According to Economists --Manhattan RE actually undervalued?

Whats that? Oh its the sound of crickets coming from stevejhx and eddiewilson

Money mag did the same rent/price calculation and came up with 15% overvalued. Clearly someone has some interesting assumptions.

And, its a little late to the party... sales are aready down 40%, and prices on their way down.

I have told steve numerous times that his economic white paper and the rest of his "formulas" were broad based crap-o-la. You can't take general formulas and apply them broadly and expect credible answers, especially in high price markets such as Manhattan. Seems there are some economists that agree with me.

"For these reasons, some experts argued that it was silly to try to build a mathematical model for the market’s overvaluation. Too much is unknown, they say, to make any predictions.

“I try to avoid house price forecasting,” said Paul S. Willen, senior economist and policy adviser at the Federal Reserve Bank of Boston. “Let me just say this, as an economist, that asset pricing is something we’re exceptionally bad at.”

Forbes Magazine also did the same calculation for rent vs. buuying and they came up with 15% too.

15% overvalued implies what in terms of a decline?
what about the herd psychology
it is manhattan and it can't sink herd = ?
i better run before the sky falls herd =?

Miami and Phoenix are 40% overvalued now according to the article
prices there have already dropped a bunch, right
so when can I go there and pick up something at 20% of the 2006 price?
I'll move my time machine forward and take it

Soon, my Apple stock will be worth more than any Manhattan apartment

The article did NOT say that Manhattan RE is undervalued. It says New York is undervalued. For all we know, they can be talking about Buffalo or Syracuse where RE is indeed undervalued since they never had any major appreciation.

Try again alpine292. Go to pg 2 of the article and click on the multimedia chart. New York is being compared to all other major cities.

steve's and his lap dog Eddie's heads must be spinning right now. I like how a vice dean from Columbia Business School actually has calculated that New York real estate is 5% undervalued.

34 Cities Where It is Still Better to Rent:

New York-North New Jersey-Long Island, N.Y.-Pennsylvania*
-102,428
-106,287
-109,625

http://realestate.msn.com/rentals/Article2.aspx?cp-documentid=8377648&GT1=35000

Hey Juice Man,

Did you forget to read the paragrah directly under the one that says prices in NY are undervalued? Well, here it is:

"Still, Mr. Mayer says prices in these cities will probably continue to fall because of deteriorating mortgage markets and economic fundamentals."

That makes 203 posts in a row from LIC with no facts and no brain.

Nothing spinning here, sales are down, prices are down, and, uh... we told you so. I'm sure the view of the Manhattan crash will look extra awesome from the pits of Long Island City!

That's right Juice Man, yoru preciosu vide dean from Columbia siad that prices in NY will FALL depsite being undervlaued. Allow me to re-post his statement a few times:

"Still, Mr. Mayer says prices in these cities will probably continue to fall because of deteriorating mortgage markets and economic fundamentals."

"Still, Mr. Mayer says prices in these cities will probably continue to fall because of deteriorating mortgage markets and economic fundamentals."

"Still, Mr. Mayer says prices in these cities will probably continue to fall because of deteriorating mortgage markets and economic fundamentals."

"Still, Mr. Mayer says prices in these cities will probably continue to fall because of deteriorating mortgage markets and economic fundamentals."

"Still, Mr. Mayer says prices in these cities will probably continue to fall because of deteriorating mortgage markets and economic fundamentals."

"Still, Mr. Mayer says prices in these cities will probably continue to fall because of deteriorating mortgage markets and economic fundamentals."

Be careful, give LIC too many facts and he'll melt.

> Whats that? Oh its the sound of crickets coming from stevejhx and eddiewilson

Sounds like a lot of crickets...but it sure 'aint me...

So you agree alpine292 that the article compares cities and not Albany, NY? No need repeating yourself, we may have some softness because of economic conditions but that is a far cry from the 40-50% correction prognostications we have heard on this board.

Let me get this right.... if we have a 25% decline, the bulls will be vindicated because it wasn't the 40-50% decline you're saying someone called for?

BTW, check your facts, there was an entire thread on this with predictions, no one had 40-50%. The majority said 15-25% down.

Spunky, you are SO pathetic

the article said Manhattan might be undervalued by 5%" (based on some formula they havent released for review yet) .. and in the very next sentence said "but prices will continue to fall due to economic situations" ...

VERY NEXT SENTENCE

and you selectively posted the first sentence and made it sound like a point.

man, you ARE pathetic .. and getting desperate

thats why they call it shilling...

looks like its still crickets from the bull side...

"BTW, check your facts, there was an entire thread on this with predictions, no one had 40-50%. The majority said 15-25% down."

Not sure what thread you are talking about, but there are planty that have steve and dco on record for 40-50%. I have no idea what your predictions are, I just lumped you into that group since you seem to be steve's Mini-Me

What is "planty"?

Keep jumping up and down about 50%, but here are the actual estimates:

http://www.streeteasy.com/nyc/talk/discussion/4465-how-much-will-nyc-decline?last_page=true

> I just lumped you into that group since you seem to be steve's Mini-Me

I lumped you into the group of people who don't seem to know anything

planty = a room with lots of plants

EW, you are predicting "NYC 16% decline from peak". That is bizarre. Based on your language (CRASH, CRASH, CRASH), I just lumped you into the unrealistic bucket. A 16% correction from peak is hardly a crash, not sure why you continue to talk like the world is ending. Shit, on this board you could be considered a bull with such a low prediction.

I’m not going to look for the threads, but steve and dco are both on record for 40-50% corrections.

So, I'll take that as an apology...

Sure EW. I apologize for my mis-characterization of your doom and gloom level. I don't apologize for the donkey comment on the other thread though. That was funny and you called me an idiot first. The donkey is still there by the way.

> That was funny and you called me an idiot first.

Right after you told the same lie and insulted me. So, you're still an idiot then.

Now I am confused - EW - based on all your gloom and doom postings, I thought you were predicting a CRASH. Now you are on record as saying "16% correction.". Since when is 16% considered a crash? I figure we've seen a 5-10% correction so far, so not much more to go based on your prediction. Welcome to the Bulls side, EW!

EW, for someone that insults people all day you sure are sensitive.

In the stock market, a bear market is a 20% decline....but the measure is obvious.

I'm going off median sales price, which has the upward slant factor involved. That day, I said 16%. Some days I feel like 18%. Some days more. But thats off an imperfect measure. If we're talking Case Schiller, I think we're talking 25% easy, but thats metro. So we're not working off a perfect yardstick.

More importantly, peak was last year, and I think we have at least a year or so before bottom. Meaning inflation itself will take off at least 4%, if not more.

If you read my posts, I've said numerous times that in real estate, often the worst damage is done when prices just sit there for extended periods.

So, even at the minimum count, thats definitely 20%, which is absolutelybear territory by any measure.

Either way, even if it was "just" 16%, you're calling that bull territory.

WOW, NOW THAT IS BACKPEDALLING!

As long as the market goes down "only" 16%, then all the bulls will say they're right?

Laughable.

> EW, for someone that insults people all day you sure are sensitive.

Ironic... you are the one who started complaining.

What's even funnier is that calling for a 15-20% decrease a year ago was heresy. Now, there has been so much backpedalling from the bulls that they'll take a 16% decline as a victory. Hillarious.

"What's even funnier is that calling for a 15-20% decrease a year ago was heresy. Now, there has been so much backpedalling from the bulls that they'll take a 16% decline as a victory. Hillarious."

You don't get it EW. Your fellow doomers would call a 16% correction bullish. You backpedaled on them.

Let me get this straight, the market goes down 20%, then the bulls were right because it didn't go down 40%?

ROTFL. This is hilarious.

There has been so much backpedalling by the bulls, its not even funny. Anything short of an 80% decline, they'll say they were right.

They're even trying to play it both ways. LIC comment calls for a 15% decline, then tries to play the other side...

"I have seen a few bears making comments on these boards recently, gloating about how they were right and how no one listened to them and, see, now everything is horrible and everyone should have listened to them. The problem is, I'm not sure what they were right about. NYC prices haven't crashed. They keep gloating that all these owners have lost all this value on their properties, but it just hasn't happened."

There is no worse backpedalling than this.... this is the same guy now admitting (in the same week) its 15-20%.

This is so funny, the bulls will try and claim victory because it "only" went down 20%.

But, if anything, shows we were right...

> You backpedaled on them.

You need to learn what the term means before you use it, Juice...

EW, can you re-read your post and explain to us what the hell you are talking about? You sound like a 3rd grader trying to explain that Jimmy pushed you at recess and made you split your pants.

I think we're all in agreement - if you say the NY RE market will only go down 10 - 15%, you are hereby officially classified as a BULL.

To be a true bear, you must believe it it will go down 30 - 40% or more.

"and I think we have at least a year or so before bottom."

Well then, YOU Eddie are DELUSIONAL (according to Professor Chase)

Speaking of Steve, where has he been lately? Did perfitz have him arrested for real estate terrorism?

New York is much cheaper than London.

http://www.nysun.com/new-york/ny-fares-well-vs-london-in-a-new-study/83495/

No doubt the economy has softened the real estate market, but time is running out on the $729,000 conventional loan. Could be we'll see a buying spree this fall.

http://www.nytimes.com/2008/08/10/realestate/10mort.html?_r=1&ref=realestate&oref=slogin

It is possible in some cases to directly compare costs to buy vs cost to rent.

e.g. 201 West 72nd Apt 10O
http://www.streeteasy.com/nyc/rental/379489-condo-201-west-72nd-street-upper-west-side-manhattan
for rent at $4000
sold 6/30/08 for $985,000.
cost/yearly rent ratio = 20.5

Assuming 6.5% interest, the owner would have had to put down at about 500k in down payment just to have neutral monthly cash flow.

aplineNJ person:
> Well then, YOU Eddie are DELUSIONAL (according to Professor Chase)

1) Who is Professor Chase?

2) What exactly did he say about me

What's rich is that the print edition carried this story immediately below the current thread's piece:

Mortgage Rates, Down for So Long, Are Creeping Back Up and Crimping Affordability

http://www.nytimes.com/2008/08/09/business/09mortgage.html?ref=business

(although they then backpedal a bit from the headline)

That is not going to be good for prices...

Eddie,

Professor Karl E. Chase, the co-creator of the Case Shiller Index. He said in the NY Times piece that spunky linked to that anyone who says they know with connfidence when the market will bottom is "delusional."

*Karl E. Case*

Hmm, another person thinks Eddie Wilson is disingenuous. Interesting . . .

I kind of like the last paragraph which states the following:

“I try to avoid house price forecasting,” said Paul S. Willen, senior economist and policy adviser at the Federal Reserve Bank of Boston. “Let me just say this, as an economist, that asset pricing is something we’re exceptionally bad at.”

Yet Edddie Wilson and SteveJhx certainly have a lot more credibility when it comes to house price forecasting in Manhattan.

Spunky, given up already. stop being such a pinata.

"I have told steve numerous times that his economic white paper and the rest of his "formulas" were broad based crap-o-la. You can't take general formulas and apply them broadly and expect credible answers, especially in high price markets such as Manhattan. Seems there are some economists that agree with me."

Yet that is exactly what those economists did - "take general formulas and apply them broadly" - because that's what the article is about.

Moreover, not only did they do that, the said that no formula is perfect. And I agree.

"in high price markets" like San Diego.

What a load of cr*p. Absolute price levels have nothing to do with it. Manhattan was once cheap.

I read the article and am pleased to announce that, like the Case-Shiller index, it is for the New York metropolitan region, not Manhattan, which did not experience such a broad increase in prices. I fully agree that for New York as a whole - which runs from Hartford to Bucks County - the figure is likely to be around 15%.

That, however, is not Manhattan.

But I do congratulate spunky on his return, after finding what he believes to be the silver lining.

"Speaking of Steve, where has he been lately?"

Too much work to do yesterday & today to do much posting. And tomorrow and the next.

"For these reasons, some experts argued that it was silly to try to build a mathematical model for the market’s overvaluation. Too much is unknown, they say, to make any predictions.

“I try to avoid house price forecasting,” said Paul S. Willen, senior economist and policy adviser at the Federal Reserve Bank of Boston. “Let me just say this, as an economist, that asset pricing is something we’re exceptionally bad at.”

steve, you have conveniently avoided what I have been saying all along. Just because you have a paper with a Fed guy and a couple professors on it, doesn't make it credible. Economists are bad at asset forecasting because you can't take general formulas and apply them to all markets. Admit it steve, you have been touting over generalized economic crap for over a year now. Whenever anyone tries to apply some common sense to your "formulas" you bang the drum that “Economists are smart, and they must be right”. I’ve said all along that it was silly, the models don’t make sense for Manhattan, and it looks like that there is at least one economist that agrees with me.

"What a load of cr*p. Absolute price levels have nothing to do with it. Manhattan was once cheap."

You are a piece of work. If you read the flawed paper you have posted 20 times, it talks about the over sensitivity to interest rates and high asset prices. That is why I have dismissed it from the start. The paper was written for Albany not Manhattan.

“I try to avoid house price forecasting. Let me just say this, as an economist, that asset pricing is something we’re exceptionally bad at.”

Well good that that's what he thinks, but "asset pricing" is what supply and demand analysis is about. That is an inherently ridiculous statement. In fact, I believe it was YOU who initially injected CAPM into this discussion.

Backpedaling?

Just do yourself a favor - Google "asset pricing" and see what comes back.

What a load of cr*p.

"If you read the flawed paper you have posted 20 times, it talks about the over sensitivity to interest rates and high asset prices."

And? Are you now making the case that real estate isn't sensitive to interest rates? Specifically because it is so expensive, a small increase in interest rates can have a dramatic effect on prices.

Or do you deny that?

"The paper was written for Albany not Manhattan."

Aaah! Manhattan is special.

What bs.

And to make it clearer - I NEVER said that one theory or formula was sufficient to get an understanding of the market. I said there are many ways of doing it, many ways of looking a market.

You are now arguing that there is NO way to look at a market because it's too complicated, and economists are bad at it.

Well, if that's so, governments and every major corporation and university in the world, not to mention Nobel, are wasting their money.

What nonsense. Give me your theory - I think it's called the Know-Nothing Theory - and I'll take a look.

Best regards,

"I said there are many ways of doing it, many ways of looking a market."

This is coming from a guy who refuses to look at median price per square foot as an acceptable measurement of real estate prices. Which one is it steve? Are you willing to look at measures that aren't perfect or not? Seems like the imperfect measurements that fit your one size fits all models are ok, why not something as simple as median price per square foot? Again, you talk out of both sides of your mouth.

"Well good that that's what he thinks, but "asset pricing" is what supply and demand analysis is about. That is an inherently ridiculous statement. "

but, but, but, this guy is from the Fed. He must be right steve. Why don’t you post another article from a Fed guy or Nobel laureate to defend your theories, it makes you look even more desperate

"What nonsense. Give me your theory"

I've given you my theory many times steve. It’s called the common sense theory. Take theories from published articles, apply common sense to them, and get a credible answer. Whenever someone tries to change one of your precious public articles, you spit the dummy, and say stupid things like economists must be right because they published it in a paper. Keep relying on fed guys for your answers and the rest of us can continue to laugh at your results.

By the way, your buddy EddieWilson is predicting a 16% decrease from peak. That is not even in the ballpark of your 40-50% prediction. Would you consider him a bull?

"This is coming from a guy who refuses to look at median price per square foot as an acceptable measurement of real estate prices."

JuiceMan, over the months your arguments are getting more and more pathetic. I never ever said that. What I said is that they couldn't be used the way you were plotting to use them since they are highly variable and easily skewed by the sample in the quarter.

"Are you willing to look at measures that aren't perfect or not?"

I'm not sure what that means, but no measure is perfect and I've always said that. I said you had to look at multiple measures - I'll look at all of them in detail, and discuss them.

"It’s called the common sense theory."

OMG LOL LMAO.

"Keep relying on fed guys for your answers and the rest of us can continue to laugh at your results."

Keep on laughing, baby, because to me it's common sense that property prices can't double in 4 years and stay there, especially when incomes are falling and credit is tightening.

How's that for common sense?

You are really getting funny.

Gotta love JM's "I've given you my theory many times steve. It’s called the common sense theory"

What does your common-sense theory tell you, JM? that now is a good time to buy, paying nearly twice as much to own (when adding mortgage, opp cost, tax, maintenance, insurance) compared to renting -- when the prices are unlikely to go up from today's prices for the next 3 - 5 years?

Also, not sure what Steve thinks, but 16% down is firmly in bull territory as far as I'm concerned. Heck, I think Spunky, JM, and LIC are secretly betting declines around that number.

Can we finally stop with this ridiculous claim that you can rent now at half the cost of buying? Any realistic view of comparable apartments has shown that this "rent for half the price" claim is nonsense. In actuality, monthly rents compared to ownership costs are generally in the same range right now. Anyone who says differently just doesn't know what they are talking about.

"Anyone who says differently just doesn't know what they are talking about."

Find a few examples of the same apartment for both sale and rent, where it's breakeven on cash flow basis.

Dozens or more posts have been made showing it's twice as expensive to buy as to rent.

Bears, your hopes and dreams for prices to come down are fading fast, I don't know what you are looking at, but my studio condos comps prices have moved higher in the past year not lower and that's with the media induced terrified buyers sitting out-of-bounds....at the first positive media headline(which is coming soon) we will see every Joe shmoo and his brother "GETTING IN THE GAME" ....inventory already has decreased 10% from May highs...the Fed liquidity is pouring money into the economy....2009 is looking better and better....Wall Street? Once the street feels things are getting better it's off to the races and bonuses will be paid to keep those deals flowing....All you bears are self destructing and paralyzed by fear. But it's not too late..learn from this board..see yourselfs for the disasters you are and change...Good Luck.... :)

steveF, of ponzi-scheme fame?

"Dozens or more posts have been made showing it's twice as expensive to buy as to rent."

Another stevejhx fantastical delusion, in which he ignores all practical analysis that shows he is wrong.

Oh my poor Bear.. it's the perfect legal ponzi scheme..all you do....is look for a great location where evryone wants to live and ......BUY. It's such a wealth builder...I know you are afraid to change a light bulb but get past your doubts and fears and you'll do well....a little Franklin D "All we have to fear is fear itself...You..hmmm..either work for Streeteasy drumming up these message boards or are afraid to even leave your computer and go outside.

I just closed on my 1 bedroom full service high rise condo 2 weeks ago in Murray Hill. I got it at a 20% discount compared with similar units in the area. Reading people's opinions on this board has helped me tremendously in the past few months when it comes to spotting opportunities and evaluating comparables.

Now that I am a owner and no longer a renter I guess it is in my interest to see property prices go up. But IMHO prices in the city still have room to fall. I've been going to open houses every weekend since December 07 and what I've seen is prices are on a gradual downward trend. With layoffs and cutbacks in the financial sector this year and still no light at end of the tunnel I don't know when this the trend will reverse.

I work on wall street myself but furtunately my spouse's profession is in healthcare so hopefully we can ride out the storm with our relatively bargain price purchase and come out of this thing. When our friends tell me they are thinking about buying I tell them it's a good idea to give it another year and see how things turn out.

Just my 2 cents.

stevejhx: "Find a few examples of the same apartment for both sale and rent, where it's breakeven on cash flow basis."

LICC retort: "Another stevejhx fantastical delusion, in which he ignores all practical analysis that shows he is wrong."

stevejhx repeats: "Find a few examples of the same apartment for both sale and rent, where it's breakeven on cash flow basis."

LICC - can't.

That's funny SteveF. Just got back from brunch with a friend who's a long-time broker at Elliman. She has no incentive to talk things down, obviously, but told me that studios and 1-bedrooms are in a world of hurt right now and that there's such a glut that folks are looking for adjacent 1BRs as a cheaper alternative to buying 2/3 BRs.

Her take on buying 2/3 BRs is that it's holding up pretty well (some softness) and said in general May/June/July were busier than Feb/Mar/Apr but that she fears that the overall slowness will continue for some time.

Her take on 1BR/studios was that the glut is only going to get worse with new condos and flippers.

But what the hell does she know? She's only a real estate broker. Should we believe a real estate broker who is being honest about a down market to a friend? Or should we believe SteveF, who just invested in a condo with declining equity value?

As for me, I do work on Wall Street, and I can tell you that banks are paralyzed by balance sheets with lockjaw. I don't think the deterioration of credit card receivables, withdrawn home equity loans will help much either. But hey, I just see what's happening everyday.

My friend (Elliman broker) had been pretty pushy in the past about buying. Today she said, and I quote, "Makes sense to rent right now. Save some $$. This market's not going anywhere fast."

"JuiceMan, over the months your arguments are getting more and more pathetic."

This is how steve starts all of his posts when he knows he is wrong

"I never ever said that. What I said is that they couldn't be used the way you were plotting to use them since they are highly variable and easily skewed by the sample in the quarter."

OMG. So you are telling me that the median price per sq foot (not price - price per square foot) is more volatile than your 12x theory? That's exactly my point. You can post for a year regarding your 12x bullshit without a care for the accuracy of the measurement (or more importantly the applicability of the measurement to Manhattan), but you cannot accept that the median price per sq foot as the closest possible measurement for market performance.

steve, as always you are best known for inconsistency and every word you say is taken with a grain of salt.

"What does your common-sense theory tell you, JM? that now is a good time to buy, paying nearly twice as much to own (when adding mortgage, opp cost, tax, maintenance, insurance)"

No, paying twice as much to own does not make sense but do you really believe that most properties are 2x to buy than rent? Do some research cartman rather than following steve like a dumb, blind dog

"when the prices are unlikely to go up from today's prices for the next 3 - 5 years?"

Really? You know this how?

"you are best known for inconsistency"

I have been completely consistent.

"So you are telling me that the median price per sq foot (not price - price per square foot) is more volatile than your 12x theory?"

I didn't say that, but now that you mention it....

They are two different measures of housing prices that are not related to each other. Median price is affected directly by the (relatively small) sample of apartments that closed in a quarter; the "12x" ratio is directly correlated to the ratio between PITI and rent: PITI = 30% of gross income for housing expenses; rent = 40x monthly rent.

Before proceeding, do you deny that for most people those are the ratios? If so - if that's what you mean by "Albany" - then the argument is over.

If you agree that they are constraints, and you make $100,000, 30% of that is $30,000, divided by 12 gives you a monthly rent of $2,500.

To rent an apartment at $2,500 you would need a minimum income of 40x that which is - YIKES! - $100,000.

12 * 12 * $2,500 = $360,000. An 80/20 30-year mortgage at 6.5% will give you monthly mortgage payments of $2,275.44. Add in a few hundred dollars a month for property tax and maintenance, and - YIKES! - it adds to TWO THOUSAND FIVE HUNDRED DOLLARS!

So humor me: Tell me what's wrong with that logic, why it doesn't apply to Manhattan.

Wait! I know! The tax benefit!

Wrong. Not included in PITI.

Uhm, parents giving kids the down payment money.

Quantify it.

Uhm, uhm, putting down more than 20%.

It doesn't affect the validity of the argument, since the difference could be invested elsewhere.

Uhm, uhm, uhm, taking out an ARM.

Then that adds in a risk premium, which is precisely the difference between long- and short-term interest rates, which doesn't change the validity of the argument.

Uhm, uhm, uhm, uhm, taking out a 40-year mortgage.

Yeah, and a 100-year mortgage would even be better, wouldn't it?

So, JuiceMan, humor me: what's wrong with that logic?

Ok. I'll humor you. What is wrong with that logic is that with your formula there is no difference in “equilibrium” between:

$1000 rent/mo and $1000 buy/mo

vs.

$6000 rent/mo and $6000 buy/mo

How can your 12x scenario treat both of those scenarios the same? They are not the same. The higher the price the harder it is to have true "equilibrium" as you define it. Your formulas and theories ignore the tax benefit and principal payment, because these formulas were built around low price examples where the tax benefit and principal build up is not as significant. In a higher price environment, you cannot ignore these two things because it will significantly alter your equilibrium. That is why I have continually said that your formulas are incomplete. If you want to use the 12x formula you need to figure both the principal payment and the tax benefit, but you won't because a fed guy that studied Albany says not to.

That's what I mean by common sense steve and this is not a new argument. Every poster who has taken the time to challenge you on your formulas has said the exact same thing, and you continue to dismiss. If you can tell me how your 12x logic can delineate between the two scenarios above than maybe we can have a discussion….but I doubt it.

Steve, let's say we live in the exact same units on the same floor in the same building. Both of us would live there for the next 30 years. You rent at $x/month, I bought at 12 times your annual rent. Makes no difference which one you do, right?

Make some (reasonable) assumtions about the increase/decrease of the price of my property/your rent/my CC/my RE tax, and show me how our "financial situations" would be the same in 30 years.

Also, please don't tell me that your rent would be decreasing overtime in nominal dollars. Best case scenario, there will be periods where it stays the same. Please keep in mind, in the last 48 years, rent has gone up on average 6%/year in nominal dollars.

Also, please keep in mind that our situations MUST be EXACTLY the same. Otherwise 12X is not the equilibrium. Let's see your math...

One thing I wasn't clear about above was your tax rate is presumably higher in the $6000/mo scenario since, as you make more (and can afford more) your tax rate increases. The higher your tax rate, the more benefit there is to owning real estate. It is not a linear relationship as the 12x formula assumes

"$1000 rent/mo and $1000 buy/mo vs. $6000 rent/mo and $6000 buy/mo"

So there it is - the reason that Manhattan is special is because it's expensive. Or is the reason that it's expensive is that it's special.

Alas, it makes no difference. I can afford to pay $6,000 a month to rent or to buy, and in fact between my two places I own.

Yet when I go into the bank they look at PITI. Yes, they might be willing to lend me up to 32% rather than 28%, but that's it. And if I go to rent an apartment they want 40x that in annual income.

And when I went before the co-op board, they looked at my income and ability to service my unit.

If you say $60,000 a month to rent or to buy, then we might be talking.

"How can your 12x scenario treat both of those scenarios the same? They are not the same. The higher the price the harder it is to have true "equilibrium" as you define it."

They are indeed the same at that level. You will need to go much higher to find a difference.

"Your formulas and theories ignore the tax benefit"

The tax benefit is not calculated in PITI, and therefore it is not taken into consideration when determining how much of a mortgage you can afford. Therefore, when you add it in as an "additional benefit," you are adding in a fictitious benefit because it is not available to those who would need it.

"and principal payment,"

I don't ignore the principal payment. The whole purpose of buying rather than renting is to capitalize an expense, which is only wise when prices are low, so as to lock in that expense.

"because these formulas were built around low price examples where the tax benefit and principal build up is not as significant."

That is truly moronic. We've already discussed the tax benefit. We've already said that the 12x ratio does not take it into account explicitly; rather, it is taken into account implicitly in the price of the house. Imputed rent takes it into account explicitly, but you dismiss that as "academic." You also seem to dismiss owner's equivalent rent, which also takes it into account.

You want your cake and to eat it, too, JuiceMan. There are widely accepted ways to take into account what you say I am ignoring, but you deride them because, again, they don't give you the answer you want.

The only way to get the answer you want is to take the 12x ratio and apply the tax benefit at the highest marginal rate. Well, that ratio has never taken the tax benefit explicitly into account nor does it need to, and you need to calculate it at your blended - "effective" tax rate.

"In a higher price environment, you cannot ignore these two things because it will significantly alter your equilibrium."

That's ridiculous. Except at the extreme ends, it's an order of magnitude because everything is calculated as a percentage. The ratio of 30% of $50,000 is the same as the ratio of 30% of $500,000. 30%.

"That is why I have continually said that your formulas are incomplete."

I don't doubt that they're incomplete - all formulas are. That's why you need to look at different ones.

"If you want to use the 12x formula you need to figure both the principal payment and the tax benefit, but you won't because a fed guy that studied Albany says not to."

Wrong on both counts. You want to add the tax benefit into the 12x formula which - based on rent and PITI - does not include that benefit. It's obvious why you want to do it - BECAUSE IT GIVES YOU THE ANSWER YOU WANT.

But it is wrong. That ratio does not - and cannot - include the tax benefit because it's not included by the people who are going to give you your mortgage.

I have provided two other formulas that DO explicitly include the tax benefit, but you deride them as academic. BECAUSE THEY DON'T GIVE YOU THE ANSWER YOU WANT.

"Every poster who has taken the time to challenge you on your formulas has said the exact same thing, and you continue to dismiss."

That would be you, spunky, LICC and Sneaky Pete. A might band of economists you all!

"If you can tell me how your 12x logic can delineate between the two scenarios above than maybe we can have a discussion….but I doubt it."

What two scenarios? You tell me how it can "delineate between the two scenarios above" because it doesn't. Walk into a bank tomorrow, file an application for a loan taking into account the tax benefit, and watch them laugh in your face.

Because they will.

"I own and rent," I meant.

Steve, Let's say both of us make 100k/year. Just to make it simple, let's say that our income puts us both in the %30-tax braket.

You rent one unit at 2500/month, I buy the unit under you for 360k. In the first year, I will pay roughly 1850/month for my mortgage, 300/month CC and 350/month, for a total of 2500/month.

Would our tax returns for that year be the same? Would our taxes for that year be the same?

steve is scrambling as hard as he can to disregard the tax benefit to owning, because he knows that all his formulas break down when you take taxes into account.

"Walk into a bank tomorrow, file an application for a loan taking into account the tax benefit, and watch them laugh in your face."

Your entire argument back to my post was based on what the bank will lend you? LMAO. Same old argument. Not talking about a loan, we are talking about the financial benefits of owning vs. renting. You don't want to talk about it because you know you are wrong. There is a difference between those scenarios and you know it, everyone on this board knows it. 12x. LMAO.

I own and the tax benefits of owning are sh*t because all the money I save goes to pay the damn property taxes! So Steve is 99.9% correct!

""when the prices are unlikely to go up from today's prices for the next 3 - 5 years?"

"Really? You know this how?"

Should I lsit the reasons? Here they are:

1. Credit Crunch
2. Rising Inventories
3. Rising Interest Rates
4. Wall Street Layoffs
5. Horrible 2009 Wall St. bonus season
6. Did I mention the credit crunch? I think I did.

alpine, didn't we already establish that you have very high taxes? Further, taxes are already figured into steve's "equilibrium" price.

Your right Steve F. Things are great. We bears are a bunch of idiots. Who cares about the glut of 1 bedroom apartments? Who cares about credit crunches, layoffs, and low bonuses? The foreigners will keep prices up and we will all be priced out FOREVERRRRRRRR!

"I will pay roughly 1850/month for my mortgage"

No you won't. A 30-year 80/20 mortgage at 6.5% is $2,275.44.

"Would our tax returns for that year be the same? Would our taxes for that year be the same?"

Who said they would be the same? They absolutely positively would NOT be the same. But that does NOT take away from the argument that if you make x amount of money, you can only afford an apartment that costs y, and that y is either 1/40 of your monthly income or 30% of your total income in housing expense, which is the same number.

What the argument on this board has been is that - BECAUSE of the tax benefit - you can afford to pay more for an apartment. But you can't, because no one will lend you the money.

That's a far different - and more subtle - argument than JuiceMan is making.

Nonetheless, Bgaria, as soon as you take that mortgage tax deduction into account - which has nothing to do with the 12x ratio - you must also take into consideration opportunity cost, risk premium on owning, expectations of future price increases/decreases, which you conveniently forget.

"steve is scrambling as hard as he can to disregard the tax benefit to owning, because he knows that all his formulas break down when you take taxes into account."

No they don't - the formulas that include the tax benefit work perfectly well. It's the ones that don't that don't work - not because they're wrong, but because people don't know how to use them.

Again, JuiceMan, your arguments are pathetic. "Your entire argument back to my post was based on what the bank will lend you?"

Why yes - you can't take a tax benefit on a loan bigger than what you qualify for. LICC's argument is that it makes perfect sense that it should cost twice as much to own as to buy out-of-pocket BECAUSE OF THE TAX BENEFIT.

Alas, you can't afford to pay twice as much out-of-pocket to own versus to buy, so you're not eligible to take the tax benefit.

LMAO.

"We are talking about the financial benefits of owning vs. renting."

Not really, but if you want to, fine. Owning is a capitalized expense. When the amortization of that capitalized expense - which includes the tax benefit - is less than the cost of renting, then it is more advantageous to own. Otherwise, it's more advantageous to rent.

No?

"You don't want to talk about it because you know you are wrong."

I just did. Nanny-nanny-boo-boo.

"There is a difference between those scenarios and you know it, everyone on this board knows it."

Knows what? That owning can sometimes be advantageous. I know that, that's why I own. What is moronic is when people - such as yourself - say that owning is ALWAYS more advantageous at any price. That is moronic.

Now then, if you agree that sometimes renting is more advantageous than owning - you probably don't - we have to come up with the breakeven point: when is owning more or less advantageous.

And that requires formulas. 12x (not including the tax benefit), imputed rent and/or owner's equivalent rent (including the tax benefit).

No?

Not to you! Because imputed rent and owner's equivalent rent - both accepted theories, the former used to calculate NYC real-estate tax, the latter used to calculate inflation - don't give you the answer you want. The only way you can get the answer you want is using the price-to-rent ratio and then subtracting out the tax benefit, when, as far as I can tell, "tax benefit" is nowhere indicated in that ratio.

Because it's not.

That's what you don't understand.

"Further, taxes are already figured into steve's "equilibrium" price."

They absolutely are.

Yes, I do have very high taxes. But what do you think is going to happen to the taxes in Manhattan when there is no more abatements???

Actually, alpine makes a great point: once the abatements expire, property taxes on new Manhattan condos will be almost as expensive as New Jersey property taxes + NYC income tax.

It is ridiculous that in NYC a $2 million brownstone in Brooklyn can pay $5,000 a year in property tax, when a $2 million condo pays $20,000.

Just shows to go you....

"No you won't. A 30-year 80/20 mortgage at 6.5% is $2,275.44."

Care to double-that? Monthly payment for a 80/20 mortgage at 6.5% for a 360,000-property is $1,820.

" But that does NOT take away from the argument that if you make x amount of money, you can only afford an apartment that costs y, and that y is either 1/40 of your monthly income or 30% of your total income in housing expense, which is the same number"

Have I ever argued with you that on 100k income, you can only get a mortgage for a 360k-place? EVER?

"What the argument on this board has been is that - BECAUSE of the tax benefit - you can afford to pay more for an apartment. But you can't, because no one will lend you the money."

That might have been the argument on this board, but that's not MY argument.

"Nonetheless, Bgaria, as soon as you take that mortgage tax deduction into account - which has nothing to do with the 12x ratio - you must also take into consideration opportunity cost, risk premium on owning, expectations of future price increases/decreases, which you conveniently forget."

I am not "conveniently forgetting" them at all. YOU are forgetting them. That's my main beef with the 12x ratio. The 12X ratio completely ignores all these factors, and they cannot be ignored.

So, I am going to ask you again (for the third time now, I believe), to make some assumptions and show me how the buyer and the renter of (virtually) the same property would be in EXACTLY THE SAME financial situation 30 years later.

I claim that based on what data we have on national average prices for average homes since 1960 and national average rents for average homes since 1960, the 12X ratio gives a clear advantage the the home owner over the renter. That's why it can't be right. 12X can't be the equilibrium.

"Care to double-check that?"

"What the argument on this board has been is that - BECAUSE of the tax benefit - you can afford to pay more for an apartment. But you can't, because no one will lend you the money."

You are pathetic steve. I have never argued this. What I am saying is that $1000/mo to rent and $1000/month to buy is not the same as $6000/mo rent and $6000/mo to buy. The tax benefit is different, it is not linear, and as I said before, the 12x breaks down. You can talk loans, PITI, or whatever you want to try and change the subject. It doesn't matter. Those two scenarios are not the same from an owner’s perspective and the equilibrium will be different.

I don't care if you post a book steve, you are still wrong any way you look at it.

"I have never argued this. What I am saying is that $1000/mo to rent and $1000/month to buy is not the same as $6000/mo rent and $6000/mo to buy. The tax benefit is different, it is not linear, and as I said before, the 12x breaks down."

I am gonna leave that to you and Steve, but it did remind me of something else...

The 12X ratio breaks down for a different reason too... The decision between renting or buying a 360,000-dollar place is completely different than the decision between renting and buying a 3,600,000-dollar place. The reason is in the different rates you would get on your mortgage. So, you need at least 2 ratios to account for that, a simple 12X doesn't do it.

steve, here is another rent vs. buy formula by a reputable economist. I've included his article and bio. 300x monthly rental costs. Are these economists smart or what?

APRIL 13, 2007
House Prices and Transaction Costs
Arnold Kling
The New York Times offers a nifty rent-vs.-buy calculator to go with a David Leonhardt piece on whether or not is a good time to buy a home. Under the "advanced settings," I eliminated the transaction costs from buying a home. The baseline setting was a 4 percent cost of buying a home and a 6 percent cost of selling a home. If you set those to zero, then under the rest of their assumptions it clearly pays to buy.
I use a simple formula to determine rent vs. buy:

profitability = rental rate + appreciation rate - interest cost

In the example in the Times calculator, the monthly rent is $1112, for an annual rate of $13,344. Dividing that by the purchase price of $220,000 gives a rental rate of roughly .06. Adding this to the appreciation rate of .02 (2 percent per year) and subtracting the interest cost (.0625 for a 6.25 percent mortgage rate) gives a positive number, indicating that you should buy. On the minus side, there are property taxes for the buyer. On the plus side, there is the tax deductibility of the mortgage interest as well as the property taxes.

An even simpler rule that I use is the rule of 300. If the price is less than 300 times the monthly rent on an equivalent house, it is ok to buy. I figure that if the real interest rate (i.e., the after-tax interest rate minus the inflation rate) is 4 percent, then the ratio of price to annual rent should be 1/.04 = 25, which means that the ratio of price to monthly rent should be 300. In the example, they give, the ratio of price to monthly rent is well below 300, so my simple rule says "buy."
The real killer, relative to my formulas, is the transactions costs. I think that an unheralded part of the housing boom of the past decade has been a reduction in transaction costs, as the costs of mortgage origination have fallen. Real estate commissions still wipe out a lot of the profit from buying a home, though, which is why it usually only pays to own a home if you plan to keep it a long time.

Arnold Kling received his Ph.D. in economics from the Massachusetts Institute of Technology in 1980. He was an economist on the staff of the Board of Governors of the Federal Reserve System from 1980-1986. He was a senior economist at Freddie Mac from 1986-1994. In 1994, he started Homefair.com, one of the first commercial sites on the World Wide Web. (Homefair was sold in 1999 to Homestore.com.) Kling is an adjunct scholar with the Cato Institute. He teaches statistics and economics at the Berman Hebrew Academy in Rockville, Maryland. In 2004 and 2005, he has taught "Economics for the Citizen" at George Mason University in Fairfax, Virginia.

Stevejhx using your example of renting a studio for 2500 per month or 30,000 per year compared to owning a studio with a 30 year fixed rate this is what I come up with. After 15 years if you rented the studio with a 5% increase in rent per year you are looking at the following annual cost (see table below). If you rented the same apt at the end of 15 years you would of paid $679,724 in rent. By owning the studio your annual cost (fixed rate mortgage)of 30,000 would be essentially the same or a total at the end of 15 years of $450,000. This results in a 279,724 cost savings of owning vs renting. Of course there are going to be maintenance/CC and tax increase but then again minimum compared to the increase in rent that has occurred over the past 15 years in Manhattan. At the end if 15 years you certainly would not only have some decent equity built into your studio apt but probably some nice appreciation as well.
Annual Rental Cost
Year 2008 30000
Year 2009 31500
Year 2010 33075
Year 2011 34728
Year 2012 36465
Year 2013 38288
Year 2014 40202
Year 2015 42213.
Year 2016 44323
Year 2017 46539
Year 2018 48866
Year 2019 51310
Year 2020 53875
Year 2021 56569
Year 2022 59397
Total Rent paid $679724.00

steve, again you disregard flaws in the basic underpinning of your theory. Why do you assume that everyone takes the maximum loan amounts possible? My mortgage amount isn't even close to 32% of my income. Your theories fall apart so easily.

"I eliminated the transaction costs from buying a home."

NEAT-O! They can amount to 20% of the total cost of owning under time.

"Adding this to the appreciation rate of .02 (2 percent per year)"

Best of luck in a falling market (though okay in a stable market).

"and subtracting the interest cost (.0625 for a 6.25 percent mortgage rate) gives a positive number, indicating that you should buy."

What? You subtract out the interest? Do you not pay interest?

Please!

Your "rule of 300" is fine if you put interest and transaction costs back in.

But your "rule of 300 does NOT work for the price-to-rent ratio basis. You explicitly need take into account the tax benefit, the risk premium on owning, the opportunity cost, and expectations for future price increases / decreases.

Which is - IMPUTED RENT!

Ta-da!

What you so blithely derided is, in fact, what you're using.

All buying is is a capitalized expense that you amortize over time. If you use imputed rent - which is basically what your "rule of 300" is - it is highly sensitive to interest rates and expectations of future price changes.

The problem with it is - and feel free to deny - is that by definition what it measures is what someone would be willing to pay for a house. Not what they actually can pay, which isn't the same thing.

What they can pay = 12x annual rent, because that is the market constraint.

"I think that an unheralded part of the housing boom of the past decade has been a reduction in transaction costs."

It wasn't a reduction in transaction costs - it was an artificial lowering of interest rates through ARMs and option-ARMS and probably, for all I know, payday loans. It was also a loosening of underwriting standards since the mortgage bonds sold were rated Triple-A (how, when they are on subprime and Alt-A?) and banks thought they were offloading the risk onto investors.

Not.

Spunky, your theory is incomplete.

"After 15 years if you rented the studio with a 5% increase in rent per year"

Impossible in the long-term, unless incomes increase at that rate as well. And if they do, there is not real increase in rent.

"By owning the studio your annual cost (fixed rate mortgage)of 30,000 would be essentially the same or a total at the end of 15 years of $450,000."

You need to give more details on this $30,000 per year mortgage. What are you counting in that $30,000?

"At the end if 15 years you certainly would not only have some decent equity built into your studio apt but probably some nice appreciation as well."

In a rising market that's a great theory. In a falling market it doesn't work. Take a look at Chelsea Stratus where you have #35A listed for $2.25 million.

http://www.streeteasy.com/nyc/sale/217323-condo-101-west-24th-street-chelsea-manhattan

And you have #34A in contract at $2.475 million.

http://www.streeteasy.com/nyc/sale/194216-condo-101-west-24th-street-chelsea-manhattan

That's negative equity of $225,000.

Let's say you can rent that place out for $8,000. That loss in equity is 2.3 years' worth of rent, excluding transaction costs, which would make it probably close to 5 years' worth of rent, not to mention the the $500,000 down payment which at a measly 5% interest - and you can get much more in preferred stock - is $24,750, or another 3 months' rent.

Excluding property taxes that are abated but won't be forever, and the monthly mortgage payment of $14,682 less the $8,000 you're likely to get for it (on an 11-month basis). Your monthly loss on a rent-equivalent basis - nearly $7,000 - is equal to what you can rent the place out for.

To quote LICC, spunky, you disregard flaws in the basic underpinning of your theory.

"Why do you assume that everyone takes the maximum loan amounts possible?"

For most people it is, but not for everyone.

"under time"

LMAO.

It's early!

Steve, I was paying 2500/month to rent a studio in the FiDi. Using your model, I just bought it for 360,000k. CC are 300/month, RE tax is 350.

Fast-forwrad 2 years...

Wall Street keeps taking hit after hit, Manhattan real estate market is in a tail-spin. Banks are reluctant to lend at 6.5%, now the rate is 8%. Because so many people in my neighborhood have lost their jobs and have moved on, and because of all the new construction, now there is an over-supply of studios and rents are falling. Now the same studio rents for 2300/month.

I decieded to cut my losses and offred it at 12 times annual rent, or 331,200. However, nobody can afford to buy it, because at 8%, the monthly expenses of the owner are 2,594.

What happened? I followed your method, did nothing wrong... Bought at 12X annual rent because that was the equilibrium, the fail-safe prie to buy... How did I lose money??

"the fail-safe price to buy"

Who said that?

Here's the problem: "Fast-forward 2 years..."

You are buying real estate for the wrong reason - for appreciation. Historically real estate does not appreciate very much. If you bought it as an investment, most of the investment comes from having someone pay your expenses for you, not from the naked increase in value.

Fastaus..."in a world of hurt"??
that's funny is that her Jesse Ventura impression for the day...:)

"You are buying real estate for the wrong reason - for appreciation."

I didn't buy it for the appreciation. The 12X ratio suggested that buying would be the same as renting. Well, between two options that are "the same", i decided to buy. The 12x ratio didn't talk about appreciation/dericiation, so I didn't even consider that. It didn't even talk about future rents, so I didn't conseider them either. All I know is that two years later I have to sell, and I am losing money. How is that possible?

"If you bought it as an investment"

I didn't buy it as an investment. I bought my home.

Also, I bought at 12X, which was equivalent to renting. Why can't I sell at 12X annual rent two years later?

Just an interesting note. Spunky entitled this thread "According to Economists --Manhattan RE actually undervalued?"

But go to the link

http://www.nytimes.com/2008/08/09/business/economy/09bargain.html?_r=1&adxnnl=1&oref=slogin&ref=business&adxnnlx=1218285495-GhqQzjt5IIb+jibxY8VPvQ

and for some odd reason, MANHATTAN ISN'T MENTIONED?

Could this be deceitful?

"I bought my home."

Good. Then what are you worried about what the price is right at this moment? I know that JuiceMan denies that assets can be priced - even though he attempted to introduce CAPM into the real-estate pricing discussion we had several months ago - no one ever said that any asset would always increase or always decrease in value. They will fluctuate.

"All I know is that two years later I have to sell, and I am losing money. How is that possible?"

If you bought your home with a 2-year price horizon, you made a huge mistake. Again, even JuiceMan and Spunky will agree that you don't buy a home unless you have at least a 7-year time horizon, because it's an illiquid market.

JuiceMan, follow-on: "subtracting the interest cost (.0625 for a 6.25 percent mortgage rate) gives a positive number, indicating that you should buy."

Once you have subtracted out the interest cost - an AMAZING assumption as it's 99% of the cost in the first few years - do you still put the tax benefit back in? Because imagine how profitable real estate would look if you didn't count the interest, but then did count the mortgage interest tax benefit.

You pay $100,000 in mortgage interest and are in (LICC's fictional) 30% tax bracket, you wind up GAINING $30,000 a year.

Wow! Financial magic!

"If you bought your home with a 2-year price horizon, you made a huge mistake."

How in teh WORLD does the 12X ratio account for my time horizon? You mean, there are different ratios for different time horizons? You mean, there are different ratios to account for the difference between the interest rates on a comforming and a jumbo mortage? You mean, it's not as simple as 12X ratio?

"Historically real estate does not appreciate very much."

Care to define "very much" for us? It has appreciated in real dollars between 1960 and 2008. It has appreciated at over 6%/year in nominal dollars between 1960 and 2008...

Why do you assume that everyone takes the maximum loan amounts possible?

"For most people it is, but not for everyone."

Your supporting data for that statement is what exactly, steve?

By the way steve, there is no 30% tax bracket, and I never said there was. You are the one who makes up fantasy tax brackets to try to create misleading hypotheticals to support your mistaken opinions. Please stop making things up already.

""I bought my home."

Good. Then what are you worried about what the price is right at this moment?"

So, if i go out and buy in Manhattan today, at today's prices, with a 50 year-time horizon, I am doing nothing wrong? I am buying my home at a price I can afford... What do I care where prices are in 2 years?