What if I'm wrong?

Have you considered buying real estate?

I wouldn't invest in real estate now without the lift of needing a place to live, cheap mortgage rates and interest deduction. Finding a great place and a community would be an emotional, not a financial, decision.
If you are looking for long term appreciation, maybe a low-fee index fund with carefully picked blue chips?

rhino - I want to be sure I get the question - you are saying you have the $ for a deposit but are not currently trying to buy. And your concern is that if real estate prices rise and your $ isn't invested in something that correlates to that rise, your $ expressed as a % of the eventual apartment you buy will decline - is that it?

If real estate prices rise, nothing is a good hedge, due to the leverage inherent in buying an apt, if you finance even half, you have a 2x bet on prices. At 20% down you are levered 5x to price movements.

rhino: decent question. And therein lies the rub. There almost always exists a situation where a natural hedge either doesn't exists, is extraordinarily expensive or ends up not offering the coorelation one thought it might. This is where the aggressive types see huge opportunity on a risk/reward matrix. It often means simply rotating straight line investments. (I think I posted about this a few days ago). Since Feb of 2007 it has been game on for this type of investing. It all started with a quiet little post by HSBC in Q1 2007 where they were the first bank to take significant charges and writedowns. Almost immediately all asset classes started trading in their own little worlds. Absolutely massive opportunities ever since. Those opportunities have slowly been closing over the last 4 months. The risk/reward ratios are not as great as once offered. Having said this, I believe RE is slowly approaching a better opportunity vis a vis stocks, commodities, shorting the dollar. For the last year, I have ridden like a rented mule, FXA,FXI,EWZ,TIP and HYG and these are still my core holdings. However, I have started accumulating TBT. I simply see no way out of the current fiscal nightmare without the $ getting destroyed. The only way will be for rates to explode. So the plan over the next for months is to start rotating out of FXA, FXI, and HYG as I accumulate TBT and hold EWZ and TIP. Does it offer decent protection against my downpmt losing its purchasing power, no fucking idea. But its all I got.

patient (& op)- seems to me that if you are convinced that the dollar is going to continue to weaken against the other currencies of the world (pick 'em), but you are a dollar earner who expects to continue to live in a dollar environment - specifically NY - than thhis might be exactly the time where you would be looking to actually buy a dollar denominated asset - specifically real estate for example - before your dollars are "destroyed" and al the other currencies of the world are able to buy that dollar denominated asset more cheaply. I'm not saying I agree, but if you are as convinced of things as you seem to be in your post above, then you'd have to believe that real estate is going to decline more than the dollar for this not to be the time for you to get your dollars to work before their relative value is decimated. or am I not right or misunderstanding something here - which happens frequently.

"I simply see no way out of the current fiscal nightmare without the $ getting destroyed. The only way will be for rates to explode."

Now I'm really reaching! I actually think it will be a combination of both. Nice pop in rates, little more weakness in currency. I also believe most of these trades are forward looking and these thoughts are partially priced in already....You know, buy the rumor sell the news....So back to NYC RE: disclosure: I renewed my lease this summer for another year. I share the view of a few others. If current thoughts are pricing is 2004-2005, and you can find the apt of your dreams that rarely comes available, if you can easily afford it, and if you buy it at a decent discount to "current" market. Hey why not?, life is a journey, not a destination.

The extra money in circulation would only become a local problem if prices start to increase at an out of control rate. Shouldn't prices remain stable until the unemployment rate starts to drop? Unless you plan to use your dollars to buy a place in Japan in the next 6 to 9 months, no worries, your dollar will be fine. If this is truly a global recession then why would the dollar continue to drop significantly more in the long run? Yes, we inflated the currency, but aren't we getting out of the recession faster than other countries and probably more efficient as a result? Our car industry for example will come out of the recession much more competitive than before. The dollar will be strong again, with a strong economy behind it.

We're in a similar position. We have RE exposure obviously, and have been looking for a way to hedge that since '07. Haven't succeeded as I'm sure you remember my saga of the bad trades. Munis took a beating and I cashed out at -30% because that was our pull-trigger point. Bought a little bit of SRS - turned out not to be a hedge against residential RE. I had some foreign-denominated holdings, but sold right when the dollar strengthened. I was going to switch back in again, but USD never quite reached my target for switching back in. Have some GLD but bought in at 900, so while it's appreciated, it hasn't matched the fall of the USD.

There are some who believe in buying "real assets" to protect against the fall of the USD.

I know a little about the London RE market and they haven't begun to experience the pain they should, due to the fact that their mtges are essentially floating for the most part. This means that people who own have had their mtge payments slashed in half - and are keeping the economy afloat with the extra cash in pocket. This can't last forever, obviously.

nyc10023, you are trying to short an illiquid asset, which kinda doesn't work. Your best bet is the Case-Shiller futures for the NYC area, but even that is problematic because pricing contains expectations of a continuing drop. This is caused by the illiquid nature of the asset: no hedge is available. Were that not the case, future CS prices would be flatish as otherwise there'd be an arb.

No one knows the future, but realize future expected changes in home prices are already baked into housing-related stocks, even though they are not baked into current home prices. You could sell now to take advantage of this discrepancy, bit that'd cost you 10-15% in transaction costs. Therein lies the rub.

And don't even begin to think that NYC home prices and anything else in the market are going to be correlated going forward simply because of the economy. NASDAQ peaked around 5000 a decade ago and didn't even make it back up past 2500 in the latest upturn. Meanwhile, home prices went up. Such is the nature of bubble assets vs non-bubble assets, but this time around it is housing will continue losing value long after everything else starts moving up.

It need not be a perfect hedge...And Modern I understand the issue of leverage. For discussion assume I am an all cash buyer. I am thinking NY munis may be the best thing. Maybe some Manhattan concentrated office REITS. Both have a better yield than a coop's cap rate.

just thinking out loud - stocks in big NYC finance employers (C, BX, JPM, etc.), hedge fund index, etc.?

Oy boy, this is like hedging pets.com with Microsoft. Not saying there's no correlation / hedge, but rather that you are adding more risk from the uncorrelated portion of the hedge than you are taking away. The world does not necessarily end up working the way you think it will. Are stocks and NYC housing correlated? Probably. More than 50%? Not anywhere close to that. So are you adding risk when you "hedge" NYC housing with stocks? Uh-huh. Is that uncorrelated portion of the hedge in the right direction? Give that SP at 7xx was the best valuation any of us had seen in our lifetimes, perhaps will ever see, and value investors like Buffet and doom-and-gloomers and Obama were saying it's a buy, probably not.

Rhino, I think you are willing to speculate alongside your hedge; I just worry that some might take this and actually think they are mainly hedging rather than speculating. NY munis have an interest rate exposure that will blow up inverse to housing in the case of inflation. Office REITs, besides being offices, are forward looking and liquid unlike housing so it is forward-looking while housing is not, and that market was never keen on 2% cap rates so you could paint the walls whatever color you wanted, etc. A f-ing mine field. Concentrate on growing that pile of cash, I say, and the rest will follow. Speculate, but don't pretend you're actually hedging because that's a recipe for not managing your risk.

No one wants to play! I know this is not a perfect hedge. It goes without saying that making money is always a good policy. I have to put my money somewhere. Conceptually it would be interesting to own some things that have a reasonably positive correlation, not a perfect one.

Owning financials is not attractive, because I work in finance. And I really wish people would stop thinking inflation will drive housing values up. Higher interest rates would crush real estate. Crush it. When price to rents are already stretched to the max, the impact of higher interest rates would be far greater than rent inflation. Further, rents are a local good, not like oil and gold. This is such a popular misconception.

I realize office REITs are a sloppy hedge. However, the employment market in NYC drives the office market and the coop market as well. Plus the yield is double the residential cap rate. I think its an interesting idea.

Rhino, I don't disagree with the notion that inflation means higher interest rates which is a negative on home prices. However, how many times have you heard a story about someone's parent buying their place in 1968 for $60K that is now worth $2M? Lots of things are going on with the underlying economy, with long rates vs short rates, etc. I'm not saying it's a bad theory, but the data just doesn't support it. Note the graph of nominal home prices since 1970:

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

It never went down during the hyperinflation years. So you say "yeah, but that was when inflation was already high; what matters is when inflation and interest rates up from a low level.". At least that's what I thought, so I clicked on the bottom of that page to go farther back in time:

http://mysite.verizon.net/vzeqrguz/housingbubble/united_states_1890-2008.png

Note the increase in nominal prices from the 1950s despite interest rates rising during that period through the 70s and 80s. In fact, the only times nominal prices dropped were during deflationary periods: the 30s and now. Pretty mind-blowing, right?

This just goes to illustrate my point. You are convinced inflation will kill home prices, yet the data doesn't support it. I'm not saying it won't, but just saying keep your eyes open to the possibilities.

FWIW, I think office REITs are a much better hedge and have some relative alpha (the cap rate you mention), so longing then is a fine speculative hedge for you. However, shorting them to hedge a long-residential position is silly.

But you are wrong already.

You project prices to collapse 20-30% since the Spring. *check*

I dont remember prediction we would fall ANOTHER 20-30% since this Spring. The only thing you will find from me on this board, was a prediction after Lehman collapsed that prices WOULD FALL 20-30% and they have. *Sorry*

Again, I would not propose to hedge. I do not own real estate. I just think its an interesting notion to 'tilt' my portfolio toward things that have a logical and positive correlation to real estate, as a renter.

I am sorry I-know-nada, I just disagree. The type of inflation we are guaging here is dollar weakness, which will drive rates, but I dont think it will have a big impact on rents. Dont trot out your 1968 example. Manhattan enjoyed a renaissance, a mortgage market was created, Wall Street enjoyed a renaissance, securitization was invented...there is too much to address here. We are talking about now.

I understand the that you disagree, but you act as if the probability of rates rising alongside NYC home prices is low. Would you put money on a Case-Shiller NYC vs CPI correlation derivative? Make me a market...

That's the point, I dont care about a correlation derivative. I am talking about NOW. Are you a professional trader? You don't have the pre-reqs for a course that I could teach.

nada, do you in any way see incomes rising over the next few years? just curious. whatever long-term inflation scenarios i can envision, i can't envision one that includes wage inflation. but maybe i'm just a woman of limited vision.

i just can't see how you'd have home prices and/or rents sustainably rise under these current circumstances without incomes rising. even rents if buying becomes more prohibitive due to increased interest rates. was it the oft-despised self-promoting Krugman who recently wrote that most economic models are currently suspect, as these are not ordinary economic times? i'd tend to agree.

Why dont you make me a wager on the future rather than a wager on what the past correlations would show? See that's whats traders and investors do. Besides, get the historical reference right. The point here is if mortgage rates rise, rents will not necessarily be rising, and therefore, prices will likely fall.

Aboutready has it right. Incomes and rents are not going to rise just because rates are rising. Rates can rise due to the dollar demise, which has nothing to do with local rents.

What about diversifying savings into a basket of currencies? Several banks allow for foreign denominated CDs or even foreign denominated savings accounts. I believe HSBC is one. That would at least help cash not lose its buying power relative to foreign buyers.

I kinda like NY munis and office REITs. I am not convinced that the dollar is as big a driver as the NYT and brokers like to say. In order for the rental market to get tight again, it is going to require a lot of hiring here in Manhattan. That is why a reasonable position in office REITs is intriguing to me. Plus I get paid to wait.

Brookfield Properties Corporation (Brookfield Properties) is a North American commercial real estate company. The Company operates in two principal business segments: the ownership, development and management of commercial office properties in select cities in North America, and the development of residential land. As of December 31, 2008, the Company's commercial property portfolio consisted of investment in 108 office comprising 74 million square feet in 12 United States and Canadian markets. The Company's primary markets are the financial, energy and government center cities of New York, Boston, Washington, D.C., Houston, Los Angeles, Toronto, Calgary and Ottawa.

Uh, Rhino, I'm talking about future correlations, not past. What would be a point otherwise??? Regarding my profession, would rather not get into it. Happy to be educated nevertheless. Would be happy to substitute 10yr rates for CPI, if you prefer. Mortgage rates were rising back then as well, no?

What do I think will happen, AR? NYC will continue declining over the next few years. Inflation will be normalish, wage increases as well. If we see big inflation (the kind you'd want to hedge), it'll be well after the big decline in NYC housing.

So none of you think we could face inflation where wages don't rise, but everything else does? Hmm. What if RMB unpegged?

P09 seems to have a good portfolio - heavily foreign, and he's betting that interest rates will rise.

"And I really wish people would stop thinking inflation will drive housing values up. Higher interest rates would crush real estate. Crush it. When price to rents are already stretched to the max, the impact of higher interest rates would be far greater than rent inflation."

Rhino, the way I view inflation as a hedge is against rising rents. If interest rates skyrocket as you suggest, there would be a significant inflation problem. Wouldn't it be nice to have a low interest, fixed mortgage that protects you against a large increase in living costs? I never think of rent vs. buy spreads at a market level, I think of them at a personal level. Right now, the premium I pay to own is very little and this equation gets better over time, not worse. Rents will rebound both because of incomes and inflation, there is no chance you are going to have rents at current levels as the economy improves and interest rates rise. On the flip side of this argument you could lose some equity if you don’t have a long view and for the short term city dweller, renting is the only option.

I respect the questions you are asking and think they are the right ones to consider. However, you are trying to look into the future and considering far too many variables. Trying to time when interest rates, inflation, prices, and the NYC market are all in alignment is an impossible task and at the end of the day if you have a long view, none of it matters that much.

Betting interest rates will rise is betting against NYC real estate not with. Inorada I'll bet you if inflation rises mortgage rates will rise and prices will fall because rents will lag. Make the amount easy on yourself.

Juice thanks for dropping by and telling me portfolio management is impossible. I beg to differ. When mortgages are expensive prices fall. Employment is a lagging factor. Example now.

I'm not giving you portfolio advice Rhino, just suggesting another way to look at the problem. It doesn't matter what prices or rents do independently of each other, only the delta between the two at a given point in time. If I own and my personal rent to buy ratio is at equilibrium, I only expect that to get better over time. Your "portfolio management" assumes that both variables move continuously.

Sounds like it might be good fun, Rhino. How do you propose we set it up? (I'm talking about which indices, formulas, and whatnot.) Haven't thought it through myself. I'm guessing that by the time all is said and done, we might get the market's price for it.

Speaking of which, it seems to me the Case-Shiller NY futures are the cleanest hedge. Liquidity is crap, of course. The bid/ask spread on Nov 2013 is crazy right now (145/200), but would you consider Nov 2012 at a 162/184 spread?

10023, i think asset classes can rise in price while wages fall. but, at least over the next few years, that wouldn't include the cost of owning or renting a home.

Yeah, I don't know too much about hyper-inflationary environments. Can consumables like groceries go up in price while rent stays flat/goes down?

Sure because ags are global commodities.

Although I like REITs I'd be very careful about considering them as a Manhattan residential real estate hedge.

The correlation has historically been quite low. In addition, the 30-day volatility of REITs is now just shy of 40% (while the S&P 30-day vol is just north of 20%.)

In addition, REIT yields are taxable at "ordinary income tax rates" as they have not been subject to corporate income tax already. (I keep my REITs in my 401(k) and IRAs.)

I've also looked at Shiller's residential housing 3X ETFs but have found them wanting.

Bottom line - as uncreative as it may sound, my downpayment is in a variety of muni bond funds - including a bit of high yield muni funds (Vanguard and PIMCO). (I also used closed-end fund muni funds last year when the discounts ballooned - but those discounts have now come way back in.) The rest of my portfolio, though, is where I choose to be more creative.

Most certainly, nyc10023. In the range of a few percent in any year, that's probably the norm. But I would think it's quite unusual to have multi-year double-digit inflation overall yet deflation over the same period in some more specific part (hedonically-adjusted computers excepted). Nothiing to back that up, though.

i'm not the expert, but i think it can definitely show up in things like oil, which would put upward pressure on prices in a variety of ways. how successful that would be at fanning price increases/wage inflation would depend on a number of things. if consumables go up in price, and wages as a whole do not, that would likely put downward pressure on housing costs.

i'm not saying that eventually there may not be a huge issue with inflation, there very well may be. but given all the holes out there right now, i wouldn't expect it to be any time in the next year or two.

Iknownada I didn't say I was betting direction outright did I? I might but didn't say that. Choose a mortgage rate. If we hit it the bet is on. The bet is then whether we rise or fall over the next six months.

I'm thinking of Weimar Germany, Latin-America - that type of inflation. And to some extent, inflationary pressures after the '97 (?) financial crisis in emerging Asian and Russian economies.

Rhino - but your bigger financial picture matters more, no? Where do you want to be in 10, 20 years? When and where do you want to retire? Keeping your dp safe is only a small part of the picture.

it's hard to tell, 10023, this is much more of a globalized scenario, i'd think. there are a lot of people who have a vested interest in the value of the dollar. but somewhere down the road things may become more interesting than we'd like to see.

Who says I am talking about a big part of my portfolio? Have I ranted enough on this board about my background not to be told the tax status of reits?

AR: don't laugh, but I'm tempted to buy say, 1000 acres of productive farmland up north as a small inflationary hedge.

This a portfolio lean and each part mist have it's own merit regardless.

Then who cares about what you're doing with a piddly part of your portfolio? If your career is on an upwards trajectory, you could make much more $ YOY with that than whatever you do with your dp allocation.

If you dont think this is interesting then why not take a fucking hike?

I didn't invite you personally.

"Then who cares about what you're doing with a piddly part of your portfolio? If your career is on an upwards trajectory, you could make much more $ YOY with that than whatever you do with your dp allocation."

Well said nyc10023 and I like the 1000 acres idea as well.

Touchy, touchy, Rhino. Are we talking 10%, 20% and would that proportion change dramatically every year depending on your annual comp? At some point does what you're willing to spend as dp become chump change?

I'm just looking for positive correlation to real estate ideas. I'll worry about my income trajectory and position sizing.

Just stick it in HAP:

http://www.vaneck.com/index.cfm?cat=3192&cGroup=ETF&tkr=HAP&LN=3-01

That 1000 acres of northern farmland will also be a good global warming hedge. Get on it!

Rhino, I don't like your structure because I believe housing is heading down regardless of whether mortgage rates go up or not. So in order to make it interesting, you have to (a) take that out of the equation; and (b) get rid of that free option you are giving yourself should inflation & interest rates remain subdued, yet housing falls regardless.

I think what you're saying is that if we have an interest rate spike, housing gets hit harder than it otherwise would over the next 6 months. Fine, I don't disagree with that. However, what about the 6 subsequent years? That's where I have the issue.

How do you think this all played out between 1950-1990 when the 10yr yield went from 2.3% to a peak of 14.6% in 1982? What makes it different this time? Honest question, would love to hear your answer. That period had the same rising interest rates you're talking about, the same inflation increases, etc., but ended up with rising nominal home prices and flat-ish real prices. (Dear lord, do we now consider real price swings of 15-20% as flat-ish?!!?!) I understand the housing bubble is unique to our current time, but we are talking relative to an ongoing bubble correction, no?

Last go around. Manufacturing to service economy with structural inflation buil in via labor contracts. This go around the biggest fuckng re bubble this planet has ever seen with a huge gap in pre bubble capacity utilization/ overbuilt capacity to -> causing structural wage deflation.

OK, I'll play. Rough idea here rhino - if you think it has merit you can do some work, if not pls don't flame me, I am thin skinned and don't want to cry on the desk here. Decide what your time frame is for likely purchasing, and take 20% of your downpayment and put it into out of the money GS calls of a longer duration than your time frame.

I am assuuming GS and RE will move - roughly - in tandem, ie in the same general direction. If GS goes up, you have 80% of your initial dp left, and also the calls will have appreciated, and hopefully helped you keep up with real estate prices.

If GS decelines, I am positiing that it will be because financial sector in general has done so, and that if this, then real estate will also have declined. But you'll be in similar position as you are now because the other 80% of your dp will have been in cash, or near cash, and so will be intact.

Or something like that.

You are making my point. Higher interest rates wiped out 30 years of real price inflation in real estate. Now is like 1950.

"That period had the same rising interest rates you're talking about, the same inflation increases, etc., but ended up with rising nominal home prices and flat-ish real prices."

inonada, and what do you think happened to rents during that time?

Flmao oj. Chk it out bqck in the day there renters stayed renters now we can go from strategic homeowner to renter in 6 months. Paradoxically the pendulum has swung to too easy to buy homes from too hard.

I don't think you did much to answer the question w67th. Ask your nutty friends what happens if real home prices stay flat while the economy (incomes) improves in an inflationary period? What do you think happens to the rent vs. buy discrepancy? Also ask those nutty friends how that looks to a real estate owner 3 years from now and how much different (e.g. better) it would look 10 years from now.

Apropos of not much at all, I really like this blogpost -- especially the fun table:

Jim Jubak: Why this isn’t the start of another 10-year bull market

http://jubakpicks.com/2009/10/19/why-this-isnt-the-start-of-another-10-year-bull-market/#more

That's a keeper, alanhart.

Thanks.

I think rents went up during that time, JM, except maybe if you were rent controlled. I ain't arguing with you on that one. I understand that being short a bond (i.e., mortgage) during a period of higher-than-expected inflation makes you money. Rhino is the one arguing the other side, and I think there's a valid counter-point in what he's saying. I'm just not sure it'll overcome the main point (yours) in the long run.

If I were looking to pick an argument with you, JM, I'd point you at how many years it took to go from a period of low inflation (1930s-1950s) to one of high inflation (1970-1980s) despite all the inflation worries at the beginning of the interval because of rampant money-printing. If you want to make a general CPI inflation hedge, there are ways of doing it that don't involve a (IMO) depreciating asset with high transaction costs.

Crazy multitasking. Driving texting, shaving my nutty friends. Hold on a moment.

I got one word for you oj, Volker.

inonada, no need to "pick an argument" with me, a different point of view is fine. I don't disagree that inflation can take years to occur. I was merely pointing out that I would rather own real estate for the long term during an inflationary period in an improving economy than not. That said, I did not purchase real estate as a "general CPI inflation hedge" but rather as a place to live. If it happens to be a good hedge than that's great, it gives me something to talk about on streeteasy.

Alanhart, the 1981 bull market began with a 7x P/E on normalized earnings. Currently, we're at 18.3x. This is a good rebuttle. I've never been impressed with Jim Jubak.

http://www.hussmanfunds.com/wmc/wmc091019.htm

When I keep proving you wrong, Iknownada, are you going to keep saying I will be wrong in the long run? There is no valid counterpoint. The best time to buy any financial asset is during a period of high interest rates, especially real estate.

alanhart, one of the most interesting data points in your link is the fact that home ownership % has barely increased since 1981 (65.2% vs. 67.4). Couple that with the personal debt statistics and it tells us what we already know. People are spending more on homes than in 1981 and are borrowing much more to do it. I would have thought that the boom would have impacted home ownership % much more than the data shows.

buying NYC REITs sounds real smart to me :)

Iknownada, its wonderful that you are short a bond when you own real estate. You are also long an asset that is inversely correlated to the cost of money....and unless you are upside down, then the asset is bigger than the liability. Its clear that cheap money can drive real estate up. See 2001 to 2008. How can YOU argue the inverse does not hold? Its just dumb.

Iknownada, its wonderful that you are short a bond when you own real estate. You are also long an asset that is inversely correlated to the cost of money....and unless you are upside down, then the asset is bigger than the liability. Its clear that cheap money can drive real estate up. See 2001 to 2008. How can YOU argue the inverse does not hold? Its just dumb.

i like jubak. JM, i wonder what those numbers looked like at the peak.

Iknownada, its wonderful that you are short a bond when you own real estate. You are also long an asset that is inversely correlated to the cost of money....and unless you are upside down, then the asset is bigger than the liability. Its clear that cheap money can drive real estate up. See 2001 to 2008. How can YOU argue the inverse does not hold? Its just dumb.

Iknownada, its wonderful that you are short a bond when you own real estate. You are also long an asset that is inversely correlated to the cost of money....and unless you are upside down, then the asset is bigger than the liability. Its clear that cheap money can drive real estate up. See 2001 to 2008. How can YOU argue the inverse does not hold? Its just dumb.

Iknownada, its wonderful that you are short a bond when you own real estate. You are also long an asset that is inversely correlated to the cost of money....and unless you are upside down, then the asset is bigger than the liability. Its clear that cheap money can drive real estate up. See 2001 to 2008. How can YOU argue the inverse does not hold? Its just dumb.

wow, that was quite the repost. rhino, inonada rents.

JM, but you bought in Pennsylvania!!

"People are spending more on homes than in 1981 and are borrowing much more to do it."

More exactly, People HAD BEEN spending more ... and HAD BEEN borrowing more ...

"The best time to buy any financial asset is during a period of high interest rates, especially real estate."

During a high interest rate period, rents will be higher, real prices will be flat or go down and this will narrow the price to rent gap. That said, if you lock in a low rate before an inflationary cycle, you get the benefit of decreasing ownership costs as compared to rents during the entire inflationary period. You may even get a couple points of appreciation for your trouble and (amazingly) you may own the asset at the end of the cycle or two.

Said another way, if you just buy a place you love and hold it for the long term, non of this happy horseshit makes a bit of difference.

Wrong Juice. If you buy in a period of high rates and own through a decline in rates, then the appreciation far outweighs the higher carrying cost. As a matter of fact, your carrying cost is never that high, because prices adjust instantly to rates. So if you bought during a period of high rates, those self same high rates were offset by a lower price! I'm sorry you just don't get it. And if you think none of this matters, why are you participating? If its all a wash, why do you care? Long term only works out if you buy well. If you buy and have low carrying costs (below rent), sure thats great. Case and point, we have low interest rates right now...yet what else do we have? Prices so fucking high that carrying costs exceed rent despite how low interest rates are. Are you getting this at all or no?

Oy boy, Rhino. I can't believe you got me agreeing with JM.

Let me make it real simple. Suppose inflation expectations are at 0% forever, and suppose I can get 100% financing for my $100K apartment at 6% interest-only (that's what the market requires over 0% inflation to cover that level of risk). Monthly payments are $1K per month, and I can rent it for $1K per month. Assume I'm a corporation with just this asset, so I'm holding no risk (non-recourse and no credit to worry about), and I'll never make anything since the cashflows don't change because of 0% inflation.

What happens when inflation hits? I get more rent each month and start getting positive cash flow. What about the value of the apt? Who cares, I'm not selling, I don't need to post margin, and I don't need to roll the financing. I used to get nothing each month, and then I start getting something, all caused by a change in inflation from prior expectation.

What the "inflation can only help since my asset inflates" people are missing is, as you point out, that higher interest rates go hand-in-hand with inflation, hurting price. What you are missing is that future rent growth goes hand-in-hand with those higher interest rates because of the inflation, helping price. You all of a sudden have an asset whose nominal yield (not real) has increased. This counters the effect of the increased cost of financing.

And please don't start with "but your assumptions are not real", because those are all offsets to the simple example, but the inflation bit remains the same.

Make it as simple as you want. Go back and look at periods of high mortgage rates, and the prices get creamed. If you can't see that low mortgage rates and easy money fueled this bubble, and the inverse will do the inverse, you are beyond help. The problem with your stupid example is that right now cap rates are a little more than 1/2 mortgage rates. So if you expect this example to work today you are going to have to tell me why. Cap rates are 3.5% and you are borrowing at 6%. There are times when cap rates are greater than mortgage rates, those are the times to buy. You can just stretch your time horizon to infinity like JM because he holds property in LIC and say it all works out. Reality is bad financial decisions are bad, today, not in 40 years. In 40 years it all comes out in the wash...and if that's how you think...then you add nothing here.

Stop giving me lessons. I invest for a living. I have a CFA, and two ivy league degrees. Listen and learn.

and you have 1000s of books from Amazon too - don't forget that entry on your resume.

Printer, I thought you were blocked? Back in the box. You too JM.

and just when I was starting to learn so much at the foot of the master. maybe you can share your amazon purchase list so that i can follow your path to enlightenment.

seriously, your chest pounding is pathetic. you're wavering over whether or not to purchase a $1.2mm apartment - that makes you at best a 3rd yr out of biz school - if you were even 1/4 of the 'investor' your biggest issue would be whether the co-op board would accept your all-cash offer on a $15mm pad. secretaries in NYC can afford the type of places you are looking at.

rhino:
"Stop giving me lessons. I invest for a living. I have a CFA, and two ivy league degrees. Listen and learn."

nice, hey, I have no letters, no degrees, lots of daisies but not ivy, but I have lots of money. So what's your point.

inonada:
"What you are missing is that future rent growth goes hand-in-hand with those higher interest rates because of the inflation, helping price"
I have never assumed this to be true. Been a RE investor since 1986. It may be true of extraordinary lengths of time, but certainly not true in 2-5 yr windows. Rents are VERY local, interest rates are not.

My point is, I am getting tired of iknownada explaining to me slowly how this works. This is particularly on the interest rate stuff. I'm glad you have lots of money. At least we agree on the main premise. Local rents not need move in tandem with interest rates. I also believe that even if rents move, they are unlikely to move enough to overwhelm the interest rate impact, which is huge...especially when we are talking about moving from a base of such low interest rates. Also, when you come off such a bubble, I dont think buying into the first dip necessarily 'works out in the long run'. Everything always thinks whatever worked over the last 10 yrs will work in the next 10...or at least in the next 15, to be 'conservative'. Not so.

And they want to make rules through generalizations...Like 'always rent and buy stock'...or 'own your home for the long term'. Horseshit.

Printer haven't you been beaten up around here enough yet? I dont understand why people like you keep coming back.

the punches would have to land to have an effect. when i'm up against a lightweight shadowboxer like yourself it doesn't mean much

"Go back and look at periods of high mortgage rates, and the prices get creamed."

I did, except you were too busy pounding your chest. So I'll do it again. Here are mortgage rates 1963-present:

http://mortgage-x.com/general/indexes/contract_rate_history.asp

Note the run-up from 6% in 1963 to 15% in 1982. Cost of financing went up 2.5x, right? And it was moving up most of the time, not high and moving down, right? Now look at nominal prices during that same period:

http://mysite.verizon.net/vzeqrguz/housingbubble/united_states_1890-2008.png

Nominal prices went up 2.5x as well, right? The only time prices really got creamed is the present and after the Great Depression, during periods of low & lowering mortgage rates, right?

I'm not saying it's a good idea to buy, I'm not saying that the inflation counters the negative carry, I'm not saying anything like that. I'm simply trying to explain that your notion of the effect of inflation is wrong, point out the bit of it that you missed, and provide you evidence of it as politely as possible.

Why don't we try this instead? Since you have a CFA and are an expert, answer me the following two questions:

1) Why did home prices go up 2.5x between 1963 and 1982 despite the 2.5x increase in the cost of financing? Were home prices really undervalued by 2.5x? By your metric, wouldn't home prices have to have been undervalued by even more than that to account for downward pressure of increasing interest rates?

2) Why does that Shiller character insist on using real prices to show the home prices were roughly flat up until the recently-deceased bubble? If prices moved in the opposite direction of inflation, why would he insist on SUBTRACTING inflation from nominal prices and then point to a flat line as proof of something? Isn't that the opposite of what you are claiming?

Okay, what if you're wrong, Rhino? It's not that big a deal, is it? Presumably, your career will have progressed and it will only mean a year or two of waiting before buying. Or you end up moving to CT sooner than you think.

P09, interest rates have been dropping more or less ever since you started, right? You've had a couple of blips coincident with boom times, but all-in-all they've gone down, yah? The beauty of your financing is that you have an embedded option to lower your interest rate by simply refinancing. So when interest rates drop on your effective short bond position, you don't actually get hit with a loss because you simply tear up the contract (by refinancing) rather than continue to pay an above-market interest rate. Nothing in life is free, of course, so you are paying for that embedded option upfront.

In other words, how would you have done had you never refinanced from the 9-10% interest rates of the late 80s? Appreciably worse, right? That is why the lowering of inflation expectations over the past 20+ years didn't hurt you much.

Clearly local rents and interest rates are not uber-correlated, and all I'm trying to do here is attempt to explain a single effect in an isolated manner. Out of curiousity, when did you see interest rates and local rents go in appreciably different directions?

Nyc10023, I dont understand the obsession people have on this board with dialing into other peoples threads and then challenging the validity of their question. If you dont think its valid to think about tilting ones investment portfolio in some part toward the area which they are short, then by all means dont.

Iknownada, I have no desire to work through your economics homework. Suffice to say, given historically high valuations relative to rent and given historically low interest rates...I believe that should interest rates rates, the negative impact of that will overwhelm the impact of higher rents. As well, I am not convinced it would need be accompanied by higher rents. All I will say about your problem set is 2.5x over 20 yrs is only about a 3.5% increase each year. I have never and do not intend to do research to compare conditions in 1963 to now. I will venture one guess on that matter. I bet in 1963 home valuations relative to personal incomes were much much lower than they are today. In other words, houses were probably affordable in 1963. Probably incredibly so compared to today. Just watch MadMen. All this said, I find 3.5% compound NOMINAL returns to be somewhat underwhelming. Ok now school is out.

Simply put, I don't think you need to worry about hedging your downpayment, Rhino. Manhattan/metro NYC RE values are unlikely to go up so much that you need to find an investment with a positive correlation. Also, you are naturally "long" the RE market because you work in an area that roughly corresponds to Manhattan RE. If the bulk of finance people (unless you work in a niche area that is counter, somehow) do well comp-wise every single year for the next 10 years, Manhattan RE will be kept afloat and you don't need to hedge because your comp will be aligned.

Fair enough. I think its worth considering.

You are not wrong... Jon and Kate will get back together someday... it has to be, they were so happy bf the cameras....

Get off the sauce, w67/ stop posting while driving.

Rhino: see, it's all good.

By the way, the yields on these Manhattan REITS are not that great. 4.5-5.5%. I do think though that the dividends have some uspide off these levels. Who knows. I liked the Vornado chart best and bought some. Ticker VNO.