Manhattan Apartment ‘Disconnect’ a Boon to Renters

You should post this here:

http://streeteasy.com/nyc/talk/discussion/20791-sounds-like-jim-hones-is-owed-an-apology

or here:

http://streeteasy.com/nyc/talk/discussion/20803-more-and-more-press-about-rental-market-in-nyc

then step back and watch the fur fly... :)

is it really disconnected?

sales have increased because priced have dropped.... rents dropping as well fits right in.

so to correct this, either sales prices have to drop, or rents have to go up. or..we could have a situation where both drop, but sales prices drop more rapidly and over a long period of time the gap narrows. Its tough being a bull these days...i give you guys alot of credit for stickin to ur guns.

> i give you guys alot of credit for stickin to ur guns.

Isn't that the definition of insanity?

I think the line between insanity and balls get blurred sometimes.

this market has functioned with a solid sales pace for many years with the buy/rent numbers distant from the normal formulas that are applied to many other markets in determining if a market is over/under priced. Not saying Manhattan is immune to outside macro forces and affordability, Im saying the formula that is normally used to assess if a local housing market is over/under priced due to rental rates, needs to be tweaked for this local marketplace. Otherwise, how do we explain its prolonged functioning with the buy/rent so disconnected? We can say that

a) sales prices MUST go down, or
b) rents must go UP

for it to make sense again, but people have been saying that for a decade now and this market continues to trade. If its 12-15x annual rental rate, maybe it needs to be tweaked to 18-22x annual rental rate to make sense in this marketplace...just an example, maybe the tweaking is lower. Dont know. I dont trust the rental rate reports. All I know is its virtually impossible in our residential marketplace to buy a place using normal leverage and rent it out at a profit, or even breakeven, unless you got an insider price on a conversion. Commercial, different story. Commercial is all about the numbers. Its residential that needs the tweaked formula, or else you'll constantly expect this market to dramatically correct due to the dislocation; and over time history proved otherwise.

Digs, isn't that the sort of reasoning that often gets applied toward the end of a bubble? I recall all sorts of tech-era arguments about how the normal rules of valuing stocks based on profitability, earnings, etc. didn't apply to tech companies as an ad hoc justification for what later turned out to be bubble pricing.

The fact that a bubble persists for a period of time doesn't indicate that it's not a bubble. And, buying based on the hope that someone else will be willing to pay you a higher price, rather than based on the fundamental value of the asset, seems like the sort of purchasing rationale that often occurs in a bubble.

UD, I don't think we're even a decade into the disconnect. Prices vs. rents were perfectly sane in 2000 or so.

To give a sense for how long bubbles can linger, and what happens when they break, look no further than stocks. In 1995 valuations were highish, but plausible (call it 2002-2003 in NYC RE). By 2000, the S&P was at 40x normalized earnings (call it 2007-2008 in NYC RE). It took a full 9 years for full panic to set, all ideas of bubble valuations long forgotten, hopes for future gains all lost as it became viewed as a casino rather than investing, for us to hit 11x normalized earnings in 2009. The time of crazy-low valuations only lasted a year, and now we're back to a normalish number.

Using that benchmark, how long until normalcy reverts? 2017-2018?

its the new era....cash burn rates dont mean anything...yahoo at 500 a share is a steal...the globe.com is a pure money maker. Manhattan real estate never goes down.

JohnDoe - well Im not saying it doesn't apply, Im saying it needs to be tweaked a bit. Im very careful not to be one of the guys drinking the kool aid. Its just that the demand pool for Manhattan residential real estate is far deeper, wealthier, and motivated then in many other local markets where the normal formula tends to apply to market forces. Yet this market continues to function for a long time with the disconnect in place. How can this be?

I agree the fact that a bubble can last a long long time, but Im not sure I would call this market a bubble, ripe with speculation and use of insane amounts of leverage. I dont see cabbies and maids buying multi-million dollar properties.

What is normal? Is it really 12-15x annual rent? I rent a 900sft JR4 1br/1bth in a full time doorman building in PS 6 with very nice N/E views onto 84th & 3rd. I pay 3,000 a month. So lets do some math:

12x annual sales valuation ---> $432,000
15x annual sales valuation ---> $540,000

So, anything over $540,000 is a bubble waiting to burst? My argument is the 12-15x formula is low for this market...sure it applies to Commack, LI and suburbs in CT and Jersey, but to Manhattan as well?

I say 18-22x is a better formula..

18x annual sales valuation ---> $648,000
22x annual sales valuation ---> $792,000

At 22x, the top end of my range and where the market would be toppy, would equate to $880/sft for a f/s doorman bldg in PS6..Thats what Im saying. I dont think my argument means Im drinking the kool aid or failing to see a bubble.

ionada - well in 2000 I was hoping to buy but I deemed prices to high. At the time I rented a 878 sft 1br/1bth on 89th and york, d/m building with river/bridge views, for $1,900/mth, that was up from 1,750/mth in 1999...So, I would say they were still disconnected.

marco thats taking it a bit far, no?

the problem here is attempts to use a ratio as a way to apply some level of standardization to this market with one hope ===> determining if prices are too high or too low.

So, the norm is supposedly 12-15x annual rent..and so the argument goes that anything higher is too high, bubbly and must fall. Anything lower is value. I say this ratio, this formula, needs revision to apply properly in this market. Im saying, anything higher than something like 22x is too high, bubbly, and likely to fall and anything lower than 17-18 is value.

If we did use 12-15, and the 900sft apt really did fall to a price of $432,000 - $540,000, then I promise you that the macro forces that caused that fall in price action would have also made my rent for this same place fall and go from 3000/mth down to 2500/mth or, perhaps lower - thereby muting the effect on the ratio. So the ratio would still be in the 18-22x range as I am suggesting, only closer to the 18x level.

How does this look from the income point of view? $3,000 a month equates to $120k a year? Clearly $120 k in income no longer supports a purchase of $650 k without a huge down payment that would have taken years of sacrifice to amass at this income level.

thats the thing...you dont have existing liquidity, usually you dont move here, and you live outside where the ratio applies. people in Manhattan tend to have money and there are many ways to get money outside of simple saving. Hey I hear you, I never got a penny. I earned every dime I have saved. No inheritence, no gifts, and not even a life insurance policy when my father passed...nope, I had to even pay for his funeral. But for many others, the situations are different.

people used to move here in droves becuase banks and law firms were hiring and paying great mnoney. thats no longer the case. the supply is dwarfing the demand. we've seen some developers go bust and were going to see alot more. william beaver house and Azure are in completely different neighborhoods, but both are just straight up empty. landlords and developers have pushed themselves all in banking on the fact that things would get better this year. things havent. Now, theyve actually lost thier entire european investor base. so we'll see what happens.

agree but Azure is bad example...terrible location, marred project with crane accident, landlease coop, across from projects, way overpriced, etc..

agree on other points. no way labor market is like what it was, especially in terms of the future growth we saw - looking ahead, no way we match that growth. but in all markets, there will be distressed sellers, distressed developers, poor projects and bad decisions. Its the relative moves that matter and yes, we are seeing higher distress now than 5 years ago

There is another variable missing in the above equations that might skew the numbers even more greatly.

No where in your numbers do you discuss maintenance/cc's in your discussion. While it is arguable that these are replaced with real maintenance of a home/real estate taxes in other locales, it is also arguable that the rates paid are much higher than one would pay elsewhere for somewhat-like holding costs. This is even more greatly skewed in high-amenity buildings.

That said, there is an argument that the valuation is warranted, like in a growth stock, because of how much Manhattan has improved in the quality of life (growth in a stock). So people actually were getting improved returns (improved quality of life, improved high salary jobs/demand, etc.) in manhattan while they held onto the housing stock they had seemingly overpaid for in the past.

But if that analogy holds, what if that growth story has turned? The best tech stocks don't see the same multiples after their hyper-growth story ends. Even if they keep growing at best they usually hold their value while the multiple shrinks along with growth percentages.

That is what MIGHT happen in NY as Finance is no longer allowed to grow salaries so much, as services decline, as the numbers of police, firemen, etc are reduced so as to balance municipal pension funds. NY improved A LOT since the 70's. Can it continue? It is possible, especially if one day they break the stranglehold the unions have over lawmakers and future tax revenue. The question is how likely is it?

very interesting Avuws...ok, now headed to the street fairs! Enjoy the weekend all. Im outs to EU for 2 weeks and cant wait to get the hell away from data spot checks for the new analytics platform. Beta when I get back, launch hopefully a few weeks after that. Enjoy all! be safe!

UD, you're swallowing the Kool-Aid, methinks. You don't have to go back that far - to before the bubble - to get those multiples: www.350bleecker.com/sales.html.

The most recent sale is #6J: $710,000.
5J sold for $735,000 in 2006.
5L (identical apartment) sold for $422,500 in 2003.
4L sold for $325,000 in 2000.
5J sold for $185,000 in 1998.

One could argue - and I would - that the jump between 1998 to 2000 is to make up for the negative growth between 1988 and 1998. The apartment doubled in price between 2000 and 2006, but the bulk of that was in the boom years from 2003 to 2006. Prices are now below 2006's.

It's absolutely possible to see 2003's prices again. These are very long cycles - 10 to 15 years. It's only just begun.

well the talk was regarding price to rent ratios and the disconnect between what rents are and what similar sales valuations are...my point was simply that 12-15x annual rent ratio formulas do not work for this market. That it needs to be tweaked to be a more applicable ratio of whether a property is under or over valued.

The bubble talk came up later. We definitely WERE a bubble, but prices adjusted down 25-40% from peak to trough, and then reflated. I certainly think that reflation is at risk in the years to come, but to say we are a bubble today, right now, to me is flat out wrong. A bubble has certain characteristics that I dont see at play right now. The adjustment occurred, and you know how bearish I was back in 2007-2008. Then I became less bearish in 2009. Still bearish though, but less bearish than I was. With the adjustment I couldnt be as negative on the market as I was before the move down. Thats where I am today. But the bubblers out there talk as if this market STILL is a bubble that is yet to burst at all and that means moves down in the 50-60% range, close to 2000 levels. Im not sure I see that in the cards anytime in the near future. Of course if something really drastic happens, I may change. But I dont see it happening.

Something else to consider...

There was a lot of talk during and after the bailout that one of the necessary but unpleasant ramifications of the course that the government chose would lead to a prolonged period of ever declining asset values rather than a one shot (and very likely calamitous) drop. In other words, the government would soften the blow by spreading it out over many years and many different stakeholders.

Wouldn't that provide a clear explanation of what has happened in the last 18 months and what will inevitably play out over the three to five years?

" Im saying the formula that is normally used to assess if a local housing market is over/under priced due to rental rates, needs to be tweaked for this local marketplace."

Does it? Or does 2004 to present reflect the securitization boom and its lingering impact?

"how do we explain its prolonged functioning with the buy/rent so disconnected?"

An anomalous period of easy borrowing...where the local buyers concurrently enjoyed juiced incomes for the same reason.

" Its residential that needs the tweaked formula, or else you'll constantly expect this market to dramatically correct due to the dislocation; and over time history proved otherwise."

What history? Post 2004 history?

"Using that benchmark, how long until normalcy reverts? 2017-2018? "

The tough part now is the downturn coincided with a global recession. In 1992 we had a 'normal' recession....so global leaders were not coordinating to jam down interest rates. So we were able to see a trough by 1992 (vs a 1987 peak)... What is normalcy? 15x rent prices?... We have 17-18x now for coops. Maybe 15x takes two years?

"ionada - well in 2000 I was hoping to buy but I deemed prices to high"

How were prices too high in 2000? It was what, 10-11x rent back then? In 2000 rents were the same and prices were half.

Multiples suck. Cap rates are better... The real question here is ultimate how long mortgage rates will stay in the 4-6% range. If the answer is forever, then 16-20x rent may very well be the new normal.

too high for me.

'10-11x rent back then?'.

no. I was paying 1900 in 2000 for a 880sft 1BR with bridge views on 89th and York...11x rent would imply a sales price of 228,000...11x would imply 250,000...it was no where near that low. with rents that low in 2000, the ratio would have been higher, closer to the range I am suggesting applies for manhattan residential, yet likely closer to the 18-19 level that represented good value. Still I didnt buy because I was priced out for what I wanted.

2 years later, more money in my accounts and 3 months after 9/11, i signed a contract for a 500K JR4, 1069sft + 650 sft terrace, on 93rd and 2nd. To me, that was value so I pulled the trigger.

oops, '11x rent would imply a sales price of 228,000' meant 10x for that one

I was renting a 1br doorman, no-view, 700sqft apt for 2450 in '00 on the lower UWS, renting a 2b2b would have been around 4000. Chose to buy a small 2b2b doorman for 480k (2 blocks away) in '00. I didn't think it was a bad buy then.

That same 2b2b would not have rented for any more than 5k at the peak. In '01, another apt similar to mine sold for 480k, '02-03 - they were going for mid 600s. At the ht of the market, almost 1m.

"my point was simply that 12-15x annual rent ratio formulas do not work for this market"

I agree that interest rates have some effect on the rent formulas, so 12x would probably be low for today's market. 15x would probably be about right - about where rent and PITI are the same. We're still a long way from there, however.

Again, property markets move slowly, especially in Manhattan where the turnover is so slow. As shown by my example above we're already below 2006 prices for the most part. I don't see us going below 2003 prices - that will take all the froth from the market, and get Manhattan's price decrease to equal the decrease in most other boom cities: 50%.

another good point steve..so if rates went back to 2000-2001 levels of what, 6 7/8 - 7 1/4 levels, I think they were around there, the lower the multiple should go? so many variables with these ratios...tends to make interpretations more difficult

To me, UD, the constraint is on leverage: banks determine how much they will lend you, for the most part, using PITI: principal, interest, taxes, insurance. They don't take into account tax benefits. PITI = 30% of total income is usually the standard, so if you make $100,000 a year, you can afford $30,000 in housing expenses, or $2,500 a month.

Therefore, whatever you rent for $2,500 a month is what you should be able to buy for $2,500 a month. That is, not coincidentally, the same constraint as renting at 40x monthly income: $2,500 * 40 = $100,000. That is also - also not coincidentally - the break-even point for buying and renting out to an unrelated third party.

Whatever ratio gets you to that equation - the market constraint - is the right one to use. All the other things - tax deductions, discounted rent and tax increases, opportunity costs, transaction costs - tend to wipe each other out over time.

We are still a long way away from buying a studio that would cost you $2,500 a month, which is about what it costs to rent one in prime Manhattan.

"No where in your numbers do you discuss maintenance/cc's in your discussion."

what about property taxes going up? that one is a no-brainer. with the extend of how unfunded public pensions are, it's much easier to fund them with increase property taxes than increasing earn income taxes. but, the city could start by taxing heavily pensions per se and solve part of the problem (just an accounting gimmick, but one of the few legal options besides bankruptcy).

it still surprises me how home prices only adjust downwards once the higher property taxes are in place, even though the writing was on the wall. why on earth don't home buyers look into increasing carrying costs in the future that are a certainty and ask for compensation through lower prices? i guess a big part of the price adjustment comes from elderly having to downsize to cut down on property tax increases, comes from increase in force sells, not from savvy (or not so clueless) buyers that demand compensation.

"but, the city could start by taxing heavily pensions per se and solve part of the problem (just an accounting gimmick, but one of the few legal options besides bankruptcy)."

Didn't you know?? Public pension payments are exempt from state and local taxes if you live in NY State (or choose to move to a no-income tax state like FL). They get the generous pensions without having to pay taxes on them the way the rest of us shmoes have to.

Exactly, taxing them will be on the table

Does anyone know if that is even constitutional? I know that the state can't constitutionally go back on its pensions contracts. And I doubt it is possible that they will be able to change that constitution, not until things got devastatingly bad, but can they tax those benefits under the current state constitution?

If so, it might actually be a recipe for changing the constitution regarding pensions. Because taxing the pensions would no doubt drive more state pensioners out of the state and hence reduce their voting power. But all of this will play out in slow motion over decades. I think the budget busts will happen much faster than that. Without rapid growth in the economy to compensate, and with a current state political class that thinks increased spending of, say, 5% rather than 10% is a "cut", we are going to see dramatic budgetary problems in the coming 2-5 years.

The more important thing to consider is who is buying a 900 square foot 1 bedroom and needs to worry about schools? That is the biggest joke with all these apartment discussions - there is a cap on the price of smaller unit because living in them with a family is tough to impossible.

I rent 1,300 sq ft on lower park ave, full service, doorman for $under $5,000.....asking price for the same type of units is $1.5m+. It just doesn't make sense.

Due to all the gov money printing and low interest rates, NYC real estate will be EXACTLY like Japan - flat to down for 15yrs. Why waste a huge chunk of money on a downpayment when you can rent for less?

paulnyc - that is exactly my point..so do the math on your example that is clearly a higer price point (segmented market I always talk about) and a higher valued location.

18x = 1,080,000 (value)
22x = 1,320,000 (toppy)

now it makes more sense...one can take it a step further and say the higher price point, for families, in the same desireable school zone, in a more desireable location deems a small premium in these multiplers..say you use 20-24, instead of 18-22..

20x = 1,200,000 (value)
24x = 1,440,000 (toppy)

this market is so highly segmented it makes a standardized ratio not applicable in the real world. that is my point. to do so, the formula should be tweaked..to what, that is the question...what are your similar units trading for right now and are they in the range of 20-24 or my 18-22 example?

Urbandigs. Uhhhhhhhhhhhhhhhhh. Mmmmmmmmmmmmmmmmm. Uhhhhh.

Howz about a sentivity analysis on the x factor. You know 'rents'. So if you believe there is 0 chance rents will decrease for the next 10 yrs ( which I think is total rainbow unicorn land) then id say okay on your analysis. But me thinks a huge deleveraging process might just touch rent rates. Just a hunch. But remember what I said, 3 qtrs of rising rents bf you start looking at 'buying'.

- shrug -

Oh well do you see 2.5k open houses? Last nite couldn't get toll house cookie break and bake, coincidence?

well i did have 'sedm pivos'...for anyone that speaks czech youll understand

is that a cookie or a drink?

Let me do the sensitivity analysis for Paulie and use 18x = $1.08MM example with $5K rent. VERY VERY CONSERVATIVE... m'okay

let's say rents drop by 2% to $4.9K, and you've put down 20% on the $1.08MM purchase. Paulie you would be looking at a 10% decrease in your equity..... That's if rents drop by $100.... that's 2boxes of diapers. Now if rents drop by 5% or to $4.5K, you'd be looking at a 50% wipe out of your equity.

I don't know about you paulie... but prob RENTS r going up 0%, 85% down 1-10% and 15% down > 10% over the next 8 quarters..... purchase price follows just on this fact alone... then throw in tighter credit and that's the beast you should be worried about. The BUBBLE was a lax credit causation... and my feeling is purchase price will be credit determination NOT rent/buy ratio in the short term.