Renting vs. Buying in this economy

CC, you forgot to ask the troll about his worry about getting the deposit back when you rent?
What's more frightening? Losing your 1x month rental security deposit or, losing your 10% down payment on a contract if you mortgage lender back out on you?

"On the other hand, as I say in that old thread, it is ALWAYS better to rent IF you consider buying an "investment." It's not - it's a capitalized expense."

Steve this argument is so piss poor. Clearly in the 1990s when cap rates were 10%+ and the broad stock market was trading at 30x+, then buying was a better use of capital than stock investments. Clearly when the stock market was trading at 11x trendline eps in March 2009, it was better than buying an apartment for 20x price to rent. There is no ALWAYS in investing.... To say so is kind of embarrassing.

Real estate is a bond investment...the capitalized rent minus the capitalized maintenance. You want to buy it when the yield is high. When it traded to yield 3% it was a shitty investment.

I thank everyone for their responses though I am still not sure what is a better deal. The place we would buy is 525K. If we did not get this place we would probably rent a place for $3400 or $3500. We would be putting down 25% on the apartment. I know the 525K place would rent for less but we just happen to really like it. But at the same time I only want to buy if there is a serious cost savings over a 5 or 6 year period. Our maintenance would be $1180, there is a 1.5% flip tax that the seller pays. The broker in this case is taking 4% from the seller as we went in without a broker. It is a co-op. One thing we worry about is the fact that co-op boards can be difficult which means we would have a harder time finding a buyer. We already have an accepted offer on this place and are just working out the contract. We are just having second thoughts about buying now. If we did not buy we would not invest this money aggressively. We are quite conservative investors especially after seeing the current market and would not want to lose any of our principal. We would just be saving for another 5 or 6 years before heading to the suburbs. I know I am rambling a little. Does buying make sense for us?

Rhino, you are discussing what has been an unusual period in the history of owner-occupied residential real estate. If you are discussing investment properties that's fine, but historically property prices increase jointly with incomes. Only when fancy-schmancy leverage products came out did that correlation fall apart.

Which is why, in turn, so many people got the bubble wrong, most especially the rating agencies who thought real estate never declined in value. It didn't - because it never went up very much in value. Until....

PS: How far back from today do we need to go to find an entry point where this actually holds true?

PPS: When is the last entry point for which a dollar invested in stock has actually generated equity like returns of 8%?

PPPS: Bonds are actually better investments that stocks on more years than not...even more if adjusted for volatility.

1998. For RE.

"then buying was a better use of capital than stock investments."

What you're missing from that equation is rents. Regardless of what the cap rate was, you need to compare owner-occupied housing to rents, not to stocks. It's not a capital investment in the sense of stocks UNLESS you rent it out to someone else and earn income from it. The ratio between hypothetical income (owners' equivalent rent) and market rents also fell apart during the period in question.

Steve, whether we had the real estate bubble or not... Stocks were clearly overvalued in the late 1990s and real estate in Manhattan was an attractive cash flow investment. You may be able to say that stocks appreciate more over long periods of time (earnings growth is greater than inflation of rents)...but to say stocks are always better...its just silly. Stocks are not even always good in their own right. Just as real estate is bad when you pay more than monthly rent equivalent....buying stock above median valuation is simply asking for less than equity returns. Read Ed Easterlings, Secular Stock Market Returns. Stocks for the long run is a load of shit. Its a myth created by the industry. It has no more supportable basis than buying is always better in the long run. Your position on real estate seems wholly inconsistent with the flawed logic you apply to stocks. Stock is completely overrated.

Steve, I don't "have to" do anything. You may think its not valid to compare the cash flow savings of owning vs. renting (PRETAX!, I agree on that!) with putting that downpayment into a bond or a mutual fund...but I do. Its perfectly valid. I actually find myself in the very position currently. I'd rather fund my rent with bonds than buy... or be in cash and avoid risk altogether.

Steve, you can't say an owner occupant should price their home as if their renting it to themselves (like an investment property), and then in another breath say owner occupied real estate is not an investment to be compared to alternatives. Are you serious?

buy and sell, buy and sell.

This guy doesn't know what he's talking about. He knows a lot of concepts, but doesn't know how to apply them. I've read about some serious investing mistakes by this guy, and the rent and buy thread holy crap!! As a result, he's been merely luck on renting and unfortunately way unlucky on investing.

dressner, pray tell, what would you have done? what would you do now? rush out and buy, buy, buy? have fun.

Rhino86: in my old micro-neighborhood on the UWS, May 2002.

I am not asking when real estate generated an 8% annualized return to date.... I am asking when stocks did.

And I am also asking how far you need to go back to actually demonstrate that stocks have done better than real estate to date.... I am not sure you can find that starting point at all.

well, i answered the question the way i wanted to. 10023, 5/02 wasn't that different, no, than early 2000? that seems like so much more fun a date.

I think everyone knows 2002 real estate was a good purchase...if sold and on a clock currently.

actually, rhino, i was also pointing out, like I think you have been, that over the last however many years neither real estate nor stocks have necessarily been a good buy and hold strategy, for the average person.

LUCK, aboutready.

Over the last 10 years...real estate looks a lot better than stocks...I wonder how they look on the last twenty. Real estate has been a good buy and hold for 10.... Even if Manhattan apartments trade at 1999 levels, the monthly savings over the 10 years vs. renting is massive. And 1999 is a pretty draconian case, albeit feasible in my view. Stocks have been shit. You basically have to go back to the mid 1980s entry point to get a 6% annualized return....

sometimes yes, sometimes no. that's betting the ponies, not investing.

To say timing is not investing...is to deny what investing is. Its not timing to refuse to buy stock above the long term median valuation... The fact is there have been scarce times to do so in the last 15 years... Those who followed this, however, are not in the toilet.

AR: Yup. I only moved here in May '98. Prices skyrocketed between then and summer '99, when they were flattish in my neighborhood until spring '02 when they took off.

okay i have a question for you this is your home and not an investment people. total hypothetical, not me at all. we make $450k total household income, and we've managed to squirrel away $450k in savings (other than 401k, no mean achievement, and we're 38). my wife is pregnant, and we want a two bedroom in a good school district, but we think we'd like two children. we think our jobs are secure, but have the usual worries. we find a reasonably nice 2 bed coop for $900k with $1400 maintenance in a decent but not great school district that would suffice until middle school. Requires 30% down, about 3% closing costs (guesstimate, haven't bought a coop in a long time), and a bit to move and paint (say $300k roughly total). You really want to tell that family this isn't an investment, and is just a place to live?

10023, our memories are similar. and rents went through the roof also in 1998ish, if i recall correctly.

Better to rent if you consider buying an "investment." It's not - it's a capitalized expense.

You forgot to mention if childcare is necessary. For 2 kids, that's approx. 35k per annum off the books. At the age of 38, with 1 young child on the way and another planned, I would absolutely not risk 300k out of 450k savings.

Interestingly, there are not many acceptable UMC suburbs that would save this couple money, unless they bought a townhouse. I would rent a large 2br for 5000 max on the UWS/UES/downtown and see where prices were headed in the burbs & city.

actually dressner, unlike many here, i think it's somewhere in between. and dependent on personal financial situations that aren't readily apparent here.

but regardless, right now, i think very few will make the right "investment" decision purchasing a home. some people, who are including intangibles and the fact that they view the purchase largely as discretionary (it has little to no effect on lifestyle, regardless of quality of investment), will do fine buying now. for many, many people that's not the case.

steve, stop ignoring rent increases. You amortize transaction costs based on purchase date but you never factor in all the additional rent paid over time. Then you try to ignore the reduced cost from the tax benefit! Hilarious!

10023, absolutely. right now if you have two young children, and not a huge salary, renting in a good school district is a total no-brainer at anything less than a very large salary. with the upheaval that's happening, why would you commit to something that's both more expensive and binding if you had a better option?

i gave that example because people always say that this market isn't dependent upon the "wealthy." hah.

Is Dressner yet another of the many voices in LICC's head?

"my wife is pregnant"

boy, that IS a hypothetical.... ;).

Dressner seems to agree with Rhino, not stevejhx. Rhino and LICC seem to have a personal thing against each other.

30yrs, it never hurts to make sure people realize the hypothetical truly is the hypothetical. i've learned that the hard way. although, i guess...

The scary thing is that outside the NYC metropolitan area, many families think nothing of buying a house for 300k on 150k income, 150k savings - same ratios, everything divided by 3. In fact, that would be considered conservative.

Somewhat off-topic, did you see the article in NYTimes Sunday mag about buying 35 dollar raw chickens on a journalist's salary (I don't know what his wife does)? Is there something about the profession that makes 'em live high on the hog?

Aboutready, your hypothetical is interesting... Isn't the only way to really feel ok about telling that family to risk there money is if they are going to drastically lower their monthly payment...Load it in an intellectually honest way - including opportunity cost, transaction costs...then maybe even tax benefits. At the right price, a purchase could improve their budget and potentially their rate of savings...just not at this price!

buying isn't always bad. i've almost always owned. but i disagree with 10023's comment that this overspending occurs outside the NYC metro area, and not as much within. coops have kept many initial purchases sane, but huge numbers of people have nonetheless stretched themselves to the point of snapping. it is, unfortunately, in our natures generally to take what is offerred and try to acquire the most and "best" stuff possible. and money was being handed out like candy. many here are absolutely against such profligacy, but i fear we are the exception rather than the rule. not many would come onto a board such as this and say what a stupid ass they've been (hi alpie).

risk is acceptable at different levels depending on the variables. the problem is when you can't foresee the variables, and few could have foreseen the rampant unemployment, and worse, the likelihood that attempting to find a job would be so daunting. in normal times, having enough money to get by for six months to a year is considered sufficient by most experts. few have even that, and that isn't looking particularly sufficient right now. many people, both those who were foolish and those who wouldn't have been deemed foolish at the time by most, are in trouble.

Rhino, the stock data are a moving average of the S&P 500 from the end of WWII to I believe 2005. Therefore, it eliminates cherry-picking dates. Sure, "if I had bought x stock in y year, or a apartment in b year," it works great. But that's hindsight. You can't time a market.

I am consistent when I say that buying a place to live is the same as renting it to yourself, and the economics of owner-occupied residential real estate are different from investment real estate. In the latter you have someone paying off your mortgage; in the former you don't. Paying down the principal part of the mortgage is part of the return on investment, but it isn't in owner-occupied residential real estate: all you're doing is paying back a loan, which does not increase your net worth.

Where's LICC to answer the overriding question: transaction costs eat up the "tax benefit" for at least the first 7 years of property ownership?

Your logical inconsistencies are interesting to me. I can't time a stock market, however, I can refuse to buy an apartment when it is more expensive than renting. The fact is I can also refuse to accumulate shares when the market trades over 15x a normalized earnings metric like Shiller's. It was no more impossible hindsight to know that real estate was a bad investment from 2005 to 2007 than to know the stock market was a bad LONG TERM investment from 1997 to 1999. I think maybe your logical inconsistency stems from your correct real estate prognostication and your bad timing in emerging market stocks. It allows you to give yourself credit on one hand...and exonerate yourself on the other. The fact of the matter is the basic principles of valuation you seem to appreciate in real estate can be applied to stocks. However, in the short term they can be just as frustrating, as they will not provide a means for you to participate in bubbles.

10023 - are you suggesting that buying a house at 2x annual income is risky?

Actually, my timing was pretty good in stocks, rhino, until the Lehman disaster when I did not anticipate that any government would be stupid enough to let a major bank go bankrupt, but that's besides the point.

So that you know - though I was not in the market at the time - the Brazilian stock market fared no worse than the Dow from peak to trough.

Nonetheless, what you seem to be arguing is that "value investing" is the same as "market timing." It is not. I'm not being inconsistent at all, though maybe I'm not explaining myself well. There is a long-term correlation between rents and real-estate prices. That correlation broke down in the recent bubble. There is also a long-term correlation between property prices and imputed rents, which also broke down in the recent bubble. The cause of the breakdown was (among others) a breakdown in credit standards and new products allowing high risk loans to be made, securitized, and sold with a Triple-A rating.

You can apply those principles to investing in the stock market. However, owner-occupied residential real estate is not an investment - it does not generate cash flow, it does not (historically, at least) increase in value significantly over time. It is classified by economists as a capitalized expense. The price is not correlated to anything but leverage and rents. Rents are correlated to income, without leverage. Add leverage and prices go up; prices go up and a bubble mentality sets in.

In a way it was much like the .com bubble and bust, with companies with no E having infinitely high P's - as in, the price bore no relationship to expected future earnings. Fraud was involved in that, as well. You can invest in investment real estate (which generates a cash flow) as you invest in stocks - an allocation of capital. But owner-occupied residential real estate, as it produces no cash flow, is simply a substitute for renting. The economics are entirely different.

Please tell me why you think you can time the real estate market, but timing the stock market (or at least avoiding it when valuations suggest poor long returns) is not feasible. Further, even if I concede that long term real estate prices do not appreciate as highly as stocks...you ignore the dividend of owning real estate purchased at sensible points in time (sensible as you define it, for arguments sake).

Owner occupied real estate is an investment. It generates cash flow savings if purchased sensibly.

"Please tell me why you think you can time the real estate market, but timing the stock market (or at least avoiding it when valuations suggest poor long returns) is not feasible."

I don't think you can "time" the real estate market. I think you can assess its value at a particular point in time, which does not necessarily indicate short- or medium-term movements in price. If it did, we would never have bubbles.

"you ignore the dividend of owning real estate purchased at sensible points in time"

Again, I'm not saying that prices don't go up or down. They do. What I'm saying is it's not possible to pick any precise moment, and looking backwards, while helpful, does not predict what will happen in the future.

"Owner occupied real estate is an investment. It generates cash flow savings if purchased sensibly."

It isn't, and it doesn't. Your argument is akin to saying that using your Discover Card is an investment because it gives you 3% cash back. Saving on an expense (rent) is NOT the same as generating income. Your analysis is fundamentally flawed.

To be more precise, income is generated by adding value. No value is added when expenses are reduced. That is the fundamental difference between the two.

How is saving on an expense not an investment? Your logic is fundamentally flawed. I have $1.5mm in the bank. I can buy a two bed for cash (with some to spare in this market), and generate an after-tax income stream (rent minus maintenance). Alternatively, I can buy NYC municipal bonds and fund my rental payment with the interest.

"I don't think you can "time" the real estate market. I think you can assess its value at a particular point in time, which does not necessarily indicate short- or medium-term movements in price."

Yes, this can be achieved for stock investments as well. By looking back at rolling 20-year periods, you can make a reasoned judgment about equity returns over future periods based upon valuation levels. You can put the entry points into quartiles. I am not arguing that the analysis is any more precise for stocks than for real estate... It is the same. You argue that past price to rent ratios (or cap rates) tell us we do not have an attractive entry point for Manhattan real estate. Yet you tell me looking back at history of stock returns vis a vis various valuation entry points is not a helpful exercise. You don't have much to stand on here.

I did address your mistaken view on transaction costs steve, see my comments above.

Your statement that buying a place is the same as renting it to yourself is also lacking. If you made an agreement with your landlord to lock the same rent payment for 30 years, with minimal increases to account for building maintenance, and for the landlord to give you the apartment after the 30 years, maybe it would be comparable. You sort of missed the fact when buying, your monthly payment doesn't go up like rents do long-term, and that after the mortgage is paid you own a valuable asset. Of course, you will fall back on the falsity that it costs twice as much to own as to rent, which is the myth you like to perpetuate to justify your argument, but we have proven that to be completely false.

AR: do you think that it is uncommon for a single/dual-income family not in the metro area to buy a 300k house with 100k dp and 150k income? I would think that those would be conservative numbers. So what's the diff. between the 2 examples, given that both families have the same ratio of debt/income/dp? To me, the only diff. is that the monthly payments are less for the 300k house, OTOH, savings would run out at the same rate.

ChasingWamus: I'm encouraging people to reject/rethink the tradition 3x annual income "safe" ratio. Especially if you have private sector jobs. If you are maintaining 2 cars, have 2 kids, even a 10-20% reduction in income/unexpected expense, let alone job loss, even a 2x annual income/house ratio can be oppressive.

what about real estate taxes. minimal over 30 years? what about repairs to the building? minimal over 30 years? what about the need to move? most people stay in the same place for 30 years?

Rhino, investment is what you do with the savings. Income is on the left of the P&L, expenses are on the right.

In your example you are renting an apartment out to someone else. That generates income for you (it goes on the left). Rent - an expense - goes on the right. What income do you earn from reducing your expenses? None.

Instead of income, call the left-hand side of the P&L "revenue." Investments generate revenue; reducing expenses does not.

No one can save their way to wealth. This is about the oldest financial adage there is. You must increase revenue (value) in something to generate wealth. Reducing expenses can make you more efficient, but at some point expenses can no longer be reduced. If still there is no profit, what then?

If you think you can time a market, g-b bless. You can make a reasoned judgment based on charts, which sometimes helps, but it does not address the fundamentals of the investment.

In Manhattan real estate there was a fundamental reason why prices went up - income did, as well. Were it not a bubble, however, rents would have increased along with property prices; they did not. So from a fundamental perspective you have rising Wall Street incomes - based on the lie that was the housing boom - which would cause some increase in real estate values, but that same increase was not seen in rents. Ergo, the bubble.

I would think the opposite is true. I think people in Manhattan and the surrounding suburbs spend a higher multiple of income on housing, simply because the market has demanded it. I think people making $400-500k were out there buying 2-beds for $1.5mm because they wanted the space, the banks were lending them the money, and the after tax payments came lower than rent because the mortgages were so big. Mind you, only $150k of their $500k was in their base. This is actually the crux of the Manhattan bear case. These people are no longer confident about their job, their bonus and the bank is no longer as easy. Meanwhile, a condo market has essentially been created for continued growth in this kind of 'worker'.

Rhino: But even in the heartland or whatever, spending what was considered a "low" multiple (2-3x) can bring you close to the brink of disaster when there is a salary reduction/job loss because people haven't been saving much.

Agree with you that people making 400k-500k were buying 1.5m apts.

Steve, you still haven't addressed why timing real estate is possible but timing the stock market is impossible. Also, I think you are referring to income statement items in the context of right and left on a balance sheet. If you can't admit that a reasonable family can channel their monthly savings from a sensible entry into the world of home ownership into a mutual fund auto-investment, I guess we have precious little left to discuss.

Rhino: "you still haven't addressed why timing real estate is possible but timing the stock market is impossible"

Steve: "I don't think you can "time" the real estate market."

Income statements are P&L's. Same thing.

"If you can't admit that a reasonable family can channel their monthly savings from a sensible entry into the world of home ownership into a mutual fund auto-investment, I guess we have precious little left to discuss."

I never said that I can't admit that. What you're talking about is Income - Expenses = Profit. Yes profit is carried forward to the balance sheet, and it can be reinvested. Reducing expenses can increase profit. But it does not generate income.

Sorry.

"Your statement that buying a place is the same as renting it to yourself is also lacking."

Let's make this easy for you LICC, from wikipedia:

http://en.wikipedia.org/wiki/Imputed_rent

It's how your property tax is determined, and you can read about it here:

http://www.nyc.gov/html/dof/html/property/property_condo_coop_comp_rental.shtml

Just put up your numbers or shut up, LICC.

I didn't say P&L, I said balance sheet. You think you can make reasoned real estate purchases, but not stock purchases... I disagree. Steve, your finance command isn't quite what you think it is. Interest income hits on the income statement. Buying a home should generate bond-like investment income related to monthly cost savings. Cost reduction has the same impact on an income statement as does investment income. Reducing expenses does generate income, and can be channeled to other investments. In the end, the fact that down payments need to evaluated against other uses of cash is a truism that is surprising you want to debate. Just know that your 'always buy stock' analysis is shit.

"Also, I think you are referring to income statement items in the context of right and left on a balance sheet."

Okay, rhino, you have to stop RIGHT HERE. You're way out of your league: an income statement and balance sheet are two different things. There are no "income statement items in the context of right and left on a balance sheet." A balance sheet contains assets (left) and liabilities and capital (right). An income statement contains income (left) and expenses (right). The relationship between the two is that the net profit (loss) on the income statement is carried over to the equity portion of the balance sheet - as fiscal year profit.

The two other principal components of the financial statements are the statement of cash flow (or sources and applications of funds), the notes, and the statement of the independent auditors.

"Reducing expenses does generate income."

No it doesn't. It affects the bottom line (profit) but it does not generate income. You really need to let this one go.

In your hypothetical mutual fund case, what you are arguing is that a cost savings can be invested in a mutual fund. Agreed. But that "investment" is shown on the balance sheet; any yields from it will be shown on the income statement. What generates the income is not and cannot be the cost savings; it is the resulting increase in profit.

"two other" = "three other"

OOPS!

steve, neither of those links supports your claim that buying your place is the same as renting it to yourself. This is another example of you not being able to comprehend and correctly apply economic concepts. This act of yours of citing to a link with an inapplicable article when you have no good counterargument has gotten tired.

10023 - I agree that job loss can cause financial problems, and that any bills can be oppressive if you can't pay them. However, the example of the $300K (with $150K downpayment) house becoming oppressive to a household making $150K has to be viewed in the context of thier alternatives. A mortgage of $150K will cost less than $900/month. What housing alternatives would this household have at $900/month besides moving in with their parents? Perhaps they could cram into a 1 bedroom rental at $800/month, but surely their cost cutting would go further if they sold a car or cut back on other expenses.

Steve aren't you are a translator... what league are you talking about? Spare me the lessons on right and left. You still have no counter to the fact that a good apartment purchase generates a bond like interest stream...that can be compared to a bond. I hope you would not argue that a bond can be compared to a stock. By extension, all three can be compared. If you understood income statements, you would not argue that a reduction in expenses has a different impact than an increase in interest/investment income.

Yogi Berra or Groucho Marx or someone funny said something like, when asked about how many slices he wanted his pizza cut into, I'm hungry so cut it into 8 slices instead of 4.

That is like the saying that a house is an expense, or a house is income, and you get the value differently based on who owns it, and the value is different based on who owns it or how it is owned.

Its so effing clearly a bond that pays rent minus maintenance. You can consume that rent yourself, or not. A reduction in expense is the same as an increase in net income. That's why they call it NET.

"Steve aren't you are a translator"

Yes, and I used to be a senior audit manager and managing consultant with Price Waterhouse, and a senior auditor with Bank of America. Now I translate financial statements, among other things.

I'm not arguing that decreasing expenses does not increase profit; I'm arguing that decreasing expenses does not increase income. It increases profit, which may then be reinvested to increase income.

I don't know anything about investing in bonds and I've never done it - I have no comment on it.

LICC: "Finance is required by State law to value condominiums or cooperatives as if they were residential rental apartment buildings. We use income information from rental properties similar to the condominiums or cooperatives in physical features and location. We apply this income data to the condominium or cooperative and determine its value in the same way we value rental apartment buildings."

That is how property taxes are determined - using imputed rent. I'll make it harder for you:

http://www.nahb.org/generic.aspx?sectionID=734&genericContentID=96447&channelID=311

"Net imputed rent."

Maybe we should leave this at - I am looking at this as a trained analyst, and you are looking at is as an accountant. I am looking at cash economics, you are diddling over accounting treatment. I am a CFA and MBA, securities analyst... I don't feel outranked by an accountant.

Thanks for more off-topic comments steve. Finance looks at rental incomes on comparable properties to help determine condo and coop values for tax purposes. That still does not translate to your assertion that buying a place is the same as renting.

Rhino, though I've agreed with much of what you've said in the past, it's hard to believe a CFA and MBA doesn't know the difference between a balance sheet & P&L, or would maintain that reducing an expense is the same as increasing income. Mathematically the answer might be the same, but conceptually they are entirely different.

I never tried to "outrank" anybody, but I will tell you that I've never heard of "cash economics" in my life, and my undergraduate degree is in economics. I've heard of cash flow, however, which still isn't the same thing.

Buying a home is a capitalized expense.

"and you get the value differently based on who owns it"

Exactly, elopez: cut your own lawn and there is no income generated. Pay someone to cut your lawn, and there is income generated. If you cut your own lawn you can save the savings, invest it, burn it, or whatever - you haven't increased anyone's income.

Ditto housework. If you pay someone to do it it's economic income; if you do it yourself, it's not.

There is another old adage: no one gets rich if everyone in the neighborhood cuts each other's lawns, because it's just a barter, and no value is added. It's not until you add value - by having an unrelated third party do the work for you - that value is added to the cost of the inputs (lawnmower and gas).

LICC - because you don't understand something doesn't mean it's "off-topic." Just put up your numbers (which you haven't done) on what the transaction costs are and when your breakeven point is. 7 years as I calculate it.

Rhino, here's yet another way to think of it: spending increases the velocity of money; saving does not. Saving increases the monetary base.

Hmmm....

No numbers from LICC yet?

What numbers steve? You set forth faulty assumptions and a hypothetical filled with holes. You know you are wrong which is why you are trying to change the subject.

"You set forth faulty assumptions and a hypothetical filled with holes."

That's why I want to see YOUR numbers, LICC - what, to your mind, are the transaction costs involved, how much do they amount to, and how long does it take for the "tax benefit" to cover them under your assumptions.

It's not "changing the subject" - it IS the subject!

"Ditto housework. If you pay someone to do it it's economic income; if you do it yourself, it's not."

Really? So when married couples look at the cost of housework and child care vs. the income of the wife outside the house...they should really focus on the accounting treatment and stop getting caught up in the economics? There is nothing I have said to show a misunderstanding of income statements and balance sheets. Frankly, I have never seen an income statement laid out left and right. Those of us who value companies for a living, as opposed to those focused on accounting for accountings end, would not make a distinction between cost savings and additional income. I stand by the fact that buying a home is like buying a bond...its like buying a bond on credit if you get a mortgage. The coupons are equal to rent saved minus maintenance paid. You should learn something about bonds Steve. If you don't understand bonds, I am not sure how you claim to understand real estate. Mortgages and bonds...similar (if not the same), no? I am calling the savings income...a coupon for discussion sake...I realize that it is not interest income for accounting. If you can't look at it that way, I am not sure how you can evaluate it against alternative uses of cash. Ah, but that's not what you do.. You are not a financial manager or a judge of them by trade, you are an account. It shows.

The tax benefit does not "cover" transaction costs. The transaction costs would exist regardless of the mortgage interest deduction. You are trying to equate the two when that makes no sense. That would be like asking how long the increase in rents covers the transaction costs.

"The tax benefit does not "cover" transaction costs."

do not take for granted that tax benefits for homeownership will continue regardless of income. they might continue for those earning less than the average household income but not for most of nyc residents. a day doesn't pass when people write against these "tax cuts for the rich" in the financial media when talking about deficits. so don't just assume they are here to stay. of course they'll totally disappear for secondary homes regardless of income level.

You've never seen an income statement set up in 2 columns?

It can be done either in two columns or sequentially, first income, then expenses. Both are acceptable, but when laid out in columns it's much easier to see how income and expenses relate to each other.

The principal exception to this is cost of goods sold, which is considered a negative income item.

"they should really focus on the accounting treatment and stop getting caught up in the economics?"

That is the economics of it - national income accounting (which is economics) does not include cost savings for work done by a household for its own benefit. There is a significantly different economic effect between hiring someone to do something for you, and doing it yourself.

"Those of us who value companies for a living, as opposed to those focused on accounting for accountings end, would not make a distinction between cost savings and additional income."

Really? My advice is not to say that on your next interview. The fact is, economically, purchasing a home is considered a capitalized expense - in accounting, and in economics. The expense is capitalized and amortized over the life of the asset. If you buy a home for yourself no income stream is generated from you to you; you are paying a mortgage in lieu of rent.

LICC: "The tax benefit does not "cover" transaction costs."

Oxford: "To cover: (of money) be enough to pay (a cost)."

"You are trying to equate the two when that makes no sense."

No. Read the English: when purchasing a home, how long does it take for the "tax savings" to equal the transaction costs involved.

"That would be like asking how long the increase in rents covers the transaction costs."

No, because they are both expenses.

What you need to do LICC - which you CAN'T - is tell us how transaction costs affect the true cost of purchasing real estate. You LOVE to look at the benefits side - which exists - but never deal with the cost side. The fact is that it takes 7 to 10 years worth of "tax benefits" to cover - pay for - the transaction costs involved in purchasing real estate.

"The fact is that it takes 7 to 10 years worth of "tax benefits" to cover - pay for - the transaction costs involved in purchasing real estate."

7-10 years? transaction costs are proportionate to purchasing price and tax benefit is proportionate to income level (that sets the marginal tax) but also depends on the state & local income taxes. hence you make up for transaction costs much faster in states with cheap housing with high income taxes than in place like nyc, with astronomical real estate prices or florida (expensive RE but no income taxes).

We're talking about Manhattan property, admin.

Florida may have no income tax, but it has extremely high property tax and insurance, especially in Miami, costs almost as much as a mortgage.

In any case, I posted an example before of transaction costs that eat up 12-13% of the sale price of a property, which at a 35% gross tax rate (which almost no one pays) would take over 7 years to cover (pay for). Most people own property for from 5 to 7 years.

LICC says I'm wrong but won't post any numbers that prove he's right. (Because, yet again, he isn't!)

steve, you can look at any financial benefit from owning and applying it to "cover" any of the costs. Your savings from not having to pay increasing rents can "cover" the costs. The price appreciation in the property can "cover" the costs. You just hate having to account for the tax benefit so you are trying to drum up a way to ignore it.
Another point you conveniently ignored is that buyers will view transaction costs as part of their opportunity costs, not as amortized monthly expenses.

Accounting is not economics.

"Florida may have no income tax, but it has extremely high property tax and insurance, especially in Miami, costs almost as much as a mortgage."

sure, those are also carrying costs, but not transaction costs. is it possible that landlords in florida just cannot pass those carrying costs to tenants during recessions? i've seen a flood of people willing to be a landlord in a different state from where they are living bidding up prices for the locals. happy to see that craziness ending.

"If you buy a home for yourself no income stream is generated from you to you; you are paying a mortgage in lieu of rent."

The income stream is the savings vs. rent. Either way, if you don't feel versed enough in bonds it probably doesn't make sense to carry on a conversation about investing and the tradeoffs between stock, bonds and real estate.

Steve, have you ever interviewed for a valuation oriented position? How would you propose to advise me? I assume that you have never worked or interviewed for a valuation or corporate finance oriented position. You are an accountant. People go back to business school to make the transition from what you do to what I do.

Allow me to summarize the above 100 plus posts and end this discussion:

Buying is not currently preferable to renting in Manhattan because it is cheaper to rent currently than to buy, measured by the monthly out-of-pocket expenses for buying vs renting comparable properties. Hence you will save money by renting.

Investing your hypothetical 20%-30% down payment plus the hypothetical closing costs involved in purchasing an apartment in stocks or bonds at today's prices (or continuing to keep such savings in such investments) will almost certaintly yield a positive return over the next year or two as the general economy recovers, corporate profits improve and we emerge from the recession.

Furthermore, it is virtually certain that prices of Manhattan residential real estate will fall significantly over the next 18-24 months. This is what happens when a bubble bursts. How much they will fall exactly is unclear, but it will be a significantly decline and there is literally nothing that will forestall it. So why not wait until prices bottom out before taking the plunge and buying?

Mortgage interest deductions do not help the "buy" case very much, as such deductions are not applicable (a) if you get laid off and therefore no longer have an income or (b) you make over $200K (or $250K jointly w/ spouse) and are therefore "rich" according to Obama (and hence the availability of these deductions will soon be phased out by the Dems).

You can wade through all of the posts before this one, but these are the fundamental points.

ok steve, let's fix your numbers. You overstate legal fees and brokers' commissions, probably by about $20k-$25k. Let's assume a modest annualized 3% rise each in property value and rents for 5 years, and let's very conservatively assume a comparable year 1 rent of $4000. Over 5 years, you will save $38,226 in rent INCREASES alone (if you look at actual rent saved, you are looking at almost $280,000), plus you have $200,000 of increased property value. And as you pointed out, each additional year you own, the more the numbers work in your favor.

klonipin here.
I think I've been introduced to stevejhx and rhino86 in this discussion: http://www.streeteasy.com/nyc/talk/discussion/11192-another-35-decline

the logic, math, truth, facts, etc. are all on Rhino86's side, but I'm putting my money on stevejhx. No one can outlast this guy, I don't care if you are Ben Bernanke, Hank Paulson, John Paulson, Paul Samueleson, George Soros, Steven A. Cohen, Nassim Taleb, or David Shaw. Not that I rank with these folks, but I eventually had to give up and argue with a parking meter which I figured would be more fruitful than opening this guy's eyes to the truth.

My favorite points of view from stevejhx, quoted exactly

-"Stock prices do not have built-in market constraints."
-"Purchasing owner-occupied real estate is not an "investment"; it is capitalizing rent."
"'Property prices are a function of the risk and return of the asset class.' Not owner-occupied residential real estate. For investment property that is true, but it's also completely unrelated. Owner-occupied residential real estate is a substitute for renting."
"If you buy a car to use yourself, the economics are completely different from buying a car to lease to someone else. If I buy an apartment and rent it out to someone else, it's not the same as if I buy it to live in it myself. Feel free to think it is, but if I live there I'm paying down the principal; if someone else lives there they're paying down the principal for me. The former is capitalized rent; the latter is an investment."
"'to 'capitalize rent' you need to plug in the rent ... and an expected or hurdle rate of return' No you don't. You need to take the amount the place costs you and amortize it over its expected life. You really don't know what you're talking about."
"I can't give you a lesson in accounting here, klonipin, except to say that the substance of the matter is to take an expense (rent) and book it as a long-term asset, and then amortize the amount over the expected life of the asset."

one of the better ones:
"You don't need to create a present value for a capitalized expense. It is accounting, not finance. Make fun of me all you want - it is you who don't understand the difference between a capitalized expense and capitalization. You DO NOT need a rate of return."

and this nonsense
"If you buy a home and live in it, you take the price of the home, let's say $120,000, and amortize it over how long you plan to live there, let's say 10 years. That gives you annual amortized rent of $12,000, or $1,000 per month, plus the current portion of the interest expense (which is not capitalized)."

and
"Capitalization is a measure of income; capitalized rent is a measure of expense. This is what klonipin does not seem to understand."
"Capitalizing an expense does not require an interest rate UNLESS interest is being paid on the expense. There is no "rate of return" on an expense."

and the key to the misunderstanding
"Accounting is indeed different from finance."

"let's fix your numbers."

No, LICC - post your own. So it's clear.

And I did not "overstate" brokers' fees - they are 6%.

Hy klonipin, nice you're back. I stand by all of those statements.

klonipin - there are a lot of windbags on this msg bd, however I would advise people to keep things simple, focus on the important points and ignore the minutiae. Certain of the windbags love dissecting minutiae an nauseum, however I believe it's a pointless waste of time (just serves to fuel their overinflated egos).

Thanks, BSexposer, but it's not as if anybody else is reading this. I do check every once in a while for anything new or interesting. Come up with squat so far.

"Allow me to summarize the above 100 plus posts"

wow, i wish every thread would include that summary service from time to time.

LICC - transaction costs don't have anything to do with rent, so drop that part of your analysis, as well.

"keep things simple, focus on the important points and ignore the minutiae."

sounds like common sense advice, but then, that's what quants were saying to any one criticizing their models "keep it simple! your point is just minutiae".

steve, you are the one equating savings to "cover" costs.

Anyone besides me notice that stevejhx has a particular problem? He seems addicted to seeing his own thoughts posted on msg bds? Is this the sign of narcissitic personality disorder (NPD)? Could medication help? I would suggest he venture outside (i.e., away from the computer) and interact with some folks in REAL LIFE. Might be therapeutic. JMO.

For the record, here is the wikipedia definition of NPD, followed by some of the telltale symptoms of NPD:

A pervasive pattern of grandiosity (in fantasy or behavior), need for admiration, and lack of empathy, beginning by early adulthood and present in a variety of contexts, as indicated by five (or more) of the following:[1]

1. has a grandiose sense of self-importance

2. is preoccupied with fantasies of unlimited success, power, brilliance, beauty, or ideal love
believes that he or she is "special" and can only be understood by, or should associate with, people (or institutions) who are also "special" or of high status.

3. requires excessive admiration

4. has a sense of entitlement

5. is interpersonally exploitative

6. lacks empathy

7. is often envious of others or believes others are envious of him or her

8. shows arrogant, haughty behaviors or attitudes.

Even he is certifiably insane, he is still largely correct in his reasoning.

steve is anyting but correct. First off, the guy has left out any type of rent increas from his math. He assumes that rents wil always remain the same. Second off, his annual appreciation fugures for the S&P 500 are totally inflated.

"Is this the sign of narcissitic personality disorder (NPD)?"

ad hominem fallacies are also defined in wiki.

why on earth does steve constantly talk about buy vs. rent? Doesn't he have a life? He lives on SE. I wonder if SE pays him to post here...

"there are a lot of windbags on this msg bd, however I would advise people to keep things simple, focus on the important points and ignore the minutiae."

This is good advice. It is easy to discredit the long winded and it usually only takes a sentence or two.

"Even he is certifiably insane, he is still largely correct in his reasoning."

Largely correct is an interesting way to put it. I have often said that steve is directionally correct, but he can always be counted on to drop the baton in the final leg of the race.

I'm not sure how it can be said he's largely correct. To deny that buying stocks, bonds or putting your cash into a down payment on apartment are viable alternative uses of same seems largely incorrect to me. Its corporate finance 101 for the family.

"I wonder if SE pays him to post here..."

Interesting thought. Do websites like SE actually pay people to post incessantly to stimulate (if that's the right word) discussion? If so, I stand corrected.

Largely correct? Do you even read what he says?

"To deny that buying stocks, bonds or putting your cash into a down payment on apartment are viable alternative uses of same seems largely incorrect to me"

That's not at all what I said, Rhino. What I said was that if you put a down payment on owner-occupied residential real estate, it is a prepaid expense. A prepaid expense is not the same as an investment. An investment yields income; a prepaid expense does not.

LICC - post your numbers.

"A prepaid expense is not the same as an investment."

Any time you take money out of your wallet to buy a risky asset, that is an investment. I don't care how you account for it. You are picking accounting knits. You have ignored my point that I can buy bonds to fund rental payments or I can buy an apartment. That is a classic corporate finance question. This is not an accounting question. That in and of itself proves that buying a home is an investment alternative. An apartment is a stream of rent savings. You can make various assumptions about the trajectory of rents and the appropriate cap rate to value that apartment. If I think stocks are a better value than bonds, and apartments are overpriced, I can put my money into stocks. This is really not debatable stuff. I am sorry if you can't move past the accounting. I work in the world of investment decisions, cash flows. I don't make arbitrary distinctions. If I know I need to house myself one way or another, then rent savings to me is as real as rent paid.

"An apartment is a stream of rent savings."

Close. Buying an apartment is a capitalized stream of rent. It may or may not save you money.

"If I know I need to house myself one way or another, then rent savings to me is as real as rent paid."

No question.

But what you're talking about is not investing; it's asset allocation. Whether you choose to prepay your rent by buying an apartment or buy a bond and use the income stream to pay your rent.

"I don't make arbitrary distinctions."

It's far from arbitrary, and it's more than accounting. It's the economics of it, as well. You are correct in what you're saying above - I don't think I've disagreed with that (except it's a "nit" - baby flea - not a "knit").

Here was, is, and will be my point: by real-estate investment I have heretofore been referring to an asset that appreciates in value. Except in recent years housing has not increased significantly in value over time, as the price was tied to incomes, and leverage was highly regulated. When leverage was deregulated and securities sold based on a credit rating based on what had been but no longer was a highly regulated market, it caused an unsustainable spike in housing prices, aka a bubble, which is now deflating.

In your post that started this you said you were comparing housing prices to the price of other assets, and I said that that was only part of the story. I stand by that. If - and this is why it's more than accounting "nits" - you assume as economists do that buying a place to live is prepaying a future expense, then what you need to look at is not so much the allocation of that capital in terms of other asset classes, but the net present value of that stream of prepaid expenses versus the net present value of future rents over the same period of time. That is, it may be that when you look at cap rates real estate looks like a grand investment, but when you look at it compared to the substitute good - market-rate rentals - it is still vastly overpriced. That would indicate a problem not with real estate, but with the valuations of other asset classes.

Is that clearer?