The New Homeowner Hallucination: "We'll Rent For A Year And Then Sell When The Market Comes Back

Well we know the government will fight it... So by extension you are saying it will take longer... And go lower. I used to think -50%..Feel like 60-65% is more appropriate especially if interest rates creep up.

30 yrs - nice post. thanks for the insight from someone in the business...and an "expert witness," if i recall correctly.

Rhino86
10 minutes ago
ignore this person
report abuse Well we know the government will fight it... So by extension you are saying it will take longer... And go lower. I used to think -50%..Feel like 60-65% is more appropriate especially if interest rates creep up.

OMG are people for real??

Ignoring me, a guy with 30 years experience in real estate in NY, an expert trial witness sees 50% down as his most likely scenario, with a bias toward worse, if I read him correctly.

Are you for real? OMG.

Duh, 30 years of experience, so what. Get 30 people with 30 years of experience and take a vote on them not just one. Ever watch the business channel on TV, you have a ton of people with so many years of experience and some say buy stocks, others say don't buy stocks.
General Motors was run by car people and now they are bankrupt and now people say that the new head isn't good because he is a phone guy.
Also, have you ever been in a trial? One expert doctor says one thing, the other says another thing.
Eggs are healthy, eggs are not healthy. Eat organic...Don't waste your money.
Berniard Madoff going to jail today was a top stock market guy for 30 years.

What's your point? We are down 30%. Apparently you don't think we can go down another 30% on the current denominator. So what? Are we all supposed to stop thinking what we think because your silly ass showed up?

Get lost.

Just a math exercise, if 2007 was index 100 and we are down 25%, that is 75 now. If the total top to bottom is 50% off, that gets to 50. So 50 means that prices then have to DOUBLE, 2x, to get back to a peak, which if increases are then 5% per year from the theoretically normalized 50, it would take 15 years to get back to 100.

I just put this on the other discussion but here people expect 60%.

If 2007 was index 100 and we are down 30%, that is 70 now. If the total top to bottom is 60% off, that gets to 40 meaning 43% off from now. So then 40 as bottom means that prices then have to go up 2.5 times, to get back to a peak, which if increases are then 5% per year from the theoretically normalized 40, it would take 19 years to get back to 100.

And to think about it more, if 2007 was peak, we are in mid 2009 at this 30% down, and it will take how long to go further down? Guess 2 years for argument to mid 2011, then add 19 years on top of that, the argument would be that it would be until 2030 to be 2007 prices.

what's your point?
and...why do prices ever have to go back to a bubble induced peak?

Yes, the magic of compounding. I think in practice, however, if we fell 50% or 60%, it would be followed by above trend appreciation for a period of time. Even before credit exploded, 1992-2000 experienced strong appreciation...such that by 1998, the 1988 high had been re-achieved.

Columbia, they will eventually go back there because over time, rents do rise and even at a more normal ratio that will eventually call for prices back at those levels. Figure if the ratio got to 2x normal... In the time it will take rents to double...maybe you see those highs. 3%/yr would say in 25 years. That seems like too long to me but who knows.

i was kinda thinking about inflation adjusted, ie. constant dollars.

Doesn't that imply that if a home rises at the rate of inflation, its not appreciating? The way I think about it, even if it is rising only by the rate of inflation, it is locking in a payment in a world where rents rise over term...So I'd view that as a gain in practical terms...tho not in real dollar terms.

You get lost. Who appointed you?

You are the one who stormed in, asking if we are 'OMG, for real'. I never understand you people who swoop in to make fun...and say nothing. Still waiting for you to add something other than OMG 16-yr old textspeak.

Actually my point columbiacounty was just a math exercise to put everyone's points of view on price movements into perspective. Like someone says that the next galaxy is XX kilometers away, and they developed the measurement of light years to put that into perspective.

It was a once in a lifetime credit bubble, with price to rent relationships off the 20-year charts. Its not hard to imagine -50% to -60% and the double necessary to get us back in nominal terms taking over 20 years. This was a much more severe bubble in Manhattan than the late 80s.

HAHA you tell me to grow up but all you can say is GET LOST which is what kids do.

"And to think about it more, if 2007 was peak, we are in mid 2009 at this 30% down, and it will take how long to go further down? Guess 2 years for argument to mid 2011, then add 19 years on top of that, the argument would be that it would be until 2030 to be 2007 prices."

No, if inflation averages 3% and there is 5% appreciation on top of that (which is reasonable if you measure appreciation from the absolute bottom), giving you an average of 8% gross appreciation per year, it would only take 12 years for prices to go from 40 back to 100 (with 2007/08 prices as the baseline). So you would see prices back to the bubble top in about 2023 (12 years after the bottom of 2011). If inflation averages 5%, it would only take a little over 9 years, or about 2020. So a range of 2020 to 2023 for prices to get back to the 2007/08 highs does not seem unreasonable to me.

BTW, it took 25 years for the stock market to get back to the 1929 high. I believe Mahattan RE prices in late 2007 and early 2008 were similar to the bubble prices in the 1929 market.

Real estate can't appreciate 5% more than inflation. If you assume rents go up at the rate of inflation, if real estate appreciated 5% on top of that...the the gap between the cost of renting and owning would double every 14 years or so.

It may be able to coming out of deep trough, however.

Rhino - I believe that prices down 60% from the highs of 07/08 would be an over-correction. If that were the case, you could see appreciation of 5% over inflation for some period of time as credit is eased, incomes rise, unemployment drops, etc. All of this assumes a perfect storm on the downside (which I expect will happen).

BSExposer we agree. However, when you label it appreciation is has a connotation that suggests long-term or sustainable. I think history suggests 'real' appreciation is only seen out of troughs....So is it really properly labeled real appreciation or is it just correction of an overshoot....Much like what we are seeing right now on the downside. One way to guess would be to look at how values oscillate around the long term trend in rents.

"I think history suggests 'real' appreciation is only seen out of troughs..."

Yes, that is why I will not be buying unless and until I see the absolute bottom (which I expect to be reached in about 2 years). If you had bought the July 1932 bottom of the stock market, you would have had a CAGR of 11% plus dividends (or about 15% total CAGR) for the 22-year period until the 1929 highs were reached in 1954. Analogously, if I buy a $1MM apt in Manhattan w/ $300K down in 2011 [at $400/sq ft], I will expect an overall return on my 300K of about 300% over 10 years (or about 12% CAGR).

You make calling bottoms sound so casual. Haha. $400/ft is down 65%.

"You make calling bottoms sound so casual. Haha.

I think it's a lot easier in RE than in the stock market, as there is less liquidity in RE. Basically when I see prices stable for 4 or 5 months in a row, I think the bottom will have been reached. So if January 2011 prices are equivalent to June 2011 prices, I will take a serious look at buying. In any event, once the bottom gets reached, there will likely be an extended period where prices bounce along that bottom channel before moving back up, so there will be plenty of time to buy (unlike the stock market bottom).

"$400/ft is down 65%."

Just giving ballpark numbers - maybe $450/ft. Who knows for sure?

I know what you mean, and agree. I would actually sooner wait to see several quarters of rising prices. No one knows for sure, but -50% to -70% seems as good a guess as any to me. Stopping here at -30% seems incredibly wishful...and more than 70% down seems too doomsday.

Just to throw another iron on the fire: IF prices go down 60% in general, there will be SOME "problem properties" which will go down 80% to 90%, and some of those problem properties will be one's which no one ever thought were going to be in that category.

Zillow did a study, and 2/3 of homeowners said they would sell if prices went higher.

Thats a pretty bad sign for prices actually going higher.

I think 2/3rds would also sell if prices kept going lower.

polls merely take into account what peopel are thinking on a specific day. They are not always accurate.

> polls merely take into account what peopel are thinking on a specific day.

OK, we've gone from mere rationalization into just stupidity here.

I think history suggests 'real' appreciation is only seen out of troughs---very well said
try to invest in at least the general zone of the trough--balanced portfolios in place over the last 3 years have been an embarrassment--

Detractors, make note of another person appreciating my input here.

Ubottom, every investment needs to be compared to cash first. Real estate hasn't made sense relative to renting in years. Stocks have not made sense on multiples of normalized earnings for years either. Hussmanfunds.com has excellent equity perspective.

"oh, and for the record, let me just say tha this Mark guy from Citi is late to the ball game with this article. He should have written it and mailed it to the homeowners in CA and FL 2 years ago. All he is doing now is looking out the window and telling everyone that the sky is blue. Thank you Captain Obvivous."

- guy who only figured it out himself, oh, last week.

Rhino86
about 5 hours ago
Detractors, make note of another person appreciating my input here.

Ubottom, every investment needs to be compared to cash first. Real estate hasn't made sense relative to renting in years. Stocks have not made sense on multiples of normalized earnings for years either. Hussmanfunds.com has excellent equity perspective.

Rhino- this is why my cash is sitting in the bank. What investment makes sense now? Bonds? munis? Where do I put my downpayment and other cash for the next couple of years?

I put a big chunk of my money into some short term bond funds that have averaged 6% or so return with mild drawdowns (worse quarters = -3% or so) even through the crisis. JAFIX, PTTDX, TGMNX, ADFIX. I got tired of seeing money market yields under 1%. The stock market seems 'fairly valued'....15x normalized earnings is roughly 900 on the S&P. That doesn't seem too attractive, especially for short term money. I honestly need to learn more about bonds.

I'd say munis (fantastic yields compared to treasuries), but I'm not so sure NY is going to be able to pay all of that back.

I am telling you-do not under estimate the stupidity of the general public. There is still a strong sense among people that you cannot go wrong with real estate. This may keep real estate prices from falling to where they should be. There are alot of Alpines out there.

"There is still a strong sense among people that you cannot go wrong with real estate. This may keep real estate prices from falling to where they should be. There are alot of Alpines out there."

lol, and it's been proven that 80% of Americans cannot handle percentages. Alpine is in a very special situation, he's very under water trying to convince himself that he couldn't have done better renting. ok, that situation might not be that special.

"This may keep real estate prices from falling to where they should be. There are alot of Alpines out there."

Yes, this is very true. I just don't think there is enough wealth being created in the financial sector right now to allow enough like-minded non-owning Alpines to accumulate down payments. Meanwhile the supply of sellers is a natural flow, and condo completions continue apace.

Samporter...why the cursing defense of NY solvency?

But they still want to buy, so they may buy something cheaper. So we'll see more price compression.

"There is still a strong sense among people that you cannot go wrong with real estate."
Agreed. Part of my argument about reaching 50% down is that as time goes on and prices don't go up the general populous will have a changed perception about real estate. I think many people who are buying today in NYC feel that this might be the bottom and are worried that prices might jump back up. We've become so accustomed to prices jumping that these buyers fear that if they don't pull the trigger now that they will be "priced out forever." Such a thought is nonsense of course so overtime as prices continue to go down fewer potential buyers will be worried that prices will pop. Buyers will be more patient or even scared about buying and this will help prices fall closer to a normal price/income level.
Because NYC is such a sought after location I don't think we'll fall to a normal price/income level ever again, but we will get closer.
Vegas median income $55,000 - median home price - $120,000 - - NYC median income $55,000 - median home price $1M ish??

rhino, samporter must be gov paterson finding himself curiously addicted to SE.

Jazzman the counter to the median income thing is that the median income earner in Vegas is probably an owner...The median income earner in Manhattan is a renter...probably a rent controlled renter if they make $55k. I agree with the general premise, though. I don't think enough renters are making enough money to make the jump to ownership at these price levels to balance the numbers of natural course of time sellers as well as the new developments.

Christ BS, then why are you pitching me NY munis? :)

I would avoid any munis from states on either coast - some of the "flyover" states might be safe though. NY is an ABSOLUTE DEBACLE - banana republic.

"Overall, the [NY] state budget included a combined total of $12.6 billion in extraordinary federal aid in 2008-09 ($1.7 billion) and 2009-10 ($10.9 billion). As directed by the Obama administration and Congress, New York had to spend this aid as soon as possible in order to help stimulate the economy and preserve critical services. It could not be used to fund the state’s Rainy Day reserve."

http://www.budget.state.ny.us/budgetFP/0910enactedInitiatives/0910enacted_federalAid.html

BS if you carry your argument to its logical conclusion how are feds different from NYS? both will tax their way out of it...

"how are feds different from NYS"

The difference is that we have a federal system. People and corporations will leave NYS when taxes get jacked up, but they won't leave the US.

i believe more than five companies out of s&p500 already re-incorporated - just the beginning... as to individuals - where exactly are they going to move, nj or ct?

"as to individuals - where exactly are they going to move, nj or ct?"

Probably back where they came from (other areas of the country).

Move out of the city, to a suburb...unless prices decline enough. Thousands of finance industry people have to reconsider how they spend money...What it means to have a $1.5mm mortgage and private school bills. There are a lot more people at the margin making that decision today vs. 12 or 18 months ago. Those who are not at the margin...many/most of them already own. And of my friends, one in particular is looking at what he paid $2.5mm, reasoning through his overall budget, and asking himself if it really makes sense for him to be here.

I know quite a few people who have left NYC in the last year or two, before the current economic debacle happened last fall. They've moved to San Francisco, Atlanta, Denver, etc. It's not hard to do - you just hire some movers and pack up your belongings and vamoose. Now with taxes getting jacked up and the gravy train of Wall St shut down, I expect massive outflows of yuppie types (not to mention the fact that most college or bus school grads will seriously re-think any plans about moving to NYC).

BS you are forgetting about all the artsy types who moved to Brooklyn. They will move back and buy two bed condos for $1.4mm down from $1.8mm. Also, the mid-level advertising types pulling down $200k who moved to Scarsdale will sell their houses and bid on classic sixes on the UES.

Well, if there is anything I've learned since the downturn began, its how many people are so on edge about financial and other considerations, just looking for someone/somewhere to lash out.

We wouldn't have 80% of the conversations of this board IMHO if there weren't so many sore spots.

30years: "I bought a number of Coops in Forrest Hills in this time period. A few facts:"

Absolutely 100% correct on all points. You couldn't give away coops in Queens.
In my case, though, there were buildings were so many owners were caught in the
same bind that renting out long term was no problem - all the owners moved out.
Boards accepted it. This last boom cycle was more condos than coops, and I have
a hunch it could be worse than the coop slump in FH.

"BS you are forgetting about all the artsy types who moved to Brooklyn. They will move back and buy two bed condos for $1.4mm down from $1.8mm. Also, the mid-level advertising types pulling down $200k who moved to Scarsdale will sell their houses and bid on classic sixes on the UES."

Where are artists going to come up with $1.4 million? And why are ad executives going to move from Scarsdale to NYC? If they moved out there, then chances are they did so to get quality public schools and more living space. Why would they be so eager to give that up?

Just when I think you can't outdo yourself, clear sarcasm eludes you.

ROTFL.

haaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaa

i'm crapping myself.

Its so funny. He's just not a bright guy.

You know the problem with all of you, you only think American. New York is a worldwide city, and by international standard it is cheap, really cheap. It is too much of a struggle for a foreigner to buy a co-op, but as soon as the global crisis ease up, you should find the international community buying in, and there is no way they are buying the suburbs or Denver. Look at London no English person can afford to bvuy in the city. but mainly Russians, Indians, .....Don't look at Manhattan prices the same way you are looking at Dallas prices.

Never been the driving force behind the market...just on the fringe. New York was a global city in the 1990s too. This is a close cousin to the perennially weak argument that New York is special. We know its special... Its why its been the most expensive city in the US forever.

"you only think American. New York is a worldwide city"
lol, japanese feel good about new york being a global city in the 80's... nothing like dumber foreigners to bail us out of our own stupiduty

NYC was "special" until Wall St imploded - now, not so special...

Rome was and is nice too. Had its ups and downs.

http://www.observer.com/2008/shiller-new-york-we-re-ancient-rome-right-fall

"INTERVIEWER: Have you invested in property in New York City?

SHILLER: No. Hah."