Owning costs 30% less. Renter = sucker.

Rufus?

rufus,

"It was rented to a short-term sucker for $1400" ... cost to rebuild after party: $65,000

math, math, math = much cheaper to rent than to own

Chicago? Didn't that fall into the lake?

That math seems pretty straightforward that you'd rather own than rent, and demonstrates the ridiculousness of the contortions people in NYC are going through to try to convince themselves it works out here.

dealboy=dumbboy

Manhattan 1BR on Fifth Avenue in midtown.
Just signed the deal to rent for $3,250.

This apt normally sells for $850,000
It was originally sold to a sucker in 2007 for about $900,000.

Monthly cost to own today:
Taxes = $252
Common Charges = $556
Mortgage = $3861 (assuming 20% down)
Total = $4669/mo

Let's disregard the tax deduction.

For me, renting is 30% less than owning.
AND I don't tie up a 20% down payment of $170,000 into a capital expenditure.
I love Chicago. But who wants to live there in a $105,000 cookie condo in a non desirable area? Ew.
No brainer either way. Your mileage may vary. Good luck.

Let's disregard the tax deduction....what!?

that tax deduction is probably worth at least 1,100 a month positive cashflow so that 4,669-1,100 = 3,569 a diff of $319. HOWEVER...
You are now paying down the balance owed on the loan(principal) every month as well so that is prob another 900 per month that is also INCREASING every month with NO TAX impact. So 3,569-900 = 2,669 per month.
If u invest the(downpymt) 170k in a US 10 yr risk free @ 3% = 425 per month - tax on that = prob 325 per month net after tax

so that's 2,669 monthly cost for owning VS 2,925 monthly cost for renting = 256 monthly higher cost for renting.

Ohh and you OWN it.....

So matsonjones you are not as savvy as you think you are. have a great day!

Oh, spunky!

i would like to add that at todays rates, that mortgage payment is even lower. should be around $3500.

Why would you use risk free return on downpayment money in the rent scenario versus a 5:1 leveraged not at all risk free investment on the buy scenario? That's inane.

so a 3% ten year treasury with no leverage is identical in risk to a five to one leveraged NYC apt??--an apt that just lost 25-30% in value for the last "cheaper to buy" genius??

i won't bother with the rest of your "analysis"

shake them pom-poms stevie!!!

Not this stevie, WB.

stop Wbottom, stop the nonsense. My studios are right near the highest I've ever seen their list prices at. So stop. Again stop with the garbage talk. Since last year studios have rebounded back to near peak levels. You've lost and missed a window of opportunity b/c of your arrogance and ignorance.

jordyn, your primary home is not risky. In 30 years you'll have paid it off and it will be worth a lot more. I'm a property investor. I have risk. Not a primary owner. The vast majority who aren't complete idiots with numbers.

> Since last year studios have rebounded back to near peak levels.

Uh, nope.

Median Manhattan studio, per the Miller Samuel numbers, is down 24.8% from peak. That is the lowest quarter since the drop began.

That is the opposite of a rebound.

Sorry, toots, but you are lying again.

> You've lost and missed a window of opportunity b/c of your arrogance and ignorance

Sounds just like you, SteveF...

"Why would you use risk free return on downpayment money in the rent scenario versus a 5:1 leveraged not at all risk free investment on the buy scenario?"

Bingo.

"That's inane."

Or just someone who really, really, REALLY wants to justify something they did, whether it was smart or not.

"Ohh and you OWN it....."

you know, you also own the food you eat, but then you poop it out and never see it again.

"My studios are right near the highest I've ever seen" ... more likely YOU are the highest you've ever seen. Seek moderation counseling.

steveF is really spunky, who was buying property - and Merrill Lynch stock - right up to the very end.

Then - POOP.

"jordyn, your primary home is not risky. In 30 years you'll have paid it off and it will be worth a lot more. I'm a property investor. I have risk. Not a primary owner. The vast majority who aren't complete idiots with numbers."

This doesn't make any sense. Why is your primary home a less risky investment than an investment property? Because you hold it longer? That makes it less likely you'll lose all your money, but doesn't change the inherent risk of the investment (which matters, for example, if you're forced to sell earlier than you originally intended). It's ridiculous to compare a risk-free investment with something that is both highly leveraged and not at all free of risk as evidenced by all of the people who have been totally wiped out in recent years.

fsteve is just feeling a bit desperate. he and RS should form a support group.

Thanks rufus and spunky. I think I'll just keep renting in Manhattan. For now.

There are significant transactions costs in buying and selling houses (or condos or co-ops), making owning a bad deal if you know you will be moving somewhere else in less than 5 years.

You almost always better off, possibly a LOT better off, owning if you know you are going to live there for the next 30 years. But who can predict where there next job will be, or if their economic circumstances will change (requiring a more expensive or less expensive house) or they will get married or divorced?

Unless the neighborhood goes bad on you. People who owned in Detroit before the city became the horror that is is lost nearly everything they invested in their house.

Some of these statements seem more than bit inane%u2026 rather than make sweeping generalizations, why not just build a financial model , discuss the validity of our assumptions, and go from there? I%u2019m a recent buyer, so maybe I%u2019m biased. But my numbers aren%u2019t:
Here are my (hopefully) conservative assumptions (based on a $850k purchase price, 5% mortgage, 20% down payment, and initial rent of $3,250):
Nominal Stock market growth (to represent opportunity cost of the down payment): 7%
Inflation: 2%
Annual Rent Increase: 2% (inflation)
Annual Co-op Charge Increase: 2% (inflation)
Annual Home Appreciation: 2% (I%u2019m a big believe that- in the long run- home prices will more or less track inflation)
Tax Rate: 35%
Cost to Sell: 10% (of home cost at time sale)
With all of these assumption, most of which are (I think) fairly pro-renting%u2026 break-even on a PV basis (discount rate equal to inflation) is year 7. After this owning becomes much more profitable.
Obviously there is potential massive decrease in home prices. But I think that, even given all of the uncertainty, it%u2019s tough to make the argument that buying is a dumb decision. I guess my point is that on this forum the rent vs buy argument seems to be largely ideological, when it should be based on numbers.

A renter could use the not down payment to invest in some RE ETFs. Argument over.

"Why would you use risk free return on downpayment money in the rent scenario versus a 5:1 leveraged not at all risk free investment on the buy scenario?"

Because that is the correct way to do it. To risk adjust the buy, do a sensitivity analysis on levels of appreciation / depreciation and throw some probabilities against each scenario. Leave the risk free rate on the down payment money alone.

"Or just someone who really, really, REALLY wants to justify something they did, whether it was smart or not."

Which is why renters model a 15% return on their down payment money after losing 40% in their actual portfolios.

How you can tell that somebody has no idea what they're talking about:

"To risk adjust the buy, do a sensitivity analysis on levels of appreciation / depreciation and throw some probabilities against each scenario. Leave the risk free rate on the down payment money alone."

Pretty words, absolutely meaningless when strung together in a sentence.

You know what, if the rent/buy ratio was 100x monthly rent, I'd buy too. Unfortunately for buyers in NYC, the ratio here is almost 200, which makes buying here conspicuous consumption.

Seems like the only way you can economically justify Manhattan purchase prices is "if" you believe that rents will rise far more rapidly than inflation in general - for an extended period of time.

matson disregarded the tax deduction (ridiculous!) and forgot all about the long-term increase in rents (ridiculous!).

Of course when you disregard facts, the numbers will work to whatever you want, no matter how incorrect.

Hey steveF, let's work through this for a 10-year horizon. I want to see what parts, if any, of the following you agree or disagree with.

Using your numbers, an owner with full usage of the tax benefits you've outline has put $170K down to receive a $3250 rent benefit for a monthly after-tax down-the-drain cost of $2669. So, there's a benefit of $580 a month, or $7000 a year.

Now, let's look 10 years ahead. At that point, the rent is probably more like $4000 (around a 25% increase). The taxes and common charges will be around $1600: the unabated taxes are probably around $650 assuming $252 is year 4 of a 10-year abatement, so ($650 + $550) for now, increased by around 25%, gives $1500. This means that by year 10, the benefit will be around $630 a month, or $7500 a year. So, let's just call it a benefit of $7500 for each of all ten years, or $75K overall.

On the other side of the ledger, however, is $85K in transaction costs. And $10K in insurance. And $10K in misc maintenance. So, what you end up with is a $30K loss to hopefully be offset with capital gains.

Now here's the big question. Right now the asset is yielding $7000 a year for a price of $850K. In 10 years it'll be yielding $7500 a year. What do you expect someone to pay for it in 10 years?

Let's assume that interest rates remain where they are today, never mind that the market is predicting they'll be 1-2% higher. Let's assume that buyers are willing to buy at the same valuations as today (I'm not holding my breath, but you can). Even with all this, you'll have a capital gain of $850K * ($7500/$7000 - 1) = $60K. After offsetting with the $30K, you're left with $30K.

So, you have $30K gain on your $170K investment assuming all goes well, interest rates remain at today's lows despite where the market is pricing them, current valuations remain supported, and rents increase at a healthy clip. This amounts to a 1.6% annualized return for a 10-year risky 5x-levered investment. When risk-free is returning 3%.

Now obviously you disagree with this analysis somehow. I'm curious on which points. Where do you think rent & monthlies are going to be in 10 years for this specific unit? How about price? How about interest rates? How about on transaction costs?

LICC moved to Long Island City and thinks it was a good idea.

To paraphrase, "Of course when you disregard facts, the numbers will work to whatever you want, no matter how incorrect."

Wait. That wasn't paraphrasing. It was plagiarism.

HAHAHAHAHA!

Nada -- I'll admit I only read your example very quickly, but are you accounting for the $135k or so in additional equity you would have built over ten years via your mortgage payments?

Memorandum from your Long Island City condo management company:

Beware of the blob, it creeps
And leaps and glides and slides
Across the floor
Right through the door
And all around the wall
A splotch, a blotch
Be careful of the blob

"Why would you use risk free return on downpayment money in the rent scenario versus a 5:1 leveraged not at all risk free investment on the buy scenario?"

"Because that is the correct way to do it."

Only if you are intentionally trying to skew the results.

Taking risks that aren't paid for is lousy investing.

> A renter could use the not down payment to invest in some RE ETFs. Argument over.

Leveraged, of course...

inonada,

You're spot on, but let's not forget what is implicit in your analysis: at a purchase price of $850k, we're looking to annual rent to purchase price of over 20. Lesson learned from this isn't that one shouldn't buy, it's that one shouldn't buy until, a minimum, rents and purchase costs start falling into line

"The Truth About The American Dream"

"The American Dream of owning a home on a 30-year mortgage and building up equity over the years is over. And it isn't coming back."

"A home of your own increasingly means a home of the bank’s. Today some 86 million Americans live in homes that are ‘under water;’ where the amount owed on the mortgage is greater than the value of the house. Since the financial crisis began in 2008, over one million consumer mortgages have gone into foreclosure. Sales of bank-owned properties are now 34.5 percent of the housing market; homes in foreclosure waiting for resale now account for a three years-supply on the sluggish housing market."

http://www.businessinsider.com/the-truth-about-the-american-dream-2011-6

"The American Dream of owning a home on a 30-year mortgage and building up equity over the years is over. And it isn't coming back."

lol that's hysterical. But imagine if the world stopped rotating and it happened. Then man that would send your rents through the roof. lol. what nonsense you bears dredge up.

"Only if you are intentionally trying to skew the results."

no, actually, it is the right way to do it. The risk of your equity when you purchase a home and the return you expect on your downpayment invested elsewhere are two very different concepts. You have never had the capacity to understand this and consistently mix them up. Even stevejhx understands it, maybe he can explain it to you.

"Taking risks that aren't paid for is lousy investing"

Totally agree, which is exactly why you use the risk free rate in this model. Are you catching up?

"Pretty words, absolutely meaningless when strung together in a sentence."

Maybe, but I definitely know what I meant to say.

> Totally agree, which is exactly why you use the risk free rate in this model.

Only if you have no understanding what risk is. Housing, particularly leveraged, is not risk free.

> Maybe, but I definitely know what I meant to say.

He gave you the benefit of the doubt, but good to see you are absolutely sure about being wrong.

> "Taking risks that aren't paid for is lousy investing"

> Totally agree, which is exactly why you use the risk free rate in this model.

Wow, you have that completely backward. You are taking a risk, and then assuming you shouldn't be paid for it. You are making the exact mistake of screwing up what you claim to totally agree with.

1. Renters, Do not forget to add moving cost (emotional pain for some of us) and paying a broker as you have to move every 3-5 years. Otherwise, your landlord will stiff you with larger than market rent increases.
2. Owners, do not forget the insurance and apartment renovative costs (new kitchen/bathroom every 15-20 years).
3. In my view, it all depends on your rate of return assumption on your down payment investments and inflation assumptions. We are cash investors after being burnt several time in the stock market. Hence our return is zero.
4. Also, depends of if you want to live well (high ceilings, higg-end finishes, furnishings to your liking), renting an apartment at a high end building will be very expensive. Check full service top-end Related buildings Caledonia, 2 cooper. All at least $6 per sq ft. A real 1200 sq ft 2 br will cost $7K. Same can be bought for $1.5mm.
5. Also, if inflation picks up, good luck to renters. Apt owners have at least part of their cost locked up and the property prices are likely to go up with inflation.
6. We believe in putting enough down payment 30-35% (in manhattan) so that your mortgage and maintenance is equal to your rent. Principal accumulation is for free after that.
7. Tired of listening to how real estate is going down but that is not true in Manhattan unfortunately.
8. Manhattan is where all the rich poeple, trust fund kids, and wealthy foreigners want to live. We believe it will remain strong as even 2009 could not shakedown prime manhattan by more than 15-20% and that too was only temporary.

Will appreciate point by point feedback from people on the board who typical sounds logical (prob math/finance trained) - nada?

Full disclosure. We rent but potential buyers for the right place.

"Housing, particularly leveraged, is not risk free"

Agreed, but you don't calculate that risk by increasing the rate of return on your downpayment invested elsewhere. That is just plain idiotic, even for you.

Point 9. 5/1 arm is 3.30. If you believe that you can pay off half your mortgage in five years. The cost is very low. Of course the correct rate to use is 30 year fixed for comparing to renting. Making this point as if you have money to pay off the mortgage to a reasonable amount, it is 4-5% after-tax yield investment more than you can say about the stock market in the last 10 years.

First, regarding the risk-free rate: JuiceMan = wrong, as usual. You use the risk-free rate as the benchmark for measuring risk. You DO NOT use the risk-free rate when comparing two assets that are both risky. It makes no sense.

"The risk of your equity when you purchase a home and the return you expect on your downpayment invested elsewhere are two very different concepts. [...] Even stevejhx understands it, maybe he can explain it to you."

Once again, Juicy, you have me befuddled: they are the same thing if you're discussing opportunity cost. That is, you take your down payment and invest it elsewhere, you have an expected rate of return. You take your down payment and invest it in your down payment, and you have an expected rate of return, albeit a leveraged one.

If you have $100 and invest it in stocks, and stocks go down by 10%, you have $90 left.

If you have $100 and invest it in a down payment, leverage that down payment 5:1, and the value of your home goes down 10%, you only have $50 left, so you lose more.

Look at it this way: you buy a $500 house, put down $100 and borrow $400. Your $500 house falls in value by 10%. It's now worth only $450. You still owe $400 on it, so you only have $50 in equity, instead of the $100 you started out with.

Unless you do the calculations using JuiceMath, which I'd be keen to see in writing.

"He gave you the benefit of the doubt, but good to see you are absolutely sure about being wrong."

No, not wrong, but could have been said more eloquently. Wouldn't matter, you still wouldn't understand it

Steve, do I have to find all of your posts that confirm usage of the risk free rate? How about your white paper? Do you have a bad memory?

stevejhx, you do not get a margin call for the apartment leverage as opposed to stocks where you can not leverage without worrying about being liquidated at the bottom by margin call. Also SPX was down 60% from the peak and invidividual stocks disappeared. Stocks are far more risky than real estate in Manhattan looking forward. Worst down for manhattan real estate from the peak 20%.

I think I'll just keep renting in Manhattan. For now.

"...If you have $100 and invest it in stocks, and stocks go down by 10%, you have $90 left.
If you have $100 and invest it in a down payment, leverage that down payment 5:1, and the value of your home goes down 10%, you only have $50 left, so you lose more.

Look at it this way: you buy a $500 house, put down $100 and borrow $400. Your $500 house falls in value by 10%. It's now worth only $450. You still owe $400 on it, so you only have $50 in equity, instead of the $100 you started out with..."

This is clear like crystal ! I dunno why would anyone argue with that!

Foreclosure = margin call.

I dunno, I thunk more people lost more money, more deeply and more profoundly on housing margin calls over the history of modern finance than equity margin calls -> by a bigger margin.

But I dunno how to spell and I've just recently been potty trained.

Miette: Yes, the equity is accounted for. I just used steveF's number as a starting point, which had already accounted for $900 a month to paying the principal.

seaver69: I know that's how you and I see it, but I'm wondering how steveF sees it. He's clearly capable of crunching numbers, I'm just wondering how he's seeing the numbers in 10 years.

steveF: What say you? Curious to hear your response and how you see things differently.

"stevejhx, you do not get a margin call for the apartment leverage as opposed to stocks where you can not leverage without worrying about being liquidated at the bottom by margin call. Also SPX was down 60% from the peak and invidividual stocks disappeared. Stocks are far more risky than real estate in Manhattan looking forward. Worst down for manhattan real estate from the peak 20%."

The margin call is "oh crap, I have to move", or "oh crap, I'm underwater; time to strategically default". It's true that it doesn't kick in automatically like with stocks, but that also means you can end up not just wiped out but upside down.

300_mercer, from what I've gathered you seem to have plenty of money. From my estimate, we're talking about a 30% distinction in price vs. value at the price level you're considering buying at. On the grand scale of things, it's not that big a distinction. It's a choice between 1500 sq ft or 1950 sq ft. Or, say, spending 30% of your income on housing and saving 35% versus spending 39% on housing and saving 26%. Probably not that big a deal on the grand scale of things as compared to living your life. When all is said and done, paying $2M for a place that should have been $1.4M is not going to be high on your list of regrets come the day you die.

On $6 a sq ft for those places, I dunno. Last year I saw lofts downtown in prime downtown locations, top floor penthouses w/ outdoor space, great light, great views, 12' ceilings in one (actual, not broker-BS), high-end finishes, etc. going for $4 in one case and $4.5 in the other. Sales price probably in the neighborhood of $1300 a sq ft. Didn't end up taking them as I found an even better deal that was an outlier.

On parking your money in cash, that's a tough one. With enough time, every risky asset will outperform cash eventually. Even an investment in the S&P 500 10 years ago will have returned 25% despite it having been a stupid (IMO) time to have invested. If you're happy getting a return of 3% or so over the next 30 years or whatever on your cash in a risky investment, despite being able to do the same risk-free in treasuries, then you probably won't come out behind at the end of 30 years. Just don't expect that people will necessarily be willing to return the favor later on should you want to get out earlier.

"do I have to find all of your posts that confirm usage of the risk free rate?"

Not at all, Juicy, because when you use the risk-free rate in the white paper it was adjusted using the mortgage rate. That is a correct usage of the risk-free rate. The risk-free rate was not used to calculate the opportunity cost.

"you do not get a margin call for the apartment leverage...."

So true. And most stocks you can sell with the push of a button; a house, on the other hand, you can hold for years and be forced to pay for it, whether you're 50% underwater or not.

Like most of the country is....

"Agreed, but you don't calculate that risk by increasing the rate of return on your downpayment invested elsewhere. That is just plain idiotic, even for you. "

By this sentence, it seems like you don't understand what risk is. You are confusing risk and its measurement, with the rates of return one can get at certain risk levels.

You calling me idiotic in this matter hurts about as bad as SteveF doing it. When someone has no idea what they are talking about (like you in this case), their insults of me I take as complements...

"First, regarding the risk-free rate: JuiceMan = wrong, as usual. You use the risk-free rate as the benchmark for measuring risk. You DO NOT use the risk-free rate when comparing two assets that are both risky. It makes no sense."

Correct, another Juice mistake.

"No, not wrong, but could have been said more eloquently. Wouldn't matter, you still wouldn't understand it"

Ha, that's it!

Juice isn't horribly wrong... its just that he's misunderstood!

> Stocks are far more risky than real estate in Manhattan looking forward.

That is quite a stretch without any support.

> Worst down for manhattan real estate from the peak 20%.

And that's just not correct.

Also, why would "it hasn't gone down as much... yet" be a sign of strength? Could be just has more ways to go.

Regarding no-margin-call levered investment in stocks, I seem to recall some firms peddling an investment product where you'd, say, put up $20K today and they'd put up $100K in S&P, and you just had to make a fixed payment every month and end up with $100K in exposure (after paying more than $100K in aggregate of course, to cover the interest and counterparty risk). Don't recall if the setup was recourse vs. non-recourse.

"I dunno, I thunk more people lost more money, more deeply and more profoundly on housing margin calls over the history of modern finance than equity margin calls -> by a bigger margin. "

That sounds right...

Margin, at least most folks know they are taking the risk of extra leverage on.

With houses, and the old wives tales, people are clearly unaware of the risks they've taken in a huge chunk of cases.

Swe, How about you tell us what the return of the downpayment invested elsewhere should be instead of the risk free rate. Also, and this is important, tell us why.

I'm going to grab some popcorn and enjoy this comedy.

For steve, hahahahaaha

http://streeteasy.com/nyc/talk/discussion/3594-yet-another-rent-vs-buy-thread

what do you guys think about some properties in LIC/Williamsburg?
Many 2BR/Bath for $600k
$3000/month mortgage
$300 CC
$20 Taxes (15year tax abatement)

Total ~$3300

Renting out for $3100
With tax deduction and mortgage payment going toward principal. you are netting at least $1000 with 0 Down.

JuiceMan wins The Ass of the Year Award (again), for here is what I wrote in his posted thread:

stevejhx
about 3 years ago
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"JuiceMan, you already know the answer to that. Were real estate a risk-free investment, then you would compare the opportunity cost of owning it to that of owning another a risk-free investment. In the long-term the S&P 500 is extremely consistent at an 8% real rate of return, since the end of WWII on a moving average basis. In the short-term it is more volatile than real estate only because real estate is less liquid. Real estate has other invisible risk factors built in, like the inability to sell a property when you want to, thus forcing you to maintain payments, or because of the illiquidity of the market, an inability to "time" it, at least in the simplest form of buying on the dip and selling on a spike. And you further cannot "dollar-cost average" real estate, which greatly reduces the actual risk of volatility. Not so much a factor for a down payment, but indeed a factor if you invest real-estate and common charges into the market over time, rather than paying real-estate taxes and common charges.

"If you insist on that ridiculous comparison the thread is over - compare risky investments to risky investments, risk-free investments to risk-free investments."

Someday, Juicy, you'll admit to yourself the fool that you truly are.

Also, the Chicago market is NOTHING like NYC. They overbuilt like crazy. Prices have tanked over 50% since 2006. When the stuff is selling for less than the cost of materials, it's a once in a generation opportunity.

Rents in Chicago are heating up. This makes my purchase that much more appealing. I plan to hold pass this property down to my kids, so short-term transaction costs are moot.

nada, good point. But I feel that stocks are 30% overvalued as well (see Jeremy Grantham website for fair value).30 year treasury is a bubble waiting to burst in 2 years. In my view, if I we to put any money in a risky asset, real estate is more attractive than stocks or bonds. Of course, if we do not enough money to invest in hedge funds. Some assets will remain overvalued due to limited supply - manhattan being one of them. Every one of this board has been wainting for shadow inventory to hit the market but the downtown market keeps going up.
Current market is $6 a sq ft upto 1500 sq ft. Bigger apartments do trade at a discount in terms of rent at $5 per sq ft. Also, rents have already gone up 15-20% relative to 2009 bottom when no could rent out their apartment. So you have an unusal deal but try locking that in for 10 years.

No evidence whatsoever about rent increase ..

Check the rental listings at 300 Mercer. These are all rented. The building only has 8 foot ceilings, basic rental finishes, single pane windows but full service. 1 b/r are 700 sq feet. 1.5 bath 2 bedrooms are 1050 sq ft. $5 per sq ft and it is not high end.

06/02/2011 #05127 $3,675 1 bed 1 bath
05/24/2011 #05122 $3,650 1 bed 1 bath
05/19/2011 #05120 $3,250 1 bed 1 bath
05/12/2011 #05111 $3,795 1 bed 1 bath
05/12/2011 #05110 $3,695 1 bed 1 bath
05/12/2011 #05109 $3,650 1 bed 1 bath
05/11/2011 #31E $5,150 2 beds 1.5 baths

"The building only has 8 foot ceilings"

Damn. What to do with my 9th foot?

???

300_mercer, I agree with all of your points with points #1 & #4 as being really important to us. In the end, one of the points of having/making money is to be able to live life as you see fit as 'nada was pointing out. As I suspect many families with young children or about to have young children think, we wanted to provide for greater control/stability over our home/living situation.

We were housing bears renting through the bubble and struggled with the correction not being as deep as we anticipated/hoped. We didn't think price in all of the extraordinary actions governments took.

So one way we have been thinking about your points in a summary sort of way is that the basic problem is that Quantitative Easing has distorted pricing across many if not all asset classes priced in USD just as leverage did previously. That's why the stock market, fixed income, etc all don't look like great values. We don't think we're smart enough to know with a high enough degree of certainty how this all plays out eventually (inflation, stagflation, deflation, etc) but knew that we had to get on with life and all of the other points you made (e.g. real estate certainly doesn't seem like any worse of an asset class than any of the others...and at least currently rental rates adjust with inflation, are currently rising generally, and cap rates are better than zero on cash). Besides whenever we can take a contrarian position to the mass media we find at least a little bit of comfort in not running with the herd.

As a result, as you can guess by the long winded post we bought recently. We put over 50% down to get the lowest rates possible (conforming) as we saw some value in having an off the bat in the money short where muni bond rates (albeit with a different credit risk profile) yielded more than the fixed mortgage.

So your answer is 8% steve? How about swe? How much return are we going to get on our downpaymnet? I'm really looking forward to swe's answer, it will tell how risky estate ownership is!

dealboy: In which Chicago neighborhood?
Bullet-proof vests are a good investment in many. To pass down to the kids. Any kids.

And, I like Chicago. But I wouldn't buy anything there, for any price.
Good luck with your investment.

dealboy, I totally totally agree with Truth ... but really you need a bullet-proof vest in all Chicago neighborhoods.

And you're right: They overbuilt like crazy. But add to that the fact that their population is shrinking fast, and you can quickly figure out what the recovery will be like from their 55%+ drop in prices ... and then where rents will be headed. downdowndowndowndown

Using the searching skills I learned from MidtownerVirginEast, I searched streeteasy's archives and apparently this topic has been discussed 200 times already in some form or another.

Mercer, I got my deal in late 2010 well after things had supposedly reverted. Another place I didn't take, prewar 1500-1800 sq ft 3BR on Washington Square Park with direct views of the park for $7400, 9' ceilings and in renovation. Call it $4.5 for pretty prime space. Prior tenant had been there 7 years. I've got other friends with a place in the Village, same-ish size, same-ish price except top-floor duplex with areas with 20' ceilings. Also been there 7 years or so. Then there's nellm who got $3.7 on the UWS, restricted by huge wrong-colored dog and all.

How long have you been in your place?

Here's another good one:

http://streeteasy.com/nyc/rental/721871-condo-109-norfolk-street-lower-east-side-new-york

Prime LES, 1900 indoor plus 1000 outdoor penthouse, fancy new construction/architecture/landscaping, that went for $3.5 after accounting for the outdoor space early 2011.

On 30% overvalued RE vs. 30% overvalued stocks, here's something to consider. The growth rate on stocks is much higher, so catching up on that 30% will come much quicker. Case in point: at the height of the tech bubble, valuations were overpriced by 2x let's say. Here we are a decade later, and that gap has been removed (plus or minus your 30%). At 2-3% inflationary RE increases, it'd take several decades to close that large a gap.

"So your answer is 8% steve?"

My answer to what, Juicy? Did somebody ask me a question? I pick Door #2.

How about this opportunity: http://streeteasy.com/nyc/sale/613058-condo-28-cliff-financial-district-new-york

Pick up this 1600 square footer near the Seaport for $1.4m. It has a tenant in place for $5500 per month, which I think is in the right range for that neighborhood. If you can knock $100k off the purchase price that means you are only losing about $1500 per month in the short term(after transaction costs). But rents can only go up, right?

Any takers? SteveF?

Such a deal!

"How about you tell us what the return of the downpayment invested elsewhere should be instead of the risk free rate."

Juice, you are confused once again. The rate of return of the downpayment will depend on - what else - what one chooses to invest it in. Pretty basic, not sure how you missed that.

Now, if you're asking what the rate of return needs to be to account for the risk of being leveraged into RE...... well, you're leaving something out... what is the volatility of the apartment type we're talking about? And how much leverage?

There are several ways to calculate it..... but the point is, none end up at the risk free rate.

Personally, I think a 5x leveraged RE investment is significantly more risky than an S&P fund, so that number will clearly have to be higher than 7-8%. Likely over 10%. But that is just back of the envelope, to do it right you need the factors for the calculation, which you have been ignoring.

"If you insist on that ridiculous comparison the thread is over - compare risky investments to risky investments, risk-free investments to risk-free investments."

"Someday, Juicy, you'll admit to yourself the fool that you truly are."

One of those rare times I'm in agreement with Steve....

"There are several ways to calculate it..... but the point is, none end up at the risk free rate."

swe, have a read. You are incorrect that "none end up at the risk free rate", however I agree with you that there can be additional risk in ownership that needs to be factored in, especially in markets where rent to buy ratios are currently out of whack. Paper also does a good job discussing appreciation rates and what to model to for the rent vs. buy calculation to be at equilibrium.

Apologies for insulting you, seems we are both correct.

http://www.scribd.com/doc/49767940/Lessons-from-30-years-of-Buy-vs-Rent-Decisions

"According to Himmelberg, Mayer and Sinai (2005) the opportunity cost associated with home ownership equals the risk free rate plus an additional risk premium to compensate for the higher risk of owning versus renting. On the other hand, the authors point out that owning a home serves as a hedge against future rent changes, which eliminates much of the risk associated with owning compared to renting."

"This paper uses two different approaches to determine the rate of opportunity cost associated with owning in order to span different types of homebuyers. The first approach simply assumes that the investment portfolio held by the renter earns risk free rate. This approach may be appropriate for homeowners that are not expecting to upgrade or downgrade their residence and expect to stay in the same geographical area. The risk free rate isappropriate for these homeowners because they receive constant utility from their home while they benefit from a hedge against future rent changes. The fact that they are not expecting to change their home quality removes the risk associated with the resale value of their home.

The second approach assumes that the homeowner’s opportunity cost (the return on the renter’s
investment portfolio) is the return on a portfolio with equal risk to a levered residence. Hereafter, this portfolio is referred to as a risk equal portfolio and it includes a different mix of stocks and risk free treasuries to match the risk associated with a levered residence in each particular location. This approach is suited for homeowners who expect to change the quality of their residence. These homeowners do not fully benefit from the hedge associated with home ownership because the resale value of their current home relative to the cost of their future residence is material."

"The fact that they are not expecting to change their home quality removes the risk associated with the resale value of their home. "

So, the assumption is they never, ever sell, and the value at the end doesn't matter. So, if that's the case, why not compare to a basket of dividend stocks? (I don't actually think that's right, just goes to show the assumption is a stretch).

> Apologies for insulting you, seems we are both correct.

Actually, the opinion - and it is an opinion - in the paper doesn't fix your mistake... you were wrong.

"Because that is the correct way to do it. To risk adjust the buy, do a sensitivity analysis on levels of appreciation / depreciation and throw some probabilities against each scenario"

Because you were specifically talking about price changes, and tried to use the risk free rate... where even the opinion paper notes you CAN'T use the risk free rate when price changes factor in.

damned perkies made me do it

Actually, no, what I said was that the opportunity cost rate was different than the risk of ownership. Go back, look at it. This paper agrees with that statement as well, and splits out the risk of ownership entirely.

http://real.wharton.upenn.edu/~sinai/papers/housing-bubble-himmelberg-mayer-sinai-wp-09-07-2005.pdf

"The formula for the annual cost of home ownership, also known in the housing literature as the “imputed rent,” is the sum of six components representing both costs and offsetting benefits (Hendershott and Slemrod, 1983; Poterba, 1984).5 The first component is the cost of foregone interest that the homeowner could have earned by investing in something other than a house. This one-year cost is calculated as the price of housing Pt times the risk-free interest rate rt rf. The second component is the one-year cost of property taxes, calculated as house price times the property tax rate ωt. The third component is actually an offsetting benefit to owning, namely, the tax deductibility of mortgage interest and property taxes for filers who itemize on their federal income taxes.6 This can be estimated as the effective tax rate on income times the estimated mortgage expressed as a fraction δt of home value. Finally, the fifth term, gt+1, is the expected capital gain (or loss) during the year, and the sixth term, Pt γt, represents an additional risk premium to compensate homeowners for the higher risk of owning vs. renting. The sum of these six components gives the total annual cost of home ownership"

So if you want to be technical about it:

1) You were wrong to say "none end up at the risk free rate" That's two papers now that have confirmed my point of view
2) You were wrong to lump the risk premium for owning into the opportunity cost

"I don't actually think that's right, just goes to show the assumption is a stretch"

Well, it really doesn't matter what you think is right. What's interesting is that I am providing research papers to back up to my points and swe just says "I don't think that is right". Post something legitimate that contradicts the point swe, I'll read it. "I don't think that's right" doesn't cut it.

"Actually, no, what I said was"

Actually, I quoted what you said. That line there in between the, well, quotes.
It wasn't correct.

If you want me to post something, how about a Finance 101 textbook? Ever read one?

They all say pretty much the same thing... that the risk free rate is for risk-free items, and leveraged market bets are never risk free.

What is interesting is that you don't get that noone needs to do papers on this anymore, because it is fairly well known by anyone who has taken a finance class.

So that would be a no swe? You can't find anything to back up your claims?

"1) You were wrong to say "none end up at the risk free rate" That's two papers now that have confirmed my point of view "

Actually, the paper says there is risk, but you get value back from another risk mitigated. That 'aint risk free either....

The funny part is, the paper just assumed it. It doesn't prove it, just assumes it!
"The first approach simply assumes that the investment portfolio held by the renter earns risk free rate. "

> So that would be a no swe? You can't find anything to back up your claims?

I can't post my econ textbook, does that mean it doesn't exist?
http://www.investopedia.com/terms/r/riskadjustedreturn.asp
finance 101, baby...

Would you like me to post to "back up" my claims of gravity, too?

I also decided to never ever sell my stocks. So they are risk-free now.

"Median Manhattan studio, per the Miller Samuel numbers, is down 24.8% from peak. That is the lowest quarter since the drop began.

That is the opposite of a rebound.

Sorry, toots, but you are lying again."

steveF has claimed that comps for the studio apartments that he owns and rents out are selling for at or above peak highs. If you look at pg. 7 of streeteasy's 2011 Q1 market report, median prices for both condos and new developments are above peak highs. Co-op's are indeed down about 25%. So unless steveF has figured out a way to rent co-op studios, he actually could be telling the truth.

http://docs.streeteasy.com/market_reports/2011Q1_Report.pdf

What do you think swe? Are facts getting in the way of your agenda again? Isn't it feasible that steveF could be telling the truth?

"Would you like me to post to "back up" my claims of gravity, too?"

Would just like you to show me ANYTHING that combines the opportunity cost with the risk of ownership. You seem to be avoiding the question. Definitions of risk free does little to prove your point, that is a steve tactic. Spin, redirect, and claim victory. Tisk, tisk swe

language fail, juicy

improper use of the word "feasible"

keep it simple, simpleton

Changing the topic already?

Miller Samuel median for Manhattan condos...

2008 Q1 615,000
2011 Q1 495,000

Unless we're changing the meaning of "above" or "peak highs", that's a nope...