2007 BUBBLE "an option based interpretation of the GREATEST bubble in NYC RE"

w67: I like your framework for the purely financial side of the analysis. I think you have to separate the premiums related to quantifiable factors like volatility and leverage from those that are basically emotional or subjective (such as your wife's "nesting" premium).

Taking a step back, I'm not sure "bubble" is the right term for what we experienced from 1998 to 2007. To me, bubbles involve detachment from fundamentals. To what extent did that happen here? The fundamentals really were very strong: income, wealth, credit, quality of life, quality of product and scarcity all pointed upward. If a bubble is just a rapid and unsustainable rise driven by temporary conditions, we certainly had that. But if your idea of a bubble involves tulips, Internet stocks, fiber optic bandwidth or railroads - i.e., crazed speculation as the dominant driving force - I think only certain segments of the condo market truly experienced that.

What I mostly saw over the past ten years was a lot of people making a lot of money, with easy access to even more money, competing for assets they really wanted - and in many cases having to settle for stuff they didn't really want - at prices that would have seemed crazy just a year or two earlier. Was that a bubble, or just a fleeting imbalance between liquidity-fueled demand and scarce supply?

looking at all these old threads is amusing, but wearying as well. it's really kind of amazing that prices have fallen so far, given all the efforts. when it started to hit the bankers' own personal asset collection efforts were ramped up to "save the homeowners."

there are, sadly, still a few people out there who don't seem to have been personally screwed by the bubble who are willing to go forth and risk. it's always really been the taxpayers' on the line, now they're just not hiding it. why have the political mess of bailing out the bank when you can BE the bank. and we thought americans had excessive debt before.

west81st, we didn't have income growth to warrant the increase in prices. and to the extent the income growth occurred, it was due to a bubble. the whole basis of NYC's success was the national housing and credit bubble. and some pretty slick financial innovation.

the fundamentals really were very strong: income, wealth, credit, quality of life, quality of product and scarcity all pointed upward.

Credit=Minsky(low high lending(see http://www.streeteasy.com/nyc/talk/discussion/14214-discussion-on-loosening-lending-standards)
Wealth based on rising unsustainable asset valuations(Greenspan)
Income-Debt to income ratios wee unsustainable
Quantity of Product-Take a walk outside

Looks like a bubble....

Aboutready: I think one can distinguish between a speculative bubble and a price run-up driven by favorable fundamentals that were themselves a secondary effect of various bubbles.

You're right that we have been surrounded by bubbles, and the liquid helium in those bubbles carried apartment prices upward; but I'm not comfortable characterizing what happened in my neighborhood as a bubble of any sort that Charles Mackay would have recognized. How many people bought classic sevens on West End Avenue as speculative trades? Everyone I know who bought that type of apartment intended to live there for a very long time. That's not speculation. Did they expect values to rise? Maybe, but mostly they wanted a nice place to raise a family.

West81st: I see where you are going with the difference between internet stocks and real estate but was it really not "crazed speculation"? A couple of sentences later you say that people paid prices that would have seemed "crazy" earlier. What made them pay those prices for places they did not want? It wasn't based on the value of the property's future cash flows. It was speculation that they could unload it later because real estate values never go down in NY (or some combination of that and the justifiable fear that they would get even less next year).

By the way, all of that fiber optic cable that contributed to the glut 7 years ago is predicted to be fully utilized in the next few years and those companies are out building again. Crazed speculation or too much money chasing something of (some) value?

How many people bought classic sevens on West End Avenue as speculative trades?

Answer: How man people camped out overnight on the street to get a condo at original offer price from sponsor the first day....

west81st, i think that's why MOST people bought, everywhere. not all, of course. but that adds to the emotional aspect you were discussing. it's a home, after all. we were willing to suffer a bit, either compromising or stretching, to get the homes as they were available to us. and we were encouraged by the promise that prices would only rise, which made any risk seem much less. and we were TOLD that we were doing so well, so it only made sense that you could do OK, especially since your friendly banker or broker was so keen to help you. yes, most coops had much stricter entry policies, but lord only knows the buyers' subsequent financial condition. and of course the allure of all the frenzy encouraged many to compromise or stretch. more in coops probably compromised, but buying a one bedroom when you are planning on having a child in a year or three, because you were afraid that if you didn't start on the equity ladder you'd be priced out forever, thinking that you'll be OK, is not normally speculation. but it was very stupid.

it's a chicken and an egg type thing. i usually prefer James Hamilton to Menzie Chin on Econbrowser, but i found this to be an interesting analysis. so in some ways i agree with you, but on many levels i think it's just semantics. the cycle was caused by excessive leverage, and hideously lax regulation. the speculation was primarily done by large investors, but they could only continue if the consumer was, for whatever reason, complicit. the conduit to the bubble, if you will.

http://www.econbrowser.com/archives/2009/08/reflections_on.html

The precise origin of this breathtaking series of events is difficult to identify. Because the crisis is such an all-encompassing and wide-ranging phenomenon, and observers tend to focus on what they know, most accounts center on one or two factors. Some reductionist arguments identify "greed" as the cause, while others obsess about the 1990s era amendments to the 1977 U.S. Community Reinvestment Act that was designed to encourage banks and other financial institutions to meet the needs of the entire market, including those of people living in poor neighborhoods. They also point to the political power of government-sponsored entities such as Fannie Mae and Freddie Mac, agencies designed to smooth the flow of credit to housing markets.

In our view, such simple, if not simplistic, arguments are wrong. Rather, we view the current episode as a replay of past debt crises, driven by profligate fiscal policies, but made much more virulent by a combination of high leverage, financial innovation, and regulatory disarmament. In this environment, speculation and outright criminal activities thrived; but those are exacerbating, rather than causal, factors.

Malthus: You raise excellent questions. I wish I could answer them.

Riversider: Who said there wasn't a speculative bubble in new-construction condos?

I'm emotional when old yeller died, not when I'm deciding between a 20 by 20 by 9 box to rent or purchase.

What other investment allows you to keep the profit from resale tax-free?
It was a bubble.

W81:Taking a step back, I'm not sure "bubble" is the right term for what we experienced from 1998 to 2007. To me, bubbles involve detachment from fundamentals. To what extent did that happen here?

Totally anecdotal but here goes. We are in the top income bracket which in NYC, unfortunately only puts you in middle class. In 2004, we had had it with the a@#hole Lawyer upstairs who was making our lives miserable as Co-OP prez. We started to think about moving and realized that we could not afford to buy an apartment for the price that we could sell our apartment for. Bought in Sept. 1996. Sold November 2004, made 340% profit.. Plus I had held on to my dot com bubble losses and sold them against the apt sale profit so essentially emerged from that debacle in tact. Plowed all the profits of apt into the stock market 4 days before the election and of course, as predicted, the market went way up. Sold early cause I was playing with the govt's money that we owed when taxes were due. With the profit from the stock market, we paid for the next three years rent. Well, didn't get it all out before the 2008 explosion so, we have to adjust that to 2 years free rent.

I would like to buy now. But it is way too expensive to match the space and amenities that we rent now. Was it a "bubble"? Are you kidding me? 340% in 8 years? I decorate with tulips everyday. When the mid+class can't afford to pay for a basic, livable apt- say something with a closet and a washing machine, it is a bubble.

w67: btw, love this original thread. b/c i do the real estate in this family, this is the best explanation i have come across as to why we have to 'waste' money on rent. i keep pointing to the future -- commercial real estate defaults that could wipe us out. you know, what if extell defaults on rushmore. together with their insane investment losses in miami and the unfortunate timing of the building next to the rushies --the alwyn? -- together with the 120 plus apartments next door at the trumps. could these hundreds of apts eventually sell for 10 - 20 cents on the dollar just like in miami? and then how would that affect values on the entire west side? husband is trained in unbelievable miami debacle. but your analysis is less about hypothetical future and more about 'now'.

would love to own so i could fix it up. but not willing to go broke for the sake of a garbage disposal in the sink -- which is the only thing hubbie thinks is indispensable in our rental. have found very few pre wars with in-sink gd's. would have to buy an over priced new development condo to to get him his disposal -- or i could relieve him of dish washing duty -which is never gonna happen.

apt23, absolutely. and many people were able to buy things they couldn't really afford. that's a bubble.

you stick around in your PCV apartment and you get called, well i don't even want to rehash those conversations, as if their really is some inherent connection between owning something and renting.

i'll repeat it here again, because it f'ng pissed me off so much, the mother who arrived to pick up her daughter from our apartment after a playdate. fifth avenue duplex, across from the met. (btw, didn't seem like truly great financials, but might have been family stuff i didn't know, although just claimed"extremely lucky."

drives up in whatever, meets me out front (oh, you don't mind if i don't come up and you sit outside waiting for my oh so busy ass, do you?), and then looks up at the building and says, oh it's so lovely here, and you dont NEED anything more, do you?

i have other, even worse stories.

AR:many people were able to buy things they couldn't really afford. that's a bubble.

AR, love your posts but you missed the point here. i couldn't afford to buy what i already owned. that is a bubble. i could afford it when i bought it. i just couldn't afford to buy it on the day that i sold it. boy, if that conundrum isn't a bubble then what is.

and, screw the playdates mother. where is she now?? sitting in some overpriced real estate chanting the broker's mantra: if you just hold on to it for 10 years, what does it matter?

apt23, i don't think i missed the point, really. i saw my apartment become worth more than i had sold it for as i looked for another place to buy. had contract, made shit load of money, had seen plenty of places that would have been reasonable, got concession for rent-back from buyers because prices were going sky high.

and they did. made large, huge amount, from sale. but then everything became more expensive than i ever could have dreamed. really, very quick process. wound up buying $800k condo because could no longer afford coop. literally overnight.

the playdate's mother. still on fifth. some lessers and some mores, not so much.

i was only trying to get a two bedroom with a minimum of 1.5 baths with a dining area. that's it. and i was having some difficulty on the UES, which then was my least favorite choice. how silly. in retrospect.

my buying power continued to shrink. it was at it's highest, in NYC, in probably 1998. but i sadly wasn't looking then.

speak of the devil......
http://www.nytimes.com/2009/08/30/realestate/30cov.html?pagewanted=2&_r=1&hpw

LMAO, hard to compete w/ a 1999 buyer who wants to travel to Nepal, no? and don't even consider making a "profit." What chance does a 2003-2008 buyer have, none.. IMHO.

bump bump bump...

apt23, thx for the kind words. I would have to point out something on the "renovation" front. It always amazes me to see perfectly rational renters use the fact they "can't" renovate as a negative vis-a-vis owning. The garbage disposal is $1000 installed from Gracious Homes. When I was a residential LL, I had no problem having a tenant pay for upgrades if it made them happier, and in fact usually did it w/ a 2 year renewal as part of the process and even went "halfsies" on the cost if I got to keep the upgrade.

But know this too, generally LLs have to keep up w/ the current trends. In 145W67th, they are upgrading all the units w/ stainless PAS407 REfrig, granite bath, kitchen etc... (tho no WD), and I am sure you could ask for a garbage disposal.

i put in $10k to get the refrigerator i wanted and some more cabinets. over a 5-year period that's $200 month. often you don't recoup much of the costs of renovations when you sell, as we are seeing today. people frequently don't renovate until they want or need to sell, which is stunning if you think about it. all that hassle and money and you don't even get to enjoy it. unless you can't sell.

ar, i never take a no for an answer. : )

On the daughter front, I take that as a positive in NYC, no matter how "well" we do, our kids can always feel "poor" => gives them that sense of drive that is so lacking in large swaths of the world. It's sorta like making them suffer but not in a malicious sort of way..... : )

She has listed her one-bedroom with David Hench at Halstead for $2,600 a month. She says this figure is as low as she can go — it is already less money than she needs to break even after the mortgage and maintenance payments.

“I don’t want to rent it at any price,” she said. “I need to rent it at a price that’ll help me.”

But what if she can't get $2600, but instead f$2200, will she not go to Nepal?

w67th, the daughter is hardly in a painful state. poor deprived child.

suffering is good, up to a point. but lord i could use a third bathroom for the cat litter box.

e79and2, that's like the strung out hooker/gigalo saying $10 is the lowest i'll go... wait till the john starts driving away : ) .... seriously, what does "break-even" have to do w/ market? Clueless, self serving unintentional LL.

ar, just have stevejhx get "rid" of your litter box problem... damn I know too much about SE threads.

I'm not sure about the gigolo, but that's what I was saying. For a lot of people without job, they might try the rental route for a while and maybe take something lower than their mortgage but then at some point these coops will have to go on the market for sale at lower prices too. People are ok losing money on a mutual fund but often not a particular stock and same applies for their apartment.

"People are ok losing money on a mutual fund but often not a particular stock and same applies for their apartment."

so true. why is that?

Irrationality... Your mutual fund can go down and before it goes up other people come in and purchase the cheap asset thus diluting your upside. Worse the mutual fund manager might sell the beaten down stock and buy a high flyer at window dressing time. I've seen both occur on my money market fund. A big reason why yields on money market funds go down faster than they rise.

And you get actual day to day benefit from ana apt. not so with a mutual fund.

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