Buying Makes No Sense

Yes, even if you want to be wrong, and assume you can only make 2% on the $400k, thats $400/month after taxes (40% rate). So you are behind renting by $5000/year at an equivalent.

If you want to step up to a short term bond fund (still way risker than levered equity interest in real estate)....you can double that $400 to $800 a month. Now you are paying $10k/year for the privilege of owning. This does not include amort of transaction costs.

Talk about stocks and commodities all you want. 25% down payments made in real estate a year ago are down 100%? Oil? -50%. Stocks? -35% if you top ticked them. Real estate equity is the only potential for greater than 100% losses.

I dont know why you keep asking what is better? Its not hard to beat 3.5% in the muni market right now with less risk than Manhattan real estate. What is your interest in bulling NYC real estate? Its a bad idea.

- Obv short term bonds way LESS riskier.

You see what's wrong with your statements AVM is you are basically saying there are money market funds yielding bps and then 'everything else'...and among 'everything else' real estate is 'ok'.... Well thats just wrong. Dead wrong and kinda deceptive or ignorant or some combination.

using real estate (leveraged bet) to preserve capital is not exactly a great way to invest at the moment.

AVM, if he lost the $400k in its entirety, he'd still currently be better off renting. one can argue that rents will increase, but i see little to no risk of that in the near term. why overpay for the space when the odds are that you're just pissing money away? unless you believe dolly and feel that prices have nowhere to go but up.

Rhino,

Are rents at 2000 levels?

Have you seen any sort of long term time series on Manhattan rents?

Thanks.

http://www.purearb.com/purearb/wp-content/uploads/2009/08/desco_market_insights_vol_1_no_2_20090706.pdf

Here's a report from de shaw. they mention the time portal fallacy. buying a home right now is exactly that.

Buying doesn't make sense BECAUSE YOU CAN'T AFFORD IT.

There...simple enough?

"You see what's wrong with your statements AVM is you are basically saying there are money market funds yielding bps and then 'everything else'...and among 'everything else' real estate is 'ok'.... Well thats just wrong. Dead wrong and kinda deceptive or ignorant or some combination."

None of that is deceptive or ignorant. I don't have the time or inclination to go through every asset class on the risk/reward spectrum. Of course there are shades of gray here. I know it's not just binary -- b/w MM and everything else -- I wasn't saying that.

As to the implicit statement that real estate is "ok" within these different choices. Again, this is not deceptive or ignorant, but your are right that it might turn out to be wrong. That's an opinion, time will tell. It's not something that can be scientifically measured at this point in time.

Didn't even really intend to bull it. The argument is interesting. There seems to be enough views to the contrary. Thought the other side could occasionally have its say.

Just follow my timing - do the opposite, and you will be fine.

Case in point: bought WFMI at 40 a couple years ago, went up to 50s on the acquisition of Wild Oats. I sold at 17, at the beginning of the big panic. Congratulated myself at the bottom, and it's trading in the mid-30s. I didn't sell at the bottom, but sat out the last 7 months. Also went short just before bottom.

Avm instead of presenting the limp devils advocate stance, admit that cap rates are out of whack with triple tax free NYC muni yields which have lower principal risk than coop equity levered at two levels. I am afraid if you say four percent is good enough times some poor dope will take it as an accurate and educated risk adjusted fact when it's very much not. Manhattan coop equity is not a short term bond risk profile. Again your assertion is either both ignorant or deceptive for effect.

admin got it right, buying in the present environment only makes sense if you can capitalize on a FHA loan... best way to play it is in a 4 family townhouse priced around 1.5-1.6. finding one is a bit like stumbling upon a unicorn (never happened to me)... ergo it doesnt make sense to buy

reading through these forums highlights the madness that is NYC living... it only really makes sense in one of 2 scenarios... 1. your making 2+ million/year and can comfortably afford a 7 or 8, private school and a million dollar second home...or 2. you're willing to live well below your means - mercenary style - and diligently pocket significant cash (say 1-5 hundred k per year), buy gold and look forward to moving to a low cost of living area, say colorado or north carolina within 10 years... if your not engaged in either scenario life here can be very confusion and lead to countless hours wasted reading and posting on the SE boards as you try to put together a puzzle that's missing key pieces.

Rhino: I had terrible luck with munis (not that it detracts from your main point). Bought RMUNX at 18, sold at 13, now it's close to 16. The volatility in munis was huge & unprecendented. What should I have done?

Sure everyone has sold poorly at times. Those funds have been animal off the bottom. I guess if you want to be dogmatic the price is less important than the income. In other words when you sold it at the bottom you were selling something with a double digit
yield. Conceptually a yield that high can overcome the principal loss in a few years. Remember the maket action that knocked your muni fund down 25 percent wiped downpayments of 25 percent off the board.

adamsmith: I agree
Here is the precise recipe you are talking about
Renovated Brownstone 3 or 4 family for $1.x million such that you can get it for 3.5% down + FHA cap on loan
Interest rate is 4.5% with 1 point with 0.5 mortgage insurance for 5 years

Obviously have donwside exposure but hey join the rest of America underwater and walk -- your downside risk is capped at 3.5% and if the market recovers you do Ok

The challenge is to find such a property since the sellers seem to be attached to such things with superglue

right... send me the listing when you see it... short or that I would touch NYC RE

would = would NOT

RMUNX has returned 45% so far in 2009, including reinvested dividends.

Rarely good to sell when yields soar (and prices drop).

Rarely good to buy when yields tumble (and prices climb) - Manhattan residential real estate?

Ericho is that the stmt from carolst that got you to pay $900 psf in th powerhouse?

Yeah, it was a huge mistake to sell RMUNX. But things were looking pretty dire, and I didn't and don't have great faith in the muni bond rating system. When is the tax tsunami going to hit prices?

w67th. Good catch.

"imho buying might make sense at these inflated prices only if you are willing to really play the game (minimize skin and be willing to walk away if underwater while living rent free). that's not for everyone. besides you have to buy below $750k to qualify for FHA..."

there's another way buying now makes sense, which is sort of the exact opposite: while I haven't seen ANY stats to back this up, it SEEMS to me that people move an awful lot more (across teh country) than they used to: you used to see people growing up in a house, inheriting the house, then passing it along to their kids, or some other form of LONG term ownership. My mom still lives in the house in Queens that my parent bought in ?1958?. If you are going to buy all cash and intend on staying in the apartment forever (or the moral equivalent), and the apartment is big enough that you can/could reasonably do this, then the overwhelming odds are that over the real long term (30 years plus), no matter how much further the market falls from here (if it does) that 2 things will be true: 1) that at whatever future time after that the property gets sold it will be worth more than you pay for it today, and 2) market upturns and downturns won't really matter because you will be making monthly payments of mtc or cc/ret which will be well within your means and you just won't have to care about what the market is doing.

The reason why there's been so much market volatility in the past few decades is the same reason there's been more stock market volatility. Before ?1980? people were not directly in the stock market; they may have owned some stock or some funds, but they didn't "play" the market. hen, playing the market got opened to "the masses" and an awful lot changed. Same thing with housing, aftger perhaps buying a starter house and moving up once, people didn't buy a new house at the same rate they bought a new car - they bought a house, raised their kids, lived their life...... And this ISN'T just because we're talking houses vs apartments, because there are PLENTY of people who did the exact same thing with apartments in NYC. I'm pretty sure some posters here have spoken about their own experiences of their parents long term residence in apartments in Manhattan (and Brooklyn).

"Whats going to happen when a private equity firm buys Stuy town and dumps every renewal tenant and sells it as a condo. They buy it for a 7.5% cash yield and sell the units for 5% yield, undercutting the market by 35%."

While I agree that this scenario might make sense financially, there's such a heard mentality when is comes to RE, even when you are talking about financial institutions, that I don't see it happening because o on will want to try to pitch the idea to whoever has the deep pockets to come up with the investment $ (unless it goes for a really low price, but in that case it will make sense as a rental, and then I think it will just stay that way because it makes sense again).

"The ultimate eff you trade here is Manhattan prices just go nowhere for 10 years."

I'll give to 10 to one odds that whatever happens, it isn't that.

30yrs, mobility just died. Nobody has the means to move. I'll find the links later. You're sounding awfully bullish these days. Not that there's anything wrong with that.

The likely tax tsunami should actually benefit munis as they naturally become more attractive as tax rates go up.

The problem is the job market. You should tie yourself to employment flexibility not housing stability at this point. Just my opinion.

"30yrs, mobility just died. Nobody has the means to move."

I'm not sure how this reconciles with "everyone" turning into renters?

30 yrs - could an all-cash buyer of a lifetime apartment possibly be less relevant to the average Manhattan purchaser? While it can always go up, if there are more dumb people with money than I imagine...there simply is not a defensible argument for purchasing now. The best that can be done is - buy if you dont care about the overwhelming near term negatives...or, if you pay cash and stay forever, its mathematically impossible to lose.

What is so fning hard? Greatest bubble popped 1 year ago in NYC. What is the question? When do you buy lemming dos 1.0 or snow leopard at half price in 2 yrs?

Where did I say that? If you have the option right now I'd opt for mobility. And actually foreclosure combined with no savings and little available credit in many areas has turned huge numbers into renters, and worse.

Yes w67, its the perverse imp in me trying to bait people into telling me why the biggest bubble resolves in a year when most real estate downcycles last 3 or so.

RE is the side story (to me). I never count primary residence equity as part of portfolio because it's so illiquid. More worried about what to put investment cash. So far, investments have been crap over the last few years. I have consistently made the wrong calls. Perversely, if I just held on to whatever positions instead of trading out, I'd be down very slightly today... Of course, the turn in fortunes have only come in the last 3 months.

Mobility is all well and fine, but one can't sit in cash forever.

You didn't sell rmunix that distressed three months ago. Needing to manage liquid investments better isn't a reason to buy real estate. Home ownership is a use of cash that is not currently appropriate for first time buyers period.

I sold RMUNX in October '08 (yes, ouch). I'm not looking to buy real estate for investment. Just at a total loss of what to invest in. Fixed income - everyone is saying that's the next bubble. Equities - um, we've had a fast ride up. My short positions - very painful right now to look at (I just did). Muni bonds - everyone is saying, don't worry, they will keep paying because not paying for basic sewer/roads is unimaginable although it's hard to invest in specific project-linked munis on retail level. Meanwhile, USD has been in for a wild road. Deflation is illusory, because my cash buys less overseas (and that matters to me).

"30 yrs - could an all-cash buyer of a lifetime apartment possibly be less relevant to the average Manhattan purchaser? While it can always go up, if there are more dumb people with money than I imagine...there simply is not a defensible argument for purchasing now. The best that can be done is - buy if you dont care about the overwhelming near term negatives...or, if you pay cash and stay forever, its mathematically impossible to lose."

I'm sorry if I wasn't clear that this is exactly what I was talking about. Not that this will change the market, not that anyone else should buy based on this, but simply that for those who DO fit this scenario, that it still can "make sense" to buy now, or really at any time. Can you think of any time period ever where sales volume was ZERO?

"Where did I say that? If you have the option right now I'd opt for mobility. And actually foreclosure combined with no savings and little available credit in many areas has turned huge numbers into renters, and worse."

But isn't that really an indication of MORE mobility? (forced mobility, maybe, but mobility never-the-less).

Oh you lost money when everyone else did. I actually didn't. I lost buying around 900 and puking it at 800. If you are risk averse buy short term bond funds that have managed risk well in terms of drawdowns. I owned some adfix jafix and tgmnx. Go to google finance and notice their worst 3 mos periods are only half as bad as their best are good. I own some gold and gold stocks. Accumulating tips. I want to add munis but the rip off bottom is tough to look at. That said in isolation a six or seven yield is good. All this said I am mostly cash. Fundamentally the stock market is rich. Technically if it clears 1120 god knows how far it can go. Watch the 50 day moving averages for better entry. On a definative break of those run for the hills.

Yep, and in addition, I shorted the market in Feb! Have some gold too. Which munis do you like? Does it bother you that your cash is worth less now?

What do I buy in foreign currency? My cash is worth more shares of stock, more oil and more apartment than a year ago.

Don't take this the wrong way but you don't sound like a sophisticated enough investor to short anything. Be in or be in cash.

I need to do more work on munis. If I am committed to ny as a home arguably I go ny state munis and if they shit the bed a cheaper home oppty is an offset.

Long story, Rhino. Can't go into it on a public forum.

30yrs not geographical mobility. In the slightest. But I'm fairly certain you get my point.

"Avm instead of presenting the limp devils advocate stance, admit that cap rates are out of whack with triple tax free NYC muni yields which have lower principal risk than coop equity levered at two levels."

No, I won't admit that. Because I'm not certain it's true. I own a lot of muni funds. I love them. But the last 2 weeks they've gone down a lot in value. That's not important. What is important - as stated previously, cap rates are low for a lot of reasons. One big reason is that interest rates are low. Going back to the early/mid-90s...yes, cap rates were a lot higher back then. Interest rates and inflation were WAY higher then too. This doesn't tell the whole story, of course. But, it's not so easy to stick a finger in the air, and say hey, this is the right magical cap rate.

rhino, you talk about dupes who might believe things that are bogus. Well, if the only views ever espoused are doom and gloom, then it's an absolute certainty that people will only hear one side of the story. Shouldn't there be an honest debate both ways?...if people choose to debate at all? I didn't start a thread titled "buying makes no sense". But if someone does start this topic, surely it should be an open forum.

"30yrs not geographical mobility. In the slightest. But I'm fairly certain you get my point. "

No, I don't , so either I'm being terribly thick or we're talking past each other. I don't understand how a shift in the market from more people being owners to more people being renters doesn't represent an increase in mobility in every way.

30yrs, mobility requires two things. a lack of ties and cash. most people aren't hitching a ride solo on railroad cars just yet. so forced mobility usually implies a lack of cash. it's much more expensive to relocate now than in the past.

AVM, you are missing the major point. Coops are much more risky than muni bonds, #1. #2, if you want to look at cap rates vs. mortgage rates, the current spread is unusual. So 3.5% is close to a historical low, and 6.5% vs. 3.5% is a near historical high. You may want to take a punt on comparing coops to other investments...but you're just wrong on the facts. You also havent address my point that arguably NOTHING is riskier than twice levered equity in a coop, as none of these alteratives (to a down payment) can go below zero. As a matter of fact, if we exclude single securities from the equation, none of them can go anywhere close to zero.

4% sucks.

"30yrs, mobility requires two things. a lack of ties and cash. most people aren't hitching a ride solo on railroad cars just yet. so forced mobility usually implies a lack of cash. it's much more expensive to relocate now than in the past."

I think you are overstating the current lack of cash that exists. If it was THAT much, people wouldn't be able to rent apartments. Most people who can afford the apartments we're talking about can "finance" the amount it would take to relocate on credit cards if they had to.

But from your comment, I do think we were talking past each other: I'm not talking about relocating to Kansas, I'm talking about relocating to a rental (like say, in Brooklyn).

yes, i'm talking about the ability to look for employment anywhere. and i was speaking of more than just NYC, i think NYC lags the country in terms of these issues, but i can foresee similar things happening here.

btw, there are record numbers of homeless people now in the NYC shelter system. and a few of our commenters have mentioned people sleeping on other people's couches. i doubt that's from losing their home in these cases, but i don't doubt that it is happening around us.

"That's an opinion, time will tell. It's not something that can be scientifically measured at this point in time. "

Yes it can be measured. 3.5% is a historical low, both absolute and relative to prevailing mortgage rates.

"I'm not talking about relocating to Kansas, I'm talking about relocating to a rental (like say, in Brooklyn)."

Many consider them equivalent.

nyc10023, are you investing or are you trading? Lines are of course blurred, but it sounds to me that you are trading but might think you are investing. Look at equities, for example. They are worth nothing more than their future earnings, and you really have to look out 30+ years. When you shorted in Feb, did you really think the earnings prospects over the rest of your lifetime had gone down by a factor of 2 from the peak? If not, why weren't you short at the peak. Prices went down because of panic, need for liquidity, momentum, covering of levered positions, etc., but probably not fundamentals. Playing the short-horizon stuff is tough; playing long-term fundamentals is easy. It just takes patience, a long-term outlook, risk management, and the willingness/ability/cash to stick to your gun & grow your position when the market os saying you're wrong.

Inonada: can't go into the reason we shorted.

Got it. Sounds like you were hedging something, maybe income or an illiquid investment...

"So 3.5% is close to a historical low, and 6.5% vs. 3.5% is a near historical high. You may want to take a punt on comparing coops to other investments...but you're just wrong on the facts."

A few things here:
1. 6.5% is not today's prevailing mortgage rate for credit-worthy borrowers. 30-yr fixed is more like 5.0% to 5.25% today, for conforming loans up to $729.5k or thereabouts. To say that lending standards have tightened is obviously true. But to say that banks are not lending below 6.5% is wrong.

2. Perhaps 3.5% is today's average cap rate across all of Manhattan, I'll take your word for it. But that doesn't mean every single property in priced at 3.5%. There are deals to be had. If I'm buying an apartment at 5% cap rate, I care more about my own deal than where the rest of the city is priced at.

3. Yes, co-op equity is a zillion times more risky than muni bonds. Granted. But the volatility is not only on the downside. Munis pay 3% fixed forever (or until the bond matures). But, rents fluctuate. What if rents go up over time but the 3.5% cap rate stays fixed. Your return ends up far in excess of 3.5%, because of the growth in rents. The math is simple. I know you think this scenario has a very low probably of occurring. Fair enough. But it's not accurate to portray the 3.5% as a fixed rate of return, with only downside. There is the possibility for upside over time too. Over the long term, the market has to be a fairly accurate gauge of fundamental reality. If the cap rate analysis is really the one true measure of reality, and the market has got is so incredibly wrong presently, then the market would be correcting more quickly than it is, IMHO.

Your comments about "conforming" mortgages are, indeed, largely correct. However, a whole lot of Manhattan purchases require jumbos which are priced well north of 5.00% to 5.25%.

"Investors" in multi-family properties are requiring cap rates of 7% to 8%. And they are getting them. Imagine the price action of a residential apartment if residential cap rates were to return to more normal 7% levels. Not a pretty thing to contemplate - if you're an owner.

I think it has been proven that renting is always better than buying.

AVM, what is this concept that 'deals' vs current market mean a damn thing? I'd rather overpay when things are dirt cheap then get 10% off when things are 30% overvalued. Thanks for explaining to me in (3) the difference between equity and debt. The issue is real estate equity is overpriced. And as far as your last sentence, I am not sure what you want. The last 12 months has probably been one of the steepest drops in Manhattan residential values on record, and this is all the while as the government is providing an unprecedented monetary easing. Further, any time one says, well if that were true the market would price it...that's just a cop out. By that logic, prices of coops should have fallen 30% the day after Lehman when bankrupt. As well, the stock market should not go up and down daily...it should just rise 1/365th of the 6% annual normal rate of earnings growth.

Listen up, I am not saying 3.5% is the total return... Wrap your head around this. I am saying given the 3.5% you require 4-5% appreciation to earn an acceptable return. As such, you are unlikely to get it. The market is priced to appreciation perfection. Further, now focus, if you buy a muni bond at a discount, coupon is not your only source of return.

PS: Nyc10023....in the words of Bob Newhart, stop it. Stop trading. Stop thinking you know how to hedge things. Stop shorting. Stop investing more than you can accept a deep market down in value on. Hold more cash. Your muni bond funds are not for trading. This is not a complex story. The stock market can be cut in half. Dont own more than you can tolerate that on. The evidence is that you wait too long to sell. Sell your muni funds down 15 or 20% not don 40%. Ditto with the market. This is bad.

Rhino. Plz stop edumcating the knuckleheads. I need lots of lemmmings to clear this stale inventory and to print at 2001 prices so my 1999 price bid to "look" okay.

I cant help it, especially with AVM. He knows just enough to reach all the wrong conclusions for the right reasons.

Of course I know rhino. AVM and a ton of others kept spewing their gotta be in RE to be a 'player' msg for a long long time. It's makes me giggle like a 5 yo girl to hear people still telling me the same story, but most of these lemmings haven't had a clear thought since 1986. Bunch of lemmings going from one asset bubble to another wo just working hard and saving.

Btwn you and me $500 psf no problem ( a classic 6 for $1mm), but I will need lemmings to tell me how the $15k credit made them buy 2 bdrm for $1mm and look at my pad in disbelief when I tell them I got it for $1mm too a year later. What is the fun in buying something cheap of you can't rub their moron face in it?

I dont think anyone is going to move the market here haha.

that onto itself is moving the mkt, no? I'm not buying when Literally all i hear is gotta beat the 12/31/09 deadline.... pass the popcorn.

yes yes, I agree that buying makes no sense.

Sincerely,

A homeowner whose house is 25 degrees warmer than your rental

"I think it has been proven that renting is always better than buying."

Really? Why don't you tell that to the people who bought in 2001 and sold in 2007 for massive profits?

and can't be sold.

El_P, did everyone buy in 2001 and sell in 2007? Did everyone buy in March 09 and sell 10-14-09?

FYI, 98% of buyers in 2001 who sold anywhere in 2002-2007, sold to buy a bigger place... and since we know $3 MM units are taking it in the horse nutz, 98% are now back to 2001. Congrats.... although fun, roller coasters getz u back to the same spot.

"The issue is real estate equity is overpriced."

I keep reading this sentence and trying to figure out what it means (not being snarky, I really don't know what you're trying to say)

The downpayment is not (imputed earnings, i.e. probability of price appreciating given rising Carrying charges and still decreasing rents) earning enough to justify getting into RE purchase at the moment.

Another way, in the absence of an equity kicker (% increase and probability wise) when you sell, owning cannot compete with renting.

30 yrs the cap rate is low compared to it's own history. Compared to mortgage rates. Compared to muni bonds. Compared to any bonds. On any comparison real estate equity is overpriced. It makes me want to be a real estate lender with a 30 percent cushion earning 6 plus on a jumbo. It makes me want to buy tips. It makes me want to buy stocks. Coops in manhattan today are the worst risk reward by far and bar none. They are nothing more than the NASDAQ at 4000 down from 5000 on the way to, what was the bottom around 1500 or 1800? It's a joke.