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

What do you consider "hijacking" to mean? We are discussing the economics and finance behind "what will get y-o-u off the fence." Is that "hijacking"?

If so, "hijacking" must mean anything that you deem impertinent, or don't understand, no?

Steve: I think the core of our disagreement is your belief that apartments are "not perishable or consumable in the sense that it is used and replaced." In my experience, houses need a great deal of maintenance and replacement or they wear out quite quickly. So standard economic pricing theory seems quite applicable.

As for the rest, I'm having trouble understanding your points. If apts sell for more than construction costs or rental value, investors will look for ways to construct new ones or sell rentals, and that increased supply will have a tendency to reduce prices. Equilibrium is the point where price equals marginal cost, because otherwise there is excess profit to be made, and eventually, someone is likely to find a way to make it. None of your list of market imperfections seem to contradict this story at all.

ECMH is a theological claim that capital markets - including real estate -- are always at equilibrium, always price risk in a particular way, never have systematic biases, and don't have bubbles. I'm not using it.

Juiceman, MM's point is that the value of an investment depends on the income it creates. Changing how you finance it changes the division of the stream but doesn't change its size, and so shouldn't change the value of the investment. Applied to real estate: the apt produces the same housing or the same rent, regardless of how big the mortgage is. Bigger mortgage means that more of the income goes to the lender, and the equity holder bears more risk of volatile price movements -- but it doesn't mean that the apt is magically worth more. If price goes up, it is because someone (both parties, in recent years) are bearing risk that they aren't charging for. That's the illusion that makes bubbles possible: people think they are getting a great deal because they are ignoring the risk they've assumed.

The original article uses a simple model of a "perfect" market. But the insight does not depend on "perfect" markets in any strong way; actually, it is more firmly based in the intuition that perpetual motion machines are unlikely. It's pretty basic, and if you think you've found a way to increase value by leverage -- not just move it around or pass risk onto people who don't understand it enough to charge full price for it -- you should probably explain yourself. That's Nobel Prize material.

However, if all you mean is that the tax subsidy to mortgage interest shifts some of the cost of owner-occupied real estate to the taxpayers, I agree, and so do MM.

I don't agree, however, with your apparent assumption that the subsidy automatically and always goes to sellers rather than buyers.

I agree with steve, how is talking about the relative cost of owning vs. buying - probably the biggest factor for fence buyers - "hijacking" the thread?

Now, the conversations do get a little nutty, but IMHO they're right on target.

ieb and evnyc:

the thread below proves that there are some good brokers around.....contrary to your previous posts denouncing all brokers as evil.....!

tandare Another round of apt searching this weekend and it makes me think about brokers. Over the last year we've met many. Some stand out as being really helpful, very honest. Others less so. This is a thread for recommendations or observations on POSITIVE experiences with brokers, in the hopes it might be helpful to others.

tandare

to start:
brokers we've met that have been honest, good listeners, knowledgeable --

Michael Stansfield, Bellmarc
Daniel Wright, Halstead

Carmela Massimo - Welcome Home Real Estate
Nina Hennessey - Halstead
Ilda Z. - (can't find business card, sadly)

NYRENewbie

Polly Chang, Douglas Elliman.

liulide

Pat Galante, Corcoran. Very thorough.

aboutready

Ed Hardesty, Elliman, sold two with him, bought one, looked at many.

nyc10022

Noel!

Mjh196

Kyle Rogers from Corcoran--fantastic broker looked at apts with him for over a year-- dozens and dozens of them, he never lost his patience and we found an amazing place after a long long search

I highly reccommend him

"So standard economic pricing theory seems quite applicable."

Then you would be alone on that - read the theory of imputed rents, which is how properties are valued.

"If apts sell for more than construction costs or rental value, investors will look for ways to construct new ones or sell rentals, and that increased supply will have a tendency to reduce prices"

If I own an apartment that was built in 1966, it is immaterial to me what the price of land and building costs are today when setting my price. What matters is rents and the cost of financing.

ECMH is not "theological" - I believe that you mean "teleological." You claimed you used the MM theory and then in the next breath say you disavowed a perfect market. Those claims are contradictory.

"None of your list of market imperfections seem to contradict this story at all."

The Econ 101 theory you purport to be explaining (which you don't) requires a perfect market (for manufactured goods). IF it were applicable to the price of owner-occupied real estate (it's not), then the barriers to entry (legal, de facto, etc.) would cause it to be inapplicable as they belie the perfect market. Real estate is an opaque market with limited inventory none of which none is identical (unlike manufactured goods), and very expensive requiring the decisions of unrelated third parties (banks, landlords) to purchase.

Owner-occupied residential real estate is capitalized rent - that's it. That's all it gives you access to: not renting. Therefore, that is the model that economists use to price it.

Sheesh.

Steve:

Economists use many models to price real estate; but they all agree that prices for comparable assets have a tendency to converge, and all but the theologians agree that tendencies can be overcome by other realities. So it is entirely appropriate to think of buying as a (close enough) substitute for renting and to conclude that the prices have a tendency to converge. And also to think that holding to rent is a (closer) substitute for selling and investing elsewhere, so those prices have a tendency to converge. And also to think that living in an existing apartment is a (sufficiently close) substitute for living in a new or renovated one, so those prices have a tendency to converge. And that all investments are rough substitutes, so pricing theories good for one investment are good for others as well.

For some reason I don't understand, you treat the first convergence as holy writ and the others as heresy. But the logic is identical.

The practical questions are which convergence is more powerful, and which is more predictable, and what the effects are likely to be of countervailing forces such as momentum or "animal spirits" or changes in taste or slow market responses or market participants operating with different value theories.

As for ECMH, I meant what I wrote -- although there is a certain charm to your re-write: ECMH theorizing its efforts towards ultimate destruction of the regulation necessary to maintain markets. Nice.

ECMH is the theory that God, via his prophets at the University of Chicago, assures that all is for the best in this best of all possible markets. And every other market too. That's theology, although not very good theology.

NOW if they could only add "rationality" into Pepsi and Coke... we'd have a functioning market! Oh! and a little bit of "truth syrup" for the Madoffs and Geitners of the world... and don't forget the entire political process that puts their stinky monkey hands into every aspect of a "free" economy... it'll take the 164 ounce cup... and a side of slim jims....

"Economists use many models to price real estate"

Show me a few.

"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."

Think of it this way: do all segments of the stock market have the same P/E ratios? While that market is the last thing I claim to be an expert in, I will go so far as to posit that there are expected P/E ratios for industries: certainly you would expect a Utility to trade at a different P/E ratio than a software company. I think that is the same for the differing "P/E" ratios of RE as well: some areas RE is thought of as a "growth stock" and other geographic areas it's treated like an dividend producing stock. So, yes, i think that the reason why ratios have always been different for Manhattan has revolved in the largest part due to the expectation of the highest growth in the asset value, rather than the income stream, whereas ion other places, it is seen as the income stream and if there is some growth, it's a bonus.

which would also explain an overshoot DOWN on prices when things are looking bad...

Interesting thought 30yrs.

Look, in most places in the US, owners of moderately sized rental projects for the area are self managed: it's a business where you get paid for doing a good job at running it: you make a substantial investment in the building in terms of a down payment, you procure tenants, you run the place.... and you make a return not just on your investment, but on the job of running the place. Could you imagine if you did all that and saw the same return as someone who was buying an apartment building in NY, hiring a managing agent, hiring brokers to rent units, etc???? It just doesn't make sense. Pretty much it's a different business, even though in both cases it seems like it's "landlord".

Hot damn, I love the ignore this person feature.

30yrs.. very well put... sorta like the Patels that own HoJos... b/f anyone get uppitty.... I can say it b/c I'm a immigrant with a gay relative in the family... m'okay....