if prices fell enough, would demand fall too?

LMAO. This is the converse of my 2004 conversation with my sis in law. She was like why is RE going up so much. One theory that I had was the people that normally would have sold, would actually keep it off the mkt if the equity kept increasing... same as if you kept winning at Atlantic City, one would continue to bet on black, as it kept paying off (in lieu of taking some winnings off the table).

That is why it is SO SO important for the equity mkt to continue to "WIN", if it did not the greater "fool" theory would not exist and the whole house of cards would fall... ie. you "need" a Warren Buffet story or else "who" would invest in a mkt that only paid an add'l 2 to 3% above a gov't bond?

THERE is only ONE true path to wealth, education => greater earnings, IMHO. well maybe not so humble... but definitely "mine."

supply and demand
higher prices induce more supply which should lower price if there is no demand
you need to know both the magnitudes and their time derivatives to say something --
high prices and rising demand
high prices and falling demand
low prices and rising demand
low prices and falling demand

are all possible where high and low are with reference to an arbitrary previous time point

"wouldn't that mean that real estate had ceased to be a high-appreciation investment?"

Real estate is NOT, never has been, never will be a "high-appreciation investment."

Its price is tied to incomes. Unless you have high-appreciation income, you have no high-appreciation "investment."

what asset price is not ultimately tied to incomes?

"THERE is only ONE true path to wealth, education => greater earnings, IMHO. well maybe not so humble... but definitely "mine."

W67 said

Tell that to all the graduating law school this year that cant find work and now have 250,000 in debt!

tell that to all the billionaires who dropped out of school and took a risk.

The path to wealth is not education, it is intelligence and taking risks.

yeah I am sure Bill Gates wishes he had spent a couple more years at Harvard and finished his degree

"The path to wealth is not education, it is intelligence and taking risks"

C'mon. The financial graveyards are filled with intelligent Wall Street execs who took risk -- way too much risk-- in this debacle. You don't think there were intelligent risk takers at Lehman? No, the ones that survived with their wealth intact were the ones who were educated about the outcome of too much risk.

67 is right. Education is everything. We should be teaching economics to junior high school kids.

Its like what Jim Rogers has been saying. He would rather know how to farm then have a degree from Wharton. Paper pushing is done

Yup, own and know how to farm land + be able to protect your crops. When civilization breaks down... Guns, food & antibiotics.

"what asset price is not ultimately tied to incomes?"

None.

The path to wealth involves luck. Boy do I know it--I would not be worth what I am now without a lot of luck. Both of my sister's families have filed for bankruptcy, yet I am top couple of percent of this society wealth-wise. That involves a lot of luck.

However, whenever you do get lucky, then you need to recognize what's happened--that's the first thing, to know opportunity when you see it--and also need the intelligence/education/novelty seeking personality/hard, hard work to make the most of what may be a tiny bit of luck.

This is where most people I see fall short. They get a lucky break, then they don't run with it, or they make very bad judgments because they don't have any horse sense.

Or they have some fatal flaw--drugs, greed, too much arrogance to listen to wiser councilors, too apathetic to do the research or master the necessary skill.

Malcolm Gladstone's book on Outliers speaks to a lot of this stuff.

Any investment you can think of has been a "high appreciation investment" for somebody. I don't think it's the choice of investment so much as it is these other factors.

{Manhattan real estate agent.}

"When civilization breaks down... Guns, food & antibiotics"

Don't forget Water.

This isnt stupid at all. Momentum is very real. What you are describing is called a revulsion low. People look at the prior 10 years. In 1988, they said buy real estate. In 1999, they said buy stocks. When real estate is priced like it affords zero appreciation (cap rate > mortgage rate), then thats precisely the time to buy. In stocks, it has been documented that volumes drop near lows.

":We should be teaching economics to junior high school kids."

Right, like the economics of real estate. Over the long term, it cant stay diverged wildly vs rents.

"Right, like the economics of real estate. Over the long term, it cant stay diverged wildly vs rents."

How about when it is wildly diverged from reality. I, like Fluter, have been very lucky. We are in the upper percentiles, have huge cushion because we have been conservative, high credit scores, etc. We want to buy in NYC but can't find anything in our price range, that would give us basic human dignity -- light, space, closets, a decent, not exclusive, neighborhood. It has made us question, for the first time in our lifelong relationship with NY, whether the relationship is over. So to the OP's point, perhaps when you factor in the huge cultural shift (more conservative lifestyles, downsizing, etc) along with the changed investment risk, NYC RE may never again be as attractive as it was in the gung ho, heady days at turn of this century.

Sorry I dont follow you. If you mean that coop prices need to fall closer into line with pretty houses in Darien CT, then I agree with you. If you mean finance income on average need to fall more in line with pre-leverage bubble norms, driving prices down, then I agree with you. There is a price at which I might choose to stay and raise a family in Manhattan. Its lower than current. And yes, that is a post-Lehman change in my mindset.

Of course, people's expectations of the future are very much based on the recent past. If prices were falling the expectation is they will continue to do so and vice versa. Part of the reason things over-shoot on the up & down side.

It may be 'of course'...but the question was raised by the intial poster.

People seem to be confusing luck with wise, calculated decision-making. To me, luck has to do with chance, randomness, a low probability...like winning the lottery. I would bet that most successful (or wealthy, if that's your term of choice) people did not become so by mere chance.

"If prices fell far enough -- say to actual pre-debt-bubble prices, maybe on a par with the early 2000's -- and if sales volume also were to stay relatively flat, wouldn't that mean that real estate had ceased to be a high-appreciation investment? And that buyers who were motivated by big returns would look elsewhere for a place to put their money? "

Absolutely. I've been saying this for a couple years.

Without an anticipated major appreciation factor, RE has less perceived value to a lot of buyers. Now, of course, lower prices can make them think that appreciation might be more... and there might be some of that now... what usually kills it is long periods of no appreciation after declines.

It becomes almost a self-fulfilling prophecy.... and why RE markets generally take years and years before there is real appreciation after a bust.

and while i agree that education can increase your chances (ha, perhaps via accessibility, etc) for wealth/success, it certainly isn't necessary for the equation.

Rhino, yes, I meant that your RE dollar goes a lot farther elsewhere. Darien wouldn't do it for me, but I think there are a lot of people that realize they don't HAVE to be in NY to work and lifestyle choices are becoming very attractive elsewhere. I think we are at the very beginning of a huge shift in mindset in our lifestyles, our culture, our true needs and the economic risk we are willing to carry. Of all the excesses we have recently eliminated from our lives, I don't miss any of them. We will never go back.

There's actually nothing lucky about knowing the difference between cheap and expensive. Using the word luck is a cop out from thinking. Its a fan favorite of bears on this site.

I agree life can be simpler... In our case, I know there is very little that will likely move us out of this area. I think doing the business of finance away from NY is easier said than done.

uwsmom, in this country luck equals your socioeconomic status at birth (or more correctly, the eventual socioeconomic status of your parents). there is certainly no direct causation between your status at birth and your likely eventual adult socioeconomic status, but the correlative effect is striking.

"there is certainly no direct causation between your status at birth and your likely eventual adult socioeconomic status"

Yes there is, clearly.

rhino, i don't think we're talking about the same kind of luck.

But we were discussing the "luck" of knowing that stocks were not a good long term investment in 1999 and real estate in Manhattan was not a good long term investment in 2007. You know, the "luck" of not paying 30x rent for a condo.

I think the President would disagree with that. He's clearly an individual who worked very hard to get where he is. I'm sure he would argue that hard work pays off. Did Obama's birth decide his socioeconomic status?

I am having two conversations at once.

ar - true points, and not to get too technical and tangential, but i would differentiate between "chance of success" and "luck". one's "chance of success" is highly correlative to one's ses at birth. luck is a weird, flimsy term to toss around.

OK, i see my error.

there is no direct causation between your status at birth and your eventual adult socioeconomic status.

Birth has a huge influence. Its indisputable in the data. Exceptions dont ruin the fact.

chance of success is highy linked to accessibility, wise decision-making, etc, no? Luck does not come into play here.

We all understand that having rich parents can be an advantage, but this is a country where one can over-come that. Maybe more than any other country on the planet.

If you had access to one piece of data to assess the financial success of a random 50 year old American person...their status at birth is the one piece of data you would want....BAR NONE AND BY FAR. GET OVER IT. Maybe you could swap education, but you would be hard pressed to disentangle the correlation with socioeconomic status at birth.

I humbly disagree - I think the case for living in NY or any other major city looks pretty attractive right now. I have a low commute cost ($89 monthly), no car payments (would need at least 2 in just about any suburb), don't really feel the need to keep up with the Jones's (very few visitors, no one knows what I do or don't have). I love that it takes me 3 minutes door to door to get milk and be back in my kitchen. I love that I have 5 playgrounds with close to $1M in equipment for my children to play on within a 10 minute walk. I love the cultural, culinary, educational opportunities and advantages that the city provides. I have always said that I will live here until I can't afford to, and certainly know many others who share that sentiment.

I need to find the article...but we're actually less upwardly mobile in the US than many of the socialist European countries...because health care costs and educations costs are prohibitive in the extreme. Sorry wrong again.

"uwsmom, in this country luck equals your socioeconomic status at birth (or more correctly, the eventual socioeconomic status of your parents). there is certainly no direct causation between your status at birth and your likely eventual adult socioeconomic status, but the correlative effect is striking."

Well.. children of folks who do well are more likely have similar drive, intelligence, etc. to their parents. And/or they are taught well.

Pretending its the money that causes that to me makes little sense.

Look at the the children of immigrant parents in this country. Nothing says upward mobility like the student body at Stuyvesant High School.

uwsmom, the problem is that people use the concept of luck to negate the importance of all personal culpability. i see it as one factor that should be considered when viewing sociological phenomena.

RS, once again you're intentionally misleading. i said it is not causative, correlative. as you very well know I have exceeded my parents' socioeconomic status.

sorry rhino.

OTNYC, there is no disagreement. Its a preference. But what I do believe is there arent enough people like you to hold the prices up at these levels. And I would even guess your cost basis is not the current market...Or you rent and pay year 2000 price.

Sorry nothing. Its the best single predictive piece of data you can have. And the fact of it is the 1960s were the golden age. You are using personal experience to imagine we are still as upwardly mobile as we were in 1960. Its just not so. But even after all that, the success stories of immigrant parents are the exceptions. Priviledge is passed to a great extent. It is causal. Its not 100% causal, but it is clearly causal.

Agree with Rhino. If born of well-to-do parents, sent to good schools, surrounded by smart fellow students, it's your ball to drop. That's a lot better position than not having those advantages to begin with. Like Ann Richards said of Bush, the son, being born on third base makes financial success easier.

There are many many examples of immigrants who had nothing or first generation success stories who would strongly disagree wiht the idea that birth equals destiny. It's defeatest talk and there's no advatnage in believing it or teaching it to your children.

your parents are not random. this is why it is not luck. sorry that my obscure point is being missed. it doesn't matter. too off topic anyway.

This topic is fun. Its not defeatist to my children, because I have money. I am sorry, but you learn how to act from your parents and peers. My wife came from a better family than I. Even her stupid friends have money. My parent didnt go to college, but we were still upper middle class. There is a lot of mobility from upper middle to upper. But you kid yourself if you think this country is such a perfect meritocracy.

rhino, i was saying sorry for the two conversations. i suspect we agree more than you'd think. i just believe that our higher education system provides some upward mobility, it is not causative, but it's highly correlative. RS, who's defeatist here? really?

http://www.brookings.edu/opinions/2009/1101_opportunity_sawhill_haskins.aspx?rssid=LatestFromBrookings

If you are born into a middle-class family in the United States, you have a roughly even chance of moving up or down the ladder by the time you are an adult. But the story for low-income Americans is quite different; going from rags to riches in a generation is rare. Instead, if you are born poor, you are likely to stay that way. Only 35 percent of children in a family in the bottom fifth of the income scale will achieve middle-class status or better by the time they are adults; in contrast, 76 percent of children from the top fifth will be middle-class or higher as adults.

The United States is exceptional, however, in the opportunity it offers to immigrants, who tend to do comparatively well here. Their wages are much higher than what they might have earned in their home countries. And even if their pay is initially low by American standards, their children advance quite rapidly.

OTNYC: you are arguing city vs. burbs. I can only live in a city for all the reasons you cite but there are many other wonderful cities where you can buy much more for your RE dollar -- and still have all the perks you mention.

apt23, there aren't many cities in the US where you don't need a car. i have a love/hate relationship with the city. i think it's a great place to raise a kid, and it's easy with the insane hours that people are forced to work. without those hours, which don't seem to get a lot of people that far, i don't know what i'd think.

get this, one of the reasons we left Seattle in the mid-90s was that NYC provided better real estate value compared to income.

Shiller is on record for saying that home prices correlate historically to two things: 1. momentum; and 2. household income. He doesn't rule out the possibility of another bubble with near zero fed funds rates, but he clearly thinks negative momentum in housing prices can lead to further price declines. My personal theory to explain the housing momentum effect is that rising prices caused people to buy larger or more homes to maximize gains. Declining prices should cause people to trade down or sell off surplus homes to minimize losses. The trade-down, or sell off impulses will lead to further price declines.

Its very easy. People bought because it was going up. Appreciation was free money and rent was throwing money away. People also bought more house then they needed....because why not? It was going up and the incremental monthly payment was low AND TAX DEDUCTIBLE. NY needs to get cheaper to all kinda cities.

Yep, pretty much decided their sell point and eventual at the time of purchase.

The govt is supporting an artificial floor in RE right now. But there is also a very real cap. Right now, from my window, I can see 12 buildings that were built in the past 5 years. Every one of them were selling 2 bedroom apts at a $2 million average. They were bought because of easy credit, small down payments and the wealth of the buyers due to the stock market and bonuses. That has all changed. If we revert to 30% down, and the historical norms of income/RE purchase, all these apts are doomed. For someone entering the workforce in NY today, how long will it take before he/she can put down $600,000 for a 2 bedroom apt? I will sit and watch the resell value of the Harrison, 200 WEA, 10 West, The Rushmore, 555 West 59th et al with great interest.

Looking at the converse, rent is a bargain. How many things can you buy at 2000 price? Not many. Tech stocks, but 2000 is skewed as 10 yrs lands you in the bubble.

apt23, the real early resale fun will be in the buildings that closed earlier. more room to lower prices if the going gets tough.

THEN the fun will really begin for the newer buildings, as their abatements run out, many of them have vacancy issues, etc. of course a new development bankruptcy is often interesting as well.

Real estate as an investment is tied to many parameters - two important ones are interest rates and taxes. I would think that it is highly likely that both will have significant increases in the near and long term. This will inevitably have an impact on real estate as an investment. For the rest of us mere mortals, we all need a place to live so the issue is not as critical....but then again, what does that say for renting?

"Real estate is NOT, never has been, never will be a "high-appreciation investment.""

I think you know this is a highly untrue statement - yes, it was a bubble, and yes, it was borne out of shady and ill-conceived practices, but those were the rules, and many people certainly did experience extremely high appreciation (and consequently, depreciation). I know you've got tunnel vision when it comes to market equilibrium, but equilibrium is just an occasionally recurring pit-stop on the market's bumpy ride.

"Look at the the children of immigrant parents in this country."

That's quite the stereotype - yes, some immigrant parents push their kids hard, but there are plenty of cases where a) that doesn't happen to begin with, and b) it doesn't pan out.

Nothing so salacious.
But there can very well be issues for new developments with large unsold sponsor units and
buildings where a large number of units were contracted for at peak prices. These units if they default could be a drain on common charges. Market prices should not go down too much from here, single digits most likely, which for a two million dollar unit is not insignificant.

Some groups really push their children to succeed. It's probably cultural. Greek immigrants, past waves of Jewish immigration, Chinese etc all have pushed their children hard.

Sorry to be so off topic but I see a lot of talk here about “luck”.

I’m not sure but I think that this is a good example of luck. Someone starts their own business based on a variety of factors but the timing is not related to the general economy. They coincidently hit the sweet spot of the economic cycle are are hugely successful, much more than would otherwise be the case. The same kind of situation occurs in RE, so is this luck?

This has little to do with what station in life you are born into or how intelligent you may be and may account for a surprisingly large segment of people in a place like NY.

BTW, I understand the Visitors will provide free universal health care to all.

"There are many many examples of immigrants who had nothing or first generation success stories who would strongly disagree wiht the idea that birth equals destiny. It's defeatest talk and there's no advatnage in believing it or teaching it to your children."

Agreed.

Not saying there aren't advantages to silver spoons and such (although I think it can be a disadvantage long term) but I think its insane to talk about not having that as an excuse for not succeeding. Yes, there are extreme hopeless cases, and there should be fewer. I won't pretend I know what its like to grow up in bad project these days (although I know what "good" projects used to be like).

But for the vast majority of this country, opportunity is there. No one is saying its easy, and I don't think it should be easy. It should take effort, absolutely But I find most of the whiners had plenty of opportunity and didn't take advantage.

And, as I said, if you want to see upward mobility, take a look at Stuyvesant High School. Might have changed a bit in last few years, but back in the 90s, it was primarily child of immigrant, primarily lower class or lower middle class, and primarily not from Manhattan or Brooklyn Heights, etc.

I also read the millionaire next door... and I remember the study on folks who made over $200k done about 10 years ago, widely reported, that noted that the majority made substantially more than their parents.

Meritocracy doesn't mean you push a button and you, too can be rich... it means if you work your ass off, you have a good likelihood.

agree, sjtmd. As an asset that is frequently leveraged, interest rates and availability of funding are critical to property values. Interest rates have no where to go but up. But more important right now is availability of funding, which is becoming increasingly scarce. When the NYC market really understands this, buyers will further discount what they are willing to pay for apartments.

ieb - that's pretty close. it's kind of like being sprinkled with fairy dust.

"I need to find the article...but we're actually less upwardly mobile in the US than many of the socialist European countries...because health care costs and educations costs are prohibitive in the extreme. Sorry wrong again. "

Having siblings that live in the EU, they'll be the first to tell you that this isn't true, at least from a getting to "rich" perspective. The ability for someone from public schools to make millions (like a lot of my classmates have) is rare over there. Part of it is wall street... which, if you look at the biggest names, most did not come from money. Kravis, Wasserstein, everyone arrested in Den of Thieves, etc. UK has some of that, but not as much, and its rare in the other countries. And NYC is the only place with boatloads of seven figure lawyers as well.

BTW, I understand the Visitors will provide free universal health care to all.

that's funny! I heard that the SCI FI show is being discussed in an Obama context

uwsmom, more common than not?

ieb, if you have certain connections and options you are more likely to access to the ready cash when the opportunities arise. and if something goes wrong, you're much more likely to have a safety net. i think, unfortunately, that this is much more true today than in the past. perhaps that upward redistribution of wealth has had something to do with it.

obviously there are many people who, for whatever reason, timing, effort, education, luck, rise in socioeconomic status, it's just not as likely.

I heard that Diddy birthday is now and he's 40 years old and started out cleaning toilets, now worth $400M.

"Some groups really push their children to succeed. It's probably cultural. Greek immigrants, past waves of Jewish immigration, Chinese etc all have pushed their children hard."

And now us Jews are getting lazy, unfortunately. The "reward" of success.

Its absolutely cultural... but, just goes to show that it is possible. And possibility, the PURSUIT, is all that should be promised. There is no right to success (or, almost anything that gets attached to "right to"). Education isn't a right either... you have a right to schooling. Whether you use it to educate yourself is up to you (and your parents).

There's a whole class of electricians, plumbers, roofers who start out working for someone, open a business do well and even wind up buying buildings and becoming landlords. Others open up pizzarias, bagel shops, etc

what do you think this is worth?
http://www.streeteasy.com/nyc/sale/475813-coop-118-west-79th-street-upper-west-side-new-york

And now us Jews are getting lazy, unfortunately. The "reward" of success.

... well parents do well and don't want their kids to have to go through what they went through, and future generations get the wrong message sometimes.

i've been strongly considering having our daughter experience deprivation. would be good for her soul.

it's entirely possible to inculcate a desire for success, drive and good work habits while not depriving your child. it does require a fair amount of conversation and attention, however.

My favorite like from the Bill Cosby show was where Cliff corrects Theo and says, "No you are not rich, only your mom & I are, you got nothing" .. i'm paraphrasing.

ieb, you shouldn't indulge me. its kind of a vacuous concept, which is why it pains me to see it thrown around so casually. certainly, if we're going to define luck, i think it should be defined as less common (not more common). i would define it as something that happens to you, not something you can will (which is why its unlikely to exist if/when prudent decision making is involved). that being said, "being born" into a certain SES is not a matter of luck either. there is 100% certainty that you will be born to your parents. luck COULD come into play if you are adopted, i suppose, but certainly isn't factored into your birth.

Is this a real estate web site or a sociology / psychology forum?!

Yes

RS, matt used that quote earlier. i know he doesn't have kids, and cliff was using the line in a comedy show for laughs.

do you have children?

sjtmd, you don't think real estate is related to socioeconomics? there could be some interesting ways to make the connections more obvious, though.

"there is 100% certainty that you will be born to your parents" - cuts close to the bone?

sjtmd - seriously, how much is there to say about real estate? ;)

"... well parents do well and don't want their kids to have to go through what they went through, and future generations get the wrong message sometimes"

Agreed 100%

"it's entirely possible to inculcate a desire for success, drive and good work habits while not depriving your child. it does require a fair amount of conversation and attention, however."

I know its possible, I've definitely seen it. Not 100% sure how to do it myself. Easiest way might be to say its all going to charity except for college fund or something like that. Then give it to 'em anyway at age 40. ;-)

In terms of luck/children... remember the economic view (not everyone follows, but many schools of though do). You ARE your children. Goal is maximization of consumption over yours and your children's lifetimes.

And clearly many parent act this way.

what wwould you call someone who is born to loving, appropriately providing parents of reasonably high SES vs. someone born into extreme poverty with other negative circumstances?

it is not statistically lucky that your parents have you. it is statistically lucky that you have those parents. or not, as the case may be.

I know its possible, I've definitely seen it. Not 100% sure how to do it myself. Easiest way might be to say its all going to charity except for college fund or something like that. Then give it to 'em anyway at age 40. ;-)

that's very funny. and probably better and easier than what i'm trying to do.

ar - we absolutely use the terms "good luck" and "bad luck" as you describe above. i'm just suggesting that although we call it luck, its really far from it.

it's also normative, of course. we value certain genetic results. athleticism, beauty, "success", stardom. the luck probably lies more in whether your genetic potential matches current standards. back in the day the best mastadon hunter was a mighty fine catch.

this sent some of the blogosphere into a tizzy yesterday. food for thought.

http://baselinescenario.com/2009/11/02/smart-hard-working-people/

i know this is not the point of the article, but there is terrible misuse of the term. The author doesn't know why he/she is smart and hard-working so decides to attribute it to luck. huh????

and one's IQ is not a matter of luck. what is this person talking about? sadly, i'm not able to grasp the true content of this article b/c of these little hang-ups. i'll have to read it again.

And we're all lucky that we were born in the United States in the 20th century and not as a Serf in England in the middle ages.. The luck thing is defeatest.

and i love that the auther claims to have "done" nothing to be smart and hard-working, as if it just happened to him/her while sitting in a black box for 40+ years. i think this author hit his/her head from leaning too far left. :)

interesting article, but totally wacky!

it depends on how you look at it, uwsmom. i firmly believe IQ is just a matter of luck, via genetics. you don't do anything to deserve it, you don't earn it, you're given it, so what else can it be?

same with beauty, although like intelligence it can be enhanced with effort. same with athleticism or musical talent. you can enhance whatever you get, but you can't purely conjure up ability without having been "given" it.

Brain is like a muscle. Yes some we all can't be Arnold Schwartzeneger, but the average person can work hard and get good grades. Far too many parents don't take an interest and are totally happy blaming the school and the teachers yet don't help with homeowrk and keep the kids up late at night.

gosh, IQ, beauty (or "looks"), natural inclinations toward something...anything that is arguably genetically based seems to fall closer to fate (if there is such a thing), which in my opinion is on the opposite spectrum of luck. "What will be will be" is not luck. BUT, what will be that wouldn't otherwise have been MAY have resulted from luck.

it depends on if you view yourself as a statistic. i tend to. out of so many children born in a given year, only a certain percentage receive the goods. i think if you're one of them you're lucky.

Now I understand the anti-Rand feelings, IQ is luck/genetics. If you're smart, it's not you. If you do well in sports, you just inherited the right gene.

I do so a unifying theme here. When it comes to peoples myths, they are very attached. So much creative prose against truisms. There are two truisms I see here. One is that being born with money is still the best way to get rich, and is still the single best predictive piece of data. And two, that price to rent ratios in Manhattan are way out of whack.

Yea and a the majority of posters currently rent.

and you always say that I have a sense of self-entitlement.

what you do with your luck is you.