Bottom line - rent/cost ratio has to fall into place

I've been saying that for over a year, but thanks.

Some data: I just checked and found that the decent sized studio apartment I rented at 250 w 19th in 1994 for 1400$ per month now goes for 2500$. Units are not sold in the building.

The apartment I rented in 2000 at 270 w 17th st for 2850$, can be rented for around 3300$ (or maybe lower). It was offered for sale in 2000 at 380k, now this type offered at 700k plus. About 640 sf.

It seems rents went up way less than apartment prices.

With one caveat: here on the UWS, the rental stock is not the same as the sale stock. It's difficult (getting easier since you see rentals in co-ops these days) to rent the same apt that you could buy. If you are a family, it's not very stable to rent in a co-op - you might have to move every 2-3 years. So I would recognize a small premium for owning but when the market overcorrects, that premium might disappear for a while.

This is what drove our decision in 1999 to start looking for places to buy. To rent a 2-bedroom in our building was 4500+. To own a 2-bedroom co-op in a slightly better location, better-maintained building cost 3000 net (without factoring the interest lost on 90k downpayment). We fully recognized that we could lose our 90k dowpayment, but were prepared to take that loss for the extra bedroom and we were also at the beginning of our careers in NYC, so saw ourselves here for at least 10 years.

nyc10023, do you think that's unique to the UWS? That's one of the major issues with rent vs buy - the stock is very rarely identical (to be fair, it is in some cases, as has been shown in some threads here).

The rents are coming down faster than the prices. So the ratio is even more out of whack now than at the peak. Some rents are close to what you would pay in 2000. The prices are way above that.

bjw, there may be a differential between rental quality and for-sale quality in older apartments (e.g. coops) but with the large number of unsold new development units turning rental the quality gap is shrinking fast. New construction in LIC, Brooklyn and The Financial District are poison for buyers and bare now egging for renters. How far will the rot spread? Only time will tell.

^^ "and are now begging"

No, for instance - there are not that many prewar 7 room apts you can rent on prime stretches of Fifth or Park. Can't speak for downtown, as there are many more condos. Jimstreeteasy pulled out great orange-for-orange examples. In our area (use PS199 zone as a proxy), there are not many 4-bedroom prewar apts for rent, ever. There are some townhouses and duplexes in townhouses for rent, but the last one for under 10k at 312(?) west 70th rented quickly once broker lowered their price.

The cost of ownership vs renting is ALWAYS the fundamental financial calculation. Personal preferences, outside of finances, i.e. type of unit available in a certain neighborhood, amenities available, etc. may tip the balance for you in favor of ownership. But if cost is the overwhelming factor for you, then yes, always do the rent vs buy calculation. Certainly those who just "had to buy" in 05-06 are kicking themselves now that we're on the steep downcurve. And, for 71% of Americans, they don't "own" anything, they're making payments to a financial institution on an instrument called a mortgage.

In an ideal world without class differentials, yes. It should "cost the same" in the end to own and to rent. That's only fair.

However, in real world, a large majority of people find it LESS financially draining (at least in a short run) to rent "nice things" than it is to own--e.g., cars, LV/Hermes bags, etc. So, this "rent = own" fomula does not necessarily work.

In terms of housing, I myself am happy to be in a bldg. w/ virtually 100% owner occupied, without transient rental populations. But, then, others may be completely happy in rental bldgs. or bldgs. w/ large rental populations. Because of people like me, at least in NYC, rentals would probably continue to be considered less desirable and thus less costly on average.

80sMan, definitely agree there. I guess my point was that it's not unique to the UWS.

One thing the rent/buy price equality argument frequently forgets is time horizon. Let's use cars as an example. If I need a car for 20 minutes, taking a cab is the optimal solution. If I need it for 2 days, renting is the optimal solution. If I need it for 2 years, leasing is the optimal solution. If I need it for 5 years, buying is the optimal solution. In all cases but the last, my 'cost per mile' is higher than buying, but it is still the best solution.

Same thing when looking at housing - 1 night - a hotel. 1 month, an extended-stay hotel. 3 years - rental. 7 years - buy.

There have been substantial demographic changes (delayed marriages, delayed child-bearing, greater desire to live in the city) in NYC over the past decade that have extended the time horizon of a given housing need, turning renters into buyers. I'm generalizing here, but 15 years ago the model was: Graduate college, share with roomates for 3 years. Then move into a studio for 3 years. Co-habitate with fiance for a yr in one of those studios, then get married and move into a 1-bed for 3,4 years till you have kids - move to suburbs and buy a house. All of those NYC living arrangement show renting to be the optimal solution.
Now, the model is more: Graduate college, share for 3 years. Live in studio for 6-8 years till married. Move to one or two bed as DINKS, have kid(s) a few years later - stay 7yrs+. Those scenarios move the optimal solution much more towards buying, which is why I think that looking at prices on an after-tax cost to an owner occupant, vs. the attractiveness of a property as an investment, is the way to go.
Now, those demographic changes could reverse, but demographic changes are like aircraft carriers - they don't move on a dime.

@jim -- your studio comparison (1400 - 2500 today) implies a 4% return over a 15 year period. I did something similar with the Normandie and came to a number of 3.7%.

Surprise, 3-6% is what every economist in the last 50 years has said is the appreciation rate for real estate -- I think even stevejhx said it a year ago even.

bjw -- i think you could factor the difference in quality into your calculations (maybe an extra $1000/mo to compensate for sale units being better quality) Nevertheless, the year to year return should be 3-6%. If that's the year to year on rentals in manhattan, what reason would owning be any different?

@printer -- if the you spend 200k on a down payment for a $1MM place and sell it seven years later for $1MM, how is that more optimal than taking your $200k and putting in stocks, bonds, etc.?

not to mention that the transaction costs for real estate are significantly higher than for stocks, bonds

The real appreciation in real estate is about 1% per year - the same as incomes.

printer: you have marvelous theories about life, but I see no sources for any of them.

Your "theory" about the relative benefits of buying and selling is inane: you forgot one little detail.

The price.

The mode of possession matters not at all. What matters is how much it costs.

If it cost $30,000 to take a cab uptown, it's better to buy a car for the trip.

steve, delayed age of marriage and delayed age of child-bearing are extremely well studied facts - needing to provide backup on that is about as necessary as that the earth revolves around the sun.

if you need to use statements like 'if the cab cost $30k' to prove your point, why bother?

Steve: demographic factors make a difference, they can increase the desire to own because the types of properties sought by professional couples with two or more kids differ markedly from single/childless couples.

Which means that the rental stock has not adjusted to reflect this particular demographic change.

jmkeenan/jason10006,

I don't have the time to explain the relation between time horizon, volatility and expected return here - but I think anyone can understand the basic concept that the longer your holding period of a risky investment, the greater your expected return vs the non-risky investment.

What if the $200k of stocks drops 50%? I mean, we could play this game all day with made up numbers. If you don't believe that the longer you plan to live somewhere, the more favorable owning is vs. renting, than we have to just agree to disagree. And those transaction costs are a significant reason for that - the 6%, spread out over 10yrs, has a lot less impact on the return than if you held it for 1yr.

"delayed age of marriage and delayed age of child-bearing are extremely well studied facts"

But their effect on home ownership in New York City is not, and they did not change so radically in the past 10 years as to cause any change in homeownership patterns here (or anywhere).

So what's the point?

"if you need to use statements like 'if the cab cost $30k' to prove your point, why bother?"

You miss the point entirely (yet again). I merely took your (ridiculous) example to its logical extreme.

If it costs you $3,000 a month to rent an apartment that it would cost you $7,000 to own, it makes no sense to own. You laid out a grand theory of when it's appropriate to do what, without ever stating at what price.

You say, "If I need [a car] for 2 years, leasing is the optimal solution. If I need it for 5 years, buying is the optimal solution."

Not necessarily at all true. It depends on many factors, including what the resale price of the car is. If you need a car every Wednesday for the next 2 years to travel 2 miles, a cab might be a better solution, unless you live somewhere where there are no cabs.

Your "theories" are unsupportable, and downright funny they're so thin.

@printer -- you can diversify the 200k into a number of different buckets, each of which has a better proven long term track record than real estate. Take your pick of number 1% (Steve) 3% (me) 6% (Fidelity). there's lots of things out there that perform much better. Add in the transaction costs and you are looking at loser.

there is a time to make money on RE -- is when price to rent ratio is even (or even better, when it is cheaper to own than to rent which is the current condition in Las Vegas).

I take issue with your first point. The effect on home ownership in my neighborhood (UWS) of couples staying in the city to have children is dramatic. I wouldn't say the change has been over the last 10 years, it's been building up for closer to 20. The type of housing available in the 70s & 80s has changed dramatically over the last 20 years. I have been reading some old-timer memoirs of the UWS and much of the housing stock west of Columbus were not apartments suitable for families, or even professional couples. There were a lot of SROs and some co-ops (today) used to be fleabag hotels full of druggies, homeless shelter-types and prostitutes just 20 years ago. Most of these buildings are now family-occupied co-ops. So tell me again, that homeownership hasn't changed because of demographics?

Actually, demographics can change quite rapidly during extreme economic downturns. Surprisingly so. Has anyone talked to the 9 million 2009 graduates to see what their plans are?

Yes, they can. And I belong to the baby bust generation. We are about to enter our last years of child-bearing, IVF or not. It will be interesting to see if the echo baby boom generation that follows us will reproduce anywhere close to replacement levels given the depressed state of the economy. We baby-busters graduated into 15+ years of prosperity...

nyc10023, just another way we might be emulating the Japanese.

I wish. I wish I lived in a society where your neighbors wouldn't let you sort your trash improperly, and you get your garbage rejected if not appropriately sorted. I so love that. Not to mention the cleanliness of most public places. Don't love the sexism, though.

PRINTER WROTE: Same thing when looking at housing - 1 night - a hotel. 1 month, an extended-stay hotel. 3 years - rental. 7 years - buy.

That statement makes no sense. Whether rent vs. buy makes economic sense depends on the relative costs. If apartments -- for the sake of discussion -- have been in a tremendous bubble, and rents have grown much more modestly, it would make more sense to buy. Your analysis quoted in the sentence above would suggest that this relative assessment is irrelevant, which is obviously absurd.

The need to evaluate rent vs. buy on a relative cost basis is true regardless of demographic conditions. The demographic conditions you talk about -- eg, staying in the city vs moving to the burbs -- affect demand for both rentals and housing. To "have to buy" just because you are married makes no economic sense, and if it is an occassional psychic factor driving purchases, it could not alone account for bubble pricing or induce any logical person to pay a bubble price vs. renting at a non-bubble rate.

Demographic conditions can affect rent & sale prices differently because of the different types of housing available for rent and sale. What is available for sale is often not available for rent on the UWS, in desired school zone. That was my point. So it's not quite as simple as my original comment.

Nyc10023. Fair enough, but obviously that is a marginal impact, and couldn't explain a crazy outofwhack relationship of renting and buying.

Unsurprising that printer doesn't address the cost issue.

Look - when airline tickets were regulated, airlines competed on luxury items: meals, etc.

When interest rates were regulated, banks competed by changing the method of interest accrual (daily, monthly, yearly, continuously).

That is, the competed at the fringe since they couldn't compete directly.

If the costs of renting and buying are essentially the same - as in the case of price regulation - then the issues that matter are at the margin: I can paint an apartment I own, I can get out of a lease fast, the super will fix my toilet for free. But when there is a material difference in price, the competition is for most people one OF price. Yes some people don't care - they fly first class. But most people fly bargain-rates, because they need to get there.

People need a place to live. They don't need to overpay for one.

I tend to see both sides of the story. I completely agree with printer that time horizons matter. I also completely agree with steve and the others that cost of each option is key. So, I would adjust printer's analysis to say: When prices for various housing options (hotel, extended stay, rent, buy) are in approximate equilibrium, then his logic makes a lot of sense. However, when one option is out of whack (like buying has been, and still is), then the cost may overrule the time-horizon.

As everything else, there's a sliding scale. If my time horizon is 3 years and buying is 20% cheaper than renting, I'll probably buy. But if my time horizon is 6 months, I won't, because the 20% savings for 6 months from buying are not worth the aggravation, risk and transaction costs.

"Demographic conditions can affect rent & sale prices differently because of the different types of housing available for rent and sale."

While this is true, I don't think it's the primary explanation for the incredible rise in sale prices over the last 10+ years. Buyers were willing to pay much more to buy than to rent because they thought they were getting an appreciating asset. Just like a hot stock with a high P/E ratio, buyers were afraid to miss out on future gains if they didn't purchase ASAP. Also known as, "Buy now or be priced out forever."

Unfortunately, once the price stops going up, the game is over and the disparity between buying and renting is no longer tenable.

"One thing the rent/buy price equality argument frequently forgets is time horizon. Let's use cars as an example. If I need a car for 20 minutes, taking a cab is the optimal solution. If I need it for 2 days, renting is the optimal solution. If I need it for 2 years, leasing is the optimal solution. If I need it for 5 years, buying is the optimal solution. In all cases but the last, my 'cost per mile' is higher than buying, but it is still the best solution."

Except the analogy is horribly flawed when it costs you $2 million to buy a car you can rent for $3k...

This is just bad, bad logic.