what will trigger declines?

Many talk about delay in foreclosure in NYC. It is true but for COOP, the process can take about 2-6 weeks. I am not sure about the ratio between COOPs and Condos (house etc), maybe someone can enlighten me with some numbers.

To be clear, I'm not trying to be argumentative. Believe it or not, my sense of childish wonder in these matters is sincere. It pisses me off that prices are so ridiculous, but I wonder how/when/if we get from here to sanity.

jimstreeteasy
Your not alone brother.
Real Estate has more speed bumps than stocks. It's both good and bad.

Other points of concern are raised property taxes,the top bracket mortgage interest deduction issue, and the expiration of other tax cuts. As new york city's cost of living surpasses every other city, these issues will affect NYC the MOST. Our 250K a year is everywhere else's 150K a year. Families that live on 300K a year in NYC are not on easy street.

Foreclosures are in the pipeleine, they do take a long time, bu they will come. Expect to see JP Morgan Chase on the earlier lists.They will be the most aggresive and quickest to "get their books right."

Any proclaimed sense of urgency to buy in the next two years will be a red herring. Patience, which I admit I run out of, is the mantra to repeat.

Jim - I liked your post; very insightful. I was wondering the same thing a few days ago - whether there is hard data on COOP foreclosures. My guess is that its far far lower than condos, especially in Manhattan (I know I could get flamed for this, but even with the recession we can't forget that there is a lot of money in Manhattan!)

Trigger? Dude the NYC re got hit with 500 rounds of hollow point ak47... Now the bears are just clubbing long housers to save $ on ammo. But a more thoughtful analysis to follow. Gotta run.

technologic, you are right. coops are more stable, generally. that's not to say that a coop purchaser didn't go out the next year and buy a boat and a place in the hamptons he/she couldn't afford at the end of the day.

but it was easy financing for condos that set this market on fire.

Is there any indication how payments of monthly maintenance costs are doing in the coop market? What percentage of coop owners are delinquent in these payments? How difficult is it for boards to "evict" delinquents? I have been looking for a coop in PS for over a year (one bedroom/elevator) and prices on quality units are still considerably higher than pre bubble levels. Not much softening noted.

jim - Great post. When one looks at hard facts (rent-buy ratio, macroeconomics, artificially low interest rates), it is clear that prices SHOULD drift lower over the next few years, as the bubble doesn't seem to have fully deflated. It's a slow leak.

On the other hand, as you point out, there are irrational or unpredictable factors that suggest that prices could simply stay flat.

The only thing that can be pretty much ruled out is quick and significant increase - "buy now before you miss the bottom!!!" is a ridiculous mentality at this point. Patience and prudence seem to be the way to go.

I decided to subscribe to RealtyTrac a few weeks ago (it's ridiculously expensive) so that I'd have access to information about properties in pre-foreclosure, in the auction pipeline, and REOs. The numbers are staggering, and include parts of Manhattan one might have thought (especially from posters on this board) were immune. I'm looking in Harlem and found 5 properties in pre-foreclosure in one block. They may not all become REOs, but some of them certainly will, based on what owners owe to the banks, not to mention the city for delinquent taxes. To be sure, the timeline for distressed properties has now been extended by the new state legislation; it's becoming clearer to me, though, that this is a NYS variation on "pretend and extend" absent some radical improvement in the economy. Patience and prudence are the way to go. This is NOT a cyclical, but a secular change in the New York economy, and thus in the real estate market. A year from now we will be wondering what led us into magically thinking that "Happy Days Are Here Again" in the NYC RE market against the backdrop of such dismal economic fundamentals

"To be clear, I'm not trying to be argumentative. Believe it or not, my sense of childish wonder in these matters is sincere. It pisses me off that prices are so ridiculous, but I wonder how/when/if we get from here to sanity."

It really tells you a lot about this board - from a bear orthodoxy perspective, I mean - that someone who makes a thoughtful post that starts out with a flat statement calling NYC RE prices absurd and then proposes genuine and valid questions to spark discussion feels the need to make another post to reassure the audience of his bear street cred and make sure that he doesn't get attacked as a closet bull for making the empirical observation (NB: not a forecast, mind you) that prices have yet to fall as much as they might and that there is are debatable points about how/when/if (heresy alert!! musn't even think "if", let alone say it) they might fall further.

And to echo pjc, jim - Great post.

thanks sls...really, i am interested to hear what the bears (and bulls) say on this...

ar -- you nibbled on the edges,but your thoughts appreciated.( unless you might argue you've responded to this before, but here i've laid out my issues in one place)
rhino ..?

cherrywood, i would be interested to know precise #s on the parts that you say one might think are immune. With all due respect, finding 5 foreclosures on one block in Harlem doesnt say much about, e.g., the UES, Gramercy, et al. I'm not saying that is not the case, but rather than I'd be interested in hearing about what you saw.

Realtytrac lists over 1200 residential properties in default all over Manhattan, including the UWS and UES, Tribeca, West Village, and prime midtown (5th Avenue and 57th Street). Again, not saying they will all go into foreclosure, but these numbers give the lie to the notion that NYC foreclosures will be confined to Queens, the Bronx, East New York and "marginal" areas such as Harlem, or that Manhattan buyers in "prime areas" didn't buy with risky mortgages or overleverage on HELOCS and the like.

there are 25 million people within a 50 mile radius of new york and manhattan is the only great american city.. millions of people who don't live in nyc still want to own there.. the prices might come in a little more; but all you uber bears who are waiting for a collapse and can step in and buy your dream apartment at give away prices good luck.... you will be waiting a long time.

Thanks, Cherry. I wonder what the coop/condo/townhome breakdown is....

jim, i think your post is very thoughtful, and brings up many valid points. but i don't think you can narrow it down to one cause/effect type issue, or even two or three, for the rough ride down. it's a complex market, a veritable witches brew of potential nastiness, with forces currently propping up the market (which i don't believe can continue) and forces which would point to a decline (which i think are growing stronger).

i wasn't being sarcastic recently when i said i was, in some ways, surprised that prices had fallen here as much as they had. artificial pricing support mechanisms are one of the major reasons our prices got to mid-2008 levels. for much of our market, they're still extant. the best case scenario i can see is a slow slog downward over the next few years. some ups, mostly downs. if we were to find some massive generator of innovation, wealth and employment, i'd reconsider. but as i think that any development of such innovative ideas will be done overseas, i'm even skeptical under such a scenario.

if litigation starts at the new developments to any great degree, you may see some more interesting momentum. and it likely wouldn't be pretty.

to be honest, i'm rather more reticent in my cheerleading of the downward spiral than, say, w67th. while it is likely necessary, to me it is frightening. and implies huge dislocations, continued unemployment potential, social issues, etc. for me the lowered prices are not worth it. but just as we didn't have a say in the prices increasing, we don't have one in the decline.

Jimmy... I want you to walk in front of the Rushmore, put a little blanket down, get in the lotus position and look up to the sky. Just sit there a moment. Now I want you to channel the heavy burden of all the individual unit "owner's" debtload. Feel the heft of their mortgages and then pile it on with the developer's debt. Now I want you to imagine a GIANT helium balloon lifting this enormous debt load, let's label this balloon "5% leveraged equity, $500K cap gain tax free, can't lose in RE, 1000% can't lose in NYC RE, ego, 2nd, 3rd, 4th "Home", heloc, broker/investor/flipper, Foreign Buyers in this order (irish Carpenter, chinese, Korean, Japanese, Israeli, German), buy for my NYU student daughter, Miami RE investor, IBanker whose Bonuses were never in doubt and never stopped increasing for a Decade).....

Now I want you to look across the street. Thatz me in camo, this is the gun that I have.
http://www.youtube.com/watch?v=TWJp14tkBlU&feature=related

That balloon doesn't stand a chance.....

cherrywood - those 5 places in pre-forclusure on one block in Harlem, are they overleveraged townhouse shells? If so, I don't think that says much about the market in Harlem as a whole, since those could be considered strategic defaults. There definitely are many sidestreets in Harlem with many TH in poor condition and likely foreclusure. Seen it with my own eyes.

67 -- there is ammo (some logic) out there...and you listed a lot of factors driving the bubble to inflate and float....but...come on...what is going to make this really pop as you so vehemently predict? Why hasn't it happened yet? ...if it's that big of a bubble, then how can simply having low interest rates have rescued the market ? (low rates haven't done much for the real basket case markets around the country such as Miami....). what's the catalyst going to be?....in other words, if you're this sure, surely you have some scenario in mind, and obviously it hasn't happened yet....

The answer is an exogenous shock. E.g., the bursting of the economic bubble in China, which would crush commodity prices, drive down stock prices and derail confidence across the board.

Good post.

jim, you're looking for a pop. it may or may not happen. there are a number of potentials. but that doesn't mean prices won't decline. prices began declining in other markets long before the financial meltdown.

25%ish down isn't exactly chopped liver. in a small amount of time when the banking and gov't policies were strongly supporting prices. perspective.

very good post if you invest based on an exogenous shock e.g; a dirt bomb or whatever you will never buy anything..( stocks or real estate ) just keep your money in short term treasury bills.

I agree NYC is vulnerable to a shock -- and I think it got rescued from the full brunt of the previous 2008/20009 crisis when the world didn't end and the stock market started rising. But , as I wrote, we can't be sure when a shock will ocurr, what magnitude it will be, and what the nyc conditions will be when it ocurrs. NYC has muddled through a lot of crises.

If the bears are arguing --" nyc re will crash because there will be some macro shock "-- then fine, but a)no one can be sure about the ocurrence, extent or depth of such a shock, and it becomes sort of like a peter schiff type argument that may or may not eventually play out and b) that is is very different from saying nyc re will go down further because of inherent problems in the market (as ocurred for example in the gross overbuilding in miami, which was crashing before the 2008/2009 crisis).

Thanks for the advice Julia. You should have told more people that prior to September 08.

BTW, I was referring to Jim's post, not my own. I thought that would be clear enough but ...

Good post Jim.

AR,personally i would guess slow downward drift. My reference to pop or gap down is in reference to 67 and some others that predict basically what seems to be more than a drift down...500psf is bandied about.

hey malthus... never invest because there can always be an exogenous shock...

I think too many are underscoring the tax factor.
So many declare their earnings properly because it's not worth the trouble they can get into. This also coincided with all the booms for the last 10/15 years. Paying high taxes will force the underground cash economy to return. All of a sudden all those merchants "won't be making as much income" winky winky as they used to. This in turn filters down to what banks will lend someone based on their income which will now be so much lower.

I'm not speaking for other bears. What I am saying is that best case scenario is what you just outlined -- slow downward drift for a few years even if only as adjusted for inflation. Worst case scenario is something big happening. I can't foresee anything big happening that would lift RE prices. I can foresee a lot that would drive them down -- the simplest might just be an adverse reaction to the stimulus funds running out.

Ok Julia. Go buy yourself a place because there are 25 M people scratching to buy with you. If I wait, might I be ... priced out forever?

malthus, i agree. i honestly think it will be a series of shocks, some with greater impact than others.

jim, i don't think you're reading w67th correctly. he's saying longer-term, i believe (sit back with the popcorn and all that). and i do think we get back to 1998ish pricing eventually. but it doesn't necessarily take a disaster. all it takes is wage deflation. or taxes. or continued unemployment. or fear. or a few buildings going bankrupt. or mortgage rates increasing. or the gov't discontinuing buying mortgages. or FHA going bust. or rents declining further. or a combination thereof.

malthus.... i don't know if you will be priced out or not and i personally believe prices for quality properties will probably be flat for many years. however unless there is another debacle prices will not collapse because of the demand below the market..

Ok. So show me where I advocated waiting for a shock to buy.

Jimmy. The POP, is the shift in psyche from "Home" is greatest investment since slice sour dough bread to "ooops." It won't be ONE ENORMOUS drop to $500psf, it'll be the little mini pops that are occurring in every household in NYC. Ppl are filing their taxes, re-doing their budget and looking at the fact they want to move away from allocating 100% of their disposable/pre-tax cash/income to NYC RE to something else. It's easy to look the other way and stay the course when EVERY single media and borker/friend is telling you you made $300K on a leveraged basis for doing nothing MORE than cutting a mortgage chk every month... funny to me as a prior auditor, it looks like Kiting when you take a HELOC and some credit cards and move money around in a circle.. and it's easy to do when interest rates keeps drifting lower.. in fact it LOOKS genius! Well my little unicorn tells me 0% is BOTTOM. Now come the rewind of the "virtuous" cycle... it ain't pretty but it doesn't happen over-nite.

8K units sold/bought in manhattan/year... 80K total units in 2000 to 2010, something like 20-30% of NYC RE stock changed hands....it'll happen quicker on the way down but it ain't happening in 2 years IMHO. Look for this summer for mini-capitulation, paradoxically look for economy to improve... making bond mkt nervous of hike in IR, look for NYC RE to freeze... and forced sales to be the only players... but they'll set the price point from which "real" sellers will undercut to get out of dodge.

Enjoy the snow... if you work for $ and cat food means anything to you, be very very weary of NYC RE. There will be a time when I will go "can"t" tell if this is a false bottom... but trust me... there is not even a pretense the last 2 months is a bottom to me.

malthus when you buy after a shock (which might eventually happen) another shock( an exogenous event) might happen again; shouldn't you wait for that one too?

julia, good point. potential for shock is too high right now. just rent.

thx u ar.

"quality properties" like this:
http://streeteasy.com/nyc/sales/nyc/price:5000000-10000000?page=8&sort_by=price_desc

the 670 properties listed btwn $10MM and $5MM in nyc as of today.. yeah they are like selling like pancakes with maple syrup and crack on it.... boy if i don't buy some bf the snowstorm...it'll be ALL GONE. QUALITY/LOCATION IT ALWAYS SELLZ IN NYCRE... ALWAYS TRUST ME....

jim, great post. It's refreshing to have some balanced debate on here (w67th's military get-up imagery notwithstanding - PS: why would you need to wear camo in that situation and with that kind of gun?). Reading all this, I'm still not convinced anyone has the answers, so I'm guessing you won't get what you're really looking for either. I do have to agree with ar though - 25% down is not peanuts by any means, and it has done a lot for affordability around these parts. After years of struggling with/scoffing at the price of real estate, it's easy to be tempted to think you've "earned" a beautiful apartment at a bargain-basement type price, but barring a catastrophe, no one is going to hand you the keys and deed just for the hell of it. It's a lot of work to find a great apartment at a great price - I think some people have a hell of a time accepting that, especially now.

w67th, mini-capitulation is an oxymoron. I swear, I'm only making small cuts - I'm not taking the whole head off!

Yeah, bjw, it isn't clear, is it.

Another theme/question in my head has to do with how many underwater people really believe/realize they are underwater, and how will they react when it happens. Overtime more units sell at new price levels (down 25% from peak) in more buildings which are similar to more unit owners (who haven't sold) and it becomes more clear that gee the unit two floors above just sold for less than my mortgage, etc. Over time it will also becomes more clear that this isn't a temporary downturn that will reverse itself (if indeed, there is no uptick). Then the loss seems real, and even if you haven't lost your job I think it may have some ripple impact on market psychology on friends of friends, etc. I guess this has already happened to many owners but anecdotally I know people who don't really think in concrete terms that they have "lost" 1/4 of their purchase price because a close comparable hasn't sold. ....maybe I'm wrong on this...but I think as this sinks in it could have a dampening effect on the market....but maybe everybody already knows this..

maybe the exogenous event is massive inflation 2-3 years down the line

masive inflation will trigger price INCREASES.

jim, that's why real estate prices are so sticky. when there's plenty of demand distress doesn't show up, it's masked by people who will pay more than the seller paid. and people are very slow to accept loss, so they don't act until they are forced to.

with the new development resales that won't be nearly as likely to be true. where there are comps and someone bought in 2008 and now needs to sell, same goes. we had a certain number of people who've been saving, and were previously priced out of the market. some of them went in at this lower price point. but even with this pent-up demand and the artificial support of prices we had a significant decline in prices in a relatively short period of time.

it's not the underwater mortgages that will reset the market (until more are in foreclosure). it's the un or underemployed person or retiree who bought their place years ago who can undercut the market to get a quick sale. or the estate that doesn't want to pay $2500 a month in maintenance.

bjw. jumbo shrimp anyone? mini as in not covered by the media... but maybe I should have said... indi-capitulation (individual)....

Jimmy... it's the way "mortgages" are structured. There is no margin calls built into mortgages. the contract clearly states.. you've bought it, we financed it.... DOES NOT MATTER where the asset trades... you pay us our monthly you get to live in it. *

* Whether it's better to rent or if it even makes sense to lock yourself into a depreciating asset, makes NO f'n difference to us.. .WE ARE NOT YOUR MAMA. You want boobs and a shoulder to cry on, go ask Geitner/Greenspan. Signed your mortgage banker.

Inflation would mean higher nominal interest rates (and perhaps real rates also) which might be very damaging to prices..but that has been debated here a lot....

my point : of course a shock of various kinds could hurt nyc but absent a shock miami, vegas, etc started crashing..and one wonders if nyc conditions are such that it will go down further even if we don't get the no-brainer shock impact

No new trigger necessary, at least if you are wondering how to think about the downpayment you are contemplating making.

If you are putting a large chunk of your net worth at risk by buying an apartment, what you want to know is what the price is likely to be like at some indeterminate time in the not too near future. So ignore momentum: it is equally likely to drive prices below rational as above. What you want to know is the rational value that actual values will fluctuate around.

And that's pretty simple: no higher than the cost for investors to create a new alternative to your unit. Because if investors can make a profit doing that, they will. Slowly perhaps, so momentum may take its toll. But over time, if owner-occupied prices stay above the marginal cost of production, Adam Smith will take over.

The easiest way to make new owner-occupied units in NY today is to sell vacant or renter-occupied units. If investor can make more money selling than holding to rent, sooner or later, some will figure out how to do so. (Condo investors can just call a broker). So, it is highly unlikely that prices for homeowners can remain at 25x rental value when rentals can be bought at 7x. It is just too easy to buy at 7x and sell at 25x, making a fortune for doing nothing but changing the label on the financing.

Either rents go up, or prices go down. That's essentially guaranteed.

It could take a while: many investors are committed to the notion that God or Alan Greenspan has given them a guarantee of profit and are likely to "extend and pretend" instead of just moving on. And a great many retail buyers have accepted irrationalizations for overpaying -- even some of the "bears" on this site prophecy equilibrium prices that would make any buy-and-hold investor gag (and, eventually, sell, thus bringing prices down lower). But over time, more and more investors will get tired of making less money as landlords than they could by selling to irrational homeowners, and each one who sells will put a little more downward pressure on prices. People are slow learners, but even capitalists probably will eventually figure out that 3% gross returns (and a negative net) is not the best available investment. There are more fun ways to lose money.

So the only trigger needed is for more investors to accept that (1) rents aren't tripling anytime soon, and (2) the bubble is over. That prices remain above construction/renovation costs, so that construction has not ended forever, is just icing on the cake. $500psf doesn't need any shock at all; absent huge inflation or an enforceable ban on construction/conversion/evicting market rate tenants, it's as certain as anything is in economics. Of course, it'll go slower or faster depending on how fast the news gets out and what people perceive their alternatives to be.

(If the City shrinks, this analysis doesn't apply. Then, prices drop until investors remove supply (i.e., prices go to zero) or rents/prices drop to the point where the city-haters start to see a good deal and move back in. See 1974, when prices went negative on the UWS: the City had a program to pay people who'd agree to own and repair brownstones.)

I was a bear in 2007 and 2008, but have landed squarely in the middle of the road.

After tax breaks -- and factoring in the potential limits Obama has talked about -- the rent to own ratio for us is even or slightly in favor of owning on many of the places we've seen recently, using the comprehensive NYT calculator. (In '07 and '08, it wasn't even close.) We can get a nicer apartment than we could as renters, and we can customize it a lot more.

We want to move because our rental is too small, and we don't want to put ourselves through the anguish of having to move twice in a short period of time. The idea that prices, which are already down 25-30% from what we saw at peak, *may* be lower in 2-3 years isn't enough to deter us from buying so we can go pay (net) a couple hundred dollars more to live in a nicer rental for a few years.

We may well be wrong. We're almost definitely not at the bottom. I understand all of the bear arguments and have no desire to convince bears otherwise. Bottom line, I think the own-to-rent ratio is comparable (for us in our specific situation) and I'm not willing to put my entire life on hold and go through a bunch of hassle to try to spot the exact bottom. Instead, we're being very, very conservative with our estimates of what we can afford (lower debt-to-income and loan-to-value than required, plus more post-closing liquidity than required) and proceeding with the *idea* of buying. We're not tied to it at any means; we have to find a place we love where the financials also work. From what we've seen, we think it's feasible.

I have no desire to "preach" to anyone, only to explain why someone who has been a bear for most of the past three years may buy now.

Financeguy - You've put the argument very well. But how does it explain the rent/buy being out of whack for several years, in a worsening trend for several years (and doesn't that temper your certainty that things will indeed get rational). Regardless, of external impacts (easier financing) shouldn't the basic economics you focus on have made the trend not go for so long, to such an extent?

> masive inflation will trigger price INCREASES.

Not when it meets increased mortgage rates...

By the way, 25% isn't peanuts, agreed, but it seems less impressive when I look at it relative to how absurd many prices became. My personal barometer, the crap condo I lived in in 2000 in chelsea, is still probably 1000psf(down from 1200psf at peak)...oh well...

Good thread, Jim! I'd also echo the psycho-emotional part about home buying that defies rationality but is absolutely affecting a lot of people. A lot of people put premium on ownership for emotional sake. It seems more stable and you feel rooted. Not to mention all the extras like the ability to renovate, etc.

Also, owning in Manhattan has some sort of brand equity. If you wanted to treat housing purely as industrial commodity, it doesn't make that much difference living on 5th avenue vs Lexington. One could also argue there is higher utility in Lexington than 5th avenue. I think of housing more of as a consumer product than industrial commodity for utilitarian function.

Diamonds are not that rare and there are far more rare commodities but diamonds cost more than some of the rarer stones. If people demand something, even if it defies logic, that perception alone can create demand and justify value.

I think people who were born and raised in NYC don't care as much but the transplants (and there are a lot of them here) put a lot of premium on living in Manhattan vs. outer boros. A lot of rich people around the world feel like they should have a residence in Manhattan - it's a thing to do. As long as the city doesn't go back to the 70's when crime was high and services were poor, I think there will be always a higher housing price here than can be justified in terms of monetary value.

But having said all that, I think there is room for the market to go down further.

jim, they're in their fourth year or so of declines in CA and FL. real estate cycles are quite long, and sticky in either direction. lots and lots of popcorn.

ar..If we want to look at other areas of the country for a comparable of bubble bursting declines what is a good comp?.

I would think it would be those that were run-ups in established areas (I think that applies to some major metropolitan areas in cal., but i dont follow that at all), rather than massive mega buildup like brickell avenue/downtown miami or the tract developments you see on tv news stories. I mean, "florida" in many parts is not comparable...e.g., absurd levels of new development in suburban orlando.

patience is a virtue. After the '87 crash it took about 3 years before RE really hit the skids. My own view is that humpty dumpty (financial system) is broken and all the king's men can't put him back togther again. Their patch work will prove unequal to the task.

But what do I or anybody else on SE really know about the future. It's a guess and yours is as good as anybody else's. Jim, it's your life and your money, go with your gut.

Financeguy wrote: The easiest way to make new owner-occupied units in NY today is to sell vacant or renter-occupied units. If investor can make more money selling than holding to rent, sooner or later, some will figure out how to do so.

Ironically, when developments are troubled the risk usually mentioned is that the developer will give up on sales and go rental -- isn't that contrary to what you would expect given your view? . That has happened in some trouble buildings (63 roebling in wmburg, 20 bayard in wmburg, for example).

1998-ish pricing? Do people really think we'll see pricing like this again? (Even on an inflation-adjusted basis, which would add about 30% if you believe the gov't stats.)

http://www.nytimes.com/1998/09/24/garden/residential-sales.html
http://www.nytimes.com/1998/10/29/garden/residential-sales.html

This is not to pick on aboutready for her comment above. I'm really just curious.

Well, Miette...this debate would be more appropriate if we were going back to say 2002..or so...or 2001...

Jim: If you mean that 2001/2002 prices seem more plausible, then I agree (particularly if inflation-adjusted); that's what I consider my worst "bear case." To say one expects 1998 price levels to return is pretty draconian even for most bears. Or do you mean it would be more appropriate if we were already at 2001/2002 prices?

I mean discussing pricing levels of other years to have much meaning should probably be within a horizon of say two years or three years max from where we are now. I wish we were discussing 1998 levels because we were already at 2001....

To be fair, I don't think those saying 500psf or 1998 or whatever mean to be precise, rather they are signaling a view that expect things to get much much worse than what we have so far seen.

I'm know people aren't trying to be perfectly precise (though, to be fair, I'm sure some would say they mean exactly what they say!). I just think it's interesting to look at examples of what 1998 pricing would actually mean.

miette, my crystal ball is no less murky than any other's. but 1998, 1999 inflation adjusted seems about right to me. other factors may intercede as prices decline to prevent that point, but i don't see them happening. it will be interesting to watch. and i can't predict demographics, but i don't think they're on the side of our real estate market longer term. others would disagree.

there are two real bump up points we haven't yet breached. latter 2003-early 05 (although some properties are hitting late 2004 nominal pricing, which still puts them generally well above early 2003 pricing). and, going back further, 1998-2000.

Jim, I am perplexed by this market as well. Several times in the past week I have been through LIC on the #7, stunned at yet more new buildings just beginning work, while the recently completed towers are not yet fully occupied. Logic would seem to say disaster should be upon the developers, but ..... hasn't happened yet. Comparing this to the RE bust of about '89 or '90 and following, the biggest difference is interest rates. Maybe the worst is yet to come and we just don't see it yet, but I seem to recall everything unraveling much more quickly 20 years ago. The discussion of the RE market on this forum usually turns into arguments about what should happen and what will happen and it's not as interesting as letting what will be simply unfold.

lowery, the money kept flowing long after the spigot should have been turned off. there are still a number of large projects being finished. it will indeed be interesting to watch.

twenty years ago interest rates were much higher, no? they knew how to let developments fail.

Where's the kaboom? There was supposed to be an earth-shattering kaboom! -Marvin Martian http://www.youtube.com/watch?v=WoKvR2Y1t8Q

Sorry to dissapoin. but it aint gonna happen.

cogent analysis, rs. of course, you did buy new development. hope springs eternal and all that.

LOL No Risk when you live off Gov't R.S. hand-out.

that was an unexpected gift that just keeps on giving. i guess you think it would be prudent to move?

keep on enjoying the view. i'll enjoy the trees. for less than a third of the cost. happy home ownership.

http://www.youtube.com/watch?v=eyLrsu9YWo4

i haven't pulled up one of your youtubes in ages. since you linked to that stupid muppet thing. i doubt they've improved. but i find it interesting that you don't speak for yourself. you need to link so frequently to make your point. for everything.

An article on curbed has a graph showing the last 10 years. If you bought in 2000 you have doubled the price appreciation over the last 10 years. Enjoy the article and the graph.

http://curbed.com/archives/2010/02/04/manhattan_housing_prices_doubled_over_past_decade.php

Regarding rent/buy comparisons... I've been renting a 950sf Jr 4 w/balcony on the UES for 13 years. Full service bldg, well-maintained, 1st ave in the low 80s. Rent started at $2400, now is $3800. In 2023, will my rent have increased another 58%, to $6000? If so, I'm thinking it makes sense to buy a bigger apt (2br/2ba) for $5000 to $5300 per month now - instead of my rent increasing over that time. Maybe W67th and others who advocate renting live in rent-stabilized apts? In fact, my next-door neighbors pay around $1750 for their apt - and have 1.5 baths.

Also, I'm with lad on this: >>We want to move because our rental is too small, and we don't want to put ourselves through the anguish of having to move twice in a short period of time. The idea that prices, which are already down 25-30% from what we saw at peak, *may* be lower in 2-3 years isn't enough to deter us from buying so we can go pay (net) a couple hundred dollars more to live in a nicer rental for a few years.<< And also: >>We can get a nicer apartment than we could as renters, and we can customize it a lot more.<< Have a grade-school age kid now, so feeling the need for more space, more closets, and a 2nd bathroom.

The aversion to not continuing to rent is very understandable..moving is a hassle. Some of the renters who speak about their savings , tree amenities etc are not so much making the intellectual argument so much as being a happy hunchback..When is a hunchback happy? When he/she sees another hunchback of course!

interesting, rs, your need to insult people who rent. i can understand the desire to own, even if i don't currently share it.

i've been in my rental for six years, even prior to it reverting to RS status. many people i know who are renting have done the same or similar. for maximum savings, if you are so inclined, it does help sometimes to be ready to move. but believe it or not, not all of us rent just for savings. mobility is a huge plus.

just look at the ownership record for many of the units on the market. some have been owned for a long time. some for less than a year.

DTUT:

Are you including the cost of your downpayment in your calculation, including the strong probability that prices will return to trend -- roughly 1998 inflation -- and the risk that you will want to move precisely when momentum has pulled them below trend?

And have you included the certainty that maintenance and taxes will increase in that time as well?

Over long periods it is hard to understand how the costs of renting and buying could be radically different in a competitive market: they are two different ways of financing the same product. And the difference between diversified banks/securities markets lending to diversified landlords, as opposed to diversified banks/securities markets lending to undiversified homeowners is not great (or in the homeowners' favor), so the cost of financing should be about the same over time.

But owners carry a greater risk of momentum pricing: they'll do better than renters if they buy at when prices are below average and worse if they buy during a bubble. Given that we are just at the end of the largest bubble in NY records and that prices are still far above trends, the chances are excellent that over the next decade, renters will do far better than buyers.

>> 1998 PLUS inflation

Good reasons to buy:
--You have a strong desire to customize, idiosyncratic tastes, and understand that customization is consumption not investment, even when you aren't overpaying for the right in the first place. Of course, a long term lease would give you this in a rental, too: that's how stores deal with the issue.
--Renters take the risk of stupid landlords not tracking the market in their pricing or maintenance and thus forcing them to move. You need to judge whether that is more or less problematic than the risk of stupid neighbors making bad decisions about building maintenance and policies, failing to allow you to customize as you wish or imposing their renovations on you, or subleting too much or refusing to let you sublet, etc., thus forcing you to move. In NYC, the same companies manage most of the large rentals and the large coops/condos, so I suspect that the difference between renting and owning is smaller than the differences between well and poorly run buildings in each category.
--You have a great deal of trouble managing your finances and so prefer to have a bank forcing you to save each month, AND you have a reasonable expectation of staying in your mortgage for far longer than the national average of 5-7 years, AND you don't mind investing your savings in a single, undiversified, highly risky investment that any fundamentals-based analysis suggests will underperform inflation by a significant margin over the next several decades.
--You think that the government intends to revive the bubble by any means necessary AND that capitalist market forces are so weak and easily manipulated that it will be able to do so. If that happens, prices will go up and, of course, holding a highly leveraged undiversified investment in a risky market that goes up is an excellent way to make money. Unless, of course, you hold too long and the market collapses as such markets usually do.

Good reasons to buy, continued:
--You have large amounts of money, can reduce your risk by not borrowing, have other investments to cover you from the likely losses in this one, your spouse is fixated on "owning", AND the alternative is long-term therapy or a divorce that would cost even more and might not provide the same degree of happiness as simply paying to fulfill spouse's delusion.
--(Variant on the first reason): You have idiosyncratic tastes, understand that they are going to cost you a lot of money, have found the apartment of your dreams, and have recognized that if the market returns to rationality or, as usually happens, overshoots on the way down, you could find yourself wanting to sell at a time when prices are half or less of current levels.

Maybe the question is, if owning is more expensive than renting...until renting becomes more expensive or owning becomes cheaper, why is first-time buying even a consideration?

It just seems strangely that the mindset of many on this board is "unless you prove to me that prices are going to fall more, or that the stock market is a safe investment, well then I am going to buy an apartment". That's a bad line of thinking that has been 15+ years in the making.

PS: Stop adjusting for inflation. Rent inflation is all that matters....and there has been none.

DTUT, the is not meant to be insulting, but you don't seem to be savvy financially. First, the time to buy was 13 years ago when buying was favorable. Maybe life circumstances kept you from it, maybe you were pouring your money into stocks so you didn't have a down payment, I don't know. But that ship has sailed, you know it has sailed, and you should realize it's probably coming back. Second, you are paying WAY too much for your rental. Even a cursory look at the rental market reveals that the going rate for what you've got is $3000 tops. Historical rent charts (and word-of-mouth) demonstrate that rents are currently at 2000 levels despite inflation.

A very well-know game played by all rental buildings is to increase prices on existing tenants because they have an aversion to moving. The smart ones will make it subtle: a couple percent extra here, if the market is flat raise it 3%, if the market is down 20%, drop it by 10%. Sure at some point you can say, "well, I know it's more than market, but the difference is so small it's not worth the move". Except you should at some point realize this story is going to continue year after year, so you'll need to be proactive sometime before 13 years pass and you find yourself paying 25% above market.

Maybe you can make an argument that "yeah I overpay for rental, but it is what it is, and that makes buying better". Maybe, but why would you believe you're not going to do poorly in your buy decision either? In any case, your insensitivity to overpaying rents does not make it a good reason to buy: the "value" of your purchase to the rest of the market is determined by market rents, not your overpriced rent.

Well thats the same old shit isn't...Look how happy the people who bought in the 1990s at <10x rent...therefore now go buy at >18x rent. I am sure these same conversations were had in 2000 based on all the teachers with $1mm+ 401ks. Now its everyones parent who bought in the 1980s and 1970s who are rich off their homes.... Never mind that they bought homes when a down payment was required and interest rates were high.

"Stop adjusting for inflation." Rhino, the rent charts that I know of (e.g., the Miller Samuel one) that show that Manhattan rents have stayed pretty flat over the last ten years ARE inflation-adjusted. I could be wrong (haven't done a lot of research into this area) but I think that rents have risen on a nominal basis.

I regret getting my dad to sell his metals mutual fund in '97, close to the commodities bottom. Oops. I officially suck at market timing. However, one would be a fool to buy now. I don't see it unless 1) you find THE property which is rare to market 2) you can afford to lose down+more 3)10yr+ horizon.

Watching a re-run of my big fat Greek CDS and Economists mis-reading keynes to think you can increase gov't spending without regard to deficit size..Long Term there's a very strong argument that people will lose faith in currency as store of value and instead go into gold and other commodities.

In the long term we are all dead.

You asked for it.

shorter term... :)

Miette -- you are wrong. Rents are currently flat nominally compared to 2000, 30% down on an inflation-adjusted basis, according to the Miller Samuel charts. Being more fair and looking at the 2000 peak to the 2006-2007 peak, things went down over 10% on an inflation-adjusted basis.

Rhino86, I don't know what you're talking about with 18x rents in the 90s. Let's take DTUT as an example -- paid $2400 for 950 sq ft in 1997. Works out to $30 per sq ft annually. Let's assume that a Yorkville apt is "average" across Manhattan and use Miller Samuel's average price per square foot from 1997, $328. You get to 10.8x rents.

Are you saying that enev people who overpaid in the 90s by 66% made out OK? Did anyone really overpay by that much compared to the market?

Miette: http://millersamuel.com/charts/index.php?Node=1249521661csHCz

Wow nyc10023, that's quite a track record! Ever see the Seinfeld episode where George does the opposite of every instinct he ever had and his life turned wonderful?

Miette, on second thought, my proclamation of "you are wrong" is too strong. On a cyclically- and inflation-adjusted basis, perhaps a 1% annualized drop can reasonably be considered "flat", and on a cyclically-adjusted basis, nominal rents have gone up by a percent or two annually. However, the facts are in deep disagreement with the notions that most people have in their heads of runaway rent increases in NYC over the past decade. We haven't even kept up with the rest of the country, even at the peak from 2-3 years ago.

inonanda -- agreed. Rents have ticked up what looks like about $10 psf on a nominal basis over the past decade but have declined about the same amount on an inflation-adjusted basis.

Inonada: yep, I suck at market timing. Sold munis last fall (ouch!) Yes, I am so George-like, it's scary. I'm a female Larry David. RE-wise, I haven't done that well but haven't done as badly as equities. I did better when I was in tech, and buying tech stocks. Also bought USD in the big panic last year and saw it strengthen - but didn't sell USD then.

And from the nominal rates you can see what would create the perception that rents have gone up significantly: On a 1000 square foot apartment, a $10 psf rise in annual rent would mean an extra $10,000 per year, or about $830 per month.

Though, inon: I'm watching the stock market weaken and USD strengthen, so I'm waiting to see various commodity-linked currencies to reach my "buy" points. Last time, FXC came close but didn't get to 75cents (my buy-in for loonies). We'll see this time.

Still in munis, but not buying the big funds, buying specific issues with shorter timeline and heavy on TIPS as well, waiting for the interest rate to RISE.

"However, the facts are in deep disagreement with the notions that most people have in their heads of runaway rent increases in NYC over the past decade. We haven't even kept up with the rest of the country, even at the peak from 2-3 years ago. "

Exactly.

I wonder how much of this has to do with folks just missing that their standards change. We remember $2k rents, but forget that was for crappy studios back then. 10 years later, we have higher standards, and spend more. And $4k sounds so high.

But, when I think back to then, I remember that 40 year olds I knew were paying $4k for their 2 bedrooms in the 90s, too.

"But, when I think back to then, I remember that 40 year olds I knew were paying $4k for their 2 bedrooms in the 90s, too."

And to think it's probably no more than $5K now.

Yeah, nyc10023, fixed income is too scary for me as a whole. Too little yield, too much downside risk. Even with your TIPS, you face some risks: right now you get paid CPI plus ~1%, right? The way you "win" is if CPI goes up, but this is somewhat of a Pyrrhic victory since after all you've only beaten inflation by 1%. On the other hand, inflation expectations could remain muted while the cost of money rises. I.e., imagine the world decides that in order to hold govt bonds, they want to be paid CPI + ~2% (this latter number has historically been much higher than 1%). In that event, you are left with something that pays CPI + 1% when the market is demanding CPI + 2%. On a 10-year bond, that translates to a 10% drop.

Not saying any of this will happen, just saying that rising interest rates do not necessarily go hand-in-hand with appreciation in TIPS.

Inonada: everything seems risky to me right now, even cash, aka USD. Yes, on a leveraged basis, you drop 10% on RE, it's more, because you've borrowed it. On the other hand, your costs (should be) fixed to live in your primary residence - it's not all that bad, even if rents are 50% less, at least you're getting something for it. You could save that 50% but like I said, where to invest?

In the late 90s, a 2bedroom line in our bldg was 4500+. I pulled the trigger to buy at 480k, same location, same-ish condition. I think that's the rent-buy ratio people are hoping for. In the great crash of the early to mid-90s, the same apt was probably renting for 3k, to buy, 250k.