Cheaper to own than to rent?

Nyc10023....clearly... Too bad I didn't have two nickels at that time. Notice in each case you were looking at 10-11x annual rent multiples to purchase and Manhattan is like 16-18x right now even after this little correction.

10-11x rent right now is $450/ft for a 2 bed....down from a peak of $1200.

Interest rates may be too low to get there.

Yeah, we're the lucky members of the mini-baby bust. I think we'll make out okay compared to the echo boomers.

My 2 examples were not even NYC. That first house would sell for at least 700k now (with 100k+ work), the second 300k+.

"Juice and LICC just want to say the market is made by people with 100% job security and no need to cost opportunity"

I have no problem costing opportunity as long as you are honest about what that opportunity is. How is it that opportunity cost of a down payment invested somewhere else is always positive?

How old are you? I am 35. Clearly in 1999 I should have taken a job and bought a small apartment in Manhattan rather than move out of town to go to business school. Conversely, at least my misguided notions of buying in 2006-2008 fell through.

Same age, but I was on a rocket schedule to finish college and earn money ASAP. My partner is not much older but was a similar rocket schedule to finish grad school. Hindsight is 20-20.

Juice, I think we have taken this civil-like, so I am going to keep it above board. If you find this interesting, you should read a little about opportunity cost and what it means. Its the rate appropriate to the risk you are taking with your money. It has absolutely nothing to do with what the stock market did over the same timeframe. Nil. Nada. The stock market was a bad investment for the same reason, it was too expensive. Everything was too expensive. It was a credit super bubble. What you do with your cash is a separate decision entirely.

Mainenece and property taaxes and insurance are not included in condo bldgs. Most of the examples here of renting or owning the EXACTING same apt. in Manhattan are condos, not coops. The tax asavings is negated by maintence inside your apt (not included in many condos) insurance, and taxes plus the amoount one could earn with th3 20% down on a portfolio of conservative investments.

To be clear I meant inside the apt maintenance ie your sink is leaking or the walls need repainting in your bedroom.

"Juice, I think we have taken this civil-like"

I agree and would like to continue in that manner. You have an intelligent opinion even if I don't necessarily agree with everything you are saying.

"you should read a little about opportunity cost and what it means"

No need for an opportunity cost lesson, let’s just say I find it a tad hypocritical when bears/renters scream about opportunity cost after losing everything they have in other stupid investment vehicles.

It may be hypocritical, but it actually makes the point that opportunity cost is real and it has nothing to do with hindsight. Maybe it might be more logically named 'compensation for risk of loss'. The opportunity missed with the benefit of hindsight, was the opportunity to be in cash during the early unwind of a credit super bubble. The extra risk of real estate is also illustrated by the fact that you can lose more than 100% of your equity. Not really so in other cases. This is why the 'compensation for risk of loss' in the case of residential real estate should be even higher than for equities. For real estate, this risk is mitigated if you never move, never miss a payment, and never pay more than rent would have cost... However, when we deviate from any of those wild simplifications...I realize, and think others should, that real estate is a very very risky investment. Frankly, the tendency to make it emotional actually makes for more risk. The only thing here that anyone really disagrees about is whether the risk outweighs the tax benefits... As such, bears think you should get them for free. History illustrates you can sometimes do even better than getting them for free. For example, Nyc10023's examples could probably hold up as great cash flow investments...which made them great primary residence investments. It was really the biggest and best no brainer in 1997 when the economy was already feeling good and rents were rising. If 1998 in 1989, then it may take us six years to get there. Maybe a value buyer steps in to buy a residence sooner because the 'dividend income' of renting to him or herself is so compelling it offsets the 'risk of loss', especially with a long holding period expectation.

Above should read, if 2008 is 1989...which it kinda is... And it kinda suggests, average into stocks here and buy real estate in five years...but nothing is ever perfectly to script.

If you are saying that the risk of losing equity is too high to only make $1 more than it would cost to rent, I think that is a fair point. I would also agree that when you deviate from those simplifications you stated above, that's where trouble starts. Put more simply, buy for long term rent for short term, it’s not nearly as complicated as this thread.

I think the least compensation for the risk of owning that I should expect is 100% of the tax benefits. I agree with Steve, that the apartment should be cheaper than renting on a gross basis. I think buying to rent out is a decent frame of reference here. Anyone who bought to rent would expect to make money per month, not simply break even. That sort of mathematically proves that you are paying more than you should as an investment... Maybe the intangibles are worth it to some. To me, its prob the biggest cash outlay you'll ever make and that is playing with fire if the unexpected happens.

steve and Rhino are failing to understand the meaning of opportunity costs. You can't negate the tax benefit by alluding to the opportunity costs of the down payment without also adding back in the opportunity benefit of price appreciation of the property. They should stop misapplying concepts and saying that I have made claims that I never have. Juiceman and I have shown quite effectively that steve's claim that it costs 50-100% more to buy than to own, when comparing current monthly costs, is way off.
jason, any analysis of rent-buy comparison includes either maintenance for a coop or common charges and taxes for a condo.

Not at all. My point is that at cap rates of 2%, all you are getting is the right to the appreciation plus a money market income for a levered equity risk....and history has illustrated that will be a pretty poor investment. Listen, I have too much education in finance not to understand opportunity cost. The best time to get appreciation is when you are paying less than rent on gross carrying costs... I mean that is black and white in the data.

The gross carrying costs are still much higher than rents...50% is not far off. 100% seems high, but maybe not for a condo. You can say gross cost is not the way to look at it... But you can't really say that 50% is way off, its not. You'll pay $6000 gross to own a $4000 rental, easily.

10023, we bought in the mid-90s. but couldn't afford the end destination. we sold in 2000 and were stunned when we tried to buy something bigger (and I had been looking, so I wasn't going in blind). we did buy something bigger, and it was too much of a stretch.

we're in our mid-40s. my husband's law firm has mandatory retirement at 62. when and if i buy i'm looking at a 15-year fixed with alot down. might be better to rent.

Looking at anything other than the actual costs to the buyer is the wrong way to look at it. You have to take into account the tax benefit or else your analysis is flawed and irrelevant. If you are reviewing the financial costs and the buyer is going to have more money in his paycheck than if you look at it on a gross basis, then gross cost does not tell you what you need to know.

LICC, i'm curious. right now the mortgage deduction is getting chopped slightly. obviously now is not the time to do anything more significant, but in the future, do you really think it will continue to be sacred? the need for revenue will be HUGE going forward, and where to get it won't be an easy task. once housing bottoms, i wouldn't be surprised to see some changes here.

all i'm saying is it is something that i would never RELY upon in any calculations.

LICC, all you need to know is that when people pay higher gross costs than rent, the apartment values go down below their basis, sometimes violently. Its happening right outside your window. If you chose to ignore it or bask in the emotional value of home ownership, so be it. I think its sad that you can't stretch your mind further. I mean anyone would have to be a fucking idiot to think that purchase prices should go up 300% in ten years while rental rates go up 30% and then make an argument you should throw down hundreds of thousands to take part in it.

It isn't a debate about whether interest deductions exist or not. This is really a debate about risk of loss, a risk LICC wants to ignore. And its amazing he wants to ignore it given we have seen prices chop 25% in six months. Its a joke.

rhino, i know. you're preaching to the....

but, it was just something i thought should be pointed out. i think JM is coming from it from a slightly different approach, one that i understand better. not a loss-risk analysis, but a cost-benefit analysis. if done properly i can understand buying at certain prices under the latter analysis, but not the former.

So much for Rhino being able to have a civil, intelligent discussion. Rhino, there you go making up things I have said again. Stop getting so upset just because you are having trouble with some financial and economic concepts. And you can make conclusory statements all you want, it doesn't make them true. By your wrong statement, if you did the rent v. buy comparison in 1997, 1998, 1999, 2000 it would show gross costs to own being lower than rents. Just look at the numbers, your "all you need to know" fact is just fantasy.

If the tax laws change, then you change the analysis. I would be shocked if Congress ever entirely eliminates the deduction. No one is calling for that, and it would raise a political battle.

Contrary to the assertions of those here who try to misstate my position, I am not looking at the rent v. buy cost comparison for forecasting future prices. I am simply correcting wrong statements made by steve and others that current prices are way off from current rents.

but they are. and rents are still declining with enormous potential pressure.

LICC your compass is broken. Values oscillate around gross carrying vs rent, not after-tax carrying vs. rent. I am the one who said 1997-2000 gross prices to own were less than rent. That is what made a purchase then a good investment. Unless you made a typo and claim gross costs to own were higher then rents from 1997 to 2000, it which case you are wrong on the facts. Be sure NOT to include principal. Conversely, gross prices over rent made 2005-2008 poor investments. See Juice just wants to ignore risk, whereas you are plain stupid.

Aboutready, he has decided historically that rents oscillate around after-tax carrying costs for a 20% down mortgage... Simply wrong. Also to say values tripled while rents went went up 30% or so and somehow we maintain an equilibrium valuation...It can't possibly be correct...But still he defends the position.

and we haven't even started with the affordability/future income deflation adjustments. not only are the calculations bad today, they are likely to get worse as we follow a moving target (or a couple of moving targets).

Don't be silly. We tripled in ten years, went down 25% and we are currently at fundamental value support. Buying makes so much sense here, risk of loss is minimal and don't forget the juicy tax benefits. If you put down more, you will save even more vs. renting on a monthly basis, which is like free money.

That anyone even listens to LICC, who made the decision to leverage up to buy an apartment in a fringe neighborhood at the very tippy-toppy peak of the greatest real estate bubble in the nation's history, is nothing short of jaw-dropping.

LICC, you'd be shocked? I was shocked when the baltic dry index went to close to nothing. I wouldn't be shocked in the slightest if the mortgage deduction was eliminated for anyone making more than %200k.

They already talked about maxing the deduction at 20-something percent even if your marginal tax rate is up in the 30s.

beatyerputz, well said. i almost always stay out of the rent vs. buy. i agree with stevejhx, but there seems to be little point to entering the fray. I came in because I can see some basis for buying due to emotion, which as a former psychology student i feel could probably even be quantified. not saying I'd do it, but i've been tempted despite myself.

The emotion will soon be, take my apartment please... I bought it as an investment, and rents are so low I can barely cover my charges. Don't worry though, pre-war coops will not be affected, due to their excessive charm.

rhino, you confessed that you wanted to buy yourself. many of us are idiots, some just acted upon the impulses with more focus.

having said that, i like your snarky humor.

Rhino, you can rant and rave and make things up all you want, the numbers show you are wrong. Just look at the Miller Samuel reports and the rents from back then.
beaty - nice guess. I bought my first place in 1998. Anyone who says LIC is a fringe neighborhood either has never been there or doesn't understand real estate.

LICC, right now upper RSD, LES, Murray Hill, HK, all seem to be heading back toward fringe. Not to mention Harlem. Happens in every single downturn. And I understand real estate.

And right NOW you're wrong. rents are cratering, and sales prices are as well. who'd make an important decision, financial and/or emotional, in those circumstances? 600 or so Manhattan buyers did in the last 30 days, probably all with mortgage contingencies, let's see who closes and at what price points.

LICC, if you run the numbers on a $200-300k one bed in the late 1990s, I am not sure how you calc that your gross charges were more than the rental rates at the time. That is crazy talk. I looked at plenty of apartments in 1999 before I went to grad school. Many of them were gross carrying cheaper then rent even including principal repay.

Aboutready, sure it has been tempting...its tempting when finance is riding high, and rents are rising and your gross charges aren't 'too much' higher than your rent, and much lower after tax. To defend it now seems braindead.

rhino, i expect we were typing at the same time.

"What has been claimed is that it is not 50% more expensive to buy than to rent. You refuse to accept the math we put forward because it doesn't fit into your absurd claims."

I haven't seen any numbers.

"I can post a number of examples where equilibrium is in sight, but you will go on and on and on and on about tax benefits ignoring principal payments, etc."

Go ahead, let's see what you consider "equilibrium."

"If you can't give me specific listings, then we're talking in circles."

Exactly.

JuiceMan: "How is it that opportunity cost of a down payment invested somewhere else is always positive?"

LICC: "without also adding back in the opportunity benefit of price appreciation of the property."

You see, in their minds property always increases in value and stocks always fall in value.

I'll be glad to do this if you do it properly: using moving averages since the end of WWII - long-term, that is, without picking particular intervals. They will, however, over time, cancel each other out.

This is really funny: "Anyone who says LIC is a fringe neighborhood either has never been there or doesn't understand real estate."

I would say, "Anyone who doesn't say LIC isn't a fringe neighborhood either has been there or understands real estate."

Makes just as much sense.

How's that Gristede's and Duane Reade coming, LICC?

The proof is in the pudding: they make claims that what other people say is false, but can't show even ONE listing where you could buy an apartment under standard purchasing conditions, rent it out to an unrelated third party and remotely make money.

Seems this argument is over.

Its funny how heated this gets. If people choose not to think about their apartments as investments...its a wonder why they get so upset when other make the argument that values need to fall a lot to reach equilibrium.

They never engaged Steve... they insist aftertax is equilibrium when the history screams its actually the peak/exception.

considering how vital real estate values have been in recent years for retirement income, i don't see how people can discount its investment status. it's all part of making wise decisions financially, and not following the herd. just because the msm and the government and the banks tell you that owning a home is the best thing since sliced bread doesn't make it so.

is nice, but not necessary. and sometimes financially deadly, beyond your control.

AR: I wouldn't buy if I were you, unless you knew that you were going to retire in NYC. I don't know what you bought in '00, but there were definitely some deals to be had in Chelsea at the time. I never looked that hard once my partner vetoed my W24 proposal.

I did OK (1300 sf condo loft in Chelsea), but sold a bit early, 2004. My bubble meter was a percolating, and as one financial analyst said there's really no difference between being early and being wrong.

Still, we made some decent returns with the two sales. Now, I think you're right. If things get really low in my retirement city targets, I may look there. No hurry. Really weird, though, to be committing to Peter Cooper when we've owned most of our adult lives.

I was pretty hot on Fort Greene and Cobble Hill ahead of the herd in '00, '01 but got vetoed again.

I called Park Slope in 1997, and Williamsburg in 2001ish (multi-family for the latter). Vetoed myself.

"they insist aftertax is equilibrium when the history screams its actually the peak/exception."

Love this comment. History screams what? Show us the history, just saying "the history" doesn't make it "the history".

Here is a definition of imputed rent since steve likes it so much:

"Imputed rent is an imputation for the net rental income of owner-occupied housing. It is based on the assumption that owner-occupants are in the rental business and that they are renting the houses in which they live to themselves: As tenants, they pay rent to the landlords (that is, to themselves); as landlords, they collect rent from their tenants (that is, from themselves), they incur expenses, and they may have a profit or a loss from the rental business."

Translation, the net cost of living in your own place vs. renting it to someone else. Here is an (unfortunately) sourceless econ paper that states:

The imputed rent for owner-occupied housing.
-The household does not pay rent in name, but the cost of housing per period of time
(out of pocket expense plus the implicit cost) is in effect a rent.
-Rent is defined as the cost to purchase housing service per period of time.
-If the household chooses to rent, the cost is an actual out-of-pocket expense paid to
the landlord.
-If the household chooses to own, the cost is the sum of mortgage interest payment and
the implicit costs of forgone interest income and depreciation. The imputed rent for owner-occupied housing.

Note that is says imputed rent is interest only (does not include pricipal) and if this was a US based paper it would also exclude the tax benefit. Very simply, the net cost of owning should be compared to rent. Why is this so hard for people like steve?
http://www.sef.hku.hk/~tsechung/e0503/Owner-occupied%20housing.pdf

steve, not an ideal source but feel free to post something better that says imputed rent should not be net a tax benefit or principal and I'll be happy to read it.

Juice, I don't need to show you anything. If prices go up 300%, then they go down 20-25%, and this puts after tax carrying costs roughly equal to rental rates (at best), then isn't it obvious that after-tax equivalence is not the median? If we think of 1993 to 2008 as a trough to peak period, how can we be at the trend this high up? Seriously, do you really not see that? If I know that in the 1990s, prices fell so far the gross carrying charges were much lower than rent, all I need is those two points in time to know we don't oscillate around after-tax equivalence.

Here is some data that should end the debate but probably won't.

http://blog.reblace.com/?p=51

December 20, 2006
More about housing: price to rent ratios
Filed under: General — defo @ 10:04 pm

What? You still aren’t convinced that housing is overvalued right now? Here’s another way of looking at real estate that might convince you.

Housing prices divided by rents provides one measure prices relative to fundamental value. I like this measure because it provides a sense for what an investor could earn by buying a house and renting it out. I’d like to think that this ratio fluctuates roughly around a long-run historical norm.

The two graphs below show price to rent ratios for New York City and Los Angeles over the last 20 years. I have also included graphs of annual price and rent increases during those years. Price data are from the Office of Federal Housing Enterprise Oversight (www.ofheo.gov) and rent data are from the Bureau of Labor Statistics (www.bls.gov).

Los Angeles New York City

(note that the y-axis is normalized so the actual number means something only in comparison to other years)

Both of these cities experienced similar (but smaller) peaks in their price-to-rent ratio in the late 80s. In the early 90s, New York City and Los Angeles housing prices dropped 10% and 20% respectively in nominal terms. After adjusting for inflation, these price declines were around 40% over 6 years.

Today’s price to rent ratios in NYC and LA are 25% and 50% higher than their late 1980’s peak. Unless the US economy takes off like a rocket ship, I’m guessing at least a 20% nominal price drop in these cities over the next five years. Inflation-adjusted prices will decline even more.

The other thing going on here is mortgage rates being near 20-year lows. But my calculations suggest that the difference between 10% mortgage rates in 1988 and 6% mortgage rates today can only account for about a 25% increase in a price to rent ratio.

If mortgage rates can stay low then housing prices might decline slowly over a number of years. If mortgage rates rise (unlikely but not impossible), then watch out. Fortunately the Fed knows this and will keep interest rates low as long as possible (and then watch out for inflation!).

Not every part of the country looks like NYC and LA, but most big cities show similar increases in price-to-rents. The exceptions may be Texas and some parts of the South. Out of the 24 cities across the country for which data were available, only Houston and Dallas are not at their 25-year price-to-rent peaks right now. Of the 22 non-Texas cities, price-to-rent ratios today are an average of 42% higher than their highest peak in the 1980s.

At the end of the day, I just don’t see most of these cities escaping substantial price corrections. Who knows how it will turn out.

aboutready, the PCV examples of rents is an unusual case, because before the buyout people would put their name on the wait list with an expectation that it would be at least 10 years before they would ever be interviewed for a substantially-below-market RS apartment there, and getting in was a Godsend - post-buyout nothing happening there makes sense. I don't know if it's Stuy or PC or both, but in the old days residents were not allowed to have A/C. When I say rents will be higher in 15 years I'm thinking most rents in most neighborhoods. I think for instance of a friend living in a very unglamorous, but absolutely stable and clean as a whistle neighborhood in the outer boros in a two-fare zone that is NOT rent stabilized. The rent is now 50% higher than move-in 15 years ago. That's unregulated rent. No spectacular increases, long periods of no increases, but in 15 years, the world is a different place.

"we haven't even started with the affordability/future income deflation adjustments. not only are the calculations bad today, they are likely to get worse as we follow a moving target (or a couple of moving targets)."

You're right, and I'm beginning to feel this is a once in a lifetime change different from prior recessions. This rent/buy discussion looks different now than it did when I began following it. You nailed the reason, expectation of future curves. Nevertheless, if a married couple with 2.3 children buys a ranch home with a garage when they are 30 and never moves, when they are 60 and the nest is empty they pay only taxes and upkeep.

but...isn't the real comparison, what it cost along the way vs. a rental ? assuming that one had the discipline to bank the difference?

"Juice, I don't need to show you anything."

ok, then I don't need to accept your "history".

"I know that in the 1990s, prices fell so far the gross carrying charges were much lower than rent, all I need is those two points in time to know we don't oscillate around after-tax equivalence."

Assuming what? That 1990's prices were below equilibrium? What was equilibrium in 1990? Just because 1990s prices were below what it cost to rent how do you know how far below equilibrium prices were? I'm not being snarky here Rhino, but were does it say (anywhere) that equilibrium is where rent cost = buy costs net of all ownership "benefits"? Just because it was like that in the 1990's doesn't mean that we were closer to equilibrium. Maybe we were way below equilibrium?

Isn't equilibrium the average relationship between renting and owning over time? If we rise 300% and fall 25%, chances are we are not at equilibrium. Unless equilibrium means something different to you. Did you look at the graphs in the blog above? We were already above peak price to rent ratios by like 20% in 2005... Would you define equilibrium differently? It sounds like you define equilibrium as now, where many apartments can be bought and the aftertax costs are roughly equal to rent. My argument is, if you are only 25% off the peakiest peak in history...ummm maybe that's not a median? Dentistry is more complicated than this.

What does this graph tell you, knowing what you know about 2006, 2007 and 2008?

http://blog.reblace.com/wp-content/uploads/2006/12/new-york-city.JPG

Focus on the 1982 trough, the 1988 peak, and then picture a much higher peak above 2005 where it stops, say I don't know...in Q1 2008... WHAT DOES THIS TELL YOU!!!!?????

Long term historical data seems to show, across the country, an average of monthly cost of owning about 25% higher than monthly rent. (I read a WSJ article saying that nationally we've recently gotten back to this average.) The question then becomes, why would owning be more expensive than renting? This is not a question about a specific region or period of time.

Here are a few potential answers: 1) rights associated with ownership (no leaseholder eviction; ability to modify the property; etc); 2) tax deduction of interest to $1M in loans; psychological benefits of ownership (pride; helps people save through paying down of mortgage).

the graph shows that there was a 7-year period during which price to own was lower than price to rent, out of a 23-year period, suggesting that that 7-year period is not the norm - the top graph suggests we are heading back to a similar trough of sorts

I'm still wondering where interest rates are headed.........

Also, a part of the mortgage payment is downpayment of priciple, this means that the cash cost of a monthly payment is in part a paying down of debt, or a kind of wash as far as NW is concerned (-cash, -debt).

Here is an example for steve.

I bought last June a very small 2br for $495K in a renovated condo development on 111 St. It could have rented for $2500 (we saw the same unit a couple floors down for rent). With CC of $350 and $300 in taxes and a conforming 30-year mortgage, the place was about the same cash monthly cost either way.

As far as opportunity cost, that seems to be a question of investment risk and on that, who knows? Any equity position in anything is the risk of profit or loss, and leverage magnifies that risk. Clearly, residential real estate has historically been less volatile than the stock market, justifying leverage ratios of x4.

"Anyone who says LIC is a fringe neighborhood either has never been there or doesn't understand real estate"

LICC, in what lonely expanse of your flowery and cupcake-filled dreamworld is LIC not fringe? Dude, LIC would be fringe in Detroit.

Lowery, this whole graph lies under one, so how does it show only seven years where owning was cheaper? Be that as it may, please read the note under the graph-> (note that the y-axis is normalized so the actual number means something only in comparison to other years)

Also note that 2005 was the highest year in 23 years. Also note that we are probably priced thereabout right now, give or take. Now, LICC, please tell me how that can be defined as equilibrium? So peak is the new definition of equilibrium. I guess oil was cheap at $120 and the stock market at 1200 on the way down. You are a dope.

"Lowery, this whole graph lies under one, so how does it show only seven years where owning was cheaper?"

I must not understand what it shows, then, because I thought the lower of the two graphs plots two lines, one being the cost to own, one the cost to rent, and that the own line is under the rent line from about 1988 1995. Did I misunderstand what it is plotting?

Of course, mortgage rates spiked 1988 and after, and there were lots of resets during that period.

Yes, I agree 2005 was unbelievably out of whack with history, and it has not changed that much since. Defining what's "normal," though can go down endless roads. Any of us knows from personal observation, though, that we have lived through a period when people paid enormous sums for the privilege of owning condos and coops in neighborhoods where even very-high rents were less than mortgage+maintenance.

lowery, regarding interst rates, the spread between the Fed's target and the jumbo is still quite high, particularly if you consider that they are trying for stealth manipulations that effectively bring the target rate below zero. there is room for increases in the target rate, assuming other conditions are met (big assumption, i'll concede), without much increase in the mortgage rates.

also, there are still a huge amount of option ARMS that need to reset/recast through 2011, i believe. they can't do a thing to the rates without tanking the housing industry for another go round until this issue is resolved. they may be able to solve it if they nationalize huge amounts of stuff, and just rewrite everyone's loan, but i don't think so. I think i read that something around %50 billion worth of outstanding loan values had disappeared with the first quarter re-fis. that's nice, but it's a drop in the bucket.

Lowery, we can go down endless roads defining normal...but clearly we cannot call 2005 normal, or median, or mean, or equilibrium...correct? So clearly, purchases made today, that equal rent on after tax carrying costs are AB-normal, right? This is if I assume we're still at 2005 to actually get a deal done, which I doubt. So, when I get my ire up that LICC wants to call today 'normal', because you can buy and after tax benefits match your rent, I think the chart justifies my thinking that he is ridiculous. By a small leap of logic, if today you can buy and carry = to rent after tax benefits... THEN CLEARLY THAT WAS AS EXPENSIVE AS IT HAD EVER BEEN RELATIVE TO RENTING SINCE 1982! THAT IS NOT NORMAL.

PS the bottom graph is annual changes...So 1990 to 1995 are six years of flat or negative year on year price changes. The negative figures dont look low enough but whatever.

Is smoke coming out of your ears? Yes, if you doubt we have retraced to 2004 (who was that, Juice), then clearly the ratio of owning to renting is still higher than in any year from 1983 to 2003.

But we're not at 2004... That is why I was just on the phone with my wife's cousins whose only offer on their apartment is 20% below their 2005 cost basis.

I always like to point out how small the nyc market is, with around 5 or 6000 sales in a "normal" year. the following article I posted earlier in the important economic links thread, but I think it is essential to understanding both the buy and the rental markets. lowery, these increases were artificially obtained. these years were not normal. they were caused by a complete lack of regulation of the financial industry, causing huge spikes in salaries in the financial services area. by the way, this is from the NYU business school (not roubini), and not some hack organization. look at the charts.

http://sternfinance.blogspot.com/2008/11/are-banker-over-paid-thomas-philippon.html

"You can't negate the tax benefit by alluding to the opportunity costs of the down payment without also adding back in the opportunity benefit of price appreciation of the property."

Yes, but currently that "opportunity benefit" is a negative number, and more reason to believe that in the short term will continue to be so, rather than become positive. So for *right now*, if you want to include that number in the calculation, it gets worse, not better.

aboutready, a creepy feeling I have had since about 2001 is that the boom in NYC R/E is fueled not by salary growth, but by no-questions-asked mortgage money - take that away, and where the bottom will be is anyone's guess

Rhino86, 2005 was not normal, and about whether it's AB-normal to buy at a price at which your tax savings sort of reaches you to the point where you'd be paying rent: I agree with you that historically is not where prices usually are, and I agree that in the enthusiasm of this past boom cycle people shifted their notion of what "a good deal" was by saying things like, "well, it may be a lot in maintenance and mortgage, but when you figure how much I would be paying in income taxes, well, I'd rather pay it in mortgage interest than in taxes."

I agree with you that the tax benefit to owning is canceled out by the price premium people have been paying to get there. It seems that this will not be what drives prices in either direction. Prices are going to go lower because there's more inventory, fewer qualified buyers, lower incomes, less easy mortgage financing. If it gets to the point again that we were in the early '90s (and before the '80s boom), where buying was cheaper than renting, it will not be because people crunch the numbers so much as that more people will have no numbers to crunch than are needed to absorb the supply. So the relationship of rent/buy to direction of prices, I don't know.

lowery, we are on the same page. if anyone could buy a condo with little down and possibly dubious credit, how would it affect such a small market? I didn't get to your creepy feeling until 2003ish (although i had some similar but not focused thoughts in 1999-2000), but I've been there since.

Things started to get unreal with respect to money when my friends and slightly older co-workers started cashing in big time on stock options (I started off in the tech industry). When the tech equities started to take off in '95, previously humble and humbly paid folks were buying fancy cars & fancy homes out of proportion to their 5 figure salaries. That was when money first started to seem unreal to me and when I got the sense that one could make out like a bandit and retire by age 30. My cohort began to chase the late, greatest ideas that you could sell to a VC, any VC. We'd get together and talk tech like crazy until their eyes would bug out and they'd give us millions. Either that, or go work places where they handed out stock options like candy. Unfortunately, it wasn't that hard. 15 years later, I look back at that time and think that we could have spent our 20s building something substantial and lasting - but we spent it chasing easy money. Folks, I came close a few times to being a multi-millionaire without working any harder or faster than my peers. And I'd say about 20% of my friends did well out of that era. So bankers aren't the only evil people around.

10023, i am not saying that bankers are evil (although i have my moments). All i was pointing out was that the increases in salary there more than explained the increased prices in real estate, given that we have such a small turnoever generally.

hell, I could have made a shitload in this recent bear market rally, but because of the husband's job, I can't freely invest. Oh, well, an ulcer avoided.

The New York Times has a pretty good tool to find out, check it out:
http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html?_r=1&oref=slogin#

I disagree lowery...Investors will crunch the numbers because there will be too few owner-occupiers with numbers to crunch. Also bear in mind, mobs don't need to crunch numbers to reach the right conclusion. Much is written about this "consensus theory".

To be more clear, investors who will look at things Steve's way and look to generate monthly income are the only ones who can clear this condo glut. This is whether they are individuals or block buyers. And I doubt they'll venture a guess at value until they see rents stabilize, maybe even start rising.

Real estate is, and has always been, a LONG-TERM investment. You are all totally, utterly missing the point about the main advantage to owning versus renting: RETIREMENT! Buying an apartment in New York City during your peak earning years is the key to being able to retire in New York! Five years ago, I purchased a one-bedroom apartment for $350,000. My combined mortgage and maintenance is currently $2,000/month. Similar apartments in the neighborhood rent for $2700/month. In 25 years (or sooner, hopefully), I will have paid off my mortgage (currently a 30-year fixed rate), and going forward will have only my monthly maintenance to pay (currently $500/month). Renters, however, will never see their monthly housing costs drop -- indeed, they will only see an escalation. In 25 years, that $2700/month rent will likely be well over $4,000 (assuming a modest 2% annual rent hike), while my monthly maintenance, assuming the same rate of increase, will only have risen to $750 -- a much easier check to write post-retirement, living on a third of what I was making during my peak earning years.

Hmmm so you plan to retire in a one bed... At least it sounds like you bought it well. The point you miss is any time isn't the right time.

At least I'll be able to afford to retire in Manhattan. Renters -- unless their post-retirement income will match or exceed their peak earning years -- will not.

Most people don't buy one beds that they plan to retire in, but thanks for playing. At least it was cheaper than rent when you bought it.

Why would you not retire in a one-bedroom? Planning on starting a family at age 67?

At the price you paid, your cap rate is 7.5%...Buying it today for $800k would be asinine.

nycmatt: frightening, but good luck to you.

p.s. the key to retiring in ny is to make a shit pile of money along the way.

In your silly story, you plan to live there forever. In real life, people move around...and poor purchase timing can be very costly. Five years ago was the last time buying made real sense, as you have illustrated here. But you miss the point of your own story.

Not necessarily. If one can afford to purchase an $800,000 property today -- and will always be able to service the mortgage -- and have no plans to move -- then it's a perfectly fine investment.

(P.S.: The key to retiring in New York is buying a home you can afford and having a defined benefit pension plan. The "shit pile of money along the way" really is optional.)

how does no plans to move work? supposing plans change? then what?

Why would anyone move out of New York?

well perhaps they receive a great job offer elsewhere

perhaps a family member moves somewhere else and they want to be close to that person

If your maintenance is only $500 a month, you have either conveniently excluded taxes from the maintenance or your apartment is extraordinarily small.

or you're full of shit

"Not necessarily. If one can afford to purchase an $800,000 property today -- and will always be able to service the mortgage -- and have no plans to move -- then it's a perfectly fine investment."

Matt, you are a horse's ass. This statement is pure shit.

For the record, my apartment is 1700 square feet. Maintenance in co-ops includes taxes (in case you didn't realize this). Yes, it's a low maintenance because of retail space on the first floor.

And if you get a great job offer elsewhere, you sell. And if the market timing isn't right, you hang onto the property until the timing is right. If you were responsible enough not to overextend yourself when you bought the property in the first place, it really shouldn't be a problem.

Really. This isn't rocket science, folks.

so you have a one bedroom with 1,700 sq ft and a maintenance of $500?

Yes. It's more of a "loft", actually.

There is no place on Earth where a 1-bedroom going for $2700 a month today was selling for $210 a square foot in 2003 with $500 maintenance on a 1700-square-foot place.

Matt, go back to sleep and stop using mommie's computer. I haven't heard a tale this tall since the fourth grade. Crescent, thanks for the quick math. I think he's saying 2004...even better.

Oh Lord -- such jealousy on this board! YES! People were still getting great deals five years ago -- just because you didn't do your own legwork to FIND them doesn't mean they didn't (and still don't) exist.

no one's jealous.

what's up with your plans on 168th?