Challenge for the bears - bring it on!!

modification to the last sentence - people who think that they can make 10% per year will be buying as they are likely to be rich enough.

you fktard. all else equal... buying at $1MM less in 2 yrs means, I have 20 yrs to grow that $1MM to X, plus live the same "home" as premature equity ejaculating w67 who buys now and gets to paint rainbows two yrs earlier.

It's not you 69_Mercer, it's the who can wait 2yrs 69_Mercer... thatzwhatzubezmizzingz.

Sometimes my foreskin hurts when I get a stiffy.....

w67, Keep waiting for the market to go down, it went down already and has stabilized even up from the bottom. I would not resort to your level of language.

no angry frustrated bears please.

First of all, congrats! First order of business is that you've moved up to a nice place.

On the numbers, I don't see how you can get to $20K tax deduction. The first million of the mortgage will be deductible, so 28% of $32.5K at federal because of AMT. Then add $17.5K (after $15K standard deduction) for NY at 10%. So $11K tax deduction, making cost according to your math actually $78K. Then add $16K for transaction costs amortized over 10 years, so $94K. Then add a budget for keeping the place constant-quality over time: $200 per sq ft to renovate ever 20-25 years works out to another $16K. So $110K, or $9K a month.

On the other side you think $8K for renting the place, or a price to rent of 21. I'd get it done for more like $7K, price-to-rent of 24. How? Put some effort into it, it's not that hard. Budget a broker fee every 3 years plus $3K for movers to pack, move, unpack, $7500 all-in.

So by my math, all-in monthlies of $9000 vs. $7500 even with your assumptions on rates.

Congrats on your purchase! Do you like the space? You can easily afford it, right? The purchase price to TODAY'S price was reasonable. Will the certainty of the living space (as opposed to the relative uncertainty of renting) fit with your intermediate life goals? The purchase improved the quality of your life, right? Well put the financial calculator away! You made a great decision. Enjoy your new home.

Now to address the rates issue. Right now 5-year rate is at 1.4% while 10-year is at 2.88%. Draw a line, the market is pricing those second 5 years at 4.4%. Let's call the expectation of short-term rates (to which you are indexed) about 3% to 3.5% (inflation plus a smidge), so you'll be at 5.25% interest for those years. After taxes and amortized over the entire 10 years, that adds about $16K a year. So now you're at $125K a year.

Let's also talk about what happens when it comes time for you to sell. Maintenance will be $500 higher. Rent will be $2000 higher. But interest rates will be 2% higher (just using forward rates), or $3000 a month. Someone applying the same logic you applies today would see $1500 worse in terms of monthlies. To make up for that $18K shortfall at 5.5%, that's a $300K price drop. So that adds $30K a year, now at $155K a year total.

Fed is playing -2% real interest rates to push rates down across the board to spur math like yours and get people to keep price from crashing and handing the losses to the taxpayer. Great. Just remember to look a little ahead. I'm not talking about predicting markets here, I'm just talking about what the market, the Fed, every analyst, and anyone with a brain says is coming. The world of -2% real rates is unlikely to be permanent, you do calculations based on their permanency.

As for your rate of return of 3.25% on a risky investment comparable to a 3-5x levered RE investment, that sounds horribly low.

Suppose you buy an index fund, hold for 10 years, and sell. A 4% return yields you 3.1%. A 6% return yields you 4.8%. An 8% return yields you 6.5%. A 10% return yields you 8.2%. I personally think 8% is very reasonable. Current earnings yield is 8%. If you account for the ups & downs, smoothed earnings yield is 5.5%. Using that base, adding 1-2% inflationary growth and 1-2% real growth to get to 8% is not crazy.

So go with an after-tax number like 6.5%, and your 30% downpayment's 3.25% cost of capital is off by $20K.

So now we're at $175K a year.

Not that you shouldn't spend $175K a year on housing, mind you. Just that if you do, why slum it in a $2M purchase when you can rent something decent in the $6M range?

The risks seem well laid out.
*Real rates going form negative to positive
*Forward rates--- This is just term structure, it's not predictive. Rates in five years could be very
different than anything predicted by the forward curve
*Inflation--Official numbers weighted down by housing related components. With the shift to renting
and gov't now focusing on helping the rental market expect to be surprised on the upside
*Tax deduction--Lots of talk about limiting or eliminating the deduction
*2,000,000 purchase @ 3.25% interest only implies 100% LTV loan. Really? What bank?
*5% comp on risky investment sounds about right to me(Hussman & Grantham have it at 4% + for stocks).
8% seems coming from an environment of the last few decades. The coming decade(s) may not be so
rosy. Market is above trend of last 80 years, bond yields are low, so it's hard to see how one
achieves above 5%

Of course if rates continue down,we see more deleveraging and slow economic growth maybe you win by
betting against the forward curve and you wind up refinancing at lower rates than today. I've been
of the opinion that treasury rates are going up, and yet the opposite has occured. Either one of two
things are happening.
a) market is predicting another real bad leg down
b) Gov't is forcing a pile on the Treasury trade(Fed buying, Bank buying( Treasuries are zero
risk weight investments) and of course money coming out of Europe.

i think that getting a 5/1 IO at 3.25% on $1.4M mortgage is a dream. that rate is for conforming loans. the real rate will be closer to 3.75%-4%. please recalculate and provide real numbers not the ones flying in the clouds.

inonada: "Not that you shouldn't spend $175K a year on housing, mind you."

I disagree. I think anyone who needs to bring out a calculator should not be spending that much on housing.

but inonada is the guy who was trying to help out someone who was renting a $1800 / month studio, by referencing a $23,000 / month apartment. I think that was the scaffolding thread.

"*Forward rates--- This is just term structure, it's not predictive. Rates in five years could be very different than anything predicted by the forward curve "

And yet I could go today and lock in a 5-year rate starting 5 years from now. Or I could lock in an option in either direction. Unlike the idiots you reference who give 99% certainty on hard-to-predict crap, I will take the other side.

Predicting what the price of the S&P will be come Monday is extremely easy. I can predict it with 99% accuracy: it will be 1265.45 plus or minus 1%. Predicting its return is extremely hard: I have no idea whether that 1%-ish return will be up or down or flat. What we're talking about with rates is the former, not the latter.

And yet I could go today and lock in a 5-year rate starting 5 years from now.

In theory yes. In the swaps market yes. Now translate to treasuries and apply that to a single person taking out a mortgage, then no.

Back to the arms question. A valuable piece was left out. The initial Periodic cap. I've seen a number of these come out that rather effectively limits your risk at the first reset. Some credit unions are offering 3 year arms that make the first six years a rather attractive bet.

Why would you spend all of that money for "ok light," when you can pitch a tent in Central Park for free?

Cost 65K per year in interest (no principal added) + $24K interest - $20K tax benefit = $70K per year. 6K per month. Cost to rent such a loft which will be marketed at 2000 sq ft at least $8K even by Nada standards. Saving 2K per month.

So if you put 20% down, you are earning a $24k dividend on $400k. 6% dividend. Okay not terrible.

Unlevered return = $8k - $2k x 12 = $72 / $2mm.... 3.6% cash on cash return = that sucks. Even if you assume 2% annual appreciation, 5.6% is terrible for the amount of risk you are taking...and if you disagree, which I assume you do, then we just have different perceptions of risk...and mine is right and yours is wrong.

To make 6% dividend on a levered equity interest than can go to zero (and go to zero far more easily than a stock) actually blows too on second too. I'd rather put all my money in an income portfolio with a combination of REITs, MLPs and dividend paying stocks. The difference is I will see the marks and you will just deny them or deny they matter to you.

Agree the mortgage assumption is not realistic.

And if it is, then its a government distortion that will eventually reverse and negatively impact the value.

Sunday: "I disagree. I think anyone who needs to bring out a calculator should not be spending that much on housing."

Well, here we have 300_mercer who brought out his faulty calculator and came to a conclusion that he is spending $6K a month on housing. I made various arguments that he's actually spending $15K. Maybe you don't like some of my arguments, fine. Scratch out the ones you don't like, but it's hard to get to less than $10K. There was $1K because of improper tax benefit calculations, $2K because of transaction costs, $1K because he used (as you point out) an interest rate that was too low, etc. Never mind the cost of maintaining a deteriorating interior, the real cost of capital, the assumption of the 5-year rate magically extending to years 5-10 despite the market (including the 30-year mortgage market he chose to side-step) clearly indicating rates 2% higher, and the effects of renormalizing from -2% real rates on his own logic when he want to sell 10 years from now.

How do you think people who spend $175K on housing should do it? Just wing it? Now I think 300_mercer is just looking for a fun argument with his $70K number, but there are probably people out there thinking their cost is really $70K when in reality it is much higher. We've certainly seen plenty of example here of folks buying a $1.4M 1200 sq ft mediocre 2BR circa 2006 and selling it in 2011, and when all was said and done they had spent $175K a year for it. $420K on interest and cost of capital, $120K on monthlies, $140K on transaction costs, $210K on loss from purchase price. Yikes -- $15K a month for something you could have been renting at $5K? Or you could have had a 4x fancier place for the same amount? That's what happens when you wing it.

"In theory yes. In the swaps market yes. Now translate to treasuries and apply that to a single person taking out a mortgage, then no."

I don't have to buy stocks today to know what is predicted for their price tomorrow.

Besides, 300_mercer doesn't even have to do anything fancy here. He's a natural borrower for 10 years, say. He had the choice of a 5-year rate or a longer rate. The market clearly told him that for years 5-10 the rate will be 2% higher. He made a choice. Now if he goes forward with the assumption that rate will be flat for those years, he's an overconfident idiot. That'd be predicting rates that are fully half of what the market told him. It'd be like me predicting that the S&P will be at 1200 come Monday, despite it having closed at 1265 on Friday. It's gonna be 1265 on average, plus or minus 15 or 20. Running my world as if it's gonna be 1200 on average is stupid and would lead me to very wrong conclusions.

Rhino: "and mine is right and yours is wrong"
Rhino: "The difference is I will see the marks and you will just deny them or deny they matter to you."

Welcome back, we've missed your abrasive wit!

Yeah I was on hiatus. I like to think of it as 'dark sarcasm'.

When are you likely to make your move to the suburbs -- in a year?

Yes. Basically next summer. I have a 60-day cancellation clause in my two year lease (ending Aug 2011)... We're in at 5500 which makes the buying in Darien somewhat less than a no brainer. I dont want to pay for more space down here...but I want more space. I acutally had a phone interview with a Stamford based firm yesterday. If they meet the asking price, there is a chance its this summer. My wife is very kind but I had to tell her not to tell the Darien nursery school that we will not be attending until the very last minute. I am very glad we didnt tell them yet. I want to spend up to $1.5mm and thats just a very nice house in my opinion. If I had $3mm to spend on an apartment...then thats a difference scenario. My preference is very clear at my price point....my price point +/- 40-50% for that matter.

inonada, I actually agree with all the math you provided. What I meant was that if someone is considering renting a place for $15K/month rent and have to bring out a calculator to figure out whether one can afford it, that person probably should consider a place that's less expensive. For people with a 2-3K/month budget, perhaps a calculator is needed because their financial options are more limited. Sort of like buying a $200K car vs. buying a $20K car. If one have to bring out a calculator to figure out whether one can afford a $200K car, I personally think that person should not be buying it. The one buying a $20K car might have to watch their budget more and should consider more carefully.

As for buying, if someone has to depend on tax deductions, worry about interest rates and price fluctuations, then that person probably should not consider a multimillion dollar home. Of course I know most people don't agree with me. That's fine if they can sleep well at night.

I disagree with you entirely. Thats like saying if you are buying a $50k car you shouldn't need to look at resale value and cost of ownership, but if you buy a $20k then you need to do that. There's no logic to your view here. Perhaps what you mean is that people should compare rent to pretax cost of ownership, not after tax cost of owenership...because tax deductions basically come out in the wash when you fully load the cost of ownership.

Rhino, it all sounds exciting.

I find it interesting that we are actually seeing some moves to the burbs now. A few years ago, there was talk but no action. Now, there is you, printer, maybe UD depending how you look at it. Are you seeing a wider trend beyond SE?

I think its all part of the process of "normalizing". In 2007, I was looking at 3 beds and came close to buying one. Now there is a lot of ? around what I think my "normalized" earnings power is. If someone came along and guaranteed me $750k/yr for two years, then we would probably rent a 3 bed and kick this can out another couple of years...or maybe I'd just rob someone of a distressed situation of a $2.3mm house in Darien. Hard to be sure.

Yes, anyone who I would guess earns between $250-500k as a family income is VERY seriously considering it among my wife's friends. One couple we know just pulled the trigger on a beautiful $1.3mm house in Darien and their kid will attend the nursery school where we technically still have a spot.

Did anyone take into consideration the possibility of a 300% RE estate bubble reverting to the mean? Or does the perky global situation and the stellar world banking system take that off the table

Ino: You are a rock star!!!

The chance of mean reversion (even if its small), scares me much more for Manhattan than for anywhere else. I dont see how anyone could feel comfortable buying here while the finances industry continues to contract. Let me know if anyone doubts that its still contracting. This is just in terms of #s of ppl employed in it.

Sunday: I don't buy it. It's all relative. Calculations over paying $6K in rent are just as crazy to most Americans. Or $3000. Try explaining that one to your favorite street vendor: flushing $36K after-tax down the toilet for just a 1BR. If you're rich enough to do that, why worry over the details?

The bubble is in the price to rent not in the value. And rent is rising...if that continues, I think it is more likely that rents rise as interest rates rise and prices lag to bring the relationship to something more normal. As it is I can buy my $6000 market rental for $1.1mm or so which is not terribly out of whack...I just dont want to own an apartment like this...And I like $1.2mm houses better than $1.2mm apartments. Why? Well just look at printer who used to be full of piss and vinegar about his decision to buy. Now he feels...regret?

You get rich and stay rich by focusing on the details.

>Did anyone take into consideration the possibility of a 300% RE estate bubble reverting to the mean?

Reversion to the mean is intellectually lazy. Things were once this way, so they should always be this way, and ust because something changed, it should change back. Intellectually lazy.

No you get rich and stay rich by being extremely tight with money. It's much easier to cut costs than to earn a higher return.

Thanks for the congratulations. To address some of the comments:

Mortgage tax deduction can be taken before AMT hits you. Also, we pay more than AMT, hence real estate taxes deduction count as well. Nothing going in as getting money back from the broker. Hold 20 years 5% cost after 20 years. NPV 60K for 20 Y. $300 per month. Upkeep and reno $700 per month. $7K. There is nothing in the market of this quality for less than $5 per sq ft per month but I was using lower numbers at $4 per sq ft considering Nada can find a good deal (every one who is paying higher per sq ft is rent is stupid of course as well as averages). Still $7K cost vs $8K rent. What do brokers think is average $ per sq ft rent for renovated lofts with sub zero, marble bath etc?

Mortgage rate comment: Check TD bank. Call Manhattan Morrgage rate. You will get done at 3%.
I used no money down in my calculation assuming that you are paying yourself 3.25% post tax return. This is just to keep the math simple.

Nada, I gave two scenarios for the rates but it seems that you chose to read only one.

"Risk is rates going up in 5 years (you finance savvy bears I know the forward rates between 5 and 7 years are very high). Benefit inflation protection. If there is inflation, rates will be higher but rents will be much higher as well not to mention the property prices and your earnings.
Mild Double dip/Slow growth - Rates do not go up as fed will be on hold or will only raise to 1-1.5% and you keep saving $2k per month. If rents come down 10%, a little less saving. "

300_mercer, the mistake you are making w.r.t. rates & inflation, IMO, is that it'd take an unexpected uptick in inflation to see rates rise. Not really. Current inflation expectations are 2%, as are future ones. So why do we have 1.4% 5-year rates? Because the expectation is that the Fed can and will keep rates sub-inflation for a while keeping inflation at 2%. Eventually people like you will stop thinking "Hmm, I think a 3% return on high-risk capital is good". What we're talking about here is 3-3.5% short rates on average to coexist with 2% inflation on average. Our 0% period is to counter temporarily the deflationary direction of things. We did have one year where there was 0% inflation after all. If we start seeing 4% inflation settling in, you think the Fed is going to stick with 3-3.5% short rates? Doubtful. They'll not only put go to 4% plus 1-1.5%, but rather more like 6-7% to tame the beast.

You talk like the choice is between 2% inflation and 1% rates, or 4% inflation and 3-3.5% rates. Not really: it'll likely be 2% inflation with 3-3.5% rates and 5.5% 5/1 ARMs, or if things get out of hand, 4% inflation and 6-7% short rates and 8% 5/1 ARMs. The latter would be an $80K a year or $7K a month increment on your monthlies. Can you imagine what that'd do to the price on your place today, even you saw rents at $8K with 4% inflation rather than 2% inflation? Ten years of rent would average $10K rather than $9K. Big woop. But the price on the place would have to be $1M less to compensate, even accounting for the $1K extra on rent.

"Did anyone take into consideration the possibility of a 300% RE estate bubble reverting to the mean? Or does the perky global situation and the stellar world banking system take that off the table."

I think that's a possibility, but I don't like to talk fear. I like to talk I expectations. What makes sense is a good positive outcome under expectations, and a small negative outcome under a bad case. What's going on here is a moderate negative outcome under expectations and a big one if things go bad. If things go above expectations you tread water -- woohoo!

How many people spend $175K/yr on housing and buy $200K cars vs. those who spend $30-70K on housing and $20-50K on cars. I think the latter need the calculator to make the decision and the former can probably estimate to help with the decision. Sure it's all relative in the sense that where do I draw the line, $170K, 150K, 130K, etc... is the magic number that I say don't buy if you have to worry about tax deductions, interest rates, and price fluctuations, I don't have an answer for you.

Not having to "worry about" something is *not* the same as "not caring" about something. Keep in mind that I was responding to the comment: "Not that you shouldn't spend $175K a year on housing, mind you." For people spending $175K/yr on housing, it seems unlikely that the decision on buy vs. rent would be *primarily* based on a "buy vs. rent" analysis. I can't afford to spend that much on housing, so what do I know. I personally would not spend that much on housing unless I make around $3mm/yr, but I'm someone who would like to retire by 50 or 55.

Reversion to the mean for all risk assets is a distinct possibility. Risk assets rose in part because of the Fed trying to keep up our standard of living without an increase in incomes. This only comes from Credit. We're now undoing that. And all that credit and liquidity fueled asset prices.

"Mortgage tax deduction can be taken before AMT hits you. Also, we pay more than AMT, hence real estate taxes deduction count as well."

I don't know what you are saying here. Under AMT rules, mortgage deducts at 28%. If your tax is higher under AMT, deductions under regular tax don't matter.

Also, how is it that you pay more than AMT? If you're married w/o children (which is my understanding of where you are), AMT is with you from incomes starting at $200-250K up through around $1M. If your income is below $200-$250K, you have no business buying a $2M place. If your income is above $1M, do you think you'll be happy with "ok light" and a 10-yo reno for 10 years, and why have you been living unsatisfied in a 1100 sq ft rental?

Something doesn't add up, and if discussions with others here are an indication, I'd guess the issue is that you don't understand your taxes. But I could be wrong and would appreciate an indication as to what I'm missing.

But Nada, rent are already much higher and higher inflation will increase at 5% per year. All I am saying is - if you think there is inflation, real asset price increases will more than offset the potentially increased payments you have to make after 5 year. The transaction I did is the best inflation protection in my view. In the worst case, if the rate skyrocket to 10% which after taxes will be only be 6% or so - I will just pay it off or keep the mortgage to a $1mm. I am not streching to buy this place. Hence my comment "What am I missing if you think your job situation is ok and you have 2 years of liquidity if you lose your job?"

Also, can you post some real rental listing (mid-end reno, central ac, ok light, at least 10 foot ceilings, key lock elevator) which are available now within 3-4 short blocks (1-1.5 big blocks) of a subway) in the prime village and soho (no lower east side, beyond 2 ave, west soho on top of canal street) which are at 8K of less per month and are 2 year rentals at least. Let us how many real sq foot we get. Average of 3 listings will be fine.

"Hold 20 years 5% cost after 20 years. NPV 60K for 20 Y."

Transaction costs are not 5%. Maybe they should be, but they just ain't. Also, you pay transaction costs on an inflated asset in 20 years, not a $2M asset. So NPV cancels out.

A 20 year hold, really? OK, I'll go with it. You think a 5/1 ARM at 3.25% is a good idea when you could have done 30-year at a 1.5% spread and removed interest rate risk? It's unclear that your terms on a 5/1 ARM with expected forward rates would put you much ahead of a 30-year with a 20-year hold, as 30-year mortgages are priced with a shorter expected duration.

Tax benefit comes from my highly qualified accountant and will increase if the rates go up. I do not believe in living beyond my means. Hence only OK (by no means compromised light) light rather than spectacular 4 exposures.

"Upkeep and reno $700 per month."

A $100 per sq ft reno once every 25 years? Let me correct. A $2000 annual upkeep budget, and an $80 reno every 25 years. This isn't a central Florida bungalow. This is a $2M apartment.

Rhino, Burbs are great idea. Far cheaper than the city in every respect including schooling. However, we do not like to commute.

"What do brokers think is average $ per sq ft rent for renovated lofts with sub zero, marble bath etc?"

Who the hell cares what brokers think? They want you to pay as much as possible. Quick & easy money, supports their alligator investments.

Give me $5 a sq ft, and I'd have put you on Central Park with sweeping unobstructed park views. Including Sub-Zero and marble bath. Hey apt23, you've got unobstructed park views, right? How much do you pay per sq ft? I'm guessing $6, but if you're doing $5 I'll tip my hat to you.

"I personally would not spend that much on housing unless I make around $3mm/yr."

Let me let you in on a couple of secrets.

First, if you make $3M a year, you've got $1.75M after-tax. You blow $175K on housing. How exactly do you think you'll be spending the other $1.575M. Even if you blow another $175K on god-knows-what, that still leaves you with $1.4M to add to your piggy-bank every year. On which you'll earn $100K a year every year. While you're adding another $1.4M to it each year. You guys must be rich, but to me a $3M is gobs of money. Heck, $1M a year income is gobs. I can't figure out how the rest of you would expect to spend that kind of money...

Second, lots of people have bought $3M apts. Guess what: they're spending $175K a year even with assumptions that prices go up with inflation. I'm pretty certain they're usually making well less than $3M a year. Probably a measly $1M, maybe a pauperly $600K if they like to lever up. I know, peanuts in your book.

"Tax benefit comes from my highly qualified accountant and will increase if the rates go up. I do not believe in living beyond my means. Hence only OK (by no means compromised light) light rather than spectacular 4 exposures."

OK, so you don't know how taxes work, and we cannot have a meaningful discussion on it.

@rents going higher. Me thinkz I would like to sell you unicorns that shit, bricks.

Here is what w67 iz waiting for.

Banks to come clean on REO, regular mortgages at 6% and conforming mortgages to drop to $400k on oct 1.

@Rhino. Welcome back. Yeah, i might do the burb first as I am seeing $300psf at larchmont/Scarsdale with 1/2 acre, pool and short drive to yacht club. Say $1mm cash and buy my 3G fm cpw in 4 yrs for $1mm cash and be done. It would sync nicely with my kids testing into Stuyvesant/Bc sc.

Goodz luckz to the bears. Scratch that. Good luckz to anyone who hates eating bowls of stuooooooopid. Baconator. Smart!

"In the worst case, if the rate skyrocket to 10% which after taxes will be only be 6% or so - I will just pay it off or keep the mortgage to a $1mm."

When inflation hits 5% and interest rates 10% in your doomsday scenario, the first hit will be to your asset price. Take $1M+ off the top. Second, when you're paying a floating rate, your monthlies float with inflation changes even more wildly than rents. With $8K starting rent and 10 years, 2% inflation takes you to $9K average. 5% inflation takes you to $10.5K average. A $1500 difference. Your after-tax interest swing becomes $9K. Do the numbers.

The fact that you have $1M cash does not make the hit disappear. That $400K that you pay down is costing you lost opportunity elsewhere. You can be pretty sure that if inflation is running at 5%, short rates will be 8%, ARMs will be 10%, and expected returns on equities will be 15%. Having money later does not magically make the exposure you are taking on today disappear.

"But Nada, rent are already much higher and higher inflation will increase at 5% per year."

Go look at Miller Samuel data and compare to CPI. At the longest range, you'll see average rents outpaced inflation by 0.5%. That's almost certainly due to improvements. Comparing average prices according to Miller Samuel against SE's constant quality index, you see that purchases had quality gains of 1-2% annually over a similar period.

Also, where do you think the money will come from? Look at Miller Samuel data, an you'll see a pretty clear compression on studios and 1BRs with firmer pricing while lower pricing the higher you go. You really think the incomes are there to support the $10K rentals to go to $16K over the decade? It's pretty hard to get price inflation without wage inflation. I'm not saying it can't happen, but 5% wage inflation is really part of your outlook?

Let me summarize Inonada.

$10mm in cash at 2% is $200k. Nothing to retire on.

$10mm in cash at 10% is $1mm. Something to retire on even if inflation makes cream cheese $10 in 12oz. That's backed by us govt with guns.

As a cash hoarder, itzz criminal that my savings are subsidizing the horse farm buying fktards like mercer. But game on.

Nothing in the example made money. All we're talking about whether it's cheaper to rent real estate or rent money. No wealth has been created in the example above.

If there is inflaton, we will be very happy as the real estate prices will increase. That is the crux of my argument. But real estate for inflation protection and benefit from artifitially low rates.

Nada, can you post some rental listings as per the criteria I mentioned in my earlier post. Any money spent more than 10K per year will increase the value of the apartment. On the transaction cost being higher due to property price increase, I would love that I would have partiall tax free capital gains.

On posting 3 rental listings meeting your specific criteria on the market this instance, that'd be like me asking you for 3 with the same exact criteria for sale at the price you bought. It took you years to find that, right? And now what you've found has become "this is the only thing for me". You want to find rentals to make yourself feel better, that's one thing. People who plan on renting longer-term, that's another.

I know of a penthouse duplex loft in the village, about 1800 sq ft (maybe 1600 at worst), less than 1 big block from the subway, outdoor space, 10' ceilings with parts at 20', great light, good (but not renovated) condition going for $6K-and-change. Can you have it? No: tenant has been there for like 7 years, ain't going nowhere. There was a place on the corner of Wash Sq Park with views of the park, 3BR, 1600-1800 sq ft, for $7200 late last year. It had 10+ windows, corner exposure, with brand new renovation, high ceilings. It lasted all of 4 hours on the market, prior tenant had been there 7 years. I'm guessing that one won't show up again for another 7 years. My current place, I believe the prior tenants were here 5+ years as well.

At 1600 sq ft for $7200, it is more than $4 per sq feet per months. What happened to $3.5. Are all the people who are paying $5-6 per sq ft for related buildings in the prime areas crazy? They must have looked as well. I am talking about current listings as we just bought.

"If there is inflaton, we will be very happy as the real estate prices will increase."

What you are not getting is that you have no inflation protection as you have not fixed your mortgage, which is what give you the hedge.

If inflation swings from 2% to 5%, the 3% inflationary swing will get killed by 3% to 10% interest rate swing. The two would offset if they were of equal magnitude, but we're talking about going from -2% real rates to +3% real rates. You take the hit of that 5% swing, including accounting for price increase from inflationary change.

Also, we only had to find this place once (I do not think it is a deal as we just bought it. By definition, we are the highest bidders. What makes it a deal for us is low rates and our liquidity and desire to hold it and to pay the mortgage significantly if rates go crazy) but for rentals you will contantly have to find deals.

"At 1600 sq ft for $7200, it is more than $4 per sq feet per months. What happened to $3.5."

Well, 1600-1800 sq ft puts it at $4 to $4.5. This is prime space overlooking Wash Sq Park, corner exposure with a dozen windows. Not really fair to compare to an "ok light" loft. Didn't your wife teach you about paying up for quality ;). Point being this is not $1100 a sq ft space. If you could buy it at $2.5M in today's market, you'd have done very well.

inonada: "Second, lots of people have bought $3M apts. Guess what: they're spending $175K a year even with assumptions that prices go up with inflation. I'm pretty certain they're usually making well less than $3M a year. Probably a measly $1M, maybe a pauperly $600K if they like to lever up."

You are most likely right. That's them, not me. Whether someone spending $175K/yr on housing should be making $1.5mm, $2mm, or $3mm really depend on their plans and what makes them happy. I'm obviously on the crazy conservative (frugal) side.

At my current income, I'm hoping for retirement at 50-55, but if I were making $3mm/yr, I would do that for 10 years and retire after that. Higher the pay, greater the stress, so 10yrs is probably all I can take. I have been told that I would change my mind if I actually made that much because my life style will change. Maybe they're right, but I have seen my income increased significantly in the past 10-15 years and my expenses have increased only a little more than inflation and my retirement age target has generally went down (I did tweak it recently because of healthcare cost estimates). Let me make one thing very clear, our household income is probably lower than most on this board; we're just not big spenders.

Anyways, we shouldn't be bitching back-and-forth over nothing. We should be celebrating your new home, with you of course buying drinks for the entire SE crowd. A $2M loft -- drinks will be a drop in the bucket!

Congrats, and relax & enjoy.

Sunday, different people have different goals. Retire at 50-55? I can barely stand to be on vacation for more than a week. So, I get what you're saying if you're planning on only working through 50-55. The idea of only doing something productive with only a third of my life is not for me, regardless of the money. (Granted, that's a narrow definition of productive.)

Out of curiousity, what fraction of your gross income do you spend?

Can someone remind me how the initial post was any kind of a challenge?

>Can someone remind me how the initial post was any kind of a challenge?

Oh, tough guy.

I define retirement as not having to work for a living. That does not mean doing nothing. I intend to be quite productive after "retirement", probably more so than now.

Thanks a lot Nada. I appreciate your points as always. The biggest disagreement we have is you have a special skill of finding deals at $3.5 per sq foot. I think 3% post tax is ok with inflation protection thrown in rather than making zero due to my being conservative investor. I have plenty of exposure to the market via job as I am sure you do as well.

"inflation protection"

That's only true if you believe the bubble never existed or that it finished deflating already.

Nada or anyone kind enough to answer, im a total noob when it comes real estate, and i can't help but consider myself as one of those people who may be 'winging it' in my current pursuit to buy an apartment in midtown near central park west. While it will take some time to get to speed with the calculations above despite the fact that i have a numerical background, can someone please answer the following for starters:
1) what is being assumed above when speaking about "transaction costs"? is it specific to the type of mrtgage being used?
2) what relationship/rule of thumb can one invoke to take $x per sq foot for renting and approximate a price for bidding on a place? does one have to make an appeal to some price to rent ratio?
3) if the biggest intermetediate term risk out there is a pickup in rates, spec. 30 yr fixed rates, even assuming muted wage inflation and unemployent rates north of 8%, i.e., stagfationary 70s style jamboree, won't this mean guaranteed further pressue on rental rates, and therefore decent buffer for overpaying some now and buying? when real rates are negative you are suppossed to buy unless you expect them to get even more negative or stay negative for a very long time. absent an outright massive double dip, making some decent low ball offers now makes great sense right?

THANKS IN ADVANCE

Actually Home Prices seem to have done ok during the inflation 70's/80's. They went up nominally and held steady on an inflation adjusted basis. Not doing a 30 year fixed when you're worried about inflation doesn't make sense though..It's part of the hedge.

http://www.jparsons.net/housingbubble/

Which backs up my intuition RIversider! stagflation acutally provides a form of buffer for buying ;] Thanks for the link and response.

btw, it seems like mercer believes he's protected to inflation because of potential tax writeoffs (?) he can make should he have to refinance? otherwise, how are you protected from inflation if your rate of financing is floating mercer? plz make all appeals to appreciating home values out of it.

Bubble anyone?Thank you SIR! Yes Plz may I have another!

Why do people inflation adjust everything? There is no need to inflation adjust real estate because rents are the only component of inflation that matters. Rents are up small since 2000. What value does it add to inflation adjust them?

I do think that real estate has the potential to act as an inflation hedge. However and especially when purchasing a primary residence, its important to consider the carrying costs(Common charges, maintenance, taxes and debt). When I hear $120-180k a year, I think finding a cheaper housing solution and investing the difference in stocks & bonds will return more. Carrying costs are a drag on returns.

4mm on extended extended extended unemployment. Flamoz.

Keep buying nyc re as a hedge? Hedge to what? Flmaoz. Capitulation cometh oct 1, noon. Annie get your glock.

Who are you kidding? You wouldn't know a glock if one shot you in the face.

70/80's us was transitioning from manufacturing powerhouse to services and 9/10 of all contracts had CPI inflators including union jobs. Goodz luckz fktards. Buy nyc re now or be priced / inflationes out forever!!!!!!! I gotta peeee. But first my bonerz gotz to subside

Backward looking. Rents came stayed flat since 2000 because everyone switched to owning, and after the bubble broke a lot of inventory which couldn't be absorbed hit the market as rental product. This dynamic has mostly if not entirely played out, going forward rents should increase a lot more than they have. Instead of looking at the trend since 2000 look at the trend over 40-80 years.

No doubt w67th's boner is becasuse he was just chatting with Rhino and Riversider.

Help: The biggest risk is that we are at the end of an unprecedented 10 year bubble in which prices increased 2.5x while rents and construction costs remained essentially flat.

Current prices will be extremely difficult to sustain, since they invite landlords (who hold most NYC housing stock) to sell to occupants, and developers to develop, both of which increase supply, at the same time that reduced bubble expectations reduces demand.

Thus, the risk is that we will return to more ordinary rent-price ratios, and more ordinary relationships between the cost of producing new units and the price at which they sell.

The end of the bubble is independent of current national economic woes -- it would happen even if the local and national economy were in great shape. (Nationally, of course, the causality went the other direction: it was the collapse of the bubble that led to the collapse of the economy, not the other way around).

Risks to the economy are **in addition** to the near certainty that bubble pricing will eventually end.

If you are looking for macro disasters to worry about, the most likely one is a demand-deficit lost decade or two, Japan style. The end of the national bubble led to a drop in demand, which led to business and government downsizing, which leads to even less demand, putting us in a bad spiral. If the government doesn't spend to get us out of the trap, we could have a slow economy for a long time yet. This might well lead to a drop in prices below equilibrium levels. If people are worried about jobs, they are less likely to leverage to the hilt to buy $2m apartments. It is hard for prices to stay above costs (as they are now) for a long time -- capitalist economies are pretty good at creating additional supply to meet demand. But housing doesn't wear out quickly, so housing prices can stay below production costs for decades (see, e.g., NYC 1930-1970).

For US jobs to recover, we need the dollar to drop enough to make exports profitable. This doesn't seem to be current political policy, but that could change. A drop in the value of the dollar would have multiple, conflicting, impacts on NY RE -- if foreigners focus on the changes in prices in their currency, they will see NYC as very expensive, while if they focus on the absolute level, they may see prices as low.

The NY real estate market is dependent on the local job market and especially the highly paid financial industries, which are in a state of turmoil. If the government decides to restrain finance wages and profits, the number of customers for overpriced real estate may drop. If, as is more likely, finance profits are not restrained, the next crisis is likely to have unpredictable political consequences. Political crises are rarely good for real estate values.

1970s style stagflation is highly unlikely. We no longer have unions that can insist on wage agreements tied to CPI. Also, the Fed is now institutionally dedicated to maintaining low inflation even at the cost of extraordinarily high unemployment, and no political force currently appears likely to change that. Without wages going up, 1970s wage/price inflation is impossible.

If general prices go up without wage increases, people will be poorer. That makes it less -- not more -- likely that they will bid up rents and RE prices. No hedge here. Poverty is bad for RE prices.

The best scenario for rising NY RE prices is not stagflation, but a rapid increase in the local economy attracting new, highly compensated, renters and buyers faster than developers can produce additional quality housing for sale. If that happened, the bubble might correct by rents rising rather than prices dropping. Buy now to make a bet that NY jobs/pay will grow so fast that it will drive the cost of rents/building/converting up to match and exceed bubble prices.

these 2 points were key imo:
1) "if foreigners focus on the changes in prices in their currency, they will see NYC as very expensive, while if they focus on the absolute level, they may see prices as low."
2) "If general prices go up without wage increases, people will be poorer. That makes it less -- not more -- likely that they will bid up rents and RE prices"

It is somewhat the fear of 1) that motivates me. this dynamic has always inflated premiums for others in manhattan. at least there finally seems to be some conviction by the PboC to reign in loan supply and cool the insane Asian markets.

It is indeed 2) that also worries me. pervesely though, can't one just then lease out his property as rents in this scenario will go up. the FED will print money at all costs if push comes to shove -- DONT YOU FORGET IT.

But you make a good argument for waiting. After all, it is ALWAYS about the marginal buyer, and right now, even manhattan seems to have lost its step. Indeed, what you say here is true:
"Buy now to make a bet that NY jobs/pay will grow so fast that it will drive the cost of rents/building/converting up to match and exceed bubble prices. "

This said, what if i keep making low ball bids anyway. Say price to rent multiple of like 20-21 for prime locations with views and all that. not a HUGE risk from my perch. 20-21 mutliple for prime mnahattan seems like youve got room to be early/wrong. I do recognize its being still far from a no-brainer. What compels me A LOT is where the 30 yr is at. I mean i dont care what palys out, youre not going to see much more downside in nominal rates in the USA -- at most another 100bps, which would not last as the FED would then start printing like Zimbabwe again.

oh and thanks for the response man.

I hear you finance guy...
I'm sure shadow inventory will limit price gains over the next several years. But I'm of the opinion that food and shelter are basic commodities that one can't do without, and with ownership rates down this creates rising rents. Between the bubble air being let out, foreign money always looking to come in and new housing formation real estate may still have perform its role as an inflation hedge. Add to that rising raw material prices and the fact that real estate in Manhattan at least still requires union construction(mostly) and new housing may cost too much to get built in the numbers we saw last several years. All this should support home prices on this island over the long run.

Japan is an island, no? Fklmaoz. Tulips, I love sending my wife some tulips for absolutely no Fking reason at all. Itz a little joke, maybe I'll send a dozen to every buyer of nyc re in the last 36 months. Her mercer is Thatz yuz at 300? White or yellow?

Japan has negative population growth.
Have a good nite w67.

yeah w67th, mercer took a huge risk...paid up for no good reason. guess the wife had a lot to do with it... hope you live many happy years in the places regardless mercer. imo, you buy when you plan on holding place for the longer haul -- unless of course a bubble inflates, which won't be happening in the states any time soon. right now it seems you bought into the optimism bubble. even though prices have stopped going up, they really need to come down a lot more. just my opinion. Cheers.

poor Japan will end up losing a lrge portion of itself to the nuke disaster and poor us as we will be ingesting radioactive foods for the next decade no matter what we do.

X transfer wealth of bernie's machinations, fed/state extended unemployment benefits and 70yo parents helping their unemployed 45 yo banker kids living in manhattan, this little island of ours has had negative real income growth....

Oct 1, 2011. Noon. It'll be fun to see the leg kicked out of nyc re. Now here is a unicorn for you riversider. Sleep tight and may cream cheese be on sale tomorrow at fairways.

Help411 give it to mercer like he wants it.

'mercer, you tool. Net net, in 20yrs when we both retire, the $1mm differential in our Mercer unit purchase (2yrs) will allow me to fly a private jet while you schlep it in first class'. At least you won't see me at the baggage claim, that oughta be worth something.

Btw, I can buy any unit and turn myself into mercer the burdened /can't sleep at nite 'owner' anytime I feel like. Goodz nitez.

LOL w67th...what happens on Oct 1 noontime though? new law goes into effect? more taxes? gnight

>will allow me to fly a private jet while you schlep it in first class'.

I bet they love you at security.

"1) what is being assumed above when speaking about "transaction costs"? is it specific to the type of mrtgage being used? "

Corcoran has an excellent page detailing it all for condos an coops in NYC. Search for "Corcoran closing costs" on Google.

"2) what relationship/rule of thumb can one invoke to take $x per sq foot for renting and approximate a price for bidding on a place? does one have to make an appeal to some price to rent ratio? "

Generally, I think a price-to-rent of 16x (price divided by annual rent) is a minimal starting point for a mediocre financial decision on buying your own home. Get to 12x at current rates for it to start looking like a decent investment. You won't find anything near decent in your search area.

300_mercer: "I have plenty of exposure to the market via job as I am sure you do as well."

In theory, not much. In practice from the last few years, not much either. But maybe it was a fluke...