The discussions of how to predict future prices (for example in the "down 30%" thread) are unnecessarily complicated. What is the goal? It seems to me that it must be to estimate a value for the unit that, in the long run, has a pretty good chance of being close to what you can actually get when you sell -- especially if you can't choose exactly when to sell. Or more modestly, a value that the... [more]
The discussions of how to predict future prices (for example in the "down 30%" thread) are unnecessarily complicated.
What is the goal? It seems to me that it must be to estimate a value for the unit that, in the long run, has a pretty good chance of being close to what you can actually get when you sell -- especially if you can't choose exactly when to sell. Or more modestly, a value that the price might fluctuate around reasonably symmetrically. That's the price we call "equilibrium."
In normal competitive markets, if it costs less to produce something than the current market price, investors notice and produce more. That increases SUPPLY, which tends to decrease price. Eventually, as investors product more supply, prices decrease and the cost of production increases until the two meet. "Equilibrium" is the theoretical point where price = marginal cost of production.
In the medium run, then, we can expect supply to increase until price is no higher than the cost of producing more supply (i.e., converting rentals to owner-occupied, building/converting/upgrading units, or convincing people to move to previously non-middle class areas).
The housing market is more complicated, because DEMAND is partly a function of price trends. In most markets, demand goes down when prices go up. In real estate the reverse is sometimes true.
When prices are going up, trade-up buyers have more money, and lenders and buyers perceive less risk (if the buyer needs to sell unexpectedly, they'll be able to pay off the loan and have enough left over to start again elsewhere), so they are willing to pay more. Moreover, if buyers think that prices are going up, they are less concerned about overpaying--if they make a mistake, the market will fix it for them. So rising prices create demand.
The reverse is true of declining prices: they reduce demand. Repeat buyers have less money. Banks worry more about risk. So do buyers -- because risk is actually higher. Today if you buy you know that if you need to sell in the next few years you are going to lose a good deal of your investment. And, of course, to protect themselves, buyers want to pay a price that already includes next year's price cut, making prices go down even harder.
Leverage amplifies the trend effect, because it means that everyone makes more in a rising market and loses more in a falling one.
But it is easy to tell the direction of the current trend: down.
The hard thing is to identify how far down it might go.
The purpose of looking for an equilibrium price is this: so long as prices are above equilibrium, both forces (trend and equilibrium) are pulling in the same direction. So it is very hard to imagine that prices will stabilize above equilibrium. (It is easy to imagine -- even without a significant reduction in the quality of life in NYC -- that trend momentum alone will take prices below equilibrium for an extended period, just as they took it above equilibrium in the past decade. But once trend pulls prices below equilibrium, the two forces will be in opposite directions, and eventually the trend will slow and reverse.)
At equilibrium, the price has to be the same regardless of who uses it or how they finance it - if it isn't, investors will buy from the people who value it less and sell to those who value it more.
This means that the easiest way to predict equilibrium price is just to make the easiest calculation: what would an investor be willing to pay for the property if he/she/it were planning to rent it until the end of its useful life. It doesn't matter if YOU plan to do this: the equilibrium price is the point at which a cold-blooded investor will be indifferent between renting forever and selling right now.
(If you know what it costs to build/renovate/convert in NY -- including everything except land -- you can do the same exercise using building costs. You have to exclude land because it is highly susceptible to trend, and its equilibrium value is just its value for parking, i.e., not much.)
The value of a rental property should be [income - expenses] / expected returns. Income means rents -- the rent you'd receive if you rented it (or could rent it, in the case of a coop). Expenses means real expenses: taxes, maintenance, repairs, coop fees, etc. Not mortgage interest or principle or depreciation. Expected returns is a percentage income on capital invested an investor would expect to earn in order to buy this property rather than invest elsewhere.
Expected returns must be more than you'd hope to earn lending money to similar properties (i.e., the mortgage rate) because this investment is both riskier and more work than lending. We can argue about how much more -- I think several points more, reflecting (a) that current mortgage rates are unusually low, so if you have to sell, it'll probably be when rates are higher, which means that investors will expect a higher return, which means that the price you'll receive will be lower, (b) rents are currently very high reflecting the attractiveness of the city and are more likely to drop than rise as Wall Street contracts and the city's finances worsen, (c) current trends in real estate pricing are downward, which means that if you have to sell the odds of a below equilibrium price are higher than the odds of an above equilibrium price, (d) the recession means that the future is less predictable than it seemed a few years ago, so the odds of unexpectedly being forced to sell are higher, (e) real estate taxes are probably going to have to go up faster than inflation.
The nice thing about this calculation is that it does not require telling stories about how much leverage most buyers use, or whether the tax subsidy to owner-occupied mortgages should benefit buyers or sellers, or what tax bracket people are in and how the AMT affects them, or whether people love the city more than they used to. If the city is attractive, that should already be picked up in current rents -- you only need to guess how fast future rents will go up or down (and historically, rents track inflation very closely, so if you use real dollars, you can just ignore this). The funny taxation of owner-occupied housing -- the rent received is tax free -- and the subsidy to owner-occupied mortgages -- which shouldn't be deductible -- is irrelevant to investor-owned valuations. At equilibrium, value to an investor is a function of risk adjusted discounted cash flow, not the specific method of financing.
It is hard for me to see why an investor would be willing to take on real estate ownership in NYC for less than a substantial premium over long term stock market rates. It's more work, less liquid, and has at least as much chance of a bad result. Until the mid-90s, investors pretty consistently refused to pay more than about 100 x monthly rents, which works out to something around 8% for a well-managed building (more if you are willing to take on the extra risk of high leverage). That makes sense to me as an equilibrium price. If prices are higher than that, doesn't it make more sense to empty the building, sell it to an owner-occupant, invest in a balanced portfolio and retire?
Bottom line:
1. Prices are likely to drop at least until rental owners are indifferent between buying and selling to owner-occupants, and could go lower.
2. The price for rental investors is likely to be around 100 x monthly rental value, but could be lower or higher if investors are unusually optimistic or pessimistic about either NYC, inflation or long term interest rates. Still, 100 x monthly rental value is a rough rule of thumb for where you might expect NY prices to be heading.
3. The real estate market is not especially rational or efficient, so take all predictions with a grain of salt. You could have a major problem is you need to sell a highly leveraged asset into a irrationally pessimistic market, and knowing that the market is wrong won't help you. Alternatively, if investors have a sudden bout of animal spirits, the current downtrend could reverse for no good reason at all.
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Response by mimi
almost 17 years ago
Posts: 1134
Member since: Sep 2008
Interesting analysis. The place I am looking at could rent for 7 or 8k a month. But the cost is about double than 700k. Should I expect a 50% drop?
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Response by mjsalisb
almost 17 years ago
Posts: 177
Member since: Sep 2006
FG....I hear you and understand your point but I do think there is an issue here with the tax advantage offered to owner occupancy. By your rule of thumb, the classic six I'm renting on West 83rd for $7K per month would give a buyer paying $700K for my unit a current gross yield of 12% and a net yield of about 9.3% if maintenance cost ran around $1600 per month (sort of an average UWS classic six figure).
Now 9.3% sounds about right for an equilibrium pretax rate of return if you take into account the risks of owning a building, the likelihood over time of having to make significant repairs etc.
But if an individual owner buys the unit for $700K and gets all the tax benefits you noted, his "rent equivalent" cost to carry will be much less than $7000 per month. Isn't there an issue here?
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Response by aboutready
almost 17 years ago
Posts: 16354
Member since: Oct 2007
mimi, you shouldn't expect anything. you should just wait. there are numerous efforts currently to prop up the RE market, and despite those it is continuing to fall. but more importantly, so are rents. buying when rents are still falling is the definition of catching a falling knife. with a severe correction, which is what many if not most foresee (and falling rents concurrent with falling purchase prices despite excessive liquidity being forced into the system by the government almost certainly implies), the bottom will be in for awhile. when you can look at an apartment, after doing your research and due diligence, and say that's a decent buy, is when you should buy.
particularly in Harlem, which i know you've been interested in. (i have been too).
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Response by financeguy
almost 17 years ago
Posts: 711
Member since: May 2009
mjsalisb -- The question is whether the individual owner gives his/her tax benefits to the seller or keeps them.
In an equilibrium market, they go to the buyer, because if they don't they apt is worth more to an owner occupant than to a landlord, which is not a stable situation: landlords will sell out, which will make rents go up or sales prices go down, until the tax benefits are going to the buyer.
Of course, we aren't in an equilibrium market, and we may never be. But until prices come down to the level where a landlord buying to rent, without leverage, can earn a reasonable return, simple market pressures will tend to bring prices down further.
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Response by financeguy
almost 17 years ago
Posts: 711
Member since: May 2009
Mimi -- Markets aren't efficient and they often stay away from equilibrium for long periods of time. So I don't know that you should expect a 50% drop in the sense that you should sit around waiting for it. The prediction is no more accurate than a weather report for a month from now. But still, snow is less likely in July than 90 degrees. I wouldn't invest without being sure that you will be ok if prices return to rationality or even overshoot.
I don't see the mechanism that will stop the current price drop until prices are below equilibrium.. My bet is that the 7k/mo UWS sells for 500k at the bottom. But I wouldn't put heavy odds on it. There is no law barring a sudden and unexpected spurt of irrational optimism.
Maybe everyone will wake up feeling confident tomorrow and create a new bubble... Maybe the recession will convince a wave of recent grads to move to NY, five to a bedroom, and drive rents up to double their current level, making the current sales prices completely sensible. Or maybe the Fed will give so much money to the banks that next year's bonuses will dwarf anything we've ever seen and bankers, drunk with money, will return to seeing apartments as works of art, valued for their aesthetic charms without regard to ordinary rules of economic rationality. Seems unlikely to me, but stranger things have happened: we even once had allegedly on the wagon former alcoholic almost win the election for President because he seemed like a better guy to have a beer with than his opponent.
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Response by crescent22
almost 17 years ago
Posts: 953
Member since: Apr 2008
> Until the mid-90s, investors pretty consistently refused to pay more than about 100 x monthly rents,
This is a very interesting point that I would like to see more data on. It would counter the point that the market is warped by a substantial percentage of dwellings inhabited by owners enjoying the tax subsidy and that the proper buy vs rent calculation must include such mortgage deduction benefits.
I suppose the idea of the market being dominated by owners is less true for NYC anyway than elsewhere.
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Response by spinnaker1
almost 17 years ago
Posts: 1670
Member since: Jan 2008
It is not possible to paint this city and this market with one broad brush. I expect prices to fall further, but I just bought. So have many others. The market effect of this activity in certain areas and price levels is hard to ignore, so I don't think its as black and white as you make it out to be. I believe there are unquantitative factors at play which in the end could render much of the predictions inaccurate (I hope..) I like your posts financeguy, I just believe there is a lot of unpredictability to this market that is difficult to capture.
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Response by financeguy
almost 17 years ago
Posts: 711
Member since: May 2009
Crescent22:
There is good national data showing a long term relationship of median sales price to median rental price. Not same unit to unit, but median to median. Of course the median for rentals is a considerably smaller, lower quality product, especially in parts of the country where there is no upper (or even middle) end rental market. So this isn't like to like. That ratio is quite steady nonetheless -- about 15x annual rents. It's been reported regularly and is easily derived from Case-Shiller.
Evidence for the 100 x monthly NY ratio is more anecdotal: oldtimers (i.e., more than a decade ago) report it. And investors that pay more than this can't make a normal return except with rapidly rising rents or a bubble, so logic suggests it. Markets are often illogical, though.
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Response by financeguy
almost 17 years ago
Posts: 711
Member since: May 2009
Spinnaker: There is nothing magic about this or any other formula.
Markets move like herds, where the immediate concern is not getting eaten by predators (because you are an outlier) or trampled by your fellows (because you are moving differently than they). Food is secondary -- but at some point if all the grass is gone, the herd will move on.
Equilibrium theory is like trying to predict the movement of a herd by identifying where the grass is growing. Still, sooner or later, the grass gets eaten.
Another analogy: Markets are dynamic systems, like the planets revolving around the sun. The equilibrium works like a gravitational source, like the sun. To expect to reach equilibrium is a little like expecting the earth to end up in the center of the sun: it neglects the other force in the system. On the other hand, on average over the year, the earth is in the sun, if you measure using left - right, and if you predict that when it is moving to the left it will eventually move to the right, you are going to be right more often than someone who predicts that the current trend will continue until the earth exits the solar system stage left, or someone who argues that the earth will start to revolve around the moon.
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Response by inonada
almost 17 years ago
Posts: 8031
Member since: Oct 2008
FG, very nice post that should be read by all before they plop down a chunk of change in something they may not understand on valuing. I take exception to one of your statements, however: markets are efficient (even during bubbles such as the RE one), just not rational. In the stock market, predicting future prices (e.g., next month's) with any accuracy is pretty difficult. In RE, it is actually quite easy: just repeat what happened last month. The problem, however, is that I cannot speculate on this: i.e., the lack of liquidity, high transaction cost, and long development cyles provide the effiency. The market can be irrational (off equilibrium price as you suggest), but it can also be predictable and still be more or less efficient. Of course, one can use the predictability to help time one's sale or purchase (a nice bonus), but that doesn't mean that a dispassionate third party can speculate risk-free (or risk-lite).
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Response by financeguy
almost 17 years ago
Posts: 711
Member since: May 2009
Efficiency has several, not always consistent meanings. In finance it usually means something like "speculators can't make a profit, because trends disappear by the time they are obvious enough to cover the transaction costs." By that definition, the NY RE market is not efficient. Lots of speculators made lots of money over an extended period of years betting -- correctly -- that the up-trend would continue well beyond rational pricing. Now, the trend is downward, and any speculator who figures out a way to short it (larger scale than by renting for a while) will make lots of money.
In a related definition, in an efficient market, the best predictor of tomorrow's price (or next year's price) is today's price, because today's price incorporates all available information including information about trends. So future price movements will be in an unpredictable direction, based on information that doesn't exist. The NYC RE market is not efficient in that sense. Trends continue a very long time (even if predicting the turning point is difficult). It is a very safe assumption that prices next month will be lower than they are today.
You may be right that it is hard to use this to speculate in ordinary times: trends would need to last long enough and be steep enough to cover the large transaction costs. But the recently ended bubble was definitely big enough for that. Especially in the absence of shorting, the downward trend is easy to predict and likely to last a long time as well.
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Response by Rhino86
almost 17 years ago
Posts: 4925
Member since: Sep 2006
Cap rates will get to 8% if we get to the point where buyers do not credit any appreciation potential, like the 1990s and/or mortgage rates get that high. I have already heard of a private equity company buying a distressed condo building. It will be interesting to see where they set their asks and where the properties move. In the end its all academic. It remains to be see how many buyers exist and at what levels...are they the types to include tax benefits in their rent/buy analysis or not. I am in the camp, there simply aren't enough owner occupants to clear this supply.
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Response by spinnaker1
almost 17 years ago
Posts: 1670
Member since: Jan 2008
I just don't see any evidence that supports your prediction. Buyers are jumping into the market at current levels. While supply remains high prices are pressured downward but as prices decline the number of buyers are increasing exponentially. There is solid support at current levels in specific areas and price points.
I'm not a finance dude so its difficult for me to understand the supporting logic behind the prediction that a 7k rental will eventually go for 500k. I just don't subscribe to the belief that the market is driven by rates of return on rental properties.
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Response by Trompiloco
almost 17 years ago
Posts: 585
Member since: Jul 2008
spinnaker, I'm really sorry that you just bought and I think you made a major mistake. Buyers are getting back into the market insofar as you use month-to-month as your axis. If you use y-o-y, which is the only think that makes sense gives seasonality, this year is on track to be by far the slowest in a decade. On top of that, inventory is not really 11K (which is 35% more than in 2004 or 2005) but actually 16K or 17K if you take into account all the shadow inventory from overpriced new developments that haven't sold shit in the last year. Downward pressure is intense and increasing, as exemplified by the commentaries by brokers who just 2 or 3 months ago weren't admitting the local RE downturn and have now shifted to declare that sellers have to price 30% below peak if they want to sell. This market won't stabilize any time soon.
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Response by spinnaker1
almost 17 years ago
Posts: 1670
Member since: Jan 2008
16/45 listings in may area and price point are in contract. Once you eliminate the dogs and the dreamers that would languish in any market, you have what I consider to be healthy activity. There is an area emerging between the excesses of the bubble and the trenches of complete collapse. We have an economy that, while in considerable distress, is functioning. For a large majority of people, this recession has had no impact on their lives. They are living, having babies, buying and selling properties and making their spaces a home instead of living in an endless holding pattern. I am sorry for those who seem to be paralyzed by the volumes of analysis and the experts telling them to wait until they say go. It is possible to over think this.
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Response by West34
almost 17 years ago
Posts: 1040
Member since: Mar 2009
I love the smell of denial in the morning
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Response by se10024
almost 17 years ago
Posts: 314
Member since: Apr 2009
spinnaker, 'healthy' activity is happening at still unsustainable prices (without generalizing too much call it 1k/sf). renting the same apt for a fraction of it's carrying cost doesn't constitute life in a 'holding pattern'. to some people it's more important to 'own' (not really - the bank does), to others - they don't want to go upside down even buying into currently prevailing 'deals'. there's another major leg down -- soon.
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Response by LP1
almost 17 years ago
Posts: 242
Member since: Feb 2008
I'm stunned by the comment "for a large majority...this recession has had no impact on their lives". Wow. Really? Do you work for the government? Of course finance and real estate is a mess (large % of revenue generators in nyc), but so is anyone involved in ads, journalism, non profits, segments of law, etc etc. People are indeed living (were you looking at the suicide rate), but it does not mean that they are buying.
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Response by financeguy
almost 17 years ago
Posts: 711
Member since: May 2009
Spinnaker: my analysis does not reference the recession or a complete collapse or considerable distress. If you think those are possibilities, you need to adjust it downward significantly. I assumed stable rents and stable quality of life and rational risk aversion, not panic or collapse. This is because I'm trying to identify a long term prediction for someone who doesn't know where in the next business cycle they are going to want to or have to sell (but is aware that the odds are higher that you'll have to sell in bad times than good ones).
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Response by financeguy
almost 17 years ago
Posts: 711
Member since: May 2009
Also, inventory is not the same as supply. It's important in the short run, but not much of an indicator in the long run. If you are trying to decide between now and next month, look at inventory. If you are buying for five years or fifty, you need to estimate supply -- the total quantity of product likely to be available, not what's for sale today.
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Response by OTNYC
almost 17 years ago
Posts: 547
Member since: Feb 2009
Can't resist jumping into this one - FG, you're clearly the brightest guy on this thread so I won't attempt to go toe-to-toe with you. I do appreciate that you acknowledge there are many forces that shape an emotional market like real-estate. It is not the same as the market for financial instruments, etc.
I have found that my friends who work in finance have been reluctant to buy Manhattan real estate since the early part of the decade. For some, it made sense: they were new to hedge funds, etc. where it was expected they keep significant skin in the game until they made bigger bucks, and many were able to create fantastic returns on invested capital, far healthier than what the RE market would have given them even in boom years. Others have argued the market is overpriced since 2002.
I remember our neighbor at our last rental in 2003 telling us we were making a big mistake buying an apartment. We ended up selling the apartment in 2007 for close to triple what we paid (got a great deal from a friend and gut renovated ourselves). Unfortunately, we didn't stay in touch with the neighbor, but I would assume his wife pestered him into buying a place by 2005 or 2006. I have other friends who sold properties in 2005 or 2006 thinking the market had topped out, only to buy back in 2007/08. Whoops.
The realty is that 90% of people just want a place to live and don't want to be screwed too badly. I think most are willing to suffer a certain amount of decline in the short run to just be settled and over with it. Moving is a monumental pain in the rear - it's not just moving day. It's the packing, the emotional attachments, etc. This gets more difficult with each of life's milestones: marriage, kid 1, kid 2, etc. If you are single and travel light, then by all means, try to time the market. But I know I and many others just want a d@mn home. Not an entry at equilibrium and an exit above equilibrium.
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Response by spinnaker1
almost 17 years ago
Posts: 1670
Member since: Jan 2008
LP1 -sorry for the over generalization. In the end, we will all have been impacted by the recession.
Obviously I can't speak for anyone else but within my circle life is marching on much as it has and hopefully always will. There is plenty of evidence of this in the RE market as well. You can't choose to ignore it because it doesn't dovetail with the analysis. I don't deny prices have more room to fall, I am merely offering a counterpoint and a view that there is less room than many people think, given current activity within specific market segments.
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Response by petrfitz
almost 17 years ago
Posts: 2533
Member since: Mar 2008
99% of buyers never run a rent to buy analysis nor do 99% of buyers ever calculate yield on investment.
Real Estate is purchased by most buyers on comps, per square foot comps, macro neighborhood trends, gut, passion, etc.
it is this 99% of buyers that drive market price - be it right or wrong.
Petr - spot on. When someone has made the decision to buy, they figure out a budget, get a broker, and start looking at places. The smarter ones will spend some time on boards like SE and will be savvier at knowing when they have found a deal. Most will not have the patience to see more than 20 places, and those that end up buying will do so because they have found a place that suits their needs, meets their budget, and makes them happy.
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Response by w67thstreet
almost 17 years ago
Posts: 9003
Member since: Dec 2008
my condolence to all those who are buying in the last 6 months. But I thank you for setting up the next leg down in NYC RE.... you see the only units that are being "sold" or shall I say "had" are near perfect and prime locals.... it'll just make the 2nd string units languish in the market for the summer doldrums with a tsunami of price cuts when these just done (spinniker1) units are "acrisable". The new "prime/perfect" units will then have to compete w/ the just cut units and the "discounts" that OTNYC et. al. think they are getting will look like the "bail-outs" instead of the buyer's bargains you think you are getting.
And I agree in the last 10 yrs 99% of buyers bought holding their noses while their neighbors/brokers/bankers/greenspan/doorman/ex-wives/wanna lose it all and write a book writers/developers stroked your penis till you did the my erected penis is bigger than yourz purchase... but what happens if even just the 8.9% of buyers that are unemployed RIGHT NOW think rationally and does a rent vs. buy math? how about 10% unemployed or 11% and 20% underemployed... just look down there and ask if it's flaccid?
Julia... just hold on this NYC RE erection can't last much longer... the viagra is wearing off.....
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Response by petrfitz
almost 17 years ago
Posts: 2533
Member since: Mar 2008
w67th - you just joined the calls of many people who have fortold the death of manhattan real estate over the last 300 years.....It's NYC people want to live here and the people who want to live here have the most drive to succeed. Its only a matter of time before we see prices at all time highs. Ask anyone who bought in the 90's RE bust if they think that they made a mistake now.
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Response by w67thstreet
almost 17 years ago
Posts: 9003
Member since: Dec 2008
pertri..... in the late 80's thru 1999... I thought NYC RE was truly undervalued and did all my trades.... all of which allow me to blog away as you do... but the last 6 yrs has been completely IRRATIONAL.
Financeguy, I don't know if this has been mentioned but the 100x R is the "RESULTANT" rule of thumb formula given a "rational" market w/o NINJA loans, Greenspan trying to avert a deeper recession, worldwide RE mania, CDO, CDS, MBS, 0% IR, etc etc etc and yes has been in NYC RE forever.... and rightly told... in the old rational market... there was actually a discount needed to induce people to BUY vs. rent....
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Response by notadmin
almost 17 years ago
Posts: 3835
Member since: Jul 2008
"for a large majority...this recession has had no impact on their lives"
take retirement. for those that are already retired or about to, their expectations just changed in an abrupt way. those that rely on pensions (either public or private) are waking up to the reality that they are even more unfunded that before. hence, taking them for grated is nuts. did you hear YRC offering the teamsters to get paid in real estate?
anyway, this is only a part of the financial picture of a household (how to pay for retirement), but it's among the big ones next to taxes, housing, health and education if you are middle-class (whatever that means).
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Response by w67thstreet
almost 17 years ago
Posts: 9003
Member since: Dec 2008
alrighty all you RE Bullz.... here's a little synopsis of what happened in 2003-2007.... risk premium of RE and Corporate debt went to 0% b/c AIG used its AAA rating to eliminate the capital reserve required for the last 80 yrs. Now that risk premium is starting to get priced into the market and we as taxpayers are shouldering the elimination of this risk premium from 2003-2007....
and you guys don't think we are headed towards rational / 100x R? why?
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Response by w67thstreet
almost 17 years ago
Posts: 9003
Member since: Dec 2008
admin... maybe spinnnaker1 is a trust fund baby?
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Response by w67thstreet
almost 17 years ago
Posts: 9003
Member since: Dec 2008
that is not invested w/ madoff/RE/I-bank etc
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Response by Lecker
almost 17 years ago
Posts: 219
Member since: Feb 2009
w67thstreet
And I agree in the last 10 yrs 99% of buyers bought holding their noses while their neighbors/brokers/bankers/greenspan/doorman/ex-wives/wanna lose it all and write a book writers/developers stroked your penis till you did the my erected penis is bigger than yourz purchase... but what happens if even just the 8.9% of buyers that are unemployed RIGHT NOW think rationally and does a rent vs. buy math? how about 10% unemployed or 11% and 20% underemployed... just look down there and ask if it's flaccid?
Julia... just hold on this NYC RE erection can't last much longer... the viagra is wearing off.....
W67: I almost bust a seam reading that analogy! I bet you are a lot of fun at parties! ha ha!
It is gonna be interesting to see what happens when this scenario plays out!
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Response by 30yrs_RE_20_in_REO
almost 17 years ago
Posts: 9889
Member since: Mar 2009
"Evidence for the 100 x monthly NY ratio is more anecdotal: oldtimers (i.e., more than a decade ago) report it. And investors that pay more than this can't make a normal return except with rapidly rising rents or a bubble, so logic suggests it. Markets are often illogical, though."
From an oldtimer: yes.
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Response by 30yrs_RE_20_in_REO
almost 17 years ago
Posts: 9889
Member since: Mar 2009
"99% of buyers never run a rent to buy analysis nor do 99% of buyers ever calculate yield on investment.
Real Estate is purchased by most buyers on comps, per square foot comps, macro neighborhood trends, gut, passion, etc.
it is this 99% of buyers that drive market price - be it right or wrong."
another yes. but perhaps even more shockingly, retail space had the same thing happen. It used to be the owners rep had compiled some VERY detailed "foot traffic reports" and various other metrics, which retailers used to attempt to determine, based on their business plan, if their enterprise could support the rent being asked. More recently, however, you've seen a lot more of the same mentality - looking at what the stores around it rented for. It's one of the reasons we've seen much more turnover (in just about all neighborhoods) of a lot of small retailers even before the market showed signs of tanking: people were renting small retail locations that EVEN IF THEIR BUSINESSES SUCCEEDED they would have gone bust anyway because they still could not have supported the rent. one of the reasons why you see so many franchise operations taking the place of individual stores (I'd love to see how many Dunkin Donuts there are in Manhattan today vs 20 years ago) is that most of the major franchisors have a "play book" which runs through the numbers in the same way retailers USED TO and at the end many won't allow an opening where they know there is little or no chance of success.
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Response by 30yrs_RE_20_in_REO
almost 17 years ago
Posts: 9889
Member since: Mar 2009
Although I like and agree very much with financeguy's analysis (I'm sure that comes as a huge surprise to those following my posts) I do think there is one MAJOR element left out: for years, people haven't bought RE on cash flow, they've bought it on assumed appreciation. It's not like it's much different that the stock market: imagine if someone made the same type of cash flow analysis of stocks: what would the answer be in terms of where current levels of those wold be? (I actually don't know since I haven't followed the market closely in quite some time; but I'm making what i don't think is a way off assumption).
So, consciously or not, people buying RE are doing so on assumed capitol gains; so you can't take hose out of the equation (even if they are wrong). This is part of what i was getting at in another thread about the "believers" and the "non-believers": Use financeguy's calculations, but use a negative number, zero, or a positive number for expected appreciation, and that trumps most of the other calculations for an awful lot of buyers. Hell, the proof is simply to look at the amount of sales made in the past few years to people who intended to flip their deals without ever occupying them or renting them: so the expected cash flow in that case is ZERO. Well, how does hat skew the formula? By like infinity?
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Response by 30yrs_RE_20_in_REO
almost 17 years ago
Posts: 9889
Member since: Mar 2009
Another point which I haven't seen discussed much but a drum I've been beating for a few years now:
I the last downturn, you have mostly small units: not just in trouble, but being built period. Since the last upturn, the mix of units being built and sold has changed DRAMATICALLY (just take a look at the floorplans for most building built in the 1984 to 1988 period vs the 2004 to 2008 period; actually, you can probably go back much further than 2004, but I'm trying for some symmetry). Well, when you've bought an apartment which costs you $1600 a month to carry but can only rent for $1200 a month, you can CHOOSE to eat the $400 a month and wait till the market improves.
But if you have an apartment where the carry is $15,000 and the rent is $9,000, there's not much of a choice for most people: they CAN'T carry a $6k shortfall for an appreciable amount of time. Tie this in to another concept: exactly what is the universe of $10,000, $12,000, $15,000, $20,000 a month renters out there? Are there that many people out there making $800,000+ (especially now) that aren't already living in someplace (either owning or renting)? I ask because I can see how many units will be coming on the rental market NEEDING to get this type of rent, and I just don't see where the bodies are going to be coming from? Anyone have any source of statistics for this stuff? I'd love to see it.
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Response by aboutready
almost 17 years ago
Posts: 16354
Member since: Oct 2007
30yrs, the larger apartment boom has been a source of amazement to me. demographically and logistically it simply makes zero sense. we don't have the infrastructure for that kind of development, much less the demographics. add to that the downsizing baby boomers retiring and we have a perfect shitstorm of oversized apartments. that's even before the financial malaise is considered. because of the land bubble developers went after the "stay in NY, don't go to Westchester" parent market, it's cheaper to build larger units and developers, like their clients, were stretching. the schools and the market just aren't there.
the number of under-5s in the city in the last 8 or so years was huge. but not that huge. and not with families with that kind of buying power.
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Response by jmkeenan
almost 17 years ago
Posts: 178
Member since: Jan 2009
OTNYC -- riding the upward wave _can_ yield benefits, as you note -- no different than someone who got into techstocks in 1996 and got out in 1999. You look brilliant, you tell all your friends the killing you made, your friends all start thinking, I better get into these tech stocks like OTNYC, he just tripled his money. And then someone is left holding the bag.
Meanwhile the Oracle of Omaha sits the whole thing out b/c he doesn't understand it.
It's probably best to emulate Buffett long term, but the short term desire to make a big return is very tempting.
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Response by West34
almost 17 years ago
Posts: 1040
Member since: Mar 2009
Uh, maybe it's just a plain old speculative bubble. I posted this on another thread:
Harvard Housing Affordability Study: New York-Northern New Jersey-Long Island, NY-NJ-PA MSA, Median House Price/Median Household Income Ratio
It's big, it's grey, it's rough, it's hairy, it smells, it's leathery...I need to analyze it to death, no, wait, I'm too close...maybe it's, it's, it's.... an elephant!
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Response by Trompiloco
almost 17 years ago
Posts: 585
Member since: Jul 2008
West, bubble is one of the easiest words to spell, but many people just don't want to see the writing on the wall. 30 years is right: 2002-2007 people were buying in throngs because of the expectation of appreciation; right now, they're buying in modest numbers because they've been misled by brokers, relatives, etc. into believing that 30% down is enough, and that NYC RE will start going up soon. Bad a few greater fools won't save the market when all fundamentals point further down.
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Response by w67thstreet
almost 17 years ago
Posts: 9003
Member since: Dec 2008
Lecker... I am glad you enjoyed! :)
Yo aboutready!
30yrs... completely agree..... NOT many who likes or can do $30K/month nut.... not w/o price appreciation.... nay price ejaculation to keep it going....
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Response by BA_DA_BOOM
almost 17 years ago
Posts: 86
Member since: Jan 2007
1982 3.0
...
2006 7.1
I wonder how many more dual income households we have now (vs 25 years ago). The change in ratio could be unsuprising, if 100% of the second income can now go towards home financing.
Interesting analysis. The place I am looking at could rent for 7 or 8k a month. But the cost is about double than 700k. Should I expect a 50% drop?
FG....I hear you and understand your point but I do think there is an issue here with the tax advantage offered to owner occupancy. By your rule of thumb, the classic six I'm renting on West 83rd for $7K per month would give a buyer paying $700K for my unit a current gross yield of 12% and a net yield of about 9.3% if maintenance cost ran around $1600 per month (sort of an average UWS classic six figure).
Now 9.3% sounds about right for an equilibrium pretax rate of return if you take into account the risks of owning a building, the likelihood over time of having to make significant repairs etc.
But if an individual owner buys the unit for $700K and gets all the tax benefits you noted, his "rent equivalent" cost to carry will be much less than $7000 per month. Isn't there an issue here?
mimi, you shouldn't expect anything. you should just wait. there are numerous efforts currently to prop up the RE market, and despite those it is continuing to fall. but more importantly, so are rents. buying when rents are still falling is the definition of catching a falling knife. with a severe correction, which is what many if not most foresee (and falling rents concurrent with falling purchase prices despite excessive liquidity being forced into the system by the government almost certainly implies), the bottom will be in for awhile. when you can look at an apartment, after doing your research and due diligence, and say that's a decent buy, is when you should buy.
particularly in Harlem, which i know you've been interested in. (i have been too).
mjsalisb -- The question is whether the individual owner gives his/her tax benefits to the seller or keeps them.
In an equilibrium market, they go to the buyer, because if they don't they apt is worth more to an owner occupant than to a landlord, which is not a stable situation: landlords will sell out, which will make rents go up or sales prices go down, until the tax benefits are going to the buyer.
Of course, we aren't in an equilibrium market, and we may never be. But until prices come down to the level where a landlord buying to rent, without leverage, can earn a reasonable return, simple market pressures will tend to bring prices down further.
Mimi -- Markets aren't efficient and they often stay away from equilibrium for long periods of time. So I don't know that you should expect a 50% drop in the sense that you should sit around waiting for it. The prediction is no more accurate than a weather report for a month from now. But still, snow is less likely in July than 90 degrees. I wouldn't invest without being sure that you will be ok if prices return to rationality or even overshoot.
I don't see the mechanism that will stop the current price drop until prices are below equilibrium.. My bet is that the 7k/mo UWS sells for 500k at the bottom. But I wouldn't put heavy odds on it. There is no law barring a sudden and unexpected spurt of irrational optimism.
Maybe everyone will wake up feeling confident tomorrow and create a new bubble... Maybe the recession will convince a wave of recent grads to move to NY, five to a bedroom, and drive rents up to double their current level, making the current sales prices completely sensible. Or maybe the Fed will give so much money to the banks that next year's bonuses will dwarf anything we've ever seen and bankers, drunk with money, will return to seeing apartments as works of art, valued for their aesthetic charms without regard to ordinary rules of economic rationality. Seems unlikely to me, but stranger things have happened: we even once had allegedly on the wagon former alcoholic almost win the election for President because he seemed like a better guy to have a beer with than his opponent.
> Until the mid-90s, investors pretty consistently refused to pay more than about 100 x monthly rents,
This is a very interesting point that I would like to see more data on. It would counter the point that the market is warped by a substantial percentage of dwellings inhabited by owners enjoying the tax subsidy and that the proper buy vs rent calculation must include such mortgage deduction benefits.
I suppose the idea of the market being dominated by owners is less true for NYC anyway than elsewhere.
It is not possible to paint this city and this market with one broad brush. I expect prices to fall further, but I just bought. So have many others. The market effect of this activity in certain areas and price levels is hard to ignore, so I don't think its as black and white as you make it out to be. I believe there are unquantitative factors at play which in the end could render much of the predictions inaccurate (I hope..) I like your posts financeguy, I just believe there is a lot of unpredictability to this market that is difficult to capture.
Crescent22:
There is good national data showing a long term relationship of median sales price to median rental price. Not same unit to unit, but median to median. Of course the median for rentals is a considerably smaller, lower quality product, especially in parts of the country where there is no upper (or even middle) end rental market. So this isn't like to like. That ratio is quite steady nonetheless -- about 15x annual rents. It's been reported regularly and is easily derived from Case-Shiller.
Evidence for the 100 x monthly NY ratio is more anecdotal: oldtimers (i.e., more than a decade ago) report it. And investors that pay more than this can't make a normal return except with rapidly rising rents or a bubble, so logic suggests it. Markets are often illogical, though.
Spinnaker: There is nothing magic about this or any other formula.
Markets move like herds, where the immediate concern is not getting eaten by predators (because you are an outlier) or trampled by your fellows (because you are moving differently than they). Food is secondary -- but at some point if all the grass is gone, the herd will move on.
Equilibrium theory is like trying to predict the movement of a herd by identifying where the grass is growing. Still, sooner or later, the grass gets eaten.
Another analogy: Markets are dynamic systems, like the planets revolving around the sun. The equilibrium works like a gravitational source, like the sun. To expect to reach equilibrium is a little like expecting the earth to end up in the center of the sun: it neglects the other force in the system. On the other hand, on average over the year, the earth is in the sun, if you measure using left - right, and if you predict that when it is moving to the left it will eventually move to the right, you are going to be right more often than someone who predicts that the current trend will continue until the earth exits the solar system stage left, or someone who argues that the earth will start to revolve around the moon.
FG, very nice post that should be read by all before they plop down a chunk of change in something they may not understand on valuing. I take exception to one of your statements, however: markets are efficient (even during bubbles such as the RE one), just not rational. In the stock market, predicting future prices (e.g., next month's) with any accuracy is pretty difficult. In RE, it is actually quite easy: just repeat what happened last month. The problem, however, is that I cannot speculate on this: i.e., the lack of liquidity, high transaction cost, and long development cyles provide the effiency. The market can be irrational (off equilibrium price as you suggest), but it can also be predictable and still be more or less efficient. Of course, one can use the predictability to help time one's sale or purchase (a nice bonus), but that doesn't mean that a dispassionate third party can speculate risk-free (or risk-lite).
Efficiency has several, not always consistent meanings. In finance it usually means something like "speculators can't make a profit, because trends disappear by the time they are obvious enough to cover the transaction costs." By that definition, the NY RE market is not efficient. Lots of speculators made lots of money over an extended period of years betting -- correctly -- that the up-trend would continue well beyond rational pricing. Now, the trend is downward, and any speculator who figures out a way to short it (larger scale than by renting for a while) will make lots of money.
In a related definition, in an efficient market, the best predictor of tomorrow's price (or next year's price) is today's price, because today's price incorporates all available information including information about trends. So future price movements will be in an unpredictable direction, based on information that doesn't exist. The NYC RE market is not efficient in that sense. Trends continue a very long time (even if predicting the turning point is difficult). It is a very safe assumption that prices next month will be lower than they are today.
You may be right that it is hard to use this to speculate in ordinary times: trends would need to last long enough and be steep enough to cover the large transaction costs. But the recently ended bubble was definitely big enough for that. Especially in the absence of shorting, the downward trend is easy to predict and likely to last a long time as well.
Cap rates will get to 8% if we get to the point where buyers do not credit any appreciation potential, like the 1990s and/or mortgage rates get that high. I have already heard of a private equity company buying a distressed condo building. It will be interesting to see where they set their asks and where the properties move. In the end its all academic. It remains to be see how many buyers exist and at what levels...are they the types to include tax benefits in their rent/buy analysis or not. I am in the camp, there simply aren't enough owner occupants to clear this supply.
I just don't see any evidence that supports your prediction. Buyers are jumping into the market at current levels. While supply remains high prices are pressured downward but as prices decline the number of buyers are increasing exponentially. There is solid support at current levels in specific areas and price points.
I'm not a finance dude so its difficult for me to understand the supporting logic behind the prediction that a 7k rental will eventually go for 500k. I just don't subscribe to the belief that the market is driven by rates of return on rental properties.
spinnaker, I'm really sorry that you just bought and I think you made a major mistake. Buyers are getting back into the market insofar as you use month-to-month as your axis. If you use y-o-y, which is the only think that makes sense gives seasonality, this year is on track to be by far the slowest in a decade. On top of that, inventory is not really 11K (which is 35% more than in 2004 or 2005) but actually 16K or 17K if you take into account all the shadow inventory from overpriced new developments that haven't sold shit in the last year. Downward pressure is intense and increasing, as exemplified by the commentaries by brokers who just 2 or 3 months ago weren't admitting the local RE downturn and have now shifted to declare that sellers have to price 30% below peak if they want to sell. This market won't stabilize any time soon.
16/45 listings in may area and price point are in contract. Once you eliminate the dogs and the dreamers that would languish in any market, you have what I consider to be healthy activity. There is an area emerging between the excesses of the bubble and the trenches of complete collapse. We have an economy that, while in considerable distress, is functioning. For a large majority of people, this recession has had no impact on their lives. They are living, having babies, buying and selling properties and making their spaces a home instead of living in an endless holding pattern. I am sorry for those who seem to be paralyzed by the volumes of analysis and the experts telling them to wait until they say go. It is possible to over think this.
I love the smell of denial in the morning
spinnaker, 'healthy' activity is happening at still unsustainable prices (without generalizing too much call it 1k/sf). renting the same apt for a fraction of it's carrying cost doesn't constitute life in a 'holding pattern'. to some people it's more important to 'own' (not really - the bank does), to others - they don't want to go upside down even buying into currently prevailing 'deals'. there's another major leg down -- soon.
I'm stunned by the comment "for a large majority...this recession has had no impact on their lives". Wow. Really? Do you work for the government? Of course finance and real estate is a mess (large % of revenue generators in nyc), but so is anyone involved in ads, journalism, non profits, segments of law, etc etc. People are indeed living (were you looking at the suicide rate), but it does not mean that they are buying.
Spinnaker: my analysis does not reference the recession or a complete collapse or considerable distress. If you think those are possibilities, you need to adjust it downward significantly. I assumed stable rents and stable quality of life and rational risk aversion, not panic or collapse. This is because I'm trying to identify a long term prediction for someone who doesn't know where in the next business cycle they are going to want to or have to sell (but is aware that the odds are higher that you'll have to sell in bad times than good ones).
Also, inventory is not the same as supply. It's important in the short run, but not much of an indicator in the long run. If you are trying to decide between now and next month, look at inventory. If you are buying for five years or fifty, you need to estimate supply -- the total quantity of product likely to be available, not what's for sale today.
Can't resist jumping into this one - FG, you're clearly the brightest guy on this thread so I won't attempt to go toe-to-toe with you. I do appreciate that you acknowledge there are many forces that shape an emotional market like real-estate. It is not the same as the market for financial instruments, etc.
I have found that my friends who work in finance have been reluctant to buy Manhattan real estate since the early part of the decade. For some, it made sense: they were new to hedge funds, etc. where it was expected they keep significant skin in the game until they made bigger bucks, and many were able to create fantastic returns on invested capital, far healthier than what the RE market would have given them even in boom years. Others have argued the market is overpriced since 2002.
I remember our neighbor at our last rental in 2003 telling us we were making a big mistake buying an apartment. We ended up selling the apartment in 2007 for close to triple what we paid (got a great deal from a friend and gut renovated ourselves). Unfortunately, we didn't stay in touch with the neighbor, but I would assume his wife pestered him into buying a place by 2005 or 2006. I have other friends who sold properties in 2005 or 2006 thinking the market had topped out, only to buy back in 2007/08. Whoops.
The realty is that 90% of people just want a place to live and don't want to be screwed too badly. I think most are willing to suffer a certain amount of decline in the short run to just be settled and over with it. Moving is a monumental pain in the rear - it's not just moving day. It's the packing, the emotional attachments, etc. This gets more difficult with each of life's milestones: marriage, kid 1, kid 2, etc. If you are single and travel light, then by all means, try to time the market. But I know I and many others just want a d@mn home. Not an entry at equilibrium and an exit above equilibrium.
LP1 -sorry for the over generalization. In the end, we will all have been impacted by the recession.
Obviously I can't speak for anyone else but within my circle life is marching on much as it has and hopefully always will. There is plenty of evidence of this in the RE market as well. You can't choose to ignore it because it doesn't dovetail with the analysis. I don't deny prices have more room to fall, I am merely offering a counterpoint and a view that there is less room than many people think, given current activity within specific market segments.
99% of buyers never run a rent to buy analysis nor do 99% of buyers ever calculate yield on investment.
Real Estate is purchased by most buyers on comps, per square foot comps, macro neighborhood trends, gut, passion, etc.
it is this 99% of buyers that drive market price - be it right or wrong.
in up markets yes, this is not an up market http://www.businessinsider.com/henry-blodget-housing-bubble-almost-over-but-no-recovery-in-sight-2009-5
Petr - spot on. When someone has made the decision to buy, they figure out a budget, get a broker, and start looking at places. The smarter ones will spend some time on boards like SE and will be savvier at knowing when they have found a deal. Most will not have the patience to see more than 20 places, and those that end up buying will do so because they have found a place that suits their needs, meets their budget, and makes them happy.
my condolence to all those who are buying in the last 6 months. But I thank you for setting up the next leg down in NYC RE.... you see the only units that are being "sold" or shall I say "had" are near perfect and prime locals.... it'll just make the 2nd string units languish in the market for the summer doldrums with a tsunami of price cuts when these just done (spinniker1) units are "acrisable". The new "prime/perfect" units will then have to compete w/ the just cut units and the "discounts" that OTNYC et. al. think they are getting will look like the "bail-outs" instead of the buyer's bargains you think you are getting.
And I agree in the last 10 yrs 99% of buyers bought holding their noses while their neighbors/brokers/bankers/greenspan/doorman/ex-wives/wanna lose it all and write a book writers/developers stroked your penis till you did the my erected penis is bigger than yourz purchase... but what happens if even just the 8.9% of buyers that are unemployed RIGHT NOW think rationally and does a rent vs. buy math? how about 10% unemployed or 11% and 20% underemployed... just look down there and ask if it's flaccid?
Julia... just hold on this NYC RE erection can't last much longer... the viagra is wearing off.....
w67th - you just joined the calls of many people who have fortold the death of manhattan real estate over the last 300 years.....It's NYC people want to live here and the people who want to live here have the most drive to succeed. Its only a matter of time before we see prices at all time highs. Ask anyone who bought in the 90's RE bust if they think that they made a mistake now.
pertri..... in the late 80's thru 1999... I thought NYC RE was truly undervalued and did all my trades.... all of which allow me to blog away as you do... but the last 6 yrs has been completely IRRATIONAL.
Financeguy, I don't know if this has been mentioned but the 100x R is the "RESULTANT" rule of thumb formula given a "rational" market w/o NINJA loans, Greenspan trying to avert a deeper recession, worldwide RE mania, CDO, CDS, MBS, 0% IR, etc etc etc and yes has been in NYC RE forever.... and rightly told... in the old rational market... there was actually a discount needed to induce people to BUY vs. rent....
"for a large majority...this recession has had no impact on their lives"
take retirement. for those that are already retired or about to, their expectations just changed in an abrupt way. those that rely on pensions (either public or private) are waking up to the reality that they are even more unfunded that before. hence, taking them for grated is nuts. did you hear YRC offering the teamsters to get paid in real estate?
anyway, this is only a part of the financial picture of a household (how to pay for retirement), but it's among the big ones next to taxes, housing, health and education if you are middle-class (whatever that means).
alrighty all you RE Bullz.... here's a little synopsis of what happened in 2003-2007.... risk premium of RE and Corporate debt went to 0% b/c AIG used its AAA rating to eliminate the capital reserve required for the last 80 yrs. Now that risk premium is starting to get priced into the market and we as taxpayers are shouldering the elimination of this risk premium from 2003-2007....
and you guys don't think we are headed towards rational / 100x R? why?
admin... maybe spinnnaker1 is a trust fund baby?
that is not invested w/ madoff/RE/I-bank etc
w67thstreet
And I agree in the last 10 yrs 99% of buyers bought holding their noses while their neighbors/brokers/bankers/greenspan/doorman/ex-wives/wanna lose it all and write a book writers/developers stroked your penis till you did the my erected penis is bigger than yourz purchase... but what happens if even just the 8.9% of buyers that are unemployed RIGHT NOW think rationally and does a rent vs. buy math? how about 10% unemployed or 11% and 20% underemployed... just look down there and ask if it's flaccid?
Julia... just hold on this NYC RE erection can't last much longer... the viagra is wearing off.....
W67: I almost bust a seam reading that analogy! I bet you are a lot of fun at parties! ha ha!
It is gonna be interesting to see what happens when this scenario plays out!
"Evidence for the 100 x monthly NY ratio is more anecdotal: oldtimers (i.e., more than a decade ago) report it. And investors that pay more than this can't make a normal return except with rapidly rising rents or a bubble, so logic suggests it. Markets are often illogical, though."
From an oldtimer: yes.
"99% of buyers never run a rent to buy analysis nor do 99% of buyers ever calculate yield on investment.
Real Estate is purchased by most buyers on comps, per square foot comps, macro neighborhood trends, gut, passion, etc.
it is this 99% of buyers that drive market price - be it right or wrong."
another yes. but perhaps even more shockingly, retail space had the same thing happen. It used to be the owners rep had compiled some VERY detailed "foot traffic reports" and various other metrics, which retailers used to attempt to determine, based on their business plan, if their enterprise could support the rent being asked. More recently, however, you've seen a lot more of the same mentality - looking at what the stores around it rented for. It's one of the reasons we've seen much more turnover (in just about all neighborhoods) of a lot of small retailers even before the market showed signs of tanking: people were renting small retail locations that EVEN IF THEIR BUSINESSES SUCCEEDED they would have gone bust anyway because they still could not have supported the rent. one of the reasons why you see so many franchise operations taking the place of individual stores (I'd love to see how many Dunkin Donuts there are in Manhattan today vs 20 years ago) is that most of the major franchisors have a "play book" which runs through the numbers in the same way retailers USED TO and at the end many won't allow an opening where they know there is little or no chance of success.
Although I like and agree very much with financeguy's analysis (I'm sure that comes as a huge surprise to those following my posts) I do think there is one MAJOR element left out: for years, people haven't bought RE on cash flow, they've bought it on assumed appreciation. It's not like it's much different that the stock market: imagine if someone made the same type of cash flow analysis of stocks: what would the answer be in terms of where current levels of those wold be? (I actually don't know since I haven't followed the market closely in quite some time; but I'm making what i don't think is a way off assumption).
So, consciously or not, people buying RE are doing so on assumed capitol gains; so you can't take hose out of the equation (even if they are wrong). This is part of what i was getting at in another thread about the "believers" and the "non-believers": Use financeguy's calculations, but use a negative number, zero, or a positive number for expected appreciation, and that trumps most of the other calculations for an awful lot of buyers. Hell, the proof is simply to look at the amount of sales made in the past few years to people who intended to flip their deals without ever occupying them or renting them: so the expected cash flow in that case is ZERO. Well, how does hat skew the formula? By like infinity?
Another point which I haven't seen discussed much but a drum I've been beating for a few years now:
I the last downturn, you have mostly small units: not just in trouble, but being built period. Since the last upturn, the mix of units being built and sold has changed DRAMATICALLY (just take a look at the floorplans for most building built in the 1984 to 1988 period vs the 2004 to 2008 period; actually, you can probably go back much further than 2004, but I'm trying for some symmetry). Well, when you've bought an apartment which costs you $1600 a month to carry but can only rent for $1200 a month, you can CHOOSE to eat the $400 a month and wait till the market improves.
But if you have an apartment where the carry is $15,000 and the rent is $9,000, there's not much of a choice for most people: they CAN'T carry a $6k shortfall for an appreciable amount of time. Tie this in to another concept: exactly what is the universe of $10,000, $12,000, $15,000, $20,000 a month renters out there? Are there that many people out there making $800,000+ (especially now) that aren't already living in someplace (either owning or renting)? I ask because I can see how many units will be coming on the rental market NEEDING to get this type of rent, and I just don't see where the bodies are going to be coming from? Anyone have any source of statistics for this stuff? I'd love to see it.
30yrs, the larger apartment boom has been a source of amazement to me. demographically and logistically it simply makes zero sense. we don't have the infrastructure for that kind of development, much less the demographics. add to that the downsizing baby boomers retiring and we have a perfect shitstorm of oversized apartments. that's even before the financial malaise is considered. because of the land bubble developers went after the "stay in NY, don't go to Westchester" parent market, it's cheaper to build larger units and developers, like their clients, were stretching. the schools and the market just aren't there.
the number of under-5s in the city in the last 8 or so years was huge. but not that huge. and not with families with that kind of buying power.
OTNYC -- riding the upward wave _can_ yield benefits, as you note -- no different than someone who got into techstocks in 1996 and got out in 1999. You look brilliant, you tell all your friends the killing you made, your friends all start thinking, I better get into these tech stocks like OTNYC, he just tripled his money. And then someone is left holding the bag.
Meanwhile the Oracle of Omaha sits the whole thing out b/c he doesn't understand it.
It's probably best to emulate Buffett long term, but the short term desire to make a big return is very tempting.
Uh, maybe it's just a plain old speculative bubble. I posted this on another thread:
Harvard Housing Affordability Study: New York-Northern New Jersey-Long Island, NY-NJ-PA MSA, Median House Price/Median Household Income Ratio
1980 3.1
1981 3.1
1982 3.0
1983 3.2
1984 3.4
1985 3.7
1986 4.4
1987 5.0
1988 4.9
1989 4.4
1990 4.2
1991 4.0
1992 4.2
1993 4.1
1994 4.0
1995 3.8
1996 3.7
1997 3.7
1998 3.8
1999 3.9
2000 4.2
2001 4.6
2002 5.2
2003 5.6
2004 6.4
2005 6.8
2006 7.1
It's big, it's grey, it's rough, it's hairy, it smells, it's leathery...I need to analyze it to death, no, wait, I'm too close...maybe it's, it's, it's.... an elephant!
West, bubble is one of the easiest words to spell, but many people just don't want to see the writing on the wall. 30 years is right: 2002-2007 people were buying in throngs because of the expectation of appreciation; right now, they're buying in modest numbers because they've been misled by brokers, relatives, etc. into believing that 30% down is enough, and that NYC RE will start going up soon. Bad a few greater fools won't save the market when all fundamentals point further down.
Lecker... I am glad you enjoyed! :)
Yo aboutready!
30yrs... completely agree..... NOT many who likes or can do $30K/month nut.... not w/o price appreciation.... nay price ejaculation to keep it going....
1982 3.0
...
2006 7.1
I wonder how many more dual income households we have now (vs 25 years ago). The change in ratio could be unsuprising, if 100% of the second income can now go towards home financing.