I've been a renter my whole adult life, here's why

One of my favorite things is reading an article that takes some fundamental assumption we all make, calmly demolishes it with data and statistics, and then handily concludes like Jackie Chan would after beating someone’s ass.

Last week, the NYTimes ran such an article.

The housing boom of the last five years has made many homeowners feel like very, very smart investors…

As the value of real estate has skyrocketed, owners have become enamored of the wealth their homes are creating, with many concluding that real estate is now a safer and better investment than stocks. It turns out, though, that the last five years - when homes in some hot markets like Manhattan and Las Vegas have outperformed stocks - has been a highly unusual period.

In fact, by a wide margin over time, stock prices have risen more quickly than home values, even on the East and West Coasts, where home values have appreciated most.

In social psychology, one of the cognitive errors we make is called the availability heuristic–basically, if something is more recent or prominent in your mind, you will weigh it more heavily in your decision-making.

I really like the NYTimes article. It doesn’t dumb down the debate by saying that real estate is “good” or “bad,” but instead shows how a bunch of factors–inflation, spending on home improvement, the recent housing boom, and the value of having a place to live–affect our impressions of real estate vs. stocks as investments.

I need to look into the data to understand it better, but my gut feel is that this is an excellent analysis because it takes a long-term perspective and discards the stupid emotions that cause us to mistakenly overvalue certain investments (”Everyone is making $200,000 on their home!! We have to buy now!!!”).

So do I think real-estate is a bad investment? Of course not. But I want to look into the data so I can answer the question I am getting more and more these days: “What about real estate?”

So you're thinking about investing in real estate! Great. As you're probably aware, some of the world's richest people have made their fortunes by investing in real estate. Investing in real estate is a great way to generate passive income which if done properly would allow you to quit your job and live off the residual income from your investment properties. Most people think that you need a lot of money, a good credit score and substantial savings to invest in real estate, however this is simply not the case.

Real Estate Investment is now treated as a major case of capital budgeting by using state-of-the-art investment analysis which incorporates the future stream of income it may generate and the associated risk adjustments. It has been the highlight of the investment literature since the 1970’s when investment theorists extended techniques such as probability, time value of money and utility into its analysis.

Real estate is basically defined as immovable property such as land and everything permanently attached to it like buildings. Real property as opposed to personal or movable property is characterized by the right to transfer the title to the land whereas title to personal property can be retained. The investment in real estate essentially depends on the risks associated with it, that is to say, even if the venture succeeds when the future stream of income will accrue to the investor and the alternative investment opportunities. Real estate investment can be attractive if viewed as a business opportunity; it can generate rental income, using it as collateral to secure a loan for a business venture, to offset otherwise taxable income through cash savings on tax-deductible interest rate losses, or simply from the profits garnered from its resale. Notable, in this context is the gains reaped by real estate speculators who trade in real estate futures (by buying and selling purchase options).

Common examples of real estate investment are individuals owning multiple pieces of real estates one of which is his primary residence and others are occupied by tenants from where the rental income accrues. Real estate investment is also associated with appreciation in the value of property thereby having the potential for capital gains. Tax implications differ for real estate investment and residential real estates. Real estate investment is long term in nature and investment professionals routinely maintain that ones investment portfolio should have at least 5%-20% invested in real estate.

A Real Estate Investment Trust (REIT) is a corporation or body investing in real estate that has the property to reduce or eliminate corporate income taxes. In return, REIT’s are required to distribute 90% of their income among the investors. These incomes are often taxable. REIT’s provide a similar function as does Mutual Funds provide for stocks in the share market. The key statistics to study about the REIT’s are the NAV (Net Asset Value) and AFFO (Adjusted Funds From Operation).

The Indian Government is yet to introduce REIT’s in the country. The government and the SEBI (Securities and Exchange Board of India) are planning to bring in legislations for the smooth functioning of the real estate market in India. with Initial Public Offers (IPO’s) streaming in from various listed real estate companies, it will be the best time to have an REIT which can help capture the current boom in the real estate market.

As any classical economist would tell you, is that homeownership is actually not a great idea from an investment standpoint. A better strategy would be to diversify as much as possible—put your money into stocks, bonds, many different geographies—and then use the income to rent whatever you like, which allows for greater flexibility and efficiencies. The popular argument that renting is equivalent to throwing money down the drain is really fallacious, since the money you save can be invested to produce dividends. Instead of you tinkering with the plumbing and breaking something, a professional can do it. The lawn guy who has the right equipment can come and mow all the lawns faster and better than individuals would, and so on.

Renting is NOT always better than owning. What a dumb statement. Who is better off: the guy who bought a house last year that has lost 7% year over year or the guy who rented and bought stocks that are now down 40% year over year?

"The S&P 500 increases at a real rate of 8.0% per annum."

How much has the S & P 500 increased over the past 12 months? The answer is -35%.

" What a dumb statement. Who is better off: the guy who bought a house last year that has lost 7% year over year or the guy who rented and bought stocks that are now down 40% year over year? "

If they bought a condo with 10% down, that 7% loss is 70% of their equity, much worse than 40% in the market.

And reality is much worse than just 7% down, so most likely they are MORE THAN 100% down on their equity. Don't know anyone, even Bernie Madoff, who lost that much in the stock market.

And this is why I'm glad I don't (have to) look at my home as an 'investment' in the first place. I own it because I want to live the way I want to live, and I want to be able to redesign and renovate it the way I want, and I really don't (have to) give a sh*t about rates of income, inflation, comparisons with the S&P, dividends, capital gains, or anything else for that matter - when it comes to my home. It's my home, and if it goes up 50%, well that's just swell, but it doesn't really mean anything to my bottom line. If it goes down 50%, well that's a bummer, but it STILL doesn't mean anything to my bottom line. It's my home, and not a line item in my investment portfolio - and I have to live somewhere anyway, so I want to live the way I want (more or less). My investment money is another matter entirely.

I think if you choose to rent rather than own (regardless of the reason), that's perfectly cool - different strokes for different folks. But I find renters who post these multiple, long winded, overly detailed, cosmic financial rationale as to the minutae why they rent and how they're just waiting for the market to drop some more so thay can perfectly 'time the market' at the bottom sound more like they're providing some ulterior motive for a kind of weird schadefreude.

"Renting is NOT always better than owning. What a dumb statement. Who is better off: the guy who bought a house last year that has lost 7% year over year or the guy who rented and bought stocks that are now down 40% year over year? "

The guy who lost 40% in the stock market. 7% with 10% down means you lost 70% of your capital.

Btw, how did you get only a 7% decline? Folks who bought at the peak are down double digits...
Oh yeah, I forgot... you "ignored" the truth.

First, I am *thrilled* that you're using real numbers. You've earned a ton of respect from me. However, you ask for those who feel otherwise on housing to critique the model, and here you are:

1: You failed to account for the tax deduction of the mortgage interest (and monthly maintenance and/or property taxes, depending if its condo or coop). That's about 200k to chop off the difference.

2: You show a 950k profit on the S&P 500 model. You can't ignore taxes on that - the taxes are just far too large to gloss over. In the owning model, the profit is under the 250k/500k exemption, so you can ignore that and still have a valid comparison. Lets say today's historically low rates are used (as you say, and I agree, its impossible to tell what tomorrow's rates will be): 15% federal capital gains, about 10% state and city taxes. This is about 237k more lost when renting.

Conclusion: You come up with a roughly 400k loss to owning. Yet the above 3 points change it in owning's favor by a bit over 400k to make them roughly break even.

3: Owning for 10 years or 15 years is more profitable than owning for 30 years. The tax deduction on the interest is higher early on, and the opportunity cost on the equity is lower. Recalculate for someone who only owns for 15 years then sells (to rent or whatever) and you'll see a different picture.

4: The 0.7% number you're using is real values. The 8% for the S&P is nominal value. You need to discount inflation everywhere, or ignore inflation and compare nominal values. You can't selectively choose one sometimes and the other other times.

5: You should count the principal payments as further opportunity cost (this helps the rent side, but is missing from your model). Even though that money creates equity, its money that on the rent side, would be invested in the S&P. On the buy side it comes back exactly as you spent it. On the rent side it comes back with a profit from the stock market.

6: Check out http://housemath.us - It does *exactly* what you did above, only to a ridiculously larger degree of detail. It'll catch a ton that you didn't, and is fully configurable (housing appreciation, inflation, etc). It also creates fun charts - you can see how with standard rates of inflation/housing appreciation (exact numbers you used above), buying is more expensive under 4 years, less expensive between 4 and about 20, and then more expensive yet again after 20 years. For exactly the reason I make in point 3.

Great analysis!

Silly. All asset classes have their day. One can make money in RE, stocks, shorting, etc. There are times it makes sense to be in it -- and times to avoid. It is not binary (yes or no) -- it is a cycle... buy low -- sell high -- or short high -- make money to the low.... Be nimble and focused.

Tuesday, you'll see more aggressive chops, in rentals especially by recent condo buyers, as well as in sales.

ps - this analysis above is still absurd, regardless of who plagiarizes it.

"Btw, how did you get only a 7% decline? Folks who bought at the peak are down double digits"

I am only analyzing data for the least 12 months.

If you can buy apartments at under 10x rent, and your monthly after tax savings vs. renting is a double digit return on your downpayment, how is that bad? Leverage cuts both ways. If you buy real estate well, your return on equity can crush any alternative. Why? The goverment wants you to be a homeowner (to a fault). There is no such thing as a margin call. You can use 10x leverage, sometimes more. This makes a comparison of unlevered returns on real estate to unlevered returns on stock unrealistic. It would hold if real estate had the same leverage limits as stock, but it does not. Sorry but anyone who rented though the 90s made a grave error on the face of it.

If you buy real estate in a period of weakness, the holding period return is much greater than 0.7%. If you put new money into the stock market during a period of strength (say 20+ P/E), the return is dismal.

I have one question that I could post anywhere on these threads but will do so here. Why is there an assumption that owners aren't also investing in the markets? I see various models and theories. But there seems to be a built in assumption that buyers are servicing their mortgage and nothing more. Maybe that's true in some cases...a person gets by and has nothing left to invest but this is also true of renters.

The premise of the debate is whether or not stocks are always better that real estate... Some people seem to think so, yet during various points in time its clearly not so. 1988 (stocks), 1998 (real estate), 2008 (stocks)...jeez is there a pattern...

So, you're cherry picking examples, and only off by 30% extra loss.

If someone did it with accurate data, you might be talking about a 100% loss in RE...

I don't debate that if you buy real estate poorly you can lose 100% (or more) of your money. And yes, everything suffers the critique of 20/20 hindsight. But are you telling me that in 1999, given rents and stock valuations that the math wasn't easy? The math was easy, but the discipline was hard. Apartments represented huge monthly savings at low price/rent multiples and stocks were trading at 30x EPS (which was uncharted territory).

KLivren64, I don't know why you plagiarize my post & claim that it's yours.

Steve, it did look familiar... But above calcs aside, do you really believe its optimal to always average into stocks rather than buy an apartment?

ANybody who plagarizes steve's posts (of all people to plagarize from) clearly has no life. See that is the thing with renters. They are always trying to justify their decision to rent. They must be really insecure as renters.

"do you really believe its optimal to always average into stocks rather than buy an apartment?"

Stocks and owner-occupied residential real estate are different things. Stocks are investments; real estate is capitalized rent. I think it's best to buy real estate when it's cheaper than renting it. I don't "dollar cost average" investments. I try to buy them when I think the price is attractive.

agreed. its vs rent not vs stock.

Risk and return - you should expect investing in the S&P to have greater return than investing in RE.

That said, I think there is something missing here. You need to include the costs of renting ($903,455)in your S&P profit analysis. So the S&P profit is now $370,311-$903,455 = -$533,144

Is the price vol of real estate lower than the S&P...probably. It's going to take at least two years to cut real estate in half, but it only took us a year to cut the S&P in half... You have the point though, you have a housing payment one way or another.

i completely agree with rhino -- you learn about the benefit of diversification in the first day of your finance 101 course. diversification across asset classes would mandate that you DO invest in some real estate.

more generally, i'm usually suspicious of people that talk in absolutes -- x is ALWAYS better than y. we are good, they are evil.

"diversification across asset classes would mandate that you DO invest in some real estate."

That would mean that you would have to own a rental property. That is an investment. If you occupy it yourself it is not an investment; it is a capitalized expense.

I think you are both off.

Diversifying into stocks doesn't mean buying one stock. A REIT would be a better choice.
Hell, if you are buying the index, you are getting REITs and homebuilders...

Buying one apartment, whether you live in it or not, is poor diversification if that is your goal.

nyc is correct - a REIT is a big portfolio of rental properties, residential and commercial. It expands upon what I said; it does not include owner-occupied residential real estate.

I wouldn't diversify into a REIT right now, though.

I do think the amount of cash you have is a factor. Hypothetically speaking, if you can afford to buy a place you can live in forever for all-cash, then that's a risk-free investment, since you never have to sell, you're simply buying the right to live rent-free forever. If you expect today's environment of minimal/zero return on risk-free investment to continue, then buying might not be a bad investment in comparison. In other words, say you buy a place for $1MM cash. Say equivalent rent would've been $4500. And your maintenance/cc is now only $1500. So you've paid $1MM to reduce your monthly outflow by $3000. Annualizing, that's an after-tax "return" of 3.6%. Not a ton, but a lot better than having that $1MM sit in treasuries and earn zero.

Obviously an extreme hypothetical example, but it's intended to illustrate that how cash-rich you are, and what your investment alternatives/preferences are, both matter. So yes, you should look are rent vs. own, but if you're putting down a meaningful downpayment, you should also consider what you'd invest that downpayment into if you don't buy, with the pluses and minuses.

3.6% is terrible, especially for an illiquid investment with 30-40% downside. You can buy fixed annuities with no downside or stock with a much higher return expectation, more liquidity. Newbuyer, its not what you would do with the money, its what alternative has the same risk profile. The fact you can rent and buy annuities with zero (or close to zero) risk ruins your analysis before it starts. Further, from this base in stocks, you can expected AT LEAST the average stock market return which is more than double.

Besides, what $1mm apartment in Manhattan fulfills a lifetime of family needs?!? Maybe when 3 beds hit $1mm we can talk!

Wow this is the most convincing bear argument I have ever heard. For real estate and treasuries. What if I put the money in the JNK etf and earn a 13% dividend, or the HYG and earn 11%. What YOU would do doesn't make the market. How does that math work out if the market requires a 6%-8% monthly yield on cash as a 'rent savings annuity'?

I don't need to read any of your analysis. All I know is this, I purchased my first apt in Manhattan many years ago (for less than $50k) and through a couple of upgrades, I now own my recently valued $3 million upper eastside apt free and clear of a mortgage. I also have a 2nd home up in CT valued at $1m with no mortgage as well. How much did I in total initially invest in my properties? Roughly $300k total.

$300k investment = $4M gain

I don't need someone to compare my stock investment returns to my real estate returns because there is no comparison. And I am not the only one, plenty of my older neighbors have also benefitted as much as I have.

Even if the real estate market corrects itself by 20 - 40%, I'm still way ahead of my stock returns.

You can take your analysis (which is based on national figures) and try to sell it to someone living in Detroit or Texas, simply because those regions did not experience the huge run up we have had here. But it is not going to fly here in NYC.

Rhino, you're either not paying attention, or pretending not to. 3.6% is after tax (since you pay rent in after-tax dollars). Actually not bad, although certainly not stellar. Furthermore, there is no downside, since you never have to sell. It's a risk-free investment, so you have to compare it to risk-free returns. JNK and HYG are both high-risk junk bond funds. No one has any idea how ugly corporate defaults will get, but it's far, far from risk-free.

And yes, what YOU would do with the money is the only relevant factor. It's YOU deciding whether to buy an apartment or not, not some hypothetical market.

Your point about a lifetime for $1MM is fair, and a good illustration why my example is hypothetical and the practical reality is more complex. I am far, far from saying that now is a good time to buy, or that an apartment is a good investment (now or in general), or anything like that. All I am saying is that someone who is cash-rich, has a long-term time horizon for their apartment, and is unwilling (for whatever reason) to invest their cash in any non RE risky assets, buying may be more attractive than for someone that doesn't fit those criteria. An argument was made above that one should simply compare buying to renting, and I was making the point that returns you could get on potential downpayment matter as well.

BigApple, your point is equally silly. Using your logic, many could've been persuaded to buy Nasdaq in early 2000. Past performance does not guaranteee future returns.

Newbuyer, just because you say you won't sell doesnt make it risk free. 3.6% after tax is still not high enough for the risk you haven't eliminated simply by saying your 2 bed / 1 bath $1mm apartment will suit you for life.

I'm actually meeting a financial advisor/friend tomorrow (today) who is telling me there are triple tax free NY munis that are yielding over 10%. Your cash yield vs. rent calc would actually be interesting to track back into the past. I think it was around 15% in the 1990s. Those were the days.

As a 60-year old investor and home owner who has accumulated a net worth of several million dollars, I recommend both home ownerhip and real estate investment (especially land) for several reasons: (1) While one can THEORIZE about the positive effects of "investing the difference" between one's rent and the amount you would otherwise spend for mortgage/maintenance/taxes, the REALITY is that few people actually do that month in, month out, year in, year, out. Whereas people normally do whatever is required to pay the mortgage, taxes, and maintenance. So, while an enormously self-disciplined person might save at the theoretical rate, for most people, it ain't gonna happen. (2) When we have faced hard times, we have never sold real estate. Why? Because it takes time so sell. This is a built-in deterrent to wealth destruction. In contrast,in a weak moment, it is easy to spend your savings or cash in a 401-K to meet an emergebcy. (3) The same notion of "buy lo, sell high" applies to real estate. Fully half or more or our net worth is related to real estate investments, including wise decisions about housing purchases. We put three kids through expensive private colleges on real estate profits because we bought low and sold high. If the financial challenges of the last year prove ANYTHING, it is that diversification (including home ownership) is a wise move.

newbuyer99 - I'm not arguing that "past performance guarantees future returns". But the premise of this original posting is based on an analysis to prove KLivren64's theory that renting (and hence, stock investing) has yielded a better return than stock market investing based on HISTORICAL returns/appreciation rates.

Of course, past performance does not guarantee future returns. But for the vast majority of long time buyers in high appreciation areas like NYC, our return on real estate investment has far outpaced our stock returns HISTORICALLY. Therefore, KLivren64's analysis using "a real annual rate of .7%" for appreciation does not apply here in NYC. NYC real estate appreciation has vastly outpaced stock returns. Who knows what the future holds, maybe it'll be 5% or .7% annually over the next 30 years? His anslysis was skewed to fit his argument by manipulating this key annual appreciation rate. If you use NYC's historical appreciation rate, you'll have a far different result. And if he is using a national figure then it's silly. I could care less what happens to real estate prices in some small town in Indiana but obviously would care a heckava a lot about where I'm living and buying in.

So assuming KLivren65 has been a life long NYC renter (which he says he is), then he probably would have been better off financially had he invested his money in New York real estate versus stocks.

I meant that this original posting is based on an analysis to prove Klivren65's theory that renting (and hence, stock investing) has yielded a better return than REAL ESTATE investing..."

> (1) the REALITY is that few people actually do that month in, month out, year in, year, out.

100% agreed. Thing is, that doesn't really make it a better investment... just an easier one (which could make it a poorer investment). There are also alternatives, like auto deduction of your paycheck to a fidelity account, lets say. Or, the great 'ol 401k.

> (2) When we have faced hard times, we have never sold real estate. Why? Because it takes time so
> sell. This is a built-in deterrent to wealth destruction. In contrast,in a weak moment, it is easy
> to spend your savings or cash in a 401-K to meet an emergebcy.

Absolutely. That being said, preventing you from making other dumb financial moves, while a benefit, doesn't necessarily make a bad investment a good investment... if alll depends where we shake out, but the historical returns on housing are actually pretty poor up to this bubble.

Being "locked in" and not making dumb mistakes in itself is good, but not necessarily if its at the cost of having to make what ends up being a poor investment.

> (3) The same notion of "buy lo, sell high" applies to real estate. Fully half or more or our net
> worth is related to real estate investments, including wise decisions about housing purchases. We
> put three kids through expensive private colleges on real estate profits because we bought low and
> sold high.

Buy low and sell high, of course. But that now means sell (and certainly don't buy) in 2005-2008, and likely most of 2009.

> If the financial challenges of the last year prove ANYTHING, it is that diversification (including
> home ownership) is a wise move.

Diversification is great... but home ownership is lousy diversification.

You are talking about putting (for most people) a HUUUUUGE chunk of their net worth in one propoerty in one location in one market that is not generating cash. And, if you are leveraged, you could have several times your net worth in market exposure.

As investments go, that is horrible diversification. Imagine if I told you that I was 200% into one stock on margin. When you are leveraged up to buy one property, thats not that different a scenario...

Diversification is good, certainly, but don't mistake buying a house on margin for that...

in more practical terms, if you want to diversify, buy REITs. Ore homebuilders.
Hell, buy the S&P and you've got a lot of that...

All would be ACTUAL diversification, instead of what becomes an overfocus on one specific asset...

I also have a negative to add...

emotionality.

Emotion is probably the one thing that hurts investors more than anything else (and you alluded to that with folks selling 401ks).

But, I can't think of anything more emotional than RE in the last 5 years.... waaaay too many decisions there being made on non-financial factors.

The anecdotes of home ownership rest on buying well. No one writes the story of how they bought their house in 1988 and waited 12 years to recoup its value. If you buy well, with leverage, primary residence real estate can be a great investment, albeit a concentrated one. You can't duplicate it with stocks because you can't lever stocks 10 to 1 and avoid any margin call over the following 10 years...if you could, then it could be. And with primary real estate the government is always on your side, as we are seeing now (not that it can save it).

Excellent point, Rhino.

We've been in a era where 99% of the anecdotes have told one story...

I remember when the anecdotes told a different story... and I know had bad things get on the way there...

Its the opposite story of 1999...which was stocks are awesome and real estate is not an investment. I disagree when people say real estate is not an investment... Like Steve says its capped rent, but capped rent vs rent is an annuity with a call option. In 2006-2007 the call option was too expensive and the annuity was negative.

Thanks everyone, please keep up the discussion and try to refute what I said: I still stand by my point that renting is always more financially beneficial over time and although there have been good points made here, no one has been able to legitimately come to a different conclusion with their own successful calculations or a good critique of the model.

-Kate

How so Kate? You have not accounted for 10 to 1 leverage in your model. Neither have you accounted for the expenditure of rent. If you buy real estate at a low price to rent ratio with 5 or 10 to 1 leverage, the value creation can not be matched by stocks. No way, no how. You can't prove a point with averages in a highly cyclical market.

> Its the opposite story of 1999...which was stocks are awesome and real estate is not an investment.

Right, everyone thought they were a genius.

Some putz from like Big Bad Voodoo Dollies Zippers or something was in a guitar magazine spouting off investment advice in 1999. All tech stock stuff, obviously, thinking he had some magic secret.

We've seen pretty much the exact same progression here... the "smarter than you" vs. the bitter, the "i got in, you didn't", and then the told you so and denial when it pops.

Human nature allows us to make the same stupid mistakes decade after decade, as long as we give the bubble a new name.

Also, no one accounts for the fact that US stock market returns are compiled over the timeperiod that represents the rise of the US to power. It is not informative of the next 50 years whatsover. All this said, your model would be fine in an all cash world...too bad that is far from the case in real estate. Nor is the case made with averages. Clearly buying sub 10x rent real estate in the 1990s made sense vs. stocks.

Cyclicality and bubbles are human nature. None of this is easy... But I'll buy stock now at the decade ago price (maybe its a bit higher now)...and in 2012 when real estate is = to 2002 price, I will buy real estate. Actually I like this JNK etf yielding 14%.

KLivren64- was I off in my analysis? If you are going to include the costs of consumption in homeownership (through equity and interest payments), you need to include the costs of consumption in renting with your S&P analysis. Based on this, homeownership is better.

You include potential rental payments and down payment in determining your S&P profit. But I don't see in this scenario how you reflect where you live and these costs (unless you are homeless). If you are diverting your future rent into investing, where are you living?

Let me know if I am off, thanks.

I have a hard time beleiving that the economy (S&P as a proxy) can grow at 8%, and at the same time, real estate would only appreciate 0.7%. Also, like jake says its not clear you are accounting for shelter in your equation. Either way its moot. Buy stocks at a below average P/E and buy real estate at a below average P/E... the lags are such that its actually quite reasonable and possible. I'm praying for a 1500 S&P in 2012 with a $600/ft real estate market. Boo Yah.

"Also, no one accounts for the fact that US stock market returns are compiled over the timeperiod that represents the rise of the US to power. It is not informative of the next 50 years whatsover."

Rhino, excellent point.

And that reminds me... from the 70s until now, Manhattan went from a place where noone wanted to live unless they HAD to to someplace cool but still expensive and crime-filled to a relatively crime-free paradise that every kid in America sees on TV and wants to move to. This isn't just a NYC thing, cities went from a period of decline, where folks were leaving in droves and they were being called "outdated" because of technology... to a period where folks in the suburbs have seen crime increases, and folks have recognized the value of density and walkability. That trend has been pretty clear and well documented.

Yes, some of the Manhattan growth was bubble, but some of it was also this factor. Assuming that this will happen AGAIN is ludicrous, as you can repeat the gains of going from least to highest demand. We're on top, we won. No place to go up.

I think this is part of where the delusion has come from. Americans watched the rebirth of the city, and the financial gains. What is really a huge exception has BECOME THE EXPECTATION.

Just one more thing that has much of this country (particularly those in cities) set up for a very rude awakening.

Ha. The only way Manhattan can dupe the returns from the 1970s to now is if it becomes a shithole in the interim and you can buy that trough. Sadly a bankrupt city like the 1970s needing a bailout from wealthy benefactors is not out of the question.

it wouldn't be bad enough.... because folks were saying "end of cities" even before that... the crisis was the effect, not the cause (like in this case).

I don't think we'll hear about major flight, because I think folks already get that the suburbs suck. In the 70s, they were thought of as utopia.

As usual, I am way behind after a couple days away. Rhino:

"I'm actually meeting a financial advisor/friend tomorrow (today) who is telling me there are triple tax free NY munis that are yielding over 10%." How did that go? If true, I'd be very interested to know which ones. My strong suspicion is that he means "tax-equivalent 10%", meaning 5% or a bit more, but not taxed, and thus equivalent to a 10%-yielding fully taxable security. That's about what we're getting on NY munis. But I hope I'm wrong, and if so, please tell, I'd be very interested too.

As for JNK, you have to look at the underlying holdings. On first glance, I would guess a solid half of those companies will default sometime in the next 1-2 years. Bloodbath potential. 14% is a great return on fixed income, but I don't have the stomach for that kind of risk.

BigApple does a lot of bragging about his/her historical return on real estate. I too have been very lucky, but not nearly so. What I see for the future is people looking at property as a need for shelter, and not as an investment. If you have more than you need, you'll begin to regret the extra property taxes and maintenance costs, because, let's face it, we've entered a dangerous depreciation phase. And all municipalities are hungry for tax revenue.

Buy real estate when people are looking for shelter from it....Like when coops on Park are being sold to avoid the maintenances.

JNK holdings below. 50% default rates?!? No way.
Top holdings
Company name % Net assets
Hca 9.25% 3.67%
Cdx Na Hy 10 Tr Cr Lkd Tr Ctf 144a 3.33%
Chs / Cmnty Health Sys 8.875% 3.29%
Texas Competitive Elec Hldgs 144A 10.25% 3.06%
Nrg Engy 7.375% 2.60%
Intelsat 11.25% 2.38%
HARRAHS OPER 2.01%
First Data 9.875% 1.88%
Windstream 8.625% 1.71%
Hertz 8.875% 1.65%
Percentage of holdings 25.58%

If we have a deeper, longer recession such as the 1990-91 downturn, the default rate will explode to 16.3%. When was the last time the default rate for high-yield bonds spiked that high? Fridson, who publishes Leverage World and Distressed Debt Investor, says in 1933, in the depths of the Depression.

I was signing up for a place for rental, $3825 / month 1BR, 2 months free (pay 12), and the On Site Residential people were concerned that my income was just on the cusp, told my HR department. My salary is $175K. I don't disclose my bonus in good years (2007) or bad years (2008), but I'm amazed that the level of salary still raises question on a rental. Oddly, I think it would be easier to buy.

Yes, before this year you could have easily qualified for 90% of an $900k loan to buy that apartment as a condo... That was the problem. Some buildings want 50x rent...way more stringent than the lending practices of 2005-2007.

They dind't quite tell me what multiple they wanted, but 45x is just under my salary.

45x the base rent (not the net rent).

And anyway, won't that basically force prices down? It certainly will not force incomes up.

Oh, and I should finish by saying that the apartment - they wanted $4100 2 months ago.

I am only guessing. I know that 50x rent is not unheard of...but its probably a bull market figure, the 50x. Classic economics says it depends. Assuming there aren't a shitload of people making 50x the rent, the price and the multiple should go down. I guess if I am the landlord, I'd rather let the multiple slip than the price...provided I didn't let it slip so far I have a tenant who cant afford to pay.

Well, truth is, after all the deductions (taxes, healthcare, transitcheck), the typical paycheck nets to $3600-$3700, which would be an ideal amount to pay.

I would think we'd have to erase the rent jump post 2005, which feels like it was about 25%.... All the $2700 1 beds went to $3300. You may very well get to the point where the $4000 luxury one bed goes back down to the $3200 it cost in 2003.

Someone was talking about Exelon Chelsea which was the most outrageous I saw on rents.

Prediction: 2012 rents: Studios $1200, One bedrooms $1800 Two bedrooms $2700 . Discuss

I think purchase prices can get cut in half, but not rents. First, because as prices fall people are going to sell and move to the rental market. Second, because rent increases on average have not been too unreasonable over time. A $1200 studio (doorman) is 10-yrs ago price... $2200 to $1800, sure....but $2200 to $1200, I doubt it. Two beds, similarly...$5000 to $3800-4000, sure... $5000 to $2700, I doubt it. Two decent employed wage earners can still pay $4000-5000. However, in 2002 when rents declined 15-20%, we did not have all these half or less sold glass condos... So maybe rents get lower than I would guess.

If sale prices drop in half, there's still carrying costs, so the monthly cost of ownership doesn't drop by half, and therefore rents couldn't drop by half.
I don't think in 1999 you could get a doorman studio for 1200.

You absolutely could. What do you think the number was? You could spend more, but you could get one around that price... And what was sick is you could buy a doorman condo studio for $100k.... So the price was 7x rent. That studio now rents for $2400, but sells for $600k. 500% increase in 10 years...yeah that's reasonable.

In 1995, I rented a studio in a co-op from an owner for $1075 in midtown east. He didn't raise the rent during the 4 years because I was a good tenant and additionally the $1075 happened to be the same rent as the prior tenant or maybe it was up $50. In 1999 it was time to move on and I found a $1800 500sf studio in a great brownstone in the village.
ps where is this $2400 studio today that you are referencing?

Agreed on RE prices dropping faster than rental prices. All the reasons listed above are valid. Plus, if the buy/rent ration overshoots on the way up, it's also likely to overshoot on the way down, as everyone is afraid to buy.

Rhino, I'll admit I don't know all the names on the JNK list, you may know them better than me. Harrah's, First Data and Hertz would scare me, but there was no analysis behind my "50% could default* guess.

>but there was no analysis behind my "50% could default* guess.

How many defaulted?
What has happened to the value of your apartment since the time that you were a new buyer?

Yeah. Another post. Pace yourself.

Is this newbie going to find every post in history and reply to it?

somewhereelse: I've never had a problem with you on streeteasy discussion boards.
You need to bring something new to the se table.
Or just stop your complaining.

Yours Truly,
El Generalisita

^^ Another drunken comment from the streeteasy alkie, within one minute of my posting a comment at 7:56pm
12/3/13.
Not directed to him and not referring to him.

Truth, don't let them bother you, just picture them naked.

The SP500 cannot grow 8% per year, it cannot only as fast as the economy on the very long term (otherwise its share of the economy would increase until it becomes bigger than the entire economy and it doesn't make any sense). If we have 3% growth, the SP500 will grow at 3%, not more. Rents and property prices the same.

OP's analysis is done by a 6th grader.
He failed to account two major (aside from dozen others) points:
1) Mortgage interest deduction
2) Rental income (Who buys a property and let it sit empty for 30years?!?)

Owners have tons of gravy, including a multi-million dollar payout when they retire or 30 more years of rent free living. The deduction is almost a moot point, and most owners earn too much anyway. Take the million dollar lottery payout at retirement and be happy.

Renters, they can't afford to buy. They will need to be broke renters until they can amass 6-figures liquid. Most idiots can not manage to do this. Hence, they do not get the jackpot at retirement and 30 years of rent-free living, to boot. Lifelong paycheck to paycheck renters?

Buyer buys $80k townhouse in 1980. Sells it for $6mm when he retires. And no, saying he could have taken that $8k downpayment to the racetrack and put it all on some horse (or investing into a company on the verge of bankruptcy) is not a valid opportunity cost comparison, you blithering imbecile.

What if stupid renter eventually buys in old age? Owners would be living rent-free at that age. Instead, she subjects herself to $60,000 a year in rent. LOL, nice "retirement" sucker. Correct, she is a ginormous fool. This is a case of "too little, too late" She should have bought something back in the 1970s or 1980s, like other people her age. She'd be sitting on millions and be living rent free. A true idiot renter who had made things even worse. At the least, should have moved to a $1500 studio.

Maybe not NYC, but owners have literally recouped 100% of the cost of their apartment in the 10 years of paying below market cost to own than to rent (owning is much cheaper than renting). Even if the apartment was today valued at $0, owners am still ahead. Wrap your mind around that.

2 years ago, I recall seeing $200k studios being posted here. Of course, some of SE crazies told buyers they were CRAZY. Now, there seem to be none of these $200k studios. If the cheapest studios are now listing for $300k, can we infer that the smart investors who bought 2 years ago are now sitting on a 6-figure profit cushion? Pretty damn incredible. Live for $1000/mo, and get paid $100k to do so. A renter doesn't see that sort of money in a lifetime!

Renters LOSE: Bought in 1983 for $1m. Sold in 2012 for $8mil. Owner walks away with a $7m profit. Renter's profit? $0. Yes, those brilliant renters can avoid the increasing cost of electricity and point out the 6 people who bought in 2009 who are underwater. They are so frickin' smart! Just think owners live for free for decades after paying off the mortgage. And get $7 million bucks as a parting gift.

Renters get ZERO percent return. And, renters pay MORE every single month, both during the mortgage and after it's retired.

Average renter net worth $5k
Average owner net worth $250k

Renting is for short-term thinkers. People used to say Manhattan was overpriced in the 1950s, 60s, 70s, 80s, and 90s. Guess what? Anyone who paid off their mortgage over 30 years was looking at a jackpot of wealthy when they retired. Renters? Nothing. Just sniveling ants trying to keep their rent control. If you take a long term perspective, buying is ALWAYS a no-brainer jackpot lottery system for your retirement. And, no, being down on your purchase from 2010 does not negate this.

Wow, anyone who bought a studio or 1BR in the 1990s is sitting on about $300,000 of cold hard cash for apartment sitting. Real estate is truly a money tree, if there ever was one. Oh, and you'be be living mortgage free by now as well. For the rest of your life.

NOT BUYING NOW VS. NOT BUYING EVER? BIG difference. Sure, this is a stupid time to buy at inflated prices after prices have gone up x00% in the last x years. Anyone who already bought from 1850 to 2008 has made out like a robber baron. That boat has sailed. Anyone who bought in 2009 or 2010 lost lost money. BUT, anyone who never EVER buys in their entire lifetime is a stupid f*cking renter idiot funding someone else's retirement. It's an important clarification that some here are too dumb to understand.

Owners should now just concentrate on paying off the mortgage, and living rent free for the rest of their lives. Renters, well, I guess can just keep paying off their master's mortgage.

TheTourist
about 15 hours ago
Posts: 120
Member since: Apr 2012
The SP500 cannot grow 8% per year, it cannot only as fast as the economy on the very long term (otherwise its share of the economy would increase until it becomes bigger than the entire economy and it doesn't make any sense). If we have 3% growth, the SP500 will grow at 3%, not more. Rents and property prices the same.

The Tourist, your thoughts are similar to Bill Gross's earlier this year. He's a smart guy, has a great track record. And directionally, your thinking isn't crazy, but it does happen to be wrong. And Gross's thinking was criticized accordingly.

One thing no one talks about when it comes to comparing the stock market vs buying a home is the emotional roller coaster ride that comes with being heavily leveraged in the stock market.

When this post was made 4 years ago, there's been numerous periods of turbulence in the stock market (16-28% drop in weeks) where it would had most likely knocked you out of the market. Now if you would had been 2-4x leveraged like a home, you would had been CLEANED OUT due to margin calls. The same leverage used for a home 4 years ago would had been far more risk free and stress free where you can then put your energy and mind on something else.

I have very rarely had a client refer to their home purchase as an investment. And all of them will have substantial assets invested elsewhere after the purchase of their home. Why do we even persist with this debate about a home purchase v. stocks? I guess it can be entertaining to watch Nada and 300Mercer battle it out :) Buying a home or investing in stocks should be done when you are financially able to do so, with adequate cash reserves and a secure income.

Happy Holidays!

Keith Burkhardt
The Burkhardt Group

>I guess it can be entertaining to watch Nada and 300Mercer battle it out :)

I find it kind of pathetic. 300 is so stretched financially post purchase that it just makes me wince when he advocates his purchase.
Yes, 300 would be right if he started out more prudently, and in fact 300 agreed with a post by Greensdale on the subject. But Greensdale seemed to be positing objectively, not out of financial desperation.

@fieldschester

I generally agree with Bill Gross yes. We have one planet, limited space, resources, energy, the earth population is going to flatten out at some point, the size of the global economy too. People who think stocks will continue at their historic average of 6.5% (not 8) total return are just fools. The global economy is not going to grow 6.5% per year in the next 30 years. On the other hand, there is, relatively speaking, a limited inventory of prime real estate in Manhattan (you can sometimes upzone, destroy buildings and build higher, but it takes forever to significantly change the pool of homes). This is actually a good argument against stocks and for (prime and limited) real estate. If billionaires and millionaires from around the world want a pad in NYC, there won't be homes for everyone, pushing prices up.

A stock can increase more than the growth of the company if the company uses debt
The aggregate growth of the aggregate of public companies can exceed the growth of the economy if labor and other costs grow more slowly.

That s what happened in 2007, too much leverage, too much debt... and everything collapsed. There is absolutely no way that worldwide equity valuations will outgrow the world s GDP over a long period, it just doesn't work. Do you think we can multiply the size of the economy by 100 ? I don't. Interesting calculation: how many years does it take to multiply the size of the economy by 100 at 6.5% ? Only 73.

>too much leverage, too much debt

Huh? Where did I talk about "too much". Don't let your propaganda get in the way of math or facts.

everything you do is about....

too much.

too much posts

too much repetition.

too much names.

just too much.

too much C0C0

The growth of public companies can definitely exceed the growth of the economy. But we are on the upper side of the Market/GDP valuations...not quite at 2000 levels where it was at 150% but we are at 113% which is higher than it was prior to the last crash.

http://www.gurufocus.com/stock-market-valuations.php

The fundamentals involving stocks, bonds, and real estate are all so stretched right now that it is difficult to make any wise long-term decision unless the thesis is "no taper". I don't think it will last forever. At least with renting, you can invest downpayment in REITS and rebalance as necessary.

As a landlord, I am thrilled people like to rent. The tenant is paying off my mortgages and in the end I own these apartments free and clear. This works even better when your down payment is very small.