New York Times on Buying vs. Renting

A very sensible article. This board is much too pre-occupied with the real estate “investment” and totally ignores the utility of an apartment as a place to live in. If more people viewed their living space as simply a quality of life expense, rent/purchase prices would be better aligned and speculation would be less prevalent.
Note that the author of the article purchased an apartment in DC not in NY and he had to relocate anyway. This is not an investment for him, just a comfortable place to live in.
It is more expensive to buy then to rent, and as irrational as it seems, people do it if it’s within reason.

"In fact, if you’re now renting — almost anywhere — and do not need to move, I’d probably recommend that you wait to buy. The market is still coming your way."

That's so dumb. As malraux, juiceman, spunky, vverain, evillagers, eah, others & I so plainly know, REAL ESTATE NEVER FALLS IN VALUE IN MANHATTAN.

In fact, it rises at a constant rate of 3x annual incomes.

"This is not an investment for him, just a comfortable place to live in."

WHAT?! That is SO stupid. Heresy. Owning the property your live in earns you interest, in the form of a tax deduction, WHICH YOU GET WHETHER YOU LOSE YOUR JOB OR NOT!

LMAO.

steve LMAO? Hmmmmmmm. Have a look at a couple of these no fee, “luxury” Chelsea rental apartments found on nybits.com:

Archstone Chelsea

1 bed - $3,590 - 569 sqft
1 bed - $4,035 - 697 sqft
1 bed - $4,475 – 729 sqft

777 6th Avenue

2 bed - $5895 - ~900 sqft (not even close but I will give it the benefit of the doubt)

“In concrete terms, a rent ratio above 20 means that the monthly costs of ownership well exceed the cost of renting.”

So according to this article, anything over 20x the yearly rent would be a bubble. So, let’s pick 15x the yearly rent as the article suggests as a “safe range”. What would the target prices be?

1 bed - $3,590 - 569 sqft = $646k - $1135 psft
1 bed - $4,035 - 697 sqft = $726k - $1042 psft
1 bed - $4,475 – 729 sqft = $805k - $1104 psft
2 bed - $5895 - ~900 sqft = $900k - $1179 psft

Does anyone think that they could find a Chelsea apartment to buy close to these prices? Steve are these real numbers? Please discredit this article from the NYTimes as incorrect, inaccurate and completely fabricated. Also, it would help if you could discredit the information on nybits.com as bull, malarkey, or general poo poo. I’m looking for an apartment that will be half the cost to rent as it would be to buy and really hoping you could shed some light on this situation.

What a great article. I actually saved it for future reference. I was laughing when he said about the Realtors basically lying to you about how great an investment is owning. I have been saying this for sometime.

Stevejhx- What is amazing is to see how many people will now read this and accept it as gospel. It's clear now steve that if wrote for the NY TIMES perhaps you could of saved people millions. It's actually quite amusing.

when did i say nyc real estate never drops? or real estate, in general? i recall posting that when i first entered the malaysian market it was a spectacular failure. however, all properties have since gone up quite a bit and any losses have been regained but i did have to gut it out some crap years.

JuiceMan quoting NYBits? Are you going native, JuiceMan?

Just go here:

http://money.cnn.com/2007/11/06/real_estate/home_prices.fortune/index.htm

"Real estate: Buy, sell, or hold?"

Then click on their link:

http://money.cnn.com/magazines/fortune/price_rent_ratios/

Hit the P/R ratio tab, and you'll get (turned sideways):

Metro area = New York
June 2007 = 17.8
15-year avg. = 11.7
% Correction = (34.6)

As we all know, prices have continued to rise since June 2007, meaning the rent-to-buy ratio is higher still, since market rents have fallen recently.

The 15-year average rent-to-buy ratio in New York is about 12. I've been saying that for MONTHS, it was proven yet again by Fortune Magazine (and many others).

The reason for the rent-to-buy ratio's being where it is is the 40x monthly rent / 28% housing expense constraints imposed by the market. They are what give you that 12x.

I pay about $4,500 per month for a 900 ft2 2-br 2-ba apartment in a good building in Chelsea. 12x that annually gives you a price of $648,000. I could buy a virtually identical unit across the street from me for $1.2 million, meaning out-of-pocket would cost me about $9,000 per month.

First, Archstone Chelsea is rent-stabilized, so it's one of the more expensive buildings to get into upfront. That aside, the 20x annual rent figure constituting a bubble are

The second half of your question:

http://www.nybits.com/apartmentlistings/cd4053be6f3a9003cad23901ea62b6bd.html

That is a 2-Bedroom at Chelsea Landmark for $6,595.

Here's a comparable listing on a similar floor at the Chelsea Stratus across the street.

101 West 24th Street, #30B in Chelsea $2,045,000

WITH a tax abatement 30-year fixed at 7.5%, your payments would be:

Down Payment: $409,000
Mortgage Amount: $1,636,000
Mortgage Payment: $11,439
Total Monthly Payment: $12,610

http://www.streeteasy.com/nyc/sale/159583-condo-101-west-24th-street-chelsea-new-york

Add back $1,500 in amortizing tax abatements and you have monthly payments $14,110 per month for an apartment that you could rent across the street for $6,595.

Sounds like an MF'ing deal to me!

Oh, I'm sorry, I forgot the tax benefit.

LMAO.

"First, Archstone Chelsea is rent-stabilized, so it's one of the more expensive buildings to get into upfront. That aside, the 20x annual rent figure constituting a bubble are"

Never did finish that thought! "constituting a bubble is well-established empirically."

steve, you asked for numbers, I gave them to you. I can find another 20 that would support what I said above. Fact is, there are numbers out there than support your theory and there are numbers that do not. You fail to realize that blanket statements are silly and that you should look at each property, building, neighborhood, on a case by case basis.

Additionally, I don't have the direct quote, but you have said in the past that the ratio in Manhattan is closer to 15x than 12x but this, you have conveniently ignored.

Getting back to the calculator - it seems that one of the biggest variables is the house appreciation versus the increase in rent. Assuming that the variables used by the Times are correct (and I'm not arguing one way or the other) - it seems that if you think that an apartment will appreciate 5% a year - then buying seems like a very strong option.

JM, Steve: can we all agree, that while buying we should look to pay 12 - 15 X annual rent of BEST PRICED RENTAL COMPARABLE, and anything more than that is a poor deal?

JM, if you find something at the 12 - 15X range, go for it. I just dont seem to be able to find it. Even those that I think are relatively well priced w.r.t comps in region are way too expensive by the rental ratio.

Actaully - I take it back. I'm just using my own numbers for rent, apartment cost, etc. Even with the calculator you can come up with pros either way.

JM, Steve: can we all agree, that while buying we should look to pay 12 - 15 X annual rent of BEST PRICED RENTAL COMPARABLE, and anything more than that is a poor deal?

JM, if you find something at the 12 - 15X range, go for it. I just dont seem to be able to find it. Even those that I think are relatively well priced w.r.t comps in region are way too expensive by the rental ratio.

JM, Steve: can we all agree, that while buying we should look to pay 12 - 15 X annual rent of BEST PRICED RENTAL COMPARABLE, and anything more than that is a poor deal?

JM, if you find something at the 12 - 15X range, go for it. I just dont seem to be able to find it. Even those that I think are relatively well priced w.r.t comps in region are way too expensive by the rental ratio.

eric unfortunately for the next 75 years at least you will never find a 12-15X range in the Manhattan market but good luck looking.

Oh steve, its the same old game. you're using a ridiculous interest rate, you're counting principal payments the same as common charges, yes you are ignoring tax benefits, and for the final touch you are ignoring the tax abatement.

And then of course another favorite trick of yours, which makes the whole exercise irrelevant, actually fraudulent. These are hardly comparable listings. The Stratus apt has higher ceilings, bigger rooms, much more closet space, bigger and nicer bathrooms, a better kitchen, and a balcony.

But other than all that, good example.

no cartman I would not agree with that. Obviously there are a lot of assumptions involved but when I run the #s even at 20x, buying may be a reasonable proposition.

houser- By your last post, you have agreed with steve's analysis. According to you Manhattan is always cheaper to rent.

gee - sorry - didnt realize i posted thrice. apologies.

Sure, there are other points (e.g., coop vs condo, large vs small maintenance, etc). The NYT guy was trying to give a rough rule of the thumb to determine if house is too expensive to buy vs rent.

What I heard Juiceman say was that manhattan apartments are already within the range suggested by the NYT guy (by his chelsea comps)

I am now hearing houser say that the range will NEVER be in that range (for the next 75 years - not sure how he got that number)

and I am hearing CCDevi say that that the range itself is invalid.

Bulls, please make up your minds

EC

Dudes, dudes, dudes.

JuiceMan, what I said is that I might not wait for 12x, I might get in at 15x, but not above that.

Your comparison:

1 bed - $3,590 - 569 sqft = $646k - $1135 psft
1 bed - $4,035 - 697 sqft = $726k - $1042 psft
1 bed - $4,475 – 729 sqft = $805k - $1104 psft
2 bed - $5895 - ~900 sqft = $900k - $1179 psft

for a building the quality of Chelsea Archstone is just ludicrous. 50% under the Chelsea Stratus (also across the street) at $1,646 psft. Using the $6,595 monthly rent that I gave at 15x, you get a price of $1,187,100 versus the asking price in the Stratus of $2,045,000.

Here's just a few more new developments and what they cost:

650 6th Avenue = $1,427 per ft² (avg)
118 West 18th = $1,462 per ft² (avg)
Jade = $1,325 per ft² (avg)
Chelsea Modern = $1,484 per ft² (avg)
245 10th = $1,377 per ft² (avg)
Prima = $1,332 per ft² (avg)

Even something "cheap" like the Clement Clarke is $1,258 per ft² (avg), and NOWHERE NEAR the prices you quote.

And for the whole neighborhood:

Sales in Chelsea
We found 483 listings
Median price: $1,695,000 Median size: 1,415 ft² Median price per ft²: $1,311

The median price per square foot in Chelsea is 30% higher than the figures you use, and that doesn't include taxes and common charges.

october, rents and owner-occupied real-estate increase in value at the same rate: the rate of incomes. Only if incomes increase by 5% will rents increase by 5%. Holding interest rates constant, the same happens with property prices: you can only afford what you can afford.

ccdevi, I was using a 7.5% fixed rate, which IS ridiculous. Here are BofA's rates today (I tried Chase, they were down):

Fixed-Rate Mortgages

Loans over $417,000

30-year Rate 8.250 Points 1.118 APR 8.448

I know, "you can get a deal." Or take out a far riskier ARM and not calculated in a risk premium. I know, I know. Stretch yourself to you break to buy something that's twice as expensive as it is to rent, when you get the same benefit back: someplace to live.

"you're counting principal payments the same as common charges, yes you are ignoring tax benefits, and for the final touch you are ignoring the tax abatement."

You are SO dumb. You don't know the difference between using the p/e ratio for a piece of property versus using the imputed rent ratio. You count those things using the imputed rent ratio, not the p/e ratio. The p/e ratio will give you a figure of 12x, imputed rent will give you something like 18x. But imputed rent includes risk premiums and expectations for future increases in property values, which aren't measured in the p/e ratio.

And the abatement is baked into the price, so the developer gets it, not the purchaser. Econ 101.

"The Stratus apt has higher ceilings, bigger rooms, much more closet space, bigger and nicer bathrooms, a better kitchen, and a balcony."

I just knew you were going to say this! Especially the balcony part!

Those apartments are both approximately 1200 square feet, so the Stratus can't "bigger rooms, much more closet space, bigger [...] bathrooms, because that would make it a bigger apartment, which it isn't. (Moron.)

I think it was you yourself who said that outdoor space is only valued at 1/2 indoor space, so if you want to pay a 100% premium for higher ceilings and a "nicer" bathroom, be my guest. Just be careful not to piss your money away off that balcony onto us poor renters below.

JM: you "can find another 20 that would support what I said above."

Uh-uh, no you can't. Because the median price figures in Chelsea demonstrate that you can't.

If you want to pay a $1 million

premium for the luxury of buying an identical apartment, go right ahead!

I first bought real estate in Manhattan in 1996, when rent vs. buy was easy -- $800 a month for a rent-stabilized non-doorman studio, where the bathroom ceiling kept falling in, or $1,000 a month for a an alcove studio in a doorman co-op, with a better kitchen, views of the Empire State, and tax benefits?

But now, speaking very broadly and very generally, rent vs. buy does not work in many areas of Manhattan (I agree Archstone vs. Stratus isn't a good comp, but even the good comps don't really work.)

As an owner, an agent, and a personal finance writer, I think there are still reasons to own real estate -- your can lock in your housing costs to a large extent; it's customizable, and it's an enforced savings plan, to name three.

But if "rent vs. buy" is what it takes to convince you to buy, you SHOULDN'T be a buyer in this market. Stop worrying and shove a little extra money into your 401(k) instead.

ali r.
{downtown broker}

I also find it very interesting that an article was cited on here, showing that the national avg price to rent ratio is about 17 and that NY has a very low relative price to rent ratio. I find this interesting because when I made this point a couple months back, the same person who posted this article accused me of making up my numbers. Oh well.

And just to prove the absurdity of your posting again, JM:

Sales in Chelsea
We found 1 listings with monthly payments of no more than $4,500 with at least 1 bedroom
Median price: $599,000 Median size: 450 ft² Median price per ft²: $1,331

With a $100,000 down payment at 7.5% interest.

Here's your comparison:

1 bed - $3,590 - 569 sqft = $646k - $1135 psft
1 bed - $4,035 - 697 sqft = $726k - $1042 psft
1 bed - $4,475 – 729 sqft = $805k - $1104 psft

ONLY ONE 1-bedroom apartment for sale in Chelsea with total carrying charges of the TOP price you quoted for a 1-bedroom apartment. If you lower the interest rate to 6.5%:

Sales in Chelsea
We found 3 listings with monthly payments of no more than $4,500 with at least 1 bedroom
Median price: $599,000 Median size: 502 ft² Median price per ft²: $1,331

ALL SMALLER.

"In fact, if you’re now renting — almost anywhere — and do not need to move, I’d probably recommend that you wait to buy. The market is still coming your way."

There it is. All the slicing and dicing will not change the main message of the article. Neeeext.

"ccdevi, I was using a 7.5% fixed rate, which IS ridiculous. Here are BofA's rates today (I tried Chase, they were down):

Fixed-Rate Mortgages

Loans over $417,000

30-year Rate 8.250 Points 1.118 APR 8.448

I know, "you can get a deal." Or take out a far riskier ARM and not calculated in a risk premium. I know, I know. Stretch yourself to you break to buy something that's twice as expensive as it is to rent, when you get the same benefit back: someplace to live.

"you're counting principal payments the same as common charges, yes you are ignoring tax benefits, and for the final touch you are ignoring the tax abatement."

You are SO dumb. You don't know the difference between using the p/e ratio for a piece of property versus using the imputed rent ratio. You count those things using the imputed rent ratio, not the p/e ratio. The p/e ratio will give you a figure of 12x, imputed rent will give you something like 18x. But imputed rent includes risk premiums and expectations for future increases in property values, which aren't measured in the p/e ratio.

And the abatement is baked into the price, so the developer gets it, not the purchaser. Econ 101.

"The Stratus apt has higher ceilings, bigger rooms, much more closet space, bigger and nicer bathrooms, a better kitchen, and a balcony."

I just knew you were going to say this! Especially the balcony part!

Those apartments are both approximately 1200 square feet, so the Stratus can't "bigger rooms, much more closet space, bigger [...] bathrooms, because that would make it a bigger apartment, which it isn't. (Moron.)

I think it was you yourself who said that outdoor space is only valued at 1/2 indoor space, so if you want to pay a 100% premium for higher ceilings and a "nicer" bathroom, be my guest. Just be careful not to piss your money away off that balcony onto us poor renters below."

The above diatribe by steve is just utter nonsense, literally every word. I hope most people on this board look through his wordiness and realize that he has absolutely no idea what he's talking about. People look at the floorplans for these apts, call your local banker or a broker at someplace like Manhattan mortgage, run your own numbers. Then see if what he says has an ounce of truth to it.

Steve, I will not respond to this crap for one reason, you simply will not discuss in an intellectually honest manner, and thus arguing with you is pointless.

ccdevi, show me where it says 17 so I can see what they're talking about.

Just to guess, here's what I think you'll find:

1) Using the imputed rent method, you will get an 18x ratio. That includes all the costs and benefits of owning versus renting: tax benefits, risk premiums, opportunity cost of not investing elsewhere, expected increases in property values, etc.

2) Using the p/e method, you will get a 12x ratio. The p/e method is simpler but just as accurate over long periods of time, and it will give you roughly the same prices. Its Adam Smith-like assumption is that all those costs and benefits are baked into rents and asking prices.

If you want to use the imputed rent method, you need to include the risk premium for owning versus renting, which is the same as the difference between the the risk-free interest rate and the S&P 500 return for assets, since real estate is a risky venture. And if you want to use a short-term interest rate versus a long-term interest rate, you need to add a refinancing risk premium onto the short-term rate which is - lo and behold! - the difference between that short-term rate and the 30-year fixed rate.

Or maybe you think it's not, in which case you're only doing half the calculations - the half that benefit your calculations.

ali r.: "but even the good comps don't really work."

What does that mean?

Here are virtually identical apartments in 99 Jane, for sale and for rent:

http://www.streeteasy.com/nyc/rental/314504-condo-99-jane-st-west-village-manhattan

http://www.streeteasy.com/nyc/sale/167077-condo-99-jane-street-west-village-manhattan

$7,500 to rent $1,995,000, or $12,155 to own.

Do the math. At 12x it should cost just over $1,000,000.

eric I'm certainly no bull but I don't think you will find a place in Manhattan using the 12 -15 X revenue formula. Great formula though I too along with you will wait till it works but I think by the time it working our great great grandchildren might be looking at other options like finding a decent place on Mars.
In the meantime I'll keep on renting so my landlord can use my rent money to pay down his mortgage while pocketing the left over to take a nice Hawaiian vacation.

while my landlord is enjoying his vacation and his growing real estate asset (you see even if it doen't appreciate he's paying down the mortgage) I'll be on these boards like you eric wishing, praying and rooting for a nice crash so I can use the 12--15X formula.

ccdevi, always when confronted with real figures says, "Steve, I will not respond to this crap for one reason, you simply will not discuss in an intellectually honest manner, and thus arguing with you is pointless."

What is it that I "will not discussed in an intellectually honest manner"?

That that is the interest rate being offered by BofA right now? Well, it is, go check:

http://www.bankofamerica.com/loansandhomes/index.cfm?template=lc_mortgage

That "Using the imputed rent method, you will get an 18x ratio"?

That will depend on a number of factors, but here's how to get to your 20x figure:

suppose the following: i) the risk-free 10-year interest rate rrf is 4.5 percent; ii) the mortgage rate
rm is 5.5 percent; iii) the annual depreciation rate is -2.5 percent (Harding, Rosenthal and Sirmans, 2004); iv) the marginal tax rate of the typical homebuyer is 25 percent; v) the property tax rate is 1.5 percent; vi) the risk premium is 2.0 percent;10 and vii) the long-run appreciation rate of housing prices is 3.8 percent (expected inflation of 2.0 percent plus a real expected appreciation rate of housing of 1.8 percent, the average from 1980–2004 for the metro areas in our sample for this paper).
Under these assumptions, the predicted user cost is 5.0 percent: that is, for every dollar of price, the owner pays 5 cents per year in cost. Leaving aside other differences between renting and owning, people should be willing to pay up to 20 times (1/0.05) the market rent to purchase a house. Hence, for example, a two-bedroom apartment that rents for $1,000/month ($12,000/year) should sell for up to $240,000. This price-to-rent ratio provides a baseline against which housing prices can be judged “too high” or “too low.” If price multiplied by the user cost exceeds the market rent, housing is relatively costly."

From: www2.gsb.columbia.edu/faculty/cmayer/Papers/Assessing_High_House_Prices.pdf

Just plug today's interest rates in, and today's risk premium, and expectations for future increases in property prices, and tell me what you come up with.

18x is really, really generous.

Or maybe this is dishonest: "Using the p/e method, you will get a 12x ratio."

If so, just go here:

http://money.cnn.com/2007/11/06/real_estate/home_prices.fortune/index.htm

"Real estate: Buy, sell, or hold?"

Then click on their link:

http://money.cnn.com/magazines/fortune/price_rent_ratios/

Hit the P/R ratio tab, and you'll get (turned sideways):

Metro area = New York
June 2007 = 17.8
15-year avg. = 11.7
% Correction = (34.6)

"The above diatribe by steve is just utter nonsense, literally every word. I hope most people on this board look through his wordiness and realize that he has absolutely no idea what he's talking about. People look at the floorplans for these apts, call your local banker or a broker at someplace like Manhattan mortgage, run your own numbers. Then see if what he says has an ounce of truth to it."

LMAO. What diatribe? There are the numbers, that's where they come from. Whereas you claim that when comparing two 1200 ft2 apartments, that the one for sale has "bigger rooms, bigger closets, bigger bathrooms" than the one for rent. HOW CAN THAT BE?

Houser: just wait.

I'll be there first to admit: I haven't been perusing these boards over the last month, but one thing remains true: stevejhx insists on pushing his views on others and negating any bull-ish press whatsoever. i thought the article was fair and there are certainly deals to be had -- especially now. why do you always reference either your Chelsea rental or your back-in-the-day West Village warrior comp as a representative sample of NYC RE? Get out more, bro. First, it seems clear that paying over $1k/ft is not kosher with you. Fine. Me too, those places are out of your budget...say it with me now. It wasn't kosher for me and I just bought a 1BR condo in Brooklyn for eventual rental income. IMO it was a good deal with an imputed rental ratio of ~15:

1 bed -- $2500 - 700 sqft = $450k
I paid a few thousand over that, but this is nowhere near the red flag area of 20x .
Brooklyn has seen a 4% increase while the rest of the country has been slammed over 14%.
Maybe you should trade down from your lux-rental stevehjx, if you really want to get in the game rather than complain that it has to meet your chelsea standards. People lease BMW's for a reason. My feeling is that more people will flock to better valued condos say, in Brooklyn, for its affordability and steer clear of tired looking coops in the MH/UES/UWS. What will this do to the market? What if the logic of newcomers entering the below $1MM market continues to sell, but the higher end slows? What if 1 BR seekers are OK with shelling out 400-700k, but once they need a 2-3BR for family, change, they hit the burbs for a better deal, more space? How does this impact the market?

I just don't like to read sweeping statements and formulaic arguments when the market is much more case-by-case sensitive than that. I agree, the truths should be adhered to ie inventory, the rental ratio, interest rates, comps, but you've also got to get up off your sedentary ass to study neighborhoods, see the raw space, etc.

curious007, I use Chelsea because there is an abundance of market rental property here, which there isn't elsewhere in the city. Therefore, it facilitates the argument and the formulas.

For people who claim to be sophisticated investors, I don't understand how you're looking at these prices.

So....all this Chelsea stuff is great, but what is the average appreciation in Manhattan? Can you break it down by area (like West village is 5.9 but UES is 4.3) or do we not have those kind of numbers? Is it building specific?

"what is the average appreciation in Manhattan?"

You can make it anything you want, depending on the start and stop dates you pick.

Right now, you might want to ask, "What is the average depreciation in Manhattan?"

See my other thread on exactly how overpriced Manhattan is:

http://www.streeteasy.com/nyc/talk/discussion/3820-how-do-you-know-if-property-is-overpriced

Whenever I see Steve post, I like to remember this nonsense he started, and has since disavowed:

http://www.streeteasy.com/nyc/talk/discussion/3410-real-estate-is-a-bad-investment

I like how steve always refers to his other posts like they are scholarly articles. . . even though they all say the same thing and end in "LMAO" . . . (even sadder to see the elderly use internet slang in postings, like they are writing on their pink rhintestone blackberrys)

Pretty soon we will see Steve's streeteasy posts showing up on SSRN and referenced in peer review publications in the form

'As detailed in Stevejhx [2008] the imputed blah blah blah'

markznyc, you idiot: THAT WAS A SCHOLARLY ARTICLE, written by:

Charles Himmelberg is Senior Economist, Federal Reserve Bank of New York, New York, New York. Christopher Mayer is Paul Milstein Professor, Finance and Economics, Columbia Business School, Columbia University, New York, New York. Todd Sinai is Associate Professor of Real Estate, Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania. Mayer is also Research Associate, and is a Sinai Faculty Research Fellow, National Bureau of Economic Research, Cambridge, Massachusetts.

LMAO.

markz, Steve also has a tendency to call everyone dude

actually I was referring to the link to your own post (which you have done several times over many posts). . .

"See my other thread on exactly how overpriced Manhattan is:
http://www.streeteasy.com/nyc/talk/discussion/3820-how-do-you-know-if-property-is-overpriced"

. . . lighten up, francis.

And what does that thread refer you back to, markz?

That scholarly article.

stevejhx - if you were to die - say in 20 years - would you say your children would be better off with inheriting ... a lease?

Steve as you seam to be the guy with numbers - is there some sort of 30 year rolling average (one that incorporates the 80-90s downturn and the 90-00 up swing). I figure that both of those decades are probably not very indicative of NYC real estate as a whole.

93rd, they would be better off inheriting whatever would be worth the most, stocks or a home. Stocks always outperform residential real estate.

That said, it can be a good idea to purchase property when (and only when) the fully amortized cost of it is less than the equivalent in rent to be paid out over time. Unfortunately, right now, the fully amortized cost is twice what the rental value indicates that it could be, meaning that, if you were to purchase today, you might lose your shirt.

Memnohmi, there is a moving average for the S&P 500 since the end of WWII. There is no moving average of Manhattan real estate for any time period that I know, since until recently co-op sales were not recorded, and most sales were co-ops.

Only now are we starting to get better data.

"dude", you refer to yourself all of the time on these boards, as you seem to have become a victim of your own cult of personality, fed mainly by the people who are sick of your one track posts (including me).

Q: I need to build a 3rd bedroom, does it make sense?
SteveAnswer: NO! You should be renting!

Q: I really like this charming apartment on the UWS that I would like to move my family into. Anyone know of any comps?
SteveAnswer: Who cares! You should be renting!

even MMMafia has been worn out by constantly playing the bear, as have I, who is relatively bullish. time to give it a rest and do a little work, don't ya think?

A while back, I got into a bit of a posting frenzy. I used to post occasionally, but then Steve was trying to call out someone about mis-using some financial term, and kept yapping about how equity returns were so much better than that of real estate. Since I work in finance, I felt a need to call him out on it. But you know what? He just kept posting, name-calling, etc etc.

Ultimately, it doesn't matter what we say. The NYC real estate will go up, or down, or stay flat...the rants of a few here (both bulls and bears) aren't going to affect the purchase decisions of true market participants, especially considering that your average apartment is now over $1m in manhattan.

So why doesn't everyone just chill out? If you're a renter, good for you, maybe you'll have a chance to buy if prices go down. If you're a buyer, as long as you're not over-leveraged and you plan to stay in your apt for a few years, you'll probably be fine too. Hey, if you buy at the right price you might even make a few bucks.

I guess I have been most bothered when Steve has made umbrella statements that I find absurd, like "real estate is always a bad investment" or things along those lines. But you know what? Since buying my apartment (new development), I've seen 2 other places that are pretty close comps that went to contract at over 20% more than my place. So, even though I shouldn't be looking at such things, since I will certainly not be selling anytime soon, it did make me feel a bit more at ease in that there is still plenty of demand for nice, new buildings in good areas as long as the price is reasonable. So I don't really feel I need to respond to Steve anymore.

Anyway, I'd encourage anyone out there who still insists on doing these little back-and-forths with Steve to just drop it. If no one responds to him, he'll be much less inclined to keep posting 100+ times per day and monopolizing these boards, and the discourse here might even go back to what it was when I first signed up for streeteasy - people providing each other with useful advice about navigating the complicated process of buying (or even renting) in NYC.

Cheers,
evillager

93rd,

I plan to buy in the next 3 - 5 yrs when prices come back to earth - so chances are, I'll leave them a condo

If I were dying in 5 yrs, I'd rather leave behind money in mutual funds - that I funded by saving 50% off owning price .. rather than a condo on which more money is owed than the condo is worth

Stevejhx wrote: "Stocks always outperform residential real estate."

That is a ridiculous statement. Maybe you mean "over the past 100 years, stocks have outperformed the nationwide average of residential real estate". But ALWAYS? Did stocks outperform residential real estate in 2004?

steve, what I asked was, do folks think there are decent $1050 - $1180 psft 1 bed apartments available in Chelsea. Absolutely. If streeteasy allowed searching for only 1 beds, your medians would be much different than you posted, but you know this. There is absolutely no credible way that you can tell me that there are not good listings for 1 beds in Chelsea between $1050 - $1180 psft with similar amenities than you nybits pads. There are many, many, listings. Just go look. 15x pal. I know I shouldn't bother, but it is fun to watch you be wrong, over and over, and over again.

oh and your numbers above are once again (as ccdevi correctly noted) garbage to the 99th degree.

Even though steve's imputed rent theory was completely debunked on another thread, he goes right back to it. Just find the other thread to see how steve's information is incorrect, cherry-picked and just plain silly.

LICComment,

You forgot to add his lack of knowledge on above vs. below the line deduction as well as effective vs. marginal tax rates, which he's stopped responding to in hopes that the thread would doze off into page 3 of the forums, which it has.

This is Accounting 101 - lost all credibility with that, yet continues to make one-sided Mike Moore-ish arguments with the numbers he pulls out of his ass.

evillager --

Eloquently put. I wish I had the patience (and skill) to write the same thing. Nicely done.

I think there should be a new rule. If Stevejhx wants to school us on finance, real estate or whatever, he should open his own discussion which he has done in the past and then not be allowed to post any messages on any other discussion. He totally takes over many of the discussions. It get to the point that people stop reading and posting (evillager) and we all then lose out.

LICComment, I disagree that imputed rent is malarkey. It can be a very useful tool for anyone looking to purchase real estate. Where steve falls short is in the message. He exaggerates numbers, leaves out important facts so he can try and support his 12x bull, and uses sweeping claims when properties should be looked at on a case by case basis. Imputed rent is a guideline and should be treated as such. You can make the numbers say whatever you want but, if used correctly (and without bias), imputed rent is a simple tool that can assist with rent vs. buy decisions. Steve is squandering an opportunity to help people because he is an ass, but don't confuse that with the fact that the concepts can indeed be valuable to your search.

It seems to me that the argument for buying rests in the erroneous assumption that renters won't invest their savings elsewhere. In an inflation-addicted society you unfortunately have no choice but to either be fully-invested or to slowly lose purchasing power. However, the choice of asset class in which to invest is very important. P/E ratios on all assets have varied greatly over time - in 2000, stocks were high and real estate was low...as a result the stock market has gone nowhere for the last decade and real estate performed well. I suspect the opposite is true now. The proper comparison is buying a home at a very high valuation vs. renting and investing a similar amount of capital in another asset class. Obviously you can get any answer you want by plugging in different appreciation assumptions but if you assume valuations are mean reverting (as they have been for the last 200 years) then you can at least make a more informed decision.

As for the buy-vs-rent calculator, it is useless because it does not incorporate risk. If I made a calculator to tell me how much of my net worth to put in the stock market I would plug in 9% appreciation, 5% borrowing cost and the answer that would come out would be to leverage myself infinitely in the stock market. Obviously that is stupid because volatily will wipe you out at some point. A home is no different. Yes, ON AVERAGE you will probably make money being invested in a home (because we are an inflation-prone society). However, the "average scenario" is actually not that important. What is important are the outlier scenarios. When you buy an asset with a high valuation on leverage it may still be OK on average but you leave yourself very little margin of safety. One deep global recession and housing P/E ratios may well end up back at historical lows and you will be bankrupt (no reason NYC real estate couldn't fall 50% in that scenario). Stocks would be down, but not as much as we are really not that far above trough valuations - hence a margin of safety.

There are of course lifestyle decisions involved in the debate but from an investor-mindset the answer is clear. Rent and be fully invested in asset classes that have lower P/E ratios and higher cash flow growth prospects.

Below is list of price/rent ratios from the Case-Shiller index for selected cities. Anyone has any comments why different cities have such drastically different ratios.

Metro area June 2007 15-year avg. % Correction
New York 17.8 11.7 -34.6
Baltimore 20.7 12.6 -39.1
Washington, D.C. 26.0 15.9 -38.9
Boston 23.2 18.0 -22.4
San Jose 42.5 27.2 -35.9

eavillager ... your discipline was much stronger than mine. I still engage in "poke the pig" with Steve just to watch him squeal and chase his tail.

hqi ... hard to make judgments about derivative data without looking at underlying data ... best to post the price index, rent index, and the derivative price/rent ratio. Also relevant to recognize the remarkably different economies, populations, housing stock, etc. among those cities.

Juiceman - Agreed. I tried to stress that STEVE's imputed rent theory is nonsense. Pretty much all of his arguments are extremely flawed.

Oh, this is tooooo good!

Show me where other than a 12x p/e for real estate is proved.

Nowhere.

"STEVE's imputed rent theory is nonsense."

LMAO. It's not mine. It's accepted economic theory.

"Steve leaves out important facts so he can try and support his 12x bull, and uses sweeping claims when properties should be looked at on a case by case basis."

What important fact is that? When have I EVER claimed that what I am saying is macroeconomic, not microeconomic?

"uses sweeping claims"

Yes - like the S&P 500 or Down Jones instead of the price of an individual stock. But - what's the beta, DUDE?

LMAO.

"Q: I need to build a 3rd bedroom, does it make sense?"

"Q: I really like this charming apartment on the UWS that I would like to move my family into. Anyone know of any comps?"

Never made a post on any of those threads.

"Steve is squandering an opportunity to help people because he is an ass"

Presumably because you don't agree with what I'm saying. Otherwise, you'd propose your own way of looking at things - which, as we know, ignores the risk premium for owning, ignores the opportunity cost of investing elsewhere, uses a short-term interest rate with utter disregard for the fact that they do not affect housing prices and they need to have an adjustment risk rate assigned to them.

Ah, evillager: "Since I work in finance, I felt a need to call him out on it." I distinctly remember your brilliant post stating that corporate income was constrained by GDP when, in fact, corporate income is part of GDP.

But I forgot - you work for billionaires, and it rubs off. LMAO.

LICC: "You forgot to add his lack of knowledge on above vs. below the line deduction as well as effective vs. marginal tax rates."

Regarding this, I was and am 100% correct: you need to use the EFFECTIVE tax rate - lower than your marginal rate - when calculating your tax benefit, else you assign the greatest tax benefit to mortgage interest, skewing the "benefit" of that deduction.

JM: "There is absolutely no credible way that you can tell me that there are not good listings for 1 beds in Chelsea between $1050 - $1180 psft with similar amenities than you nybits pads."

Show me one, when you include taxes and maintenance. Just one.

No! Here are the three listed:

Sales in Chelsea
We found 3 listings for no more than $1,000,000 at least 1,000 sqft with at least 1 bedroom
Median price: $950,000 Median size: 1,025 ft² Median price per ft²: $885

Then add in taxes and common charges, and POOF! They're gone!

"There are many, many, listings. Just go look."

LMAO.

In all of these posts, I DON'T SEE ONE NUMBER OR THEORY. Not one. Just insults and conjecture. You have my data. Transparent. Prove they're wrong.

steve, not even a challenge. See how many but...but...but's we get from this one:

Listing

http://www.streeteasy.com/nyc/sale/167474-coop-410-west-24th-street-chelsea-manhattan

Rental

http://www.nybits.com/apartmentlistings/25686a0a577df4bca1bf96c749e75024.html

Numbers:

Price $849,000

Down Payment $169,800

Mortgage $4,293

Maintenance $1,437

Monthly Payment $5,730

Opportunity cost on equity (4.5%) $637

Risk for owning (2%) $1,415

Total Cost $7,782

Tax deduction (28% rate) $(1,025)

Less Principal $(635)

Less apreciation (2%) $(1,415)

Total Cost of owning $4,707

Cost of renting 800 sqft lux $4,695

Difference Next to nothing

There is your one steve. There are many, many more. Where is your 2x? LMAO LMAO LMAO!!!!!!!!!

Juiceman although that a great example why did you use the list price of 849,000. Certainly you can negotiate a better price than that. Let's take 5% off on that and use 805,000. I think that would put you in a positive cash flow situation.
Looking forward to hearing back from Steve on this one. I'm sure he'll come up with a 3 mil apt renting out at 1500 per month. Or rather the 5 mil apt renting at 2300 per month. I do love his examples.

Good point houser, but I anticipated steve coming back with an ability to negotiate on the rent side, so we'll just call that a wash. Also, one assumption on the tax numbers, I calculated tax as a condo not a co-op (I've never lived in a co-op so don't know the tax rules). Additionally, I did not include the portion of maintenance that would be tax deductible. If jordyn or someone else wants to calculate a more accurate monthly tax benefit, please feel free. I don't think it will swing the numbers much.

JuiceMan, which formula are you using?

12x annual rent = $676,080. List price = $849,000. Overpriced = 27%.

I will say, however, that you picked a particularly well-priced apartment in this market at about $1,000 psf (which apartment, BTW, is nowhere near 840 square feet - closer to 790).

That said:

Less Principal $(635). The equation does not take the principal out. Put it back in.

Less appreciation (2%) $(1,415). Really? 2% appreciation? In this market? LMAO.

Total Cost of owning $4,707 = $4,707 + $635 (not part of the equation) + $1,145 (not realistic in today's market) = $6,487, versus cost of renting 800 sqft lux $4,695.

However, if you do the calculation with the 12x price of $676,080, you might get the right answer, which may be why:

Price History

01/18/2008 Listed in StreetEasy with Corcoran at $950,000
02/09/2008 Price decreased to $915,000
03/11/2008 Price decreased to $895,000
04/10/2008 Price decreased to $869,000
05/01/2008 Price decreased to $849,000

Then, on to the rental: the Westminster is a stabilized building for the next 17 years (I know, I lived there). Most Related Rentals are 80/20 buildings. Therefore, you pay a premium in the initial rent to account for the benefits of stabilization, making it more expensive than the competition. (It's also in a much nicer part of town, 7th Avenue, not 11th, where there is no subway for 3 crosstown blocks).

So, let's take a purely market rate building:

$2,600 1-Bedroom at Chelsea Court
$2,775 1-Bedroom at Chelsea Court
$2,900 1-Bedroom at Chelsea Court
$2,900 1-Bedroom at Chelsea Court
$2,950 1-Bedroom at Chelsea Court

They are somewhat smaller but the building is brand new and the neighborhood is better.

Pick this one, which is in a new building, somewhat smaller but on the 28th floor with an unobstructed view:

http://www.nybits.com/apartmentlistings/d4d28f598fa15ddb558cff2cd7f96d59.html

1-Bedroom at Archstone Chelsea $4,020

I'll give you this: at $1,000 psf you can ALMOST make money. Bring it down to the 12x ratio (25% less in this case) at about $800 psf, and you will DEFINITELY break even and make money in the long-term.

If there were a way in streeteasy to sort by total price per square foot it would make the comparison much easier.

FYI the property taxes for prewar co-ops are much lower than they are for condos. Also, London Terrace includes the electricity in the maintenance, which is an additional benefit. On the downside, the neighborhood sucks.

Everyone's so serious all the time. That NYT rent vs. buy calculator is fun to play with. It also says I should buy if my outlook is between 4-7 years (depends on how I set the sliders).

Well if JuiceMan puts the principal back in, and uses the 12x rent formula as the price, then I'll grant him the 2% increase in property prices. Maybe even 3%.

Then I'll laugh.

kylewest - the thing I like about the calculator is that depending on how you play with the numbers you can get the graph to come up with some really interesting conclusions (such as it's better to buy than rent but only if you are going to hold it between 5 and 7 years, etc.).

steve, the fact that you have been shown to be completely clueless on the effective v. marginal tax rate, a fairly simple concept, yet you obstinately stick to your embarrasingly wrong position, means that no one should take you seriously with anything you say on this topic.
Why do you never factor in the increases in rental costs over time, and the fact that ownership allows you to minimize your monthly increases to a far greater extent. You assume a rental rate today as if it would be static 5 and 10 years down the road. An owner's mortgage payment is not going to rise, but a renter's monthly rent will increase significantly over time.

steve, you are so funny. This is my last response on the topic because you are absurd.

“12x annual rent = $676,080. List price = $849,000. Overpriced = 27%.”

Even if that was true, that is a long way from 2x isn’t it steve?

"Less Principal $(635). The equation does not take the principal out. Put it back in."

Shall I go to the other thread where you agreed that principal should not be included as long as you include the cost of equity? I can probably find the exact quote if you really want me to look for it. Ah, what the heck, here it is.

JuiceMan - "don't forget that a portion of your mortgage goes to principal, which you need to subtract before comparing to rental costs"

stevejhx - “No you don't, unless you add in the opportunity cost of your principal invested in another asset.”

See what I mean? Do you remember that steve?

"(which apartment, BTW, is nowhere near 840 square feet - closer to 790)."

Have a look at the sqft of the rental listing. It is not listed but the floor plan is. WAY under 800 sqft

"Less appreciation (2%) $(1,415). Really? 2% appreciation? In this market? LMAO."

steve, steve, steve. In every other case you want to look at the long term trend except for this one. If we are looking at a 30 year trend, the number is higher than 2%. In your precious white paper, it is 3.8%. I gave you a break here. You have to be consistent steve, no backing out now.

"So, let's take a purely market rate building:"

See steve, this was exactly my point, and you continue to prove it over and over. You can make the numbers say whatever you want. I know nothing about Chelsea rentals (nor do I want to) so there is no way I can tell if you are comparing apples to apples.

"Most Related Rentals are 80/20 buildings. Therefore, you pay a premium in the initial rent to account for the benefits of stabilization, making it more expensive than the competition."

Then why in the world would anyone want to live in this rental if it is was that much more expensive but didn’t offer anything more than the $2500/mo 1 beds you listed? Malarkey.

steve, give it up. For every example you give, I could give another one refuting it. It is a pointless exercise. I've given you real numbers with real analysis and, in some cases, gave you the benefit of the doubt in the calculations. Enough with the, "show me numbers....show me numbers...show me just one”. I did, and your attempt to refute is laughable. Where is your 2x steve?

Why don't you take all of that energy of yours and help educate people on the formula, imputed rent, or good rental buildings in Chelsea, rather than trying to prove your highly subjective theories? There are many good things that COULD come out of your analysis, why be a dick about it?

There are costs of home ownership that will increase over time as well: common charges/maintenance, taxes and maintenance on the individual unit. On the flip side, the mortgage deduction will decrease over time as the loan is paid down.

I do agree that most of the models under discussion are probably overly simple/incomplete. People probably need to do some calculations on their own for their particularly circumstances (and taking into account which types of costs they're particularly sensitive to). Trying to look beyond a few years out is probably hopeless, though, as you can't predict any of the input values with enough precision to be useful after a significant amount of compounding takes place. It's easy to see from the NY Times calculator that relatively small changes to the inputs make significant differences in the outcome.

"Well if JuiceMan puts the principal back in, and uses the 12x rent formula as the price"

see note on principal above, thanks for making my day on that one steve. As for the 12x garbage, why don't you just look at the numbers I gave you and refute them intelligently? Everyone can follow how I calculated the numbers and it is a very basic methodology. 12x has NOTHING to do with that calculation does it steve?

jordyn, I agree that there are home ownership costs that increase over time, but I think those increases are generally smaller and are an overall lower percentage of the total monthly costs when using an 80-90% mortgage example.
True, the mortgage deduction will decrease over time, but your net equity will increase at the same time by your principal paydowns.

JuiceMan, you are significantly understating the mortgage tax deduction because you're not taking into account state and city taxes. This should make about a further 11% of the mortgage interest deductible, which is fairly significant.

Juiceman: Shall I go to the other thread where you agreed that principal should not be included as long as you include the cost of equity? I can probably find the exact quote if you really want me to look for it. Ah, what the heck, here it is.

JuiceMan - "don't forget that a portion of your mortgage goes to principal, which you need to subtract before comparing to rental costs"

stevejhx - “No you don't, unless you add in the opportunity cost of your principal invested in another asset.”

Remember these wise statements too from Steve:
"Earnings are after a company pays interest expense AND PRINCIPAL to its debt holders."
"There is no difference between an equity holder and a debtor, except who has priority over the company's assets."
"A company borrows money from equity holders just as it does from debt holders."
and this example:
"I see. So your earnings include the amount you've paid back in principal. Novel idea.

I make $100. I repay a loan, $9 in interest, $1 in principal. My net - OBVIOUSLY, according to you - $91 because I don't count the repaid principal. Somehow, I've managed to keep it.

Dumb. I make $100. I repay a loan, $9 in interest, $1 in principal. I have $90 left. Those are my earnings."

So anyway, I'm looking forward to some more squealing from Steve the pig.

Because, JuiceMan, you're mixing apples and oranges.

If you use the imputed rent model - which is what you appear to be using - then it doesn't let you add the principal back in, any more than you can "add the principal back in" on any other asset. All you're doing is paying off a loan.

Besides imputed rent, the other model that is commonly used is the p/e ratio, which is 12x annual rent.

Here's why it works:

Let's say I make $100,000. I can afford to rent an apartment that costs $2,500 per month (40x monthly rent). I can afford to buy an apartment that costs me $2,333 total per month (28% of $100,000).

Now then, using the 12x formula, that same rental apartment should cost me $360,000 ($2,500 x 12 x 12) to buy. An 80/20 30-year fixed mortgage at 6.5% costs $1,820.36 per month. Add in $600 tax / common charges / maintenance per month, and what monthly figure do we have?

$2,420.36.

Miraculously between the $2,500 I can afford to rent or the $2,333.33 I can afford to buy.

Those are the market constraints. There are the numbers.

If that's true - which mathematically it seems to be - then here are the numbers:

http://www.globalpropertyguide.com/North-America/United-States/Rental-Yields

The data are a year old (meaning that the cost to buy is up some 20% and market rents have fallen since then), but here's what it shows for co-ops and condos in lower Manhattan (1 square meter is just under 10 square feet):

Size ---------- Price --------- Rent-------Price @ 12x----Overpriced %

75 sq. m.-------$938,250--------$4,097------$589,968------59%
120 sq. m.------$1,749,120------$7,086------$1,020,384----71%
160 sq. m.------$2,498,080------$10,555-----$1,519,920----64%
200 sq. m.------$3,317,400------$12,240-----$1,762,560----88%
250 sq. m.------$5,114,000------$15,453-----$2,225,232----130%

Just FYI, the Westminster property is about 800 square feet. I lived in the smaller model 1-bedroom w/o the dining area, and it's about 650 square feet.

"Even if that was true, that is a long way from 2x isn’t it steve?"

I gave you that, JuiceMan. I specifically gave you that. I said, "I'll give you this: at $1,000 psf you can ALMOST make money. Bring it down to the 12x ratio (25% less in this case) at about $800 psf, and you will DEFINITELY break even and make money in the long-term."

The apartment you quote is about $1,000 psf. That almost lets you break even. Unfortunately, as indicated above, that apartment is far below the median price in Chelsea of $1,300 to $1,400 psf. If the MEDIAN in Chelsea were $1,000 psf, we'd be closer to equilibrium than we are.

"In every other case you want to look at the long term trend except for this one. If we are looking at a 30 year trend, the number is higher than 2%. In your precious white paper, it is 3.8%. I gave you a break here."

I am being consistent - the white paper model is a one-year model, not the model that I was discussing before, which was 30 years. The white paper is a snapshot. Even so, if you read the white paper, it says that the expectations for property price increases are based on long-term interest rates. They use a rate of 5.5%, I believe; current rates for jumbo mortgages are 8.5%. That, then, must affect the expectation for price increases.

Given the real-estate market in the country, there is a strong argument to be made that prices will fall in the short-term.

Don't mix and match models, JuiceMan - if you want to use the white paper's model, I'll accept it. If you want to use another model, then we can discuss it. The three common models are:

1) Imputed rent (white paper)
2) P/E ratio (12x annual rent, based on the market constraints above, used by Robert Shiller)
3) Price-to-income ratio, which is a macro ratio that I don't have the data on, except that I know that because of Wall Street, aggregate incomes are falling.

"your net equity will increase at the same time by your principal paydowns."

Not as fast as the S&P 500 increases over that same time.

ooh, that squeal by Stevepig was so high pitched

"There is no difference between an equity holder and a debtor, except who has priority over the company's assets."

Accounting 101. They're on the right-hand side of the equation, in this particular case we were discussing under "Equity": debentures, etc.

"A company borrows money from equity holders just as it does from debt holders."

It certainly does. Equity holders pay in capital and a premium over par. That money belongs to the shareholders, because upon liquidation it is returned to them.

I doubt I said both of these things: ""Earnings are after a company pays interest expense AND PRINCIPAL to its debt holders."

and "I see. So your earnings include the amount you've paid back in principal. Novel idea."

What I said is exactly right: "I make $100. I repay a loan, $9 in interest, $1 in principal. I have $90 left. Those are my earnings."

Oh Great Finance Guru VVerain, if that weren't true there would be no "EBIDTA," would there?

"Earnings Before Interest Depreciation Taxes and Amortization,"

wherein "amortization" is defined as, "The repayment of a loan by installments."

The dumber you try to make me look, the dumber you yourself look. "Earnings" come after "amortization."

Oh, vverain, I did not squeal. EBIDTA. Look it up.

The amortization refers to amortization of intangibles, not debt amortization. Debt amortization (i.e. scheduled principal repayment) appears solely on a cash flow statement, not on an income statement. EBITDA is the measure of earnings before interest payments to debt holders (and before depreciation of assets, and before taxes), so it would be silly to even come out and assume that it is after principal repayment but before interest payment.

What is with you and your extreme pig-headedness that you can't recognize on some areas you are out of your league, and then go and have a conversation with a knowledgeable person?

Go squeal away.

steve - equity is not considered borrowings. It is ownership interest in the company. What school did you go to so I can make sure none of my family members ever go there?

(and before depreciation of assets and before amortization of intangible assets, and before taxes, as well as before interest on debt)

steve, I'm not using the imputed rent model. I'm using a simple model that everyone can understand. What is confusing you is that I used the numbers from the imputed rent model (risk of owning, appreciation, etc) so that you couldn't argue with the numbers. Just look at the numbers I provided above steve. It is really pretty simple.

In regards to the imputed rent model, I've read the paper, it has merit, and it can be useful. I genuinely do appreciate you sharing, it was interesting to read. My issue with it however, is that the Annual Cost of Ownership formula underestimates the true cost of housing (not in your favor), specifically, the purchase price * the risk free rate drastically underestimates the true (base) cost of housing. The cost is actually much higher than what the formula states. It should be yearly (cost of mortgage - principal + opportunity cost of equity). You can then use the rest of the formula as it states, adjusting each part of the formula with your true costs (mortgage rate, tax rate, etc) and use the defaults for the risk of owning and appreciation rate. Try it out with a $1.25M property and use the numbers the paper gives you. Price * the risk free rate gives you $56,250. This is way to low for the base cost of housing without taxes maintenance, etc. Additionally, I avoided using this model because Price * the risk free rate means nothing in common terms. It is some formula a professor came up with and has no practical explanation in the real world.

So you know steve, I contacted the professor that wrote the paper to tell him why it is wrong, but he hasn't returned my message. I think you will agree in my assessment, more because it drive the costs of owning higher rather than the fact that the formula is flawed.

VVerain: The amortization refers to amortization of intangibles, not debt amortization."

No, in fact. First, I looked it up before I wrote it. Second, intangibles are depreciated, not amortized.

Just admit when you're wrong.

LICC - Columbia. Don't worry about them going there, because they won't get in.

Nonetheless, "equity is not considered borrowings."

Who said it was?

You take out a loan to buy something that costs $100. You book the thing you buy as an asset at its full value, depreciate it over its useful life as an expense. You book the loan as a liability at its full value, then each year expense the interest and amortization of the principal.

If you do what you claim should be done, you would record the value of the asset twice: once when you book it when you buy it, and again as you amortize the principal of the loan. You can't do that, which is why your relatives will never get into Columbia.

JM, I also have my problems with that particular paper, but it's valid. For me to evaluate what you're saying you need to be more specific about what formula you're using and why. However, I believe that this:

"It should be yearly (cost of mortgage - principal + opportunity cost of equity)"

suffers from the same flaw as LICC's argument: paying off the principal of the loan is an expense that must be amortized to balance off depreciation, so you're counting it twice.

In other words, you have a loan that must be paid off. That's a liability. You have a house that you own, which is an asset. The loan (liability) must be amortized and the house (asset) must be depreciated in order to for your balance sheet to balance. Otherwise, you're doubling the benefit.

That is, the depreciation of the asset is the straight-line method of accounting for the amortization of the loan principal.

"That is, the depreciation of the asset is the straight-line method of accounting for the amortization of the loan principal."

Let me explain that a little better, JuiceMan, since it might not be clear. Your true cost of owning property is measured as the depreciation of the property (excluding land) over time. That is for the full cost of the property. Added to that is the cost of amortizing the loan - expensing the principal and interest. So your full cost is:

Interest + Depreciation + Taxes + Amortization.

Or, in a sense, EBITDA. That's what the white paper does, adjusting for the tax deductions for interest and real-estate taxes paid at your effective tax rate. It then compensates for the additional risk of owning versus renting using a risk premium, also assigned to the opportunity cost of investing the down payment elsewhere.

And I reread the paper and I'm mistaken - you can use the 2% (or 3%) increase in value if you use the 10-year risk premium, assuming it's a long-term asset. But it must be adjusted by the expectation of property price increases at 8.5% long-term interest rates, not the 5.5% used in the paper. And if you use an ARM rate you must adjust for the reset risk, which of course brings you right back to the 30-year fixed rate.

I understand that paper, and why it's doing what it is. In effect I was doing the same thing by doing the same thing. I don't understand what you're doing.

"I was doing the same thing by doing the same thing."

Did I say that? "I was doing the same thing in a different way."

If it is valid steve than give me an explanation for what the risk free rate * the purchase price is? In real terms. It means nothing.

You are arguing with yourself on the principal payment:

JuiceMan - "don't forget that a portion of your mortgage goes to principal, which you need to subtract before comparing to rental costs"

stevejhx - “No you don't, unless you add in the opportunity cost of your principal invested in another asset.”

As you correctly stated, I used the opportunity cost of principal in my formula above and subtracted the principal.

steve - your words: '"A company borrows money from equity holders just as it does from debt holders."

It certainly does.'

Maybe Columbia doesn't teach reading comprehension.

Why are you considering a residential house a depreciating asset?

"Why are you considering a residential house a depreciating asset?"

Because in accounting your cost is: Interest + Depreciation + Taxes + Amortization.

That's how you define your cost. Of course the asset doesn't depreciate to zero, but if you understood accounting then you would see why it's done that way. Once it has a zero book value your cost is limited to Taxes.

And isn't that what happens once you fully pay off your mortgage? All you have left is taxes?

"You are arguing with yourself on the principal payment"

No I'm not - we were discussing different models.

"If it is valid steve than give me an explanation for what the risk free rate * the purchase price is? In real terms. It means nothing."

Sure:

"The first component is the cost of foregone interest that the homeowner could have earned by investing in something other than a house. This one-year cost is calculated as the price of housing Pt times the risk-free interest rate."

You buy a house for $100,000. Whether you borrow the money or not, there is still the opportunity cost of investing that $100,000 somewhere else. If you borrow the money - leverage - then you will offset that opportunity cost with the interest + amortization: how much it costs you to borrow that same amount of money and invest it in a home or in another asset class.

In other words, it compensates for the leverage by allowing that much leverage to purchase any asset you like.

Clear enough?

The leverage is taken into account by interest + amortization.

Nope. All you did is copy the words from the article. You obviously don't understand it so you probably shouldn't use the formula.

These are my words:

"You buy a house for $100,000. Whether you borrow the money or not, there is still the opportunity cost of investing that $100,000 somewhere else. If you borrow the money - leverage - then you will offset that opportunity cost with the interest + amortization: how much it costs you to borrow that same amount of money and invest it in a home or in another asset class."

So I didn't "copy the words from the article." I wrote that explanation.

Sorry you think that that's incorrect because you don't like it, but it's true:

You buy a house for $100,000, that's the amount you're investing, whether you borrow the funds or not. That's why the full amount is multiplied by the risk-free rate. The fact that you borrow the money is taken into consideration through interest + amortization.

The opportunity cost is on the full amount of the investment, regardless of the source of funds.

JuiceMan: "give me an explanation for what the risk free rate * the purchase price is? In real terms."

Well, there you have it. You don't like it because it won't give you the answer you want. I wouldn't do it that way myself but I understand the meaning of it.

steve, if you truly understood what I was saying you would realize that my reason for not liking the formula has nothing to do with giving the answer I want. As I said above, price * the risk free rate significantly understates the base cost of housing. You wouldn't do it this way and neither would I. So why use a formula that is flawed from the start? Are you one of those people that read something on a piece of paper and take it as gospel? I'm not.

Why don't we change it to something that is accurate. Forget about principal for a second, if you change the price * risk free rate portion of the formula to (equity * risk free rate) + (one year worth of mortgage payments). Would that be a better representation of the base costs of housing? This amount would be higher than price * risk free rate wouldn't it?

steve, you are trying to apply corporate balance sheet accounting to an analysis comparing renting v. buying a residential home. The concepts are different. Either you don't understand, or you are purposefully trying to distort the analysis to hide the fact that you don't know what you are talking about.

I am sorry, but I simply do not get the passion with which you all argue your various points. Arguments and statistics only go so far. People make money. People lose money. That is the way of the finance world. No one knows what is going to happen tomorrow or next week or next month or next year. What we do know is that over the long haul, assets such as stock, commodities and real estate all appreciate in value. There may well be a drop in the price of real estate happening or coming and it may be big but, in the end, in a year or two or five, it will come back and appreciate. It always has.

To make bold, broad stroke statements like IT IS ALWAYS BETTER TO RENT, is Steve's prerogative and if he believes it and believes his statistical back up, that is fine for him.

I want to own my dwelling, renovate it as I see fit, see the value appreciate over time and someday, perhaps sell it.

For me, it is not ALWAYS BETTER TO RENT.

The volume of time and energy that is spent at this site on these issues is simply amazing to me. You folks must have nothing better to do so have a blast.

I have to get back to work.

PS: Steve, sorry about the angry attacks a few weeks ago, I was in a foul mood.

PPS: Steve, I had a good chuckle when I found your MySpace page. It took all of 2 Google searches to land there.

I truly understand it and I believe it is a comprehensive model, albeit one of many possible ones. I am not judging it based on whether it will enhance or detract from my assumptions, merely that it is comprehensive.

All formulas are flawed in one way or another.

You would have to provide me with your own comprehensive formula so I could look at it and decide whether I like it or not. It would take me time to figure it out, most likely, as it did with the white paper.

Here is what the white paper says for a fictional property, with the formula written out in words:

Annual Rent = Price of the home * (risk-free interest rate + property tax rate – (effective tax rate (mortgage rate + property tax rate) - depreciation + appreciation + risk premium)

Let's say:

Price of home = $1,000,000
Risk-free interest rate = 4.5%
Property tax rate = .07%
Effective tax rate = 28%
Depreciation = 2.5%
Appreciation = 3%
Risk premium = 2%

You get:

$1,000,000 * .045 + .007 – .28(.085 + .007) - .025 + .03 + .02 =

$100,000,000 * (.0457 - .02576 - .025 + .03 + .02)

$1,000,000 * .04494

1/0.4494 means that you would be willing to pay 22x monthly rent to buy an apartment. For a $1,000,000 apartment, that is $44,940 per year, or $3,745 per month.

Of course if you bought a $1 million property at 8.5% interest it would cost you $6,151.31 in mortgage payments plus tax and common charges, so you'd have to make this an extremely long-term investment to make it worth your while.

On the other hand, let’s say that we expect prices to DECREASE 3% per year instead of increase. The formula becomes:

$1,000,000 * .045 + .007 – .28(.085 + .007) - .025 - .03 + .02 =

$100,000,000 * (.0457 - .02576 - .025 - .03 + .02)

$1,000,000 * -.01516 = 0 x monthly rent.

= nobody will be willing to buy.

Or - the model falls apart.

Nonetheless, given that it's so sensitive to expected future appreciation / depreciation, the next thing the paper says we need to look at is the price-to-rent ratio and compare it. Normally, over time, this is 12x annual rent. But as we see above - except in a few cases - it is currently about 25x annual rent.

If you go to Figure 2 Imputed-to-Actual-Rent Ratio versus Price-to-Rent Ratio (pg. 17) and look at New York, you will see that in 2000 the imputed-to-actual rent ratio started moving far outside the price-to-rent ratio. We know that rents have not risen nearly as much as property prices since that time - rents have been about steady since 2000, property prices have tripled. Therefore, we can expect that that ratio is three times higher than it was then, and far outside anything that has ever been seen before in real estate.

I will agree to the white-paper model, but I think - and given the inventory numbers so do lots of other people - that property prices will be falling. Given that, no one would rationally be willing to buy. I also see the model's shortcomings. I prefer the price-to-rent (Shiller) ratio since it's so much more elegant. We economists tend to overdo things. If you have another model and can give me a more detailed explanation of what you propose, I'm willing to look at it. But one of these models indicates at best that no one should be willing to buy (rising inventories) and the other indicates that prices are twice rents (meaning, as corroborated by the first model, that you'd have to have a mighty long-term horizon to make this work), so the market doesn't look very good in the short-term.

leasinglawyer, glad you chuckled. Tell those who don't believe I've actually performed at those clubs: NANNY NANNY BOO BOO.

I was at Comic Strip last night. Okay - I'm not the headliner, but I'm there.

Honestly, the only reason I'm doing this today is because it's far more entertaining than the money-laundering investigation I'm working on. It's deadly, deadly boring.

LICC: "you are trying to apply corporate balance sheet accounting to an analysis comparing renting v. buying a residential home. The concepts are different. Either you don't understand, or you are purposefully trying to distort the analysis to hide the fact that you don't know what you are talking about."

No I'm not purposefully trying to distort anything. The simplest ratio is price-to-rent = 12x annual rent. People don't like that one because it doesn't give them the answer they want. So I used the economic theory of what it actually costs to own - the one used by the Fed.

All the calculations are there.

You depreciate real-estate (not the land) over 27.5 years. That's its useful life. If you use the amortized principal method that you do, you pay lots of interest up front, get this huge tax deduction and it makes it look really neat. But you have to take a broader, economic view of what those deductions are, what the actual costs are.

I'm sorry if you don't like the way it's done, but it's how the professionals do it. Owner-occupied residential real estate is a capitalized expense, so economically you need to treat it like one.

BTW I did the NY Times model as per the above (except I used a 1% property tax rate since it wouldn't take less than that) and IF property prices and increase at 4% per year, then I'll break even in 17 years.

At 3% I'll never break even after 30 years.

Making a few minor adjustments - 28% income tax, 1% common charges, 11% return on investments (S&P 500 rate), at a 7% annual rate of increase for rents and property prices (unheard of) I will not break even after 30 years. at 8% I will break even after 6 years.

Sorry about these typos:

$1,000,000 * .045 + .007 – .28(.085 + .007) - .025 +/ .03 + .02 =

$1,000,000 * (.0457 - .02576 - .025 +/ .03 + .02)

$1,000,000 * .04494

should be

$1,000,000 * (.045 + .007 – .28(.085 + .007) - .025 +/ .03 + .02) =

$1,000,000 * (.0457 - .02576 - .025 +/ .03 + .02)

$1,000,000 * .04494 / -.01516, as the case may be.

Of course I added more typos. Now I need a drink. :)