BUYERS...What Will Finally Get y-o-u off the FENCE?

Real buyers? You mean the ones willing to pay more than they think a place is worth so that you can earn a ridiculous commission for doing almost nothing (aside from insulting those same people)?

Last year I put in a bid on a place listed at $650k. I eventually offered $600k and was told I was "not negotiating fairly"! Fast forward, that same place is still on the market and since May has been listed at under $600k.

So Fake, ask the sellers (the REAL sellers), what will finally get y-o-u to face reality?

Fayek...the question isn't if there are serious buyers, it is if there are serious sellers.

look at the prices out there. many new developments in mediocre neighborhoods with shoddy construction asking 1500+/sq foot. no one is paying that. if sellers get serious and realize that it is no longer november of 2007, then the buyers will come off the fence.

We are real buyers on the fence, dual income around $325k, no kids and no plans for kids. We are ready to move to a UWS 2 Bedroom, prefer new construction, minimum 1,500 square feet to 1,700 square feet, must have real views. When this unit is $1.25M -$1.325M, and monthlies around $2,500, we're in, otherwise it's a money losing proposition. The going price for this is $1K to $1,500K per square foot and hardly selling, but definitely listed.
Our 1 bed doorman rental with views is just fine at $3K per month until things change. A 10%-15% reduction from insanity, is still insanity and our cash is much better off in the market.

"Do I want to ignore the "tax benefit"? You get to deduct the "tax benefit" when renting to an unrelated third party, so it's there. Do you want to ignore the opportunity cost and the transaction costs?"

steve changes the topic once again. We were talking about an apartment that steve could buy and live in cheaper than his $5000 rent in Chelsea (a.k.a owner occupied real estate). He said this can't be done so we gave an example (which he said didn't exist and then he found it). steve also said it is 2x more expensive to buy than to rent which, as this example shows, is silly.

Poor steve, has to change the subject when he knows he is wrong (again).

federman, look at the purchases - it supports: similar sized apartments sold for just under $1 million (facing a warehouse). The original asking prices were $1.2 million.

That's not changing the topic, JuiceMan - it IS the topic. I DON'T pay $5000 a month rent. You DIDN'T show anything. You compare two apartments that aren't remotely similar, the purchase in tenement the rental in a luxury building, ignore the transaction costs, opportunity costs, but add back in the "tax benefit."

Find EQUIVALENT apartments, Juicy. Can't be done.

And what IS the proper buy to rent ratio, since 12x is wrong in your estimation?

steve is just a glutton for being proved wrong over and over again. And when it happens, he obfuscates, distorts, changes the subject, and just flat out lies. Sad.

"You compare two apartments that aren't remotely similar"

Nope, you are the $1200 2/2 nybits man, everyone knows it.

"That's not changing the topic"

It's not? May want to read again. I don't "invest" in rental properties so I choose not to comment on them, which makes it impossible that I ever have, which makes it completely factual that you changed the subject.

LICC, can you believe steve pays $4700 / mo to rent in Chelsea and talks about it like it is a great deal? steve should have bought 5 years ago when he had the chance, poor steve.

JM, the crazy part is that under steve's warped theory, if the economy and jobs market stabilizes in NYC, and the Wall Street firms stop cutting jobs and return to normal with respect to hiring and compensation, real estate will still fall 50%. This is insane. From what I am seeing and hearing from friends that are renting and looking to buy, the relation between rents and prices are not irrational now.

hjx, juice, LICC, steveF, etc. Here's an idea. Set up a thread for the rent vs. buy argument. Then, before you hijack another thread, just put a link to it. Seriously, how many times can you have the same argument. We've all read it dozens, maybe hundreds, of times. ENOUGH!

I know LICC, I think steve's agenda is more clear every day.

"Seriously, how many times can you have the same argument. We've all read it dozens, maybe hundreds, of times. ENOUGH!"

I agree completely l2r and if you read my post earlier in this thread, that is what I suggested. steve doesn't let things go and he forgets what he posts. Maybe we should start a senile thread?

Yes, Juicy, maybe you should start a senile thread, b/c you keep on forgetting to post what you think the proper price to rent ratio should be.

L2R - the thread is about when one would buy - I gave an answer.

Let my summarize LICC's comment: "If ... if ... if ... if ... if ..., and if ... real estate will still fall 50%.

And if a tsunami hits New York....

I'll buy when the monthly all-in nut to own would be similar to my monthly all in nut to rent a similar apartment. I'm not willing to projected any appreciation into my rent vs buy calculation right now.

"steve doesn't let things go"

Not until you answer what the proper rent to price ratio is, according to toi, Juicy....

"Not until you answer what the proper rent to price ratio is, according to toi, Juicy...."

I don't believe in the ratio steve so there is not one that is "proper". The entire ratio concept is thumb in the air math that you treats as law. There is no one size fits all formula (as we have proved many times). Your ratios are highly dependent on the user profile which makes the broad generalizations you favor even more laughable.

This is not new news steve, time to start the senile thread.

How can there be a proper ratio if the rentals have no comparison to owning? The housing stocks are not at all identical. Even in NYC with the diversity of types of apartments we have here.

"How can there be a proper ratio if the rentals have no comparison to owning? The housing stocks are not at all identical. Even in NYC with the diversity of types of apartments we have here."

well, than that goes for almost every statistic and forecasts out there. why do we even bother with median prices, average price per sf, etc if this is how you are going to answer every question?

ILoveMuayThai:

Fayek...the question isn't if there are serious buyers, it is if there are serious sellers.

look at the prices out there. many new developments in mediocre neighborhoods with shoddy construction asking 1500+/sq foot. no one is paying that. if sellers get serious and realize that it is no longer november of 2007, then the buyers will come off the fence.

Price per square foot in manhattan prime in new construction developement in the range of $1000 - $1500 per square foot is realistic....under $1000 per square foot is fantasy in my opinion...!

in Prime brooklyn neighborhoods $600 - $700 per square foot would be reasonable enough for a serious buyer who is looking to buy...!

Tallisman:

Are you waiting for manhattan prime to be under $1000 per square foot?

Sorry, just getting in for the night.

Fayek: When did you move to this city? The "fantasy" to me is average "prime" being over 1000psf when it wasn't even close not very long ago. Your broker-speak is farcical.

""How can there be a proper ratio if the rentals have no comparison to owning? The housing stocks are not at all identical. Even in NYC with the diversity of types of apartments we have here."

well, than that goes for almost every statistic and forecasts out there. why do we even bother with median prices, average price per sf, etc if this is how you are going to answer every question? "

Hardly. Comparing to incomparable things is not ths same as creating a measurement ratio. Ratio of apples to oranges is not helpful. Average price per orange or average price per apple is something entirely different.

"in Prime brooklyn neighborhoods $600 - $700 per square foot would be reasonable enough for a serious buyer who is looking to buy...!"

Complete horse emissions, Fayek. Unless you think 600 square feet is adequate space for a 2-bedroom, or you enjoy a scenic view of the Gowanus. Post some examples of new development in "prime" Brooklyn neighborhoods selling at $600 a square foot. I'll betcha anything you're going to post Toren, Forte, Oro, etc, all of which are in marginal areas and are not 70% sold, which means you're up a creek getting a mortgage.

I don't blame you for trying, this is a tough market, but here's a question: what will it take for Y-O-U to face reality? Don't overpromise. It pisses people off when you can't deliver.

"I don't believe in the ratio steve so there is not one that is "proper"."

So according to JuiceMan, there is absolutely no relationship between rents and prices.

Yup. (Laughable.)

Guess there's no p/e for stocks, either, right Juicy? Given that every company is different.

How do you spell dot.com where you come from?

"Hardly. Comparing to incomparable things is not ths same as creating a measurement ratio. Ratio of apples to oranges is not helpful"

Haven't followed the discussion from the begining but what makes price/rent ratio apples to oranges comparison as to any other housing average stats? am no expert so sincerely asking.

"So according to JuiceMan, there is absolutely no relationship between rents and prices."

More spin, blah, blah, blah, from steve. Of course there is a relationship, but your 12x ratio doesn't explain it. These ratio's are a (questionable) guideline used to try and measure some sort of relationship. You have taken this guideline and attempted to sell it to this board as concrete economic law. It’s not. In fact, I have seen more published reports saying that the relationship is more like 15-17x than 12x. Of course, you like to use 12x because it fits your agenda but it isn't used as widely as the higher ratios. Regardless, these type of things are thumb in the air guidelines that do not replace a factual and objective “all-in” rent vs. buy analysis.

The asking prices have another 15-20% to drop. When that happens. We have the cash in hand, but need for it to be worth our while.

"I have seen more published reports saying that the relationship is more like 15-17x than 12x"

Post some, especially for the New York area, and let us know what those ratios include. Then we can all see.

Because if they're owner's equivalent rent or imputed rent, the ratio is different because the inputs are different.

I'm curious....

Fayek,
Yes, I'm waiting for Manhattan prime to be under $1K per foot. We saw a unit in December at $1,200 a square foot. It's been on the market forever (year and half?), and still is (2 and counting), I'm pretty confident if we were dead serious and could show we could close in 90 days, we would have gotten it at $1025 a foot. I firmly believe there are two real estate markets in place in Manhattan. People who are serious about selling and units going at 2002-2005 prices, which in my estimation is 15% of the market place, the other 85% of the Manhattan market place is just window dressing, sellers and brokers waiting for the Dow to zip back to 12,000 and I-Bankers flush with $ ready to throw it at anything. My prediction is we will continue to see a slow drip of closings, with a 1% decline per month for the next 18 months unitl we reach an equilibrium and then closings will pick back up with prices flat for the next 5 -7 years. My two cents, but another 20% erosion at prime Manhattan r.e. is well worth sitting on the sidelines for.

"Post some, especially for the New York area"

Have I've seen your 12x ratio for the New York area? I don’t think so steve, it is a historical nationwide average before 1990.

Here is what you get with a simple Google search on rent to buy ratios:

Moody's article from 2008, that states affordable is 16.8x and a real bargain under 12x

http://www.ocregister.com/news/rentbuy-ratio-for-2075632-news-metro

NYTimes article that discusses 15-16x being "historically high" but would only have to "spend only a little more each month for the privilege of owning"

"In the neighborhoods where we were looking, two-bedroom condominiums were selling for $400,000 and being rented for about $2,100 a month, which makes for a rent ratio of 16. Four-bedroom houses were selling for $700,000 and being rented for almost $4,000, which makes for a rent ratio of 15. No matter the price range, pretty much every apples-to-apples comparison produced a similar ratio.

Historically, this is still a bit high. But it’s very different from where the market was just a couple of years ago. With house prices having fallen over the last two years and rents continuing to rise, the decision became a much closer call. We would now have to spend only a little more each month for the privilege of owning."

http://www.nytimes.com/2008/05/28/business/28leonhardt.html

Article from an economist DeForest McDuff (makes me think of the Crime Dog!), this quote was interesting:

"In addition, the price to rent ratio does not summarize all of the relevant information for a real estate investment. The return on a housing investment also depends on maintenance, taxes, insurance, appreciation, etc., which can vary from property to property. But as a basic measure of value, the price to rent ratio is a good starting point."

http://www.deforestmcduff.com/Market/0805/0805.html

Also, from this paper, the methodology used and this quote:

"In order to provide some visual consistency across the charts, I've labeled the price to rent ratios at 15 and 25 in red as a kind of "high" and "low" barometer. Note however that the long-run price to rent ratio should not necessarily be the same in all cities, just as we would not expect the long-run P/E ratio to be the same for all types of stocks."

15 is low and each city should be treated independently. Fyi, he uses 16 as a low bar for NY.

http://www.deforestmcduff.com/Market/0805/All.html

Conclusions:

1) First I want to give credit where credit is due. Steve was the first one to actively discuss price to rent ratios on streeteasy and he has not only furthered my thinking on the subject but I will bet that he has saved many readers $$ and the avoidance of bad decisions.

2) I like price to rent ratios as general macro guidelines, but they do not help individuals assess whether buying or renting is good for them. The number of variables in rent vs. buy math ( city, neighborhood, income, timeframe, mortgage rate, etc) prevent macro, general ratios from being helpful to the individual

3) Historical nationwide price to rent ratios of 10-12x do not mean that 10-12x is equilibrium, it only means that those were the historical ratios before 1990. Today, 10-12x would signal a significantly devalued market within a significantly devalued city (e.g. Detroit)

4) Steve pokes fun at me for this statement, but the reality is, a 12x ratio in Manhattan is a huge buy signal. So much so that now that we have passed it, it would take a significant shift in jobs, safety, entertainment, tourism, etc to reach that point again. You cannot have equilibrium at a level where everyone would buy instead of rent

5) The general consensus from everything I have read (and my own rent vs. buy math) is that equilibrium is between 15-17x. That is still a significant drop from the levels over the past few years but, in my view, there are definitely apartments in today’s market approaching those levels

"Have I've seen your 12x ratio for the New York area?"

Yes. Many times, but here it is again:

http://money.cnn.com/magazines/fortune/price_rent_ratios/

Press the p/r tab, you will see that 11.7 is the 15-year average.

And I've posted this one many times, too:

"Buy or Rent? Learn the Rule of 15"

"If that number is much greater than your annual-rent-times-15, the location probably still has a way to go down in home value."

http://www.cnbc.com/id/25625777/

The rest of what you wrote is shameless spin. That New York Times article ACTUALLY says:

"Throughout the 1970s, '80s and '90s, the average rent ratio nationwide hovered between 10 and 14."

Oh, look at that. The average is between 10 and 14. Guess what number falls RIGHT BETWEEN 10 AND 14?

Might it be T W E L V E?

Exactly what Money Magazine calculated, and exactly what all the other data say.

The New York Times then goes on to say:

"In concrete terms, a rent ratio above 20 means that the monthly costs of ownership well exceed the cost of renting.

http://query.nytimes.com/gst/fullpage.html?res=9907EFD91731F93BA15756C0A96E9C8B63&sec=&spon=&pagewanted=2

"for the privilege of owning."

LMFAO!

Your OC Register article says this:

"New York Peak = 26.8 2Q2008 = 22.2

That's right - from the PEAK to the present. Not the long-term, and well before the bubble started bursting.

"Moody's article from 2008, that states affordable is 16.8x and a real bargain under 12x"

It says NO SUCH THING. It says, literally:

"The bad news is that Orange County is tied for sixth highest rent ratio among the top 46 metropolitan areas, which means things are still expensive here. The metropolitan Washington, D.C. area is a more affordable 16.8. Where is home buying definitely a better bargain over renting? Columbus, Ohio, at 11.4, New Orleans at 11.5 and Indianapolis at 11.9."

You're a spin jackass. Your post is pathetic.

I don't know who DeForest McDuff is, but you say he says: "I've labeled the price to rent ratios at 15 and 25 in red as a kind of "high" and "low" barometer."

But then you look at the long-term New York City figures (Case-Shiller and OHFEO) and they hover around TWELVE. The same as the New York Times and Money Magazine.

Pathetic.

"Fyi, he uses 16 as a low bar for NY."

LMFAO! Look at:

http://www.deforestmcduff.com/Market/0805/0805.html

The chart for NY says 1990-1997 = 10.5. Maximum 19.6

Your conclusions:

1) I was.

2) "I like price to rent ratios as general macro guidelines" when just yesterday you posted "I don't believe in the ratio steve so there is not one that is "proper""

Then: "The number of variables in rent vs. buy math ( city, neighborhood, income, timeframe, mortgage rate, etc) prevent macro, general ratios from being helpful to the individual."

when in the prior paragraph you say:

"Steve was the first one to actively discuss price to rent ratios on streeteasy and he has not only furthered my thinking on the subject but I will bet that he has saved many readers $$ and the avoidance of bad decisions."

LMAO. Complete and full contradictions ON THE SAME PAGE.

3) "Historical nationwide price to rent ratios of 10-12x do not mean that 10-12x is equilibrium, it only means that those were the historical ratios before 1990."

What has changed over time? Nothing. People make x amount of money, and they are allowed by landlords and banks to spend 30% of their gross income on a place to live. That's ALL.

4) "a 12x ratio in Manhattan is a huge buy signal"

A "huge buy signal"? Why, when 12x is the approximate point at which rents = owners' carrying costs. I'll do the math for you again if you like.

5) This is truly my favorite: "The general consensus from everything I have read (and my own rent vs. buy math) is that equilibrium is between 15-17x."

EVERYTHING you post points to that figure being 12x, and 15-17x being excessively expensive, yet you draw the exact OPPOSITE conclusion from what each one of your sources states.

LMFAO.

We are finally jumping off the fence (accepted offer, closing soon) after an 18 month search. We watched the market fall from the sidelines watching some great apartments come and go (many are still there). We were quite particular in our search, 3bed/3ba, prime UWS or Tribeca, good layout, views, privacy, 2000+ sq ft, $2.5-3.5m. We've been waiting for the right time (hoping to be within 5-10% of the "bottom") and the right apartment. We finally found an apartment that works for us...probably 40% less than it would've sold for late 07/early 08.

For us the price (within 100k or so) wasn't the deciding factor. It was just waiting for the right condo to come on the market. We're all very happy with the end result.

Kubiedoo:

Congratulations are your smart purchase! Enjoy your new home!

you are an example of a real buyer who Watched, Waited, and when the right opportunity came up....you went for it...!

“You're a spin jackass. Your post is pathetic.”

When it is shown that two years of steve’s posts are absolute rubbish he starts with the name calling and personal attacks. Poor steve. I refuse to engage you in a conversation when you are this hostile steve. I will respond, but only after an apology, my feelings are hurt.

Also, with your apology if you could kindly post the link that shows us that 12x is equilibrium rather than a historical average, that would be helpful. It really is the only piece of information that can end this lovely and thought provoking conversation.

Moron 12x math by stevejhx

Assume $5000 / mo rent
12x yearly rent = purchase price of $720,000
Assume 20% down 6% interest rate = Monthly payment of $3453.41 / mo

Now what “pathetic jackass” out there wouldn’t agree that if you could buy the same unit for $3453.41 / mo (pre-tax benefit) or rent it for $5,000 that this would be an OVERWHELMING buy signal

17x math
17x yearly rent = purchase price of $1,020,000
Assume 20% down 6% interest rate = Monthly payment of $4,892.33 / mo

Now what “pathetic jackass” out there wouldn’t agree that that equilibrium on a pre-tax benefit basis is somewhere around 17x yearly rent?

tee-hee-hee. steve has put more zero's up on this board than the Red Sox have at Yankee Stadium this weekend.

Tallisman- I'm exactly where you are. Sitting and waiting until Manhattan RE comes down to earth, and yes that's below 1K/sqft, or even lower, depending on the location.

Fayek- yes, I'm a real buyer. I have cash & am ready, but not in a hurry & not willing to throw it away. I have been patient and I want a deal. I wouldn't be on this site otherwise, btw, as I have a life.

JuiceMan, you do have to give some value to the 20% down that you've put. At least let you get 6% on that money too. So the equilibrium would be more like 16.7x. Of course as you see it the interest rate is important, so throwing out things like 12x or 17x or whatever can't be constant because interest plays a role. If interest rates go up then the ratio goes down. One reason we had high prices was also because of the appreciation based on better economic circumstances in NYC and the ability of developers to make higher quality inventory than the mediocre "luxury" rental buildings in the city.

Ethan, interest rate does matter.

But what Pathetic Jackass would conveniently forget:

a) Taxes
b) Insurance
c) Maintenance / common charges
d) Transaction charges
e) Opportunity cost?

So we see how the "17x" math works: you just count the things that you want, and leave out everything you don't.

"if you could kindly post the link that shows us that 12x is equilibrium rather than a historical average"

That is the mean, not the equilibrium.

Fayek - i'm a real buyer. also have cash waiting on the sidelines for the right thing.
any place i purchase will be well under 1000k/sq ft or my money will stay on the sidelines.
i'm not sure exactly when 1000k/sq ft became reasonable, but that time is over.

i may be wrong, but i feel like very few properties sold for that back in 2004, and that is where prices should be at this point.

Of course steve loves to ignore increases in rent over time and increases in the value of the apartment over time. He also doesn't believe in factoring in the tax deduction for mortgage interest.

Why do we have to go through this again? We show how steve's analysis is foolish and mistake-ridden every time. Do we have to do it again?

Look, if long-term rates are 6.5% and you get a deduction of 40% all-in on that, then a rate of 3.9% is equivalent to a ratio of 25. I saw a lot of condos renting at the 25x ratio and I twice decided to be on the rental side of it just because I wanted flexibility and lower transaction costs. Early on that was a bad decision and later on it was a great decision. Today the ratio is lower so I'm looking more. Still looking though. I can't figure out anymore these day where I want to live in Manhattan! View, space, location ...

"Of course steve loves to ignore increases in rent over time"

No I didn't. Go ahead and factor them in.

"and increases in the value of the apartment over time.

Or decreases for that matter.

"He also doesn't believe in factoring in the tax deduction for mortgage interest."

Sure I do - as long as you factor in the opportunity cost.

"We show how steve's analysis is foolish and mistake-ridden every time."

Do you now? Everything that your BFF Juicy said pointed to a long-term average of 17x - 18x ACTUALLY points to 12x annual rent. Every last post. And MY analysis is foolish?

What does this mean?

How do you factor in opportunity cost? The whole point is you are comparing two alternatives. You already have this "opportunity cost" factored in. Also what does opportunity cost have to do with tax benefit? Why not compare tax benefit to the variance of Bernanke's beard length? Tax benefit is a real thing within certain tax brackets, etc.

Rents do increase over time.

But don't taxes and maintenance increase over time as well?

tomkey, opportunity cost is what you would have made had you not capitalized your rent by buying property, which requires a down payment and leverage. That loss is REAL, as well.

On average, rents increase in line with incomes. Taxes and maintenance not necessarily.

If you can buy an apartment and rent it out at market rates to an unrelated third party and break even, you will have found an appropriately priced property. Alas, they don't exist in Manhattan right now unless you do the Juicy/LICC new math.

"But what Pathetic Jackass would conveniently forget:"

steve gets angry when he is proved wrong. Poor steve.

"JuiceMan, you do have to give some value to the 20% down that you've put. At least let you get 6% on that money too."

Agreed, but you have to do a traditional rent vs. buy analysis instead of using steves stupid ratios. These ratios are one year rent vs. purchase price, that's it my friend. Depending on the day, steve will add some things, subtract some things, etc. My whole point is these ratios are a guidelines and nothing more, a number of posts request further give and takes and this SHOWS that these ratios are junk. You can't use these ratio's without further analysis.

"Of course as you see it the interest rate is important, so throwing out things like 12x or 17x or whatever can't be constant because interest plays a role. If interest rates go up then the ratio goes down."

Absolutely right ethanschick, do you think steve McSimpleton understands this? What do you think the ratio looked like when rates were 14%? If the ratio’s can be different based critical inputs, how useful are they in broad sweeping generalizations about where the market is going?

"That is the mean, not the equilibrium."

Exactly, so why are you assuming the mean IS equilibrium? steve's fatal flaw ladies and gentleman.

“Everything that your BFF Juicy said pointed to a long-term average of 17x - 18x ACTUALLY points to 12x annual rent.”

I love these statements by steve. Nothing he said is coherent, legitimate, or makes a bit of sense yet he always ends his argument with something like this. “I did not have sexual relations with that woman”, sure thing Billy boy.

"And MY analysis is foolish?"

The worst I have ever seen, you are making us all dumber for reading it. Where is my apology?

JuiceMan's claim: "The general consensus from everything I have read (and my own rent vs. buy math) is that equilibrium is between 15-17x."

JuiceMan's post to support that claim: "Throughout the 1970s, '80s and '90s, the average rent ratio nationwide hovered between 10 and 14."

JuiceMan's subsequent post: "steve gets angry when he is proved wrong."

Poor JuiceMan.

JuiceMan's next claim: "do you think steve McSimpleton understands this?"

Steve's actual words: "Ethan, interest rate does matter."

"I love these statements by steve. Nothing he said is coherent, legitimate, or makes a bit of sense "

Strange that, as I posted quotes from JuiceMan's own links.

Of course we can get 17x JuiceMan, if we leave out:

a) Taxes
b) Insurance
c) Maintenance / common charges
d) Transaction charges
e) Opportunity cost

as you do!

According to steve, an apartment that is equivalent to one that commands $4500 per month in rent should be priced no higher than $648,000. That is ridiculous!! At $648,000, a purchaser's monthly costs would be lower than $4500 even before the tax benefit!
I really hope no one is actually taking steve seriously.

"Of course we can get 17x JuiceMan, if we leave out:

a) Taxes
b) Insurance
c) Maintenance / common charges
d) Transaction charges
e) Opportunity cost"

This is now when steve uses 14% for opportunity cost and amortizes transaction costs over 5 years, leaves out the tax benefit, etc, etc. Not playing this tired game.

This, by the way, is now a rent vs. buy analysis. steve still haven't shown us how you get to 12x using the rent to buy ratio's that HE asked for. Price of property / yearly rent. That's it steve, that's all you can use to use your stupid ratios. Show us how you get to 12x using price of property / yearly rent. You CAN"T.

Assume $5000 / mo rent
12x yearly rent = purchase price of $720,000
Assume 20% down 6% interest rate = Monthly payment of $3453.41 / mo

17x math
17x yearly rent = purchase price of $1,020,000
Assume 20% down 6% interest rate = Monthly payment of $4,892.33 / mo

Amazing steve, you use these ratios and can't even come up with a defense to back them up

"I really hope no one is actually taking steve seriously."

I don't think so LICC. Do you realize that not one person has ever said steve was correct with his 12x theory? Not one, and there have been a lot of intelligent, hard core bears on this board.

"According to steve, an apartment that is equivalent to one that commands $4500 per month in rent should be priced no higher than $648,000."

That's right! Exactly where it was before the bubble!

"This is now when steve uses 14% for opportunity cost and amortizes transaction costs over 5 years, leaves out the tax benefit, etc, etc."

I did no such thing. Or if I did, show me where.

Then Juicy does the same thing:

"Assume $5000 / mo rent
"12x yearly rent = purchase price of $720,000
"Assume 20% down 6% interest rate = Monthly payment of $3453.41 / mo"

Where are the:

a) Taxes
b) Insurance
c) Maintenance / common charges
d) Transaction charges
e) Opportunity cost

?

I missed this:

"Do you realize that not one person has ever said steve was correct with his 12x theory?"

Juicy's OWN NYTimes post says: "Throughout the 1970s, '80s and '90s, the average rent ratio nationwide hovered between 10 and 14."

Oh, look at that. The average is between 10 and 14. Guess what number falls RIGHT BETWEEN 10 AND 14?

Might it be T W E L V E?

And then we have each and every one of JuiceMan's other posts, which I won't repeat a they are above.

All support TWELVE.

juice - why are you doing this to yourself?

Equilibrium pricing has to be at a rent - buy ratio of well UNDER 12x for comparable apartments -- probably more like 8-10x at current interest rates. (The studies of historic norms reported above are almost all based on median rent :: median sale, and, of course, median rentals are always lower quality than median sales, so they will report a higher ratio. Moreover, any study based on recent data is biased upward by the bubble itself.)

Equilibrium is the point at which price equals marginal cost, or in real estate -- sale prices are the same as rental values, construction costs and renovation costs. This is because at any higher price, someone can make excess profits by converting rentals, renovating or building, and in a capitalist market, someone will.

So equilibrium sales price will be the least of: the cost of building new high rises, the cost of convincing people that new neighborhoods (or other cities) are viable alternatives, the cost of converting rental properties to owner-occupied, the cost of changing the rent regs or zoning laws to reduce the cost of creating new supply, the cost of renovating older residential or converting commercial units.

The value of the rent ratio is that it's usually easiest to calculate rental values. At equilibrium, investors in rental properties must plan to receive their profits from rents, not flipping (since equilibrium is defined as the price at which flipping is not profitable). Also, they need to be able to make the same profit (adjusted for work and risk) as in alternative investments. Historically, rental investment has been seen as a lot of work and a significant risk; prices therefore have been based on expected returns higher, for example, than the stock market. In any event, clearly the equilibrium expected return must be considerably higher than the mortgage rate, since owning is always more risky and more work than lending on the same property. So while we can argue about what the expected return would be at equilibrium, we know it has to be higher than current (non-subsidized, ie., jumbo) mortgage rates.

So, we can say this much for certain: equilibrium in the rental market requires that purchase prices be low enough to allow more than a 6% return on equity after all expenses -- probably more like a 10% return given the risk of customary leverage. Clearly 17x GROSS rents doesn't do it -- that would only work if rental properties had no expenses and were nearly as safe as T-Bills. Even 10xGROSS rents requires a good deal of optimism that rents will go up faster than inflation, vacancies will be extremely low, taxes and repairs will be cheap, and/or banks will be willing to assume a lot of uncompensated risk.

The coop/condo market equilibrium has to match the rental equilibrium. If it doesn't, that is, if owner-occupants are willing to pay more than renters, then investors will sell formerly rented units until the two markets match. It doesn't matter how much Americans prefer to buy than rent. It isn't equilibrium if an investor can make more money selling to an owner-occupant than holding for rental for the life of the building. At equilibrium, supply adjusts to reflect demand, but prices reflect costs.

At equilibrium, price will also be no higher than the cost of new construction (not including, of course, any effect of the bubble on land prices). Moreover, while prime Manhattan is always likely to be more expensive than its competitors, the RATIO between Manhattan and alternatives can't change much unless relative quality changes, and relative quality can't change much over medium terms (when Manhattan gets nicer, and therefore more expensive, people find a cheaper alternative in Brooklyn, which then becomes nicer, more interesting and more expensive; the ratio returns to usual. Moreover, as Jane Jacobs pointed out long ago, when neighborhoods get too expensive, they get less interesting, less fun, and therefore less attractive; "nicer" is self-defeating after a certain point).

------

Equilibrium, however, is only part of the story, just as gravity alone isn't enough to explain the movements of the planets. In markets as in physics, momentum is often stronger than gravity. Real prices often depart from equilibrium, just as planets don't respond to the sun's gravity by collapsing into it.

Price trends are self-reinforcing. If enough people believe that prices are going up, they will go up, until people change their minds (or run out of money). Nor is this a sign of irrationality: once a trend exists, rational investors will rationally bet that prices are going to get further from equilibrium before they return to it, and those bets -- repeated often enough -- become self-fulfilling prophecies that may be stronger than the underlying fundamentals.

Right now, prices are well above equilibrium. Any investor that actually believed current sales prices reflect a stable market clearing price would be busy creating new supply -- converting, renovating, evicting, and building are all profitable at well under current prices. Gravity is pulling down.

Momentum is too. Prices are dropping. As prices drop, more people will spot the trend, and as they decide they don't want to buy into a falling market and lose their equity, they will make the trend even stronger.

Thus, the most likely scenario is that prices will continue to drop until somewhere well below equilibrium they get so low that investors begin buying owner-occupied homes to convert them to rentals or commercial or renters realize they are being paid enough to buy to cover the cost of further price declines. In the meantime, however, adjustment will be slow: there are always enough rationalization of every price point for transactions and delusions to continue.

Of course, it is always possible that buyers will decide they have so much money lying around that they should view "ownership" as conspicuous consumption rather than investment so the point is to overpay, or they will agree en masse that some random uptick is the sign that they must buy now or forever be locked out, or that God-given grace means that they can add an extra 5-10% to their anticipated returns because -- Adam Smith be damned -- real estate always goes up and density never does. More likely, perhaps, bankers could return to lending at rates that don't reflect risk because they've concluded that if they win their bets they've "earned" their bonuses but if they lose, that's someone else's problem. In which case, the only rational thing to do will be to "dance while the music is playing" and the bubble -- and the super-normal profits that don't exist at equilibrium -- will be back.

Financeguy:

Thanks so much for your in depth explanation above!

And now back on topic...................!

What will get ..........Y O U.........the real buyer off the F E N C E....?

Location....?

Price.....?

Sqare Feet....?

Shorter version:

EQUILIBRIUM requires that INVESTORS be indifferent between (1) holding to rent or (2) selling to owner-occupants. There is no reason to think that this price will make it financially equivalent for a person seeking living quarters to buy or rent.

If high end renting is relatively simple, it will probably be considerably cheaper to buy. To the extent that market failure -- the absence of long term leases mimicking rent stabilization or commercial leases -- makes high-end renting hard, that may be less true.

And EQUILIBRIUM isn't enough to make an accurate prediction in markets any more than gravity is in physics. Momentum can overcome it.

Financeguy:

And what causes "Momentum"...?

I know that momentum is driven by demand......

So were back to the basics.....Supply and Demand....!

Topper, you make an excellent point! Taxes, which typically make up 40% of a co-op's expenses, have gone up over 80% in the past five years:

http://350bleecker.com/newsletters/html/224.html

Representing a 32% increase in maintenance attributable just to property taxes.

Focusing on the buy-rent decision from the OCCUPANT's perspective instead of the investor's has another problem: the calculation depends on (1) the imputed interest on the downpayment (opportunity cost) which requires knowing the marginal buyer's alternative investment set of similarly risky investments, (2), the tax and other subsidies in the mortgage interest, which varies with the marginal buyer's income and the size of the mortgage, and (3) the expected holding period (due to high transaction costs).

But we have no data on these numbers for the marginal buyer. So even if this calculation were the right one to make, it's impossible.

Another way to see the same point: for most realistic holding periods, the biggest factor in your cost is your sale price. The point of asking about EQUILIBRIUM is that prices tend to move around it, so if you are predicting the price at an unknown time in the future, that's your best bet for a guess. Calculating whether it is cheaper to buy or rent, using your own personal opportunity costs, subsidies, etc., doesn't tell you much about equilibrium now, let alone when you may have to sell.

A final way: Steve and Juice seem to agree that the equilibrium value of a property depends on how much mortgage the buyer takes. That defies both the law of one price and Miller-Modigliani's fundamental finance theorem that equilibrium price is independent of how the investment is financed. So it is probably not the right way to think about the problem.

Fayek: Momentum is the tendency of the price trend to create (or destroy) demand. Rising prices make people more willing to pay more; declining prices make them demand further discounts.

"Supply and demand" is meaningless unless you explore where the supply and demand come from.

Fayek:

Buyers should be deeply concerned that they are going to get hosed if they pay more than the cost to create new supply AND are buying into a declining market.

What should get them off the fence is some evidence that prices no longer include a bubble factor (they are inflation adjusted equivalents of, say, 1993-5) or are below costs (investors are buying owner-occupied condos/coops with the goal of making money by renting them permanently, no renovator-flippers in sight, buying is significantly cheaper than renting the same apartment assuming that prices appreciate no faster than rents and that downpayments cost more than borrowed money) or that upward momentum is so strong that fundamentals are irrelevant (buyers are meeting in the parks to chant "God has promised, prices always rise").

" From what I am seeing and hearing from friends that are renting and looking to buy, the relation between rents and prices are not irrational now."

You really have to stop basing your RE decisions on what "friends" say, and try math.

The stats are out... rentals are down 17%. Compared to the 25% or so declines in prices, that simply wasn't enough to make the irrational rational. We were extremely out of whack, and now we're slightly better than extremely out of whack.

"Of course steve loves to ignore increases in rent over time and increases in the value of the apartment over time. "

Of course, the bulls conveniently ignored price decreases (sorta a bigger factor, don't you think) and common charge increases (pretty substantial now).

Thanks, financeguy, but your precious CAPM theory, as elegant as it sounds, has pretty much been discredited.

Uh,Stevejhx, the discredited form of CAPM is based on ECMH assumptions that I expressly lifted and on assumptions that risk is the same as bell-curved uncertainty that are irrelevant here. What are you talking about?

Uh,Stevejhx, the discredited form of CAPM is based on ECMH assumptions that I expressly lifted and on assumptions that risk is the same as bell-curved uncertainty that are irrelevant here. What are you talking about?

Uh,Stevejhx, the discredited form of CAPM is based on ECMH assumptions that I expressly lifted and on assumptions that risk is the same as bell-curved uncertainty that are irrelevant here. What are you talking about?

Sorry about the stutter. Not sure what happened.

I'm changing my answer... its simple.

Capitulation.

For all the real BUYERS out there.....!

you can follow me on twitter @Fayekohn.......for the latest updates on real estate in the NYC area!

It is not possible to "lift" ECMH assumptions, nor to eliminate risk. Lifting ECMH assumptions makes the entire model fall apart - on what, then, are you basing your behaviors? And risk adjustment is key to assessing opportunity cost and on the risk-adjusted discount applied to the future streams of rent being capitalized when a property is purchased for residential purposes.

Though I do agree with you that the cap rate is another way of looking at the problem, the problem with it being that it is designed to look at commercial real estate investments, not what is essentially the capitalization of future rent payments and the hedge on future rent increases that purchasing owner-occupied real estate essentially is. How, for instance, under the cap rate do you account for the known cost of common charges?

That is why including ancillary - and material - charges such as common charges, interest and taxes is warranted. The economics are different.

Fayek,

The following survey from TheRealDeal suggests it's sellers who are unrealistic in their pricing expectations:

The Real Deal Poll
How realistic do you think your current clients are being when pricing their properties? (Poll Closed)

very realistic, aggressively pricing 2% (5 votes)

realistic in view, but holding out hope for market upturn in pricing 26% (73 votes)

not realistic, over pricing 72% (204 votes)

Perhaps you should start a thread about what it will take to sellers to be more motivated?

KISS:

Its common knowledge that it is a buyers market........and that is precisely my point for this thread.....I would like to hear from the REAL Buyers what they want...?...need...? ....for them to get off the FENCE and make the purchase....!

Deals can only happen between REAL BUYERS.....and REAL SELLERS.....!

REAL meaning REALISTIC...!

OK, then, I'd get off the fence when sellers and their brokers start with more realistic pricing for this market. Want to see 2003 or before pricing. Not 2007 pricing.

Steve -- I still don't know what you are talking about. CAPM is: Expected Rate of Return = Risk Free Rate + Beta x (Market - Risk Free). It is controversial mainly because beta uses an unrealistic account of risk. But I didn't use CAPM, or beta, or ECMH.

I simply repeated the most basic story of equilibrium pricing from intro Micro Econ: at equilibrium in a competitive market, price is no higher than marginal cost. If prices are higher than equilibrium, there are excess profits to be made by increasing supply (and increasing supply tends to reduce price).

And added -- in precise contradiction to ECMH -- that momentum can keep markets away from equilibrium. If "it is not possible to lift ECMH assumptions," I guess I did the impossible, but it didn't seem that hard to me. All it took was noticing that arbitrage isn't perfect or instantaneous in the NYC real estate market.

Finally, cap rates aren't "another" way of looking at the problem of price:rent ratios. They are the only reason the ratio is interesting. At equilibrium, the capitalization rate for rentals must be the same as for similar owner-occupied units. Otherwise there is an opportunity for excess profits by converting one into the other, which isn't equilibrium by definition.

When the price:rent ratio is high, it suggests disequilibrium and therefore likely future price declines as investors increase sales supply by converting rentals into owner-occupied. Why else would anyone care about the ratio?

I'm with KISS (and am a real buyer). I want pricing that reflects current realities and a pricing-in for some downside risk. I'm ready to get real about what I can afford but want to see a recognition from sellers that most of us don't want to lose equity (whether as an investor or a plain-old homeowner).

At the margin, investors usually set the price. Therefore, Real Buyers who need to have the option of selling at some future date without losing their downpayment, should get off the fence when they see prices that would allow Real Investors to profit from long term renting without expecting to sell to someone willing to pay any more than the net income justifies.

This should happen when sellers are looking for (1) pre-bubble prices (mid-1990s plus 1/3 or so for inflation), and/or (2) reasonable price:rent ratios around 8-10, and/or (3) prices roughly in line with current renovation/construction/conversion costs (based on land prices that reflect only the income potential of the land in its current use, not speculative gains).

The details of how you calculate value aren't that important (it isn't going to be very precise anyway). The only important part is that at equilibrium, no one will include "future capital gains" as a component, because that is already included in "possibility that rents will increase faster than operating and building costs." And that possibility is minimal except in bubbles: in market economies, prices tend to track costs over time.

"Deals can only happen between REAL BUYERS.....and REAL SELLERS.....!

REAL meaning REALISTIC...!"

Yup. And when sellers are out to lunch, you're not going to make a deal. Pretty much everyone on this board has told you the same thing: prices have got to come down. Then buyers will step up. You'll know prices have come down far enough when buyers start stepping up with regularity and you don't have to harrangue them on anonymous real estate boards.

As a Real Buyer, I must say that I am disgusted by the caliber of real estate brokers and agents in nyc that I come across. They all say the same things and all act alike. Buyers are not stupid people and these idiots may be the single greatest force driving the market down. They ooze desperation and every time that I hear “there are multiple offers on this apt, I walk away. Funny, every situation where the broker has said that to me the apt is still on the market.

every time I hear it I jup back on the fence!

Followed by eensy little price cuts. 1% here, 2% there, and after a while the property goes off the market. I hear you, ieb. That said, there's some good brokers on this board. I just think they happen to be rarities.

I'm sure that there are a few decent brokers, I just haven't found one.

I live in Basston and would like to move to ny and visit about once a month to shop real estate. During the late spring I felt like maybe I was missing the market. Don't think that way anymore.

Lying is unethical, and should be tolerated by no-one!

I am sorry that you had a bad rap with an agent, but like people in every industry there will be bad ones and good ones...!

I am sorry that you had a bad rap with an agent - come on now, one agent! their like bots.

ieb

Thanks to sites like streeteasy.com, curbed, and brownstoner it has become almost impossible to lie about information....almost everything can be verified in the age of the internet!

They're hard to find. I felt that way for a bit as well. I've decided I'm just confused now and am going to refrain from making any long-term prognostications about the market. Will probably start looking again more seriously in fall, depending on what I see out there.

when "professionals" like yourselves can price product that'll clear inventory... do you even know what your role is as a RE Borker? F'n, here I'll give you a head start.... YOUR CAREER IS DEAD... of the millions of jobs lost.... you're right below the Hummer line worker in getting your "income" back when this is all thru... F'n, what good are you if you can't price things to clear?

financeguy: while I agree in general with your analysis, I have 2 nitpicks:

1) "In any event, clearly the equilibrium expected return must be considerably higher than the mortgage rate"
not necessarily: as you noted (I think) somewhere above, it also depends on the ROI the investor can get elsewhere (either risk free or not). If there is an anomaly in the market interest rates of mortgages (say, for example, because banks see lending money at a fixed rate long term as risky *for them), you can have a case where mortgage rate > ROI on RE > alternative ROI, and it still makes sense to buy RE all cash.

2) "Moreover, while prime Manhattan is always likely to be more expensive than its competitors, the RATIO between Manhattan and alternatives can't change much unless relative quality changes, and relative quality can't change much over medium terms (when Manhattan gets nicer, and therefore more expensive, people find a cheaper alternative in Brooklyn, which then becomes nicer, more interesting and more expensive; the ratio returns to usual. Moreover, as Jane Jacobs pointed out long ago, when neighborhoods get too expensive, they get less interesting, less fun, and therefore less attractive; "nicer" is self-defeating after a certain point)."

Historically, this is not accurate:for pretty much the entire 20th century, buyers of apartment buildings used an "X times rent roll" formula for purchasing, and the X varied tremendously between Manhattan and the other boroughs, and even within Manhattan. I personally know a very wealthy RE investor who made his bones buying small buildings in and around Park Slope and the surrounding neighborhoods at 2X rent roll, while Manhattan was going for 6X rent roll (yes, this was a very long time ago). But even today, if you look at pricing of small apartment building in Jackson heights vs Manhattan, it's NOT just the gross numbers which change, it is the ratios as well.

30yrs:
1) I agree. Anomalies are always probable.
2) Facts are hard things and not my area of expertise. And these facts are not a nit at all, assuming that your examples are representative, but a serious challenge to the theoretical picture as I understand it.

My assumption would be that the differential ratios reflect either (1) different expenses (vacancy rates? tax differences? anticipated repairs?) so that the NET ratios (i.e., expected returns) were more similar -- and a good reminder that GROSS ratios are potentially grossly misleading and only a rule of thumb, OR (

2) different expectations about the future -- either that the core areas seemed more stable and less risky, so a lower expected return was more appropriate, or that investors were (relatively) optimistic that core Manhattan would retain its ability to attract so rents would be steady, while the fringes seemed in decline -- it wasn't clear whether the nascent gentrifiers would prevail over the block-busters and flight to the 'burbs and buyers felt they needed to protect themselves against declining rents.

Do either of those possibilities fit with your recollection of what people thought at the time?

More generally -- equilibrium theories consistently underplay the role of optimism and pessimism about the future. Static analysis suggests that price-rent ratios should remain relatively constant, with changes in quality of life picked up in rents, rather than the ratios.

But you are usefully reminding me that in dynamic systems, people regularly buy now based on projections of future changes -- that is, of course, what makes bubbles possible. And Park Slope in the late 60's may have been a reverse bubble: the market projecting shrinkage and decline into the infinite future without sufficient thought to countervailing pressures. That sort of stuff drops out in equilibrium analysis but is the core of real market price movements.

For the immediate future, it seems unlikely to me that we have a powerful enough story available to revive the bubble, so I assume trend-chasing and fundamentals are both downward pressing. But who knows? I wouldn't have thought that "Keep the Government's Hands Off Medicare" would have much traction either, and that bit of nonsense seems to be powerful enough to be on the edge of destroying a national health insurance plan best described as Medicare-for-all. Maybe enough people actually believe that building in Manhattan is impossible or that real estate never goes down or that it is inevitable that the price of apartments --unlike all other commodities-- follow the income of buyers rather than the cost of producing them.

"Facts are hard things and not my area of expertise"

Thanks for clarifying, FG. LICC says the same thing.

Lets also not forget that much of the RE pricing was based on expectation of increases.

The 20-30% declines as of late have shattered that for a lot of people.

"Steve and Juice seem to agree that the equilibrium value of a property depends on how much mortgage the buyer takes. That defies both the law of one price and Miller-Modigliani's fundamental finance theorem that equilibrium price is independent of how the investment is financed. So it is probably not the right way to think about the problem."

financeguy, I believe in an effort to use "fundamental finance theorems" you are missing the entire point. If you relate Miller-Modigliani's theorem to real estate, you are implying that the value (to the owner) of owner occupied real estate is the same regardless of how much you finance. This, of course, is only true in an efficient market where real estate "benefit" is not based on incomes, investment returns, interest rates, etc. Further, we are discussing the value of owner occupied real estate compared to renting which would be a very easy comparison in an efficient market. Since we don't live in an efficient market, many more variables are needed to answer the question and renders Miller-Modigliani useless.

The only real conclusion to be reached via Miller-Modigliani and real estate is to finance as much as you can and invest free cash flow at (hopefully) a greater return than your net mortgage rate after tax benefit. This is not new news, and it does not help answer the age old rent vs. buy debate.

How one can simultaneously claim that he ignored efficient markets is beyond me, as an efficient market is a prerequisite for using the theorem.

Oops! I got interrupted!

"How one can simultaneously claim that he ignored efficient markets AND USED MILLER-MODIGLIANI is beyond me, as an efficient market is a prerequisite for using the theorem."

Much better.

I didn't see that statement steve but I agree with you.

Moreover, the "marginal cost of production" is a concept that is related to manufacturing, not to housing stock, which as a real asset is not perishable or consumable in the sense that it is used and replaced. The marginal cost of production may determine whether new housing units are built (if the price is above the marginal cost of production) but it will not determine the price. Rents determine the price.

Therefore:

"Equilibrium is the point at which price equals marginal cost, or in real estate -- sale prices are the same as rental values, construction costs and renovation costs. This is because at any higher price, someone can make excess profits by converting rentals, renovating or building, and in a capitalist market, someone will."

is nonsense. Under economic theory, SALE PRICES have nothing to do with INPUT PRICES except insofar as determining whether or not something will be produced. OUTPUT VALUE determines price; not input value. Therefore, construction and renovation costs are not material to the price.

Rent is - it is the equivalent good.

Alas, financeguy tries to impress us with a lot of bs, but when you look at it you can see that that's what it is. I think Juicy and I could agree on that.

Two points for steve

Wow! Me and Juicy in agreement!

There are other defects in FG's BS:

1) Economic theory does not adjust for risk, not even in opportunity cost.
2) There are significant barriers to entry into real estate development, not the least of which is the amount of money required.
3) There are significant legal barriers to converting forms of real estate - rentals into owner-occupied, co-ops into condominiums, owner-occupied into rentals, etc. - that make the market very imperfect.
4) Unlike manufactured goods, each product is unique as it exists in a fixed time and place.

I could go on, but the BS is now readily apparent.

Thanks for hijacking the thread.