are volatile in the short-term, and sometimes money can be made. But it is a rare event, historically.

Here is a good article from Shiller:

http://money.cnn.com/2007/04/09/real_estate/shiller.moneymag/index.htm

I understand completely what you're trying to say with your example, but my argument remains that it's not the same. You can invest in real estate, but not if you live in it. Then it becomes a different animal, and economists see it as such. It is a substitute good for something you would otherwise need - a place to live. Much like the infamous rice and potato argument - you need to eat.

I think the references I gave provide a good example about what I'm talking about. You're talking about a family's financial decisions - where to put their money: do they capitalize their rent, or rent and invest the money elsewhere, or save it, or burn it, or spend the weekend in Acapulco.

What I'm saying is that in economics, accounting, and business in general, it is one thing to prepay a current and long-term expense, and it's another to buy out a rival. The former is a hedge against future expense increases; the latter is an investment that should generate future income.

Buying property is more akin to the decision of whether to purchase off-the-shelf software or develop a custom made one. If you purchase off-the-shelf software you pay an annual license fee; if you develop the program you capitalize the expense and amortize it over the life of the software (or using the appropriate depreciation schedule). If you were to invest in owner-occupied residential real estate then your expectation would be for its value to increase in the future, but as Shiller in the article rightly points out, that is impossible. Investment in stocks, for instance, is different - stock prices should reflect future expectations of earnings. Companies' earnings increase faster than personal income due to value-added factors innovation, efficiencies, etc. Buying a house to live in, you can't add significant output value to it: marble staircases yes, but still, it's nothing more than a place to live.

Idiot monkeys please look at this graph, and deny that price to rents remain higher than at any point from 1980 to 2003. Cue imbeciles.

http://www.realestatechannel.com/news-assets/GraphC.jpg

"Now, let's assume he stays in this place for 30 years...are you telling me he would be better off renting? I know there are so many other factors involve but the key is, he is essentially locking his housing cost at 1,593 dollar a month for 30 years."

The question is really, at what price might he buy this place next year. The other question is, what person knows they will be in a one bedroom for not 10, not 20, but 30 years. Sure, he is better off than renting for 30 years.... One thing to note is he is buying at 11x rent, and at a cap rate of 5.5%...That is tough to find in Manhattan as of yet...And Manhattan is really the primary topic here.

Steve lets forget it. An asset allocation decision is for all practical purposes an investment decision.

Rents are higher now than they were in 2000. Prices are not triple now what they were in 2000. Double, probably, but not triple. Rents are likely not double what they were in 2000, but mortgage rates are considerably lower, so the ratio for carrying costs to own or rent are not far off. This is the point rhino misses.

Rhino, no: an asset allocation decision is a decision on where to make investments. Investments are made with income that exceeds current expenses. Rent is a current expense; owner-occupied housing is an expense in lieu of rent.

To make it easy:

http://en.wikipedia.org/wiki/Asset_allocation

The fallacy you commit is one of the principal ones that got us into this mess: the assumption that owner-occupied real estate was an "investment" that would forever increase in value. Investment real estate is an investment. It makes a world of difference.

LICC - WHERE ARE YOUR NUMBERS?!

finance guy - the money you pay in interest is not the same as the money you pay in rent, because you are paying interest to finance the ownership of the property. You own an asset for which you have the right to sell and obtain its value. This is not the case with rent payments.

What do you mean that I think rent is cheap because of the tax deduction? I don't understand what you are saying here.

I don't think real estate is guaranteed to increase by 3% every year. Over the long term, 10-30+ years, there is an extremely high probability that real estate will increase in value, and we were looking at a hypothetical assuming price appreciation.

In steve's world, the value of a property is different depending on whether the owner is living in it or not. Ridiculous.

steve - see the post from 23 hours ago. There are numbers in it. Then come back and post again in all-caps asking for numbers. Then call Bellevue, psychiatric department, and make an appointment for yourself as soon as possible.

did any of you ever see the movie flamingo kid?

money paid in interest and money paid in rent are ways of financing your right to occupy the unit. That much is identical.

The difference between renting and ownership is the residual -- who benefits/loses from market fluctuations away from equilibrium. At equilibrium, the two are the same. In the more common non-equilibrium state, ownership -- downpayment and principal payment -- buys you the investment risk that prices will go up or down more or less than rent. That's an investment like any other and should be evaluated like any investment: risk adjusted expected return.

Expected return when you buy an investment asset at double the cost of producing a replacement is low. So is expected return when current rents don't cover current expenses. If you can buy and rent for the same out of pocket, that basically means you are anticipating a zero real return on your downpayment, barring irrationally optimistic buyers appearing just when you need to sell. That sounds like a pretty poor investment to me, unless you think that rents are irrationally low at the moment (i.e., below replacement cost).

However you assess the risk of NYC real estate, it is clear that the equity holder has more risk than the mortgage lender. Thus, if you buy with an expected return based on current rents and expenses (not "appreciation") that is lower than current interest rates, you are basically betting that you are smarter than the mortgage markets -- that they see risk that you know doesn't exist.

"steve - see the post from 23 hours ago. There are numbers in it."

No. Some numbers are in it. For clarity's sake, give us ALL of your assumptions.

"In steve's world, the value of a property is different depending on whether the owner is living in it or not."

No. In steve's world, the value is the same. I don't know where you come up with this stuff, LICC.

"so the best insult you can come up with today is that he wrote in all caps? Give me a freakin break. Your a loser and will always be a loser."

Alpine, once again, you are so slow you can't even understand the insults.

It was a factless, logic-less response, basically the work of a 3rd grader. If you think all caps was the only thing wrong, well..

Oh, how can I forget... we're talking to alpine, who wouldn't know facts or logic if they rang his doorbell in New Jersey and polished his camaro.

> Prices are not triple now what they were in 2000. Double, probably, but not triple.

Likely true because we're down nearly 1/3... which would mathmatically reduce a triple to a double.

10022, it's either a PT Cruiser or a mini-van. did alpie mention a camaro? that would make for a mighty fine collection of vehicles.

LICC, price to rent ratio ignores financing and ignores taxes. Its price, divided by gross annual rent. You may not like the metric, but it is what it is....and its a fuckload higher today that in was in 2000. Thanks for wasting my time hammering a basic metric that anyone on a board like this should know into your thick head.

Steve, an annuity is an investment, is it not? Maybe if you could get past your mantra that real estate hasn't appreciated in real terms since the civil war, you'd realize there have been opportunities to invest savings into a primary home that have proven cash flow accretive for renters...And far more profitable than top ticking the Brazil etf.

rhino, you can keep saying it over and over, but the numbers show it is not true. Then, take the analysis further and compare carrying costs, which take into account financing, and you are really lost. Keep looking at financial statements and leave the high-level analysis to the people who understand it.

Prices were NEVER triple what they were in 2000 even at the peak, at least not in the buildings I track.

LICC, I showed you two graphs of price to rent. Prices have increased much more than rents for the last 10 years, even after the pullback. I can't help you any more than that. Alpine, prices tripling from 1999 to peak is pretty well documented. Who cares about 'buildings you track'.

High level analysis? Ha.

And I sourced price and rent-level data that showed you were wrong.

> Prices were NEVER triple what they were in 2000 even at the peak, at least not in the buildings I
> track.

We're talking Manhattan, not New Jersey.

Funny thing is, I remember LIC a few months back being the guy trying to show that there was major price appreciation. I'm going to have to look it up. NOw all of a sudden, there was no major increase. Got it.

Rhino,
I think we have similar pedigree. I'm mid-30s, I have a science degree from an Ivy League university and a finance degree from a top business school. I work in a finance-related field today in New York. I do not work in real estate, or have any direct connections in real estate.
Your viewpoint that real estate is overvalued relative to rental options compared to the same ratio 9 years ago is my viewpoint as well.
Your calculation of the return on ownership, through the cap rate, or the inverse calculation of capitalizing the rent streams (less maintenance) and using a tax-affected rate of borrowing plus a required equity return in excess of the borrowing costs are all correct.
The one thing I don't get, why do you need to argue with someone who has to reference investopedia or wikipedia or investorwords, etc. when you know it intuitively. Why be a hero and educate someone who wants more to win an argument rather than learn so he could be right in the future? Why allow someone to equate economics with finance (nobody ever said there was an Ivory Tower Financier) or equate accounting and auditing (all backward looking) with finance - a CPA says, yup, this statement is correct, and a CFA says, yup, I understand this statement and the past trends and here's how you can use it make money going forward.
You said it before, luck happens and it is a good thing (didn't buy real estate in the past 3 or 4 or so years), but luck can't be replicated. So be happy that you were on the right side of the decision in the past based on facts and thoughtful and correct analysis.

feingolder, why not?

you haven't changed you details have you? your handle being your real name, feingold?

aren't you the realtor who had the listin in the east 80's with the terrace and the banana in the picture?

"The one thing I don't get, why do you need to argue with someone who has to reference investopedia or wikipedia or investorwords, etc. when you know it intuitively. Why be a hero and educate someone who wants more to win an argument rather than learn so he could be right in the future? Why allow someone to equate economics with finance (nobody ever said there was an Ivory Tower Financier) or equate accounting and auditing (all backward looking) with finance - a CPA says, yup, this statement is correct, and a CFA says, yup, I understand this statement and the past trends and here's how you can use it make money going forward.
You said it before, luck happens and it is a good thing (didn't buy real estate in the past 3 or 4 or so years), but luck can't be replicated. So be happy that you were on the right side of the decision in the past based on facts and thoughtful and correct analysis."

Feinfolder, excellent points. But, you have to keep in mind...

If you didn't argue with bulls on this board who use investopedia or don't know what they are talking about...

You wouldn't have bulls left to argue with...

actually, cc, he seems to possibly be someone i might have known quite well. i found him on minyanville recently, but he'd be the type not to care so much about discovery so his handle might be more revealing.

if so, i'd love to reconnect with him.

Feingolder...that is an excellent question. When it comes to arguing with LICC and Alpine, its like teasing the dumb kids. I can't say its nice, but sometimes its hard to resist. When it comes to Steve, I couldn't help but tear into the fact that he sees stock and real estate so differently (and doesn't understand bonds). His logical inconsistencies are so rich. Such as, I should price a home as if I am renting it to myself - excluding the tax benefits of owner occupancy - yet not consider it an investment of my limited capital. Or another favorite, stock investment is always better than real estate because the long run average return on real estate is only the rate of inflation... Punctuated by - I plunked a chunk of my net worth into Brazilian stocks right at the top, because I don't look at stock valuation, I just buy it because it has returned 8% if I look back to 1920. Or the classic - asset allocation does not necessarily involve investment decisions.

"Feingolder...that is an excellent question. When it comes to arguing with LICC and Alpine, its like teasing the dumb kids. I can't say its nice, but sometimes its hard to resist."

Absolutely, you try, but its SO hard to resit.

That being said, I don't think its like teasing the dumb kids. I think its like teasing the dumb kid who was teasing the other kid for being stupid.

I do agree on Steve challenges, though. Steve has brought a lot to the table, and has opened some very good discussion, but he have some signficant cracks in logic sometimes. He's good most of the the time, but he digs in with his worst mistakes, and it leads to some nutty discussions.

Steve is fine. I don't happen to care what the long term rate of appreciation is on real estate. I know intuitively when you buy it cheap to renting you create an annuity-like asset (savings vs renting) if you stay and have a positive skew toward appreciation if you sell at a different point in the cycle. And categorically, its always better to buy stock and rent is a foolish train of thought.

"However, I think cap rates include maintenance (as it's an integral part of the cost), exclude load servicing (interest)."

If you are talking about people - specific people - doing an analysis of a specific unit, you are probably correct. But my guess is in general when you are looking at charts like the one rhino posted (http://www.realestatechannel.com/news-assets/GraphC.jpg) they do not take those into account. In fact I'd bet on it.

Cap rates don't and shouldn't take loan servicing into account. A cap rate captures the cash on cash return...buying a unit and renting it out. It allows the individual to examine if the cash return is appropriate to alternatives. Method of financing should not technically change the value of the property. I realize plenty of people want to look at it that way...but the more debt you use the more risk you take on your equity and the analysis becomes convoluted. I think its helpful to compare cap rate to mortgage rate... Right now the market is still pricing a good amount of appreciation into the asking price...To me that's not attractive. Some people may say a 4% cap rate is attractive because they expect 6% appreciation long term from this levels... for a total of 10% investment return (before leverage)... My argument is not likely, because cap rates only went below 4% during this credit mania.

AR: gotcha.

thought it was beverly feingold--re agent for this listing:

http://www.streeteasy.com/nyc/sale/373272-condo-201-east-80th-street-yorkville-new-york

but in retrospect i think she was feingoldgal or something along those lines.

What were mortgage rates in 1992? Maybe we can make some reasoned guess about where cap rates peak relative the a spread to mortgage rates....

They were 9%.....Cap rates were 11%+.... Should cap rates rise to 8% or so....from 4%?!?

only if you want people to buy RE.

I noticed among apartments marketed by individual owners for relatively newer developments that if the same apartment was for rent and sale, I could often see that the ratio was 25x as follows:

sale price (offered) = 25 x (annual rent (offered) - annual owner charges (sometimes an adjust for the income tax deductibility of the real estate tax if they were not abated))

I found it amazing how often the 25x stuck, though there was more or less and if I had to say I noticed a frequent range it was 20x - 25x.

Anyway, aside from personal preferences, or personal liquidity, etc.
25x = 4%, which isn't too far off from 6% before a tax deduction for mortgage interest expense

meaning renters were able to rent on favorable terms and the only logic to the owner was expected property appreciation to create the owners' return.

20x = 5% or around 7% pre-tax.

of course, as interest rates rise, more like 20x or lower and more like 5% and then higher.

Other benefit to renting made tangible this morning.....landlord has agreed to replace a faulty oven in our classic six UWS kitchen and the guest bath needs retiling to deal with a water infiltration problem....guess who pays for those....!not yo!

IMHO if a condo you like is available for a 4% rental rate, take it....and invest your unused down payment in a REIT if you need real estate exposure.....

If we're the dumb kids . . . then I guess rhino likes to be driven into a cursing frenzy by being made to look stupid and wrong by dumb kids.

Your home, where you live, where you have family and friends. Not math, not geek equations.

LICC, if you read through, there are a handful of people supporting me / calling you a waste of my time, and dozens calling you an idiot. You are the village idiot here, don't you realize that? I showed you how apartment values tripled from 1999 to 2008. Clearly rents did not. Therefore, I made you look stupid for suggesting price to rent ratios have been stable. Very simple.

You can make up conclusory statements all you want, the facts and verifiable numbers that I have shown clearly show you are clueless. You have a handful of renter yahoos like nyc10022 that back you - that is not anything to boast about.

Why don't try winning one argument with me, just one, before you start patting yourself on the back?

I showed multiple graphs from multiple sources confirming that price to gross annual rent ratios are much higher than 1999 or 2000.

You are sitting on a shithole in LICC that is down 30-40%...why should you call any renter a yahoo?

"His logical inconsistencies are so rich. Such as, I should price a home as if I am renting it to myself - excluding the tax benefits of owner occupancy - yet not consider it an investment of my limited capital."

That is not my "logical inconsistency," rhino - it is yours. Prepaying rental expense - which is what the vast majority of economists consider buying a home to live in is - is not the same as investing in an asset and expecting a return. It's not the same as a stock. You NEED a place to live; you don't need a stock. Stock is one of the things you can buy with surplus capital; housing is a current expense. You call it an "accounting difference"; if so, then the current ratio is an "accounting thing" as well, as is EBITDA and all other ratios that you want to come up with. So is net tangible equity. So is everything.

A home is an expense - you pay for it monthly. A stock is not an expense - it generates income (or should). If you can't see that clear difference, then verily there is nothing to talk about.

A rental apartment building is an investment; a coop apartment you can rent out is an investment (or even if you are not allowed, you can value it as such). It doesn't matter if you are the one "consuming" the income as a substitution for paying rent. Its no different than a CFO deciding whether or not to rent or own their retail locations. Steve, if you can't see that an apartment is a stream of cash flows equal to the difference between rent and maintenance...then you clearly don't understand fixed income investments. Wait, you have already said you don't.

"A rental apartment building is an investment"

Agreed.

"a coop apartment you can rent out is an investment"

Only if you rent it out.

"(or even if you are not allowed, you can value it as such)."

How "you" value it isn't the matter.

"It doesn't matter if you are the one "consuming" the income as a substitution for paying rent."

You're right about that, and it is precisely why you are wrong about the rest. Expenses "consume" income; investments don't.

Your way of thinking about this has no value to real people. I will be sure to tell my lawyer not to include my home in my estate, as it is prepaid rent, not an asset. Please tell me how you value a pre-paid rent in perpetuity. I have never come across a pre-paid expense without a date certain.

Since you have managed to say it 100x, please provide some references for 'economists' who insist owner-occupied real estate is 'prepaid rent'. I am fairly well read, and I have never seen it referred to as such.

How "you" consider this is not really the matter either. Neither is the long term rate of appreciation of real estate. It is an income investment primarily and an inflation hedge. I suppose hedges are not part of an investment plan either.

Owner-occupied real estate is both a substitute for renting and an investment. To argue otherwise is just silly. An owner substitutes rental expense with interest and maintenance expenses to obtain a source of shelter, and also has an ownership interest in an asset with capital gain potential.

"Your way of thinking about this has no value to real people."

We're not talking about "real people" here - we're talking about economists! (And I count myself as one of them.) I am differentiating between "investment" in common parlance and "investment" in economic parlance.

Owner-occupied residential real estate is a hedge against rent risk. That is commonly accepted. Here's one example:

http://real.wharton.upenn.edu/~sinai/papers/Rent_hedge_full_122304.pdf

The only way it can be a hedge against rent risk is by being prepaid rent.

Owner-occupied residential real estate is not a hedge against inflation. See:

http://graphics8.nytimes.com/images/2006/08/26/weekinreview/27leon_graph2.large.gif

During inflationary and deflationary periods the real price of housing increases or decreases, and then falls back to the inflation-adjusted mean.

"I will be sure to tell my lawyer not to include my home in my estate, as it is prepaid rent, not an asset."

I didn't say it is not an asset. It is an asset. What I said is that it was not an investment. Not all assets are investments. Prepaid expenses and prepaid taxes are assets. They are not investments.

BTW, prepaid rent is also an asset.

LICC - where are your numbers?

And the accounting for it (to answer your other question) is that you capitalize the price of the house and depreciate it over its expected life, and book mortgage interest paid as a current expense.

Again - capitalized expenses are by definition prepaid. Unless you pay for them, you can't capitalize them.

LICC - where are your numbers?

Err, see above steve. Have you made that appointment at Bellevue yet?

No, because I don't know which room you're in, LICC.

Where are your numbers laying out your entire theory?

"We're not talking about "real people" here - we're talking about economists!"

Maybe that's the problem. You are really the only one who finds use for your semantics. You still haven't shown me your economist examples. Question is, do I give a shit? Do I take my cues from real investors about what investing is or do I take them from frustrated gay accountants or academic economists? I am talking about real people approaching their personal investments. While it is not my business, if I were a financial planner trying to help a family decide whether or not the time was right to buy a home I would (1) value it as if they planned to buy it as an investment and (2) evaluate the anticipated cost savings against alternative uses of the down payment and consider the relative risks for their principal.

PS: What is the useful life coop apartment? Am I forced to sell at a date certain? Gimme a break no one gives a shit.

Your defense of a bad buy of Brazilian stock through the 'stocks are always better' line is no less transparent and self-jerking than these people who poorly timed their LICC buys insisting appreciation potential from their cost basis is robust. I am a professional investor, you are a translating accountant.

I see, Rhino. You need to resort to personal attacks on people's sexuality and "academic economists" (while bragging about your MBA and CFA) to defend an indefensible position. (By the way, you're wrong about my Brazil investments - I sold them at approximately the price I bought them for, the "loss" is just a carry-forward tax loss.)

"You still haven't shown me your economist examples."

I don't know what examples you want beyond what I've given you, but when you react the way you have when proved pretty much wrong (housing is not a hedge against inflation, among many other things) it doesn't seem worth it.

If you were a financial planner, I'd sure make sure to keep my clients far away from you.

Renting is for losers.

hi carolst!! good to see you've moved beyond your own special threads.

I'm discontented with homes that I've rented
So I have invented my own.
Darling, this place is lovely oasis
Where life's weary taste is unknown
Far from the crowded city
Where flowers pretty caress the stream
Cozy to hide in, to live side by side in,
Don't let it apart in my dream-

Picture you upon my knee

CoIumbiaCounty
4 minutes ago
ignore this person
report abuse
"Renting is for losers."

Not in this market....

Personally attacking steve - not cool.

Interesting accounting Steve. You sold them at the same price you bought them, yet you have a loss. I am looking for examples of universal economic opinion. If this is such a pervasive way of thinking, you should have some articles or quotes where owner occupied real estate is described this way, no? The funny part Steve, is that just about anyone else in this thread would consider cash out of pocket to purchase a home as investment. It is therefore maniacal that you would describe this position as 'indefensible'. Again you know nothing about bonds. A home purchased well (or outright) is a savings stream. No one but you has trouble with this concept. It need not be an equity position in an operating business to be an investment. Your whole equity analyst sucks to boot, and your 'loss' incurred speaks to it. As does any dollar you put into the market between 1997 to 2008. Again, economists and accountants are not investors...and it shows. When you delve to deeply into accounting you lose sight of economic reality. Not the professor of economics, but the kind of economics that people who put real money to work think about.

Indefensible? Defended once, twice, three times, at least. Honestly, who the fuck do you think you are? Are you sitting on 15 million bucks? Are you a recognized authority on anything? You are an accountant with an interest in blogging on real estate. I thought the guy who posted a psychological disorder was over the top...but your imagined authority and expertise here in the face of various articulate opponents (or at least proponents of opponents) is striking. You've proven nothing and won nothing.

"okay i have a question for you this is your home and not an investment people. total hypothetical, not me at all. we make $450k total household income, and we've managed to squirrel away $450k in savings (other than 401k, no mean achievement, and we're 38). my wife is pregnant, and we want a two bedroom in a good school district, but we think we'd like two children. we think our jobs are secure, but have the usual worries. we find a reasonably nice 2 bed coop for $900k with $1400 maintenance in a decent but not great school district that would suffice until middle school. Requires 30% down, about 3% closing costs (guesstimate, haven't bought a coop in a long time), and a bit to move and paint (say $300k roughly total). You really want to tell that family this isn't an investment, and is just a place to live?"

"Steve: Maybe this will explain Rhino's point:

People searching for housing can rent or buy. Suppliers in each case are largely market actors making market driven decisions using conventional finance analysis. Not everyone, of course, but people who are making decisions on arbitrary grounds usually won't affect the market: they cancel each other out if they are randomly distributed. So most of the time, we can assume that the only important players are in fact looking at housing -- even owner occupied housing -- as an investment. Builders, developers, landlords deciding whether to rent or sell make economic calculations in which opportunity costs are largely interchangeable with real costs and savings are close enough to income.

So even if some people don't think economically, the market price is usually set by those who do. Rhino's analysis is absolutely conventional and correct. "

"Your calculation of the return on ownership, through the cap rate, or the inverse calculation of capitalizing the rent streams (less maintenance) and using a tax-affected rate of borrowing plus a required equity return in excess of the borrowing costs are all correct.
The one thing I don't get, why do you need to argue with someone who has to reference investopedia or wikipedia or investorwords, etc. when you know it intuitively. Why be a hero and educate someone who wants more to win an argument rather than learn so he could be right in the future? Why allow someone to equate economics with finance (nobody ever said there was an Ivory Tower Financier) or equate accounting and auditing (all backward looking) with finance - a CPA says, yup, this statement is correct, and a CFA says, yup, I understand this statement and the past trends and here's how you can use it make money going forward."

I think you mean "Picture you upon my knee"