Only an idot would buy in NYC right now.

http://www.freddiemac.com/pmms/pmms30.htm

This data explains most of the directional behavior in cap rates and multiples over the past 25 years.

AVM, feeling superior much?

This data explains most of the directional behavior in cap rates and multiples over the past 25 years.

I see mortgage rates and points, but not cap rates.

While digging around to find a recognition agreement, found my 1992 mortgage stuff. 9.75%! I'd forgotten how high it was then. Didn't seem so at the time.

Also, 1998 appraisal, FWIW, showed 138% appreciation since 1992.

Puts things in perspective. Thanks for posting NWT

redbaiter, in this thread your shit is just completely random...on top of the rest of it, youre just not very bright

riversider: go away. everyone is either ignoring you or hating you. time for another stupid youtube?

riversider: go away. everyone is either ignoring you or hating you. time for another stupid youtube?

Clearly not true, but here you go! I like playing D.J.

http://www.youtube.com/watch?v=QTCNSpx2wzI

you may like playing dj--but everyone is leaving the party. yuck.

you may like playing dj--but everyone is leaving the party. yuck.

i dedicate this to CC & Bottoms

http://www.youtube.com/watch?v=-9mlwcAmEpo

rhino- a couple of streeteasy posters just contradicted your conclusions with a chart and a personal experience. In your mind, that is the best proof that you are wrong. Thanks for being useless.

There are many asset classes in which to invest. Stocks, Bonds, Art, Real Estate, and other "hopefully" less correlated assets such as Cat Bonds which theoretically have no correlation to the economy but have payouts pegged to unpredictable events (ie-earthquakes). But most of us are relatively simple investors and stick with stocks, bonds and real estate. Given that fact, I can not get away from the fact that in 1998, the Dow was at 8000 to 8500. At that time I bought a townhouse. When I sold my townhouse (this year at 25% off where I could have one year earlier, unfortunately), I sold it at a price that was almost triple of what I purchased it for (including renovations) in 1998. Of course, had I been a genius, I would have sold in 2007...but what can you do.

It is pretty obvious, in hindsight, that this "credit" bubble and deficit lifestyle that Americans (both individuals and at the government level) have lived off of started not in 1995 or 1996, but back in the early 1980's when Reagan changed the game for us all. It was then that it was "proven" that our government could live healthily in what has become perpetual deficit situation. It didn't take long for individual Americans to catch on to this "new paradigm" and realized that they, also, could live beyond their means because we were in a period of everlasting asset value creation. Money has been easy for going on 30 years (with a few hiccups along the way). Interest Rates have been going down for 30 years (with a few hiccups along the way).

What we are going through now is different that all the other "crises" over the past 20 years. This time the banking system has pulled back and, without almost 100% support from the federal government, there would be no credit availability at all. This isn't going to come back in the foreseeable future.

My question is, over long periods of time (10yrs) why should one broad based asset class (real estate) so radically outperform another broad based asset class (equities), especially when the engine that allowed that asset class (real estate) to grow has effectively been shut down. If one expects broad based asset classes to converge in value over time, then my house should continue to decline in value while the stock market increases in value, But at this point, in my opinion, I tripled my money by being in real estate as compared to being in a stock index fund. In other words, even if the stock market rallied back to 15k in the next 3 months, my long term return by owning my home over that period still far outperformed. BUT WHY WILL IT CONTINUE TO OUTPERFORM GIVEN THE MEDIUM TO LONG TERM HEALTH AND COMMITMENT TO LENDING IN OUR BANKING SYSTEM.

I would love to hear someone's view on why a home purchased for around $2mm when the dow was at 8500, isn't worth around that same number now with the dow not far from that level, instead of the final sale value of around $6mm (bids were in around $7.4mm before lehman). Why can't this house continue to decline in value dramatically??? Or is the thought that convergence will occur by the dow going up to 17,000 to 18,000 thus making the return over the past 10 years more closely correlated? Please prove me wrong.

Excellent post by clt89. I would add one more perspective -- I rented a Chelsea apartment (chelsea grand) in 2000 for 2900, that can now be rented for about 10 percent more (net of maintanence it is probably flat, I would guess), while the price doubled.

Having flipped through this thread, I don't get where 5% cap rate assumption comes from .

Also, what was the rhino graph several people referred to?

clt89,
You're comparing apples and oranges. You're taking a single entity (your home) and parked it against an average index (The Dow). The comparison should be comparing should be the medium home prices versus the Dow average.
Your method of comparison is like me saying...i bought AAPL at 20 in 1998 and it's now selling at 180 (800%) but the inflation-adjusted medium home prices have only gone up 16% since 1998.

http://mysite.verizon.net/vzeqrguz/housingbubble/

Here are a few possible reasons..

1. What is the location of the townhouse? If it's UWS, UES, or West Village, there are severe supply constraints. In that case the townhouse has become a very scare asset, so hence the outperformance, could actually continue.

2. Stocks have some inherent problems that aren't necessarily comparable to RE. They can be raped and pillaged by excessive management pay packages (see I-banks for much of last 5 years). Companies can overpay for acquisitions. Value can be eroded in lots of ways that are outside an individual investor's control.

3. As said before, look how interest rates have moved over past 20 years. Mortgages were in the 7-8% range then. Just north of 5% now. Do we really believe credit will be continually constrained on an ongoing basis? I think banks are eager to make loans to creditworthy borrowers at reasonable LTVs. Now, if inflation explodes and the UST's blow out north of 10%, like in the early 80's, then it should inevitably lead to a (further) crash in prices. What are the chances of that scenario? Why do foreign central banks continue buying UST's at 3.4%? Are they insane? It seems more and more like this discussion is about predicting where interest rates are going.

actually, come to think of it...for a $6 million townhouse, interest rates are mostly irrelevant. I suppose nobody's borrowing money to make this kind of a purchase (not anymore anyway). So maybe this type of RE is in its own category. I still think that point #1 holds a lot of weight though.

Congrats on your sale, by the way... sounds like the right decision in this environment. Just playing devil's advocate to an extent on this one anyway.

excellent point by ericho 75. But companies have different business models delivering into varying growth businesses, etc. Residential Real Estate isn't a rocket science business model that changed the world (like some of the most successful companies do). But of course, location makes a difference. If you own a home in the town where 90% of the homeowners work for AAPL, then a good chance that your home will rise with the tide. It is safe to say that is what has happened in NYC with wall street and many other robust industries.....but where do we go from here?

re AVM: not to sound trite but $6mm in NYC started to almost become "blue collar" (of course, a bit of an exaggeration). But I would argue the $10mm to $50mm price point is being whacked harder from a percentage drop perspective. Don't know if I am right. These listing are so discrete it is hard to come up with comps. But in this market "location, location, location" has proven to be an unbelievably painful truth for most in the country.

And, yes, I believe that credit will continued to be significantly constrained in comparison to what the world was accustomed to pre-2009 (I/O loans, Alt-A no income check, general fraud in the documenation process, 90% to 110% of LTV's) I think lending will go back to what our parents were accustomed to. And that is going to lead to a massive de-leveraging that is not nearly over......in my opinion.

also re: ericho75: I assume you are right about inflation adjusted RE prices. I will take your word for it. What is the inflation adjusted dow. Back of the envelope, if inflation was 3% over last 11 years, then and inflation adjusted Dow, if 16% higher than 8,500 should now be at 13,650 or thereabouts. WHo knows, maybe it will be in 1 year.

clt89,take a close look at the chart.

what chart?

http://mysite.verizon.net/vzeqrguz/housingbubble/

And remember that REAL incomes have gone DOWN over this period!

the chart is national. and includes the huge corrections already made in certain regional markets. looking at it certainly doesn't give me much confidence that the bottom is in.

Regarding NYC neighborhoods that are immune: UWS, UES, GV. There is currently no shortage of inventory, and unless things have changed in the past 2 weeks (which is possible due to end of summer) there is virtually no activity and continued price cuts, although I am sure there are exceptions. There must be some broker reading this stuff that can give us the rose colored version of percolating activity.

clt, there is certainly no shortage of apartment inventory in those neighborhoods. But surely you'd agree that there aren't too many listings in those neighborhoods for full townhouses..!?! That was your original example, upon which I was basing my "scarcity" comment. Maybe people woudld say there aren't any buyers for these either. But anyway, when I started looking months ago, I was hoping there might be some great deals out there on partial townhouses (duplexes/triplexes). I found very few good things available. (I didn't look much in GV, so maybe the situation there is different.)

clt89: Nice post but as I said yesterday this is all looking back and my argument is that if we’re headed for hyper inflation than real estate will continue to be a safe haven, no?

1) Over the past 11 years inflation adjusted RE is up 16% and inflation adjusted Dow is down 20% (after massively rallying back from 6600). Thats a 39% divergence.

2) CAP Rates vs. Dividends. While CAP rates are low, they have most certainly been higher (on a national level) than the dividend yield on the dow. For example if the average Dividend yield has been 2.5% and the average cap rate has been 4.5% (conservative on a national level, maybe not NYC level) then you have to add quite a bit of additional value to RE over the past 11 years. That adds another 20% to 25% to the divergence.

3) The tax benefits of owning real estate. The timing of paying income taxes on an asset you can depreciate adds even more value to RE. Additional increase in divergence.

Therefore, what has been the divergence, on a national level, of stocks vs. RE? Very large. I don't see why this shouldn't move back to a convergence over time, especially given the evaporation of liquidity that drove RE to begin with. In fact, doesn't any pendulum swing past? Isn't it possible for us to get to a point where the equity vs. RE valuation swings in the favor of equities. For this to happen, you need a large upward move in stocks or a large downward move in RE prices (or some of both).

I would be happy to have people tell me I am wrong.

"clt89: Nice post but as I said yesterday this is all looking back and my argument is that if we’re headed for hyper inflation than real estate will continue to be a safe haven, no?"

Uh, no, it's not. Sorry.

If Inflation means: Economics. a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency (opposed to deflation ). Then one should not want to hold dollars(paper money). If not Real Estate commodities then.

I repeat, and I think this threat proves....ONLY AN IDIOT WOULD BUY IN NYC RIGHT NOW.

thread I mean