What if I'm wrong?

First, lemme explain the easy part. The number of years between 1963 and 1982 is 19 years, not 20. Second, 2.5^(1/19) is 4.9% a year, not 3.5%. How do you get 3.5%? I can't even reverse-engineer your mistake on that one. Third and most importantly, your model of mortgage rates vs. prices says that prices should have gone down 2.5x, but instead they went up 2.5x. That's a (2.5*2.5)^(1/19) = 10.0% discrepancy each year between what you think should have happened and what actually happened, and it's not noise: the consistency of that discrepancy is reminiscent of Madoff's supposed returns. Yet you want to dismiss all this? OK, your choice...

You're right, housing valuations in 1963 were better than today. But housing valuations were about the same in 1982. That's the point of the Shiller's graph and the inflation-adjustment: valuations remained in a relatively narrow range. Yet nominal prices went up 2.5x, not down 2.5x as you would believe because of the interest rate rise. You might realize why if you take a moment to figure it out for yourself since you don't seem to be open to having it explained to you. It's not a random fluke of history.

To the first order, long-term rates encode future inflation expectations with a bit extra to compensate for risk, and 30% of inflation is directly rent and rent-equivalent with the remaining 70% linked indirectly. Yet when the 10yr spikes to 15%, you don't think the market is likely expressing an expectation of 10+% rent/wage/etc. inflation for the next decade? It's just free money government is handing away? OK...

*Yawn* I dont want to talk about history. Believe what you want to believe will happen in the short run if mortgage rates spike. I made the mistake of entertaining a 25 year argument in a 5-10 year debate. If you want to debate longer than 5-10 years, debate with someone else.

Yes but in 1953 they did no have hAve the bowl sink nor did thEy have th Jacque butt wash thing. Unless you can go back in time and almost make out with your grandmother there is no comparison.

And invent those things but then you would hav known about bubble and made a killing on google. Oh well

Nah, if you want to debate 5-10 years, I'm still your huckleberry. Take aforementined charts and pick any 5-10 year period of your chosing.

Facts are stubborn things.

I didnt see any charts from you. I think what youre missing here is the current situation points to rental market slack in the face of higher mortgage rates, due to an overbuild market. It also features price to rent ratios and cap rates so stretched, that the risk reward favors renting, even if one did expect rental inflation.

Also, affordability remains stretched to limits. See I am an investor not a historian. My focus in on the peculiarities of the current situation that might thrwart conventional wisdom...And frankly I am not sure your conventional wisdom is even correct.

Alright. Ya wants it? Inonada. What Part of the greatest re bubble in NYC re history popping don't you understand?

No issue with NYC bubble popping w67. That's what I think will happen, and I don't think we'll be seeing double-digit inflation any time soon. Hell, I agree with Rhino and don't even think higher-than-expected inflation would keep nominal prices afloat at this point. The only beef Rhino and I got is that he thinks housing is special and that higher-than-expected inflation will cause house prices to drop relative to what would happen at expected inflation. The only asset in the world that goes down because of inflation. I was clearing up the ignorance.

Here are your stinkin' charts for the third time. Try looking this time, it might help:

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

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

I still dont know what your point is. Dollar deflation for lack of confidence in our system rather than demand driven inflation will not drive up Manhattan rents. Are you an academic? You throw around a lot of superfluous shit. Housing is special. Its the only hard asset that has two confounding factors influencing value...mortgage rates impact affordability and therefore value and rents impact value through substitution effect.

“And if you think none of this matters, why are you participating? If its all a wash, why do you care?”

Why is it that whenever someone disagrees with Rhino he tells them to go away. Did he forget that he is posting on a public board and has asked for opinions?

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

It’s not so bad inonada, once you get through all the wit and charm, you will realize there is actually some substance there. You may even grow to like me.

“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.”

LMAO. Rent for another 40 years for all I care Rhino, just be accurate in your statements. You are so interested in yourself you have no idea how full of shit you are.

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

Great, than you may be qualified to work for me, but not sure you can cut it on the interpersonal skills. This statement says it all, what possesses someone to actually post a statement like this?

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

All I had to do is ask some simple questions and I got put "in the box”. This is too funny.

“I dont understand the obsession people have on this board with dialing into other peoples threads and then challenging the validity of their question.”

Then send your question to your own email, open it up in the morning, and answer it. At least then you won’t be disappointed in the answer.

“Iknownada, I have no desire to work through your economics homework.”

Translation – I know you are right but it goes against everything I have said in this thread, and I’m not really interested in the correct answer anyway. I just like to dream about how smart I think I am.

“*Yawn* I dont want to talk about history.”

Another great post by Rhino who has let everyone know (who still listens) about the history of cap rates. I guess Rhino only cares about certain aspects of history, not the parts that make him look foolish.

“See I am an investor not a historian.”

LMAO, see above post. Next time Rhino posts for days about history, just tell him you are an investor not a historian. Still laughing about this one.

"I was clearing up the ignorance."

Rhino, listen to inonada. He's got your number on this one and didn't need a CFA or two ivy degrees to do it. Just a little common sense and a few days in undergraduate economics class.

I like you already, JM. I just happen to disagree with some of your positions, but you typically put together a coherent argument and provide a nice counterpoint. It's kinda hard to form an opinion of the intelligence or learn from someone who constantly agrees with you de facto, so you have my respect.

However, I'm kinda disappointed by the fact that you think a CFA and two Ivy degrees makes someone qualified to do anything. Apparently, you didn't attend an Ivy school. Here's the thing I never could figure out. Everyone coming in might have some notion that they might be the smartest person ever because that's all they've ever seen. Then they all duke it out, and you are left with a few who turn out to be the top. These ones are generally smart enough to know that don't mean squat, there are a dozen other schools, a dozen other disciplines, 50 years worth of students, and all sorts of geniuses who pop out of random places. Chances are you're not the smartest person ever. Most of the rest figure this out as well, because they have a direct example of a bunch of people smarter than themselves. However, every once in a while you get some bozo that still thinks they're the smartest one around despite being some middling student in the good school. But why??? Then they show up on some random forum filled with smarter people, some finance heavies, some rich bastards, and some RE professionals, and they think a few years out of school with a middling Ivy education and a CFA running a couple hundred million dollar bond porfolio at some bank with a 6-figure net worth makes them the big swinging d--k in the room. Really??? I mean you've done well for yourself, but why make a fool out of yourself?

Egotism is the anesthetic that dulls the pain of stupidity.

Frank Leahy

The point isn't that I think I am smarter. The point iknownada is when you start waxing on and on with regard to the basics of economics - its an attempt to get you to shut up. I was trying to let you know I have plenty of experience with the basics. Plenty of people have seen my point, which again is this. (1) Manhattan rents can stay challenged is spite of dollar declines, (2) interest rates can move up simply by the withdrawal of stimulus, and/or as a reflection of national not local economic strength. (3) Price to rent ratios are stretched to the max, (4) Therefore, at this time, I would not count on Manhattan real estate being much of an inflation hedge. Further, you have been arguing your own point now for a while. "Facts are stubborn things". What do facts have to do with anything here. This has been a discussion of the (near) future of Manhattan real estate. You are the one who has turned it into an economics lesson that I didnt sign up for.

Look buddy, this all started when you started talking about using muni bonds to hedge your down payment. I 'splained how bonds go down with inflation and housing goes up, provided ample evidence and explanation, but you want to stick with your voodoo economics. If you want to acknowledge the basics and then claim that voodoo economics has taken hold, that's one thing. But you pretend like the voodoo is the basics because, quite frankly, I don't think you even understand the basics. I don't give a crap what happens to your down payment since you're a big boy. However, when you spread your voodoo, some poor sap might listen and think buying a long-term muni is going to hedge their down payment. Then, if inflation hits and their "safe" bond investment gets spanked while housing inflates away (gasp! who'd've ever thunk?), I don't want them thinking it was a fluke, but rather that your voodoo economics never took hold.

LOL, Topper.

Well fellas...from a guy with a humble bachelor's degree... I suggest that a couple of elements are missing from nearly all the above analysis. First is the fact that, unlike any other market, the policy makers in Washington influence the path of real estate pricing heavily by subsidizing with taz policy. Second, the US balance sheet has never been as stretched as it is today (well, not since the late 40's) so rates are not just a function of demand and supply anymore, but of capacity to obtain financing.

As to the original question...I have no idea. But the idea of office REITs and LP's GS idea have some appeal to me at the surface.

Now I will give YOU an economics lesson. Two things impact the value of real estate: interest rates and rents. I am of the view that rents will lag in the next upcycle. Therefore, I beleieve the rate impact will overwhelm in the early stages. The analogy to muni bonds is rates and spreads. Should I be wrong about rents, the strength of the NY economy that drives up rents, should narrow spreads. Further, the yield on the munis is better than my potential cap rate on an investment, moreso if I include the impact of negative leverage. REITS similarly - should this local economy be strong, I would expect a rally in commercial rents to drive those stocks up. Rising interest rates would have a mitigating effect. All in all I would be addressing, albeit indirectly, the weakness of my position...which is that I am 'short' the rental market, which is essentially being short the local economy. Therefore, I can get long commercial rents and NY credit spreads, which should generally follow the level of residential rents.

I am not sure what part of economics you think I don't understand, but kindly....the above is my view. I am sure some others here would agree from what I read above. I do not value your lesson in economics.

"Should I be wrong about rents, the strength of the NY economy that drives up rents, should narrow spreads."

"Therefore, I can get long commercial rents and NY credit spreads, which should generally follow the level of residential rents."

You are not going arguments from me on that, now that you have changed from "long munis" to "long NY credit spreads". I'm going to explain the distinction slowly for others, Rhino, so don't get mad. Being "long NY credit spreads" is the same as "long munis, short treasuries", which takes out the inflation risk on the hedge, which was my only point.

If RE were "reasonably" valued, then you'd want to be long inflation in your hedge. Your commercial REITs portion is long, but the long NY credit spread is flat. On the balance, however, it seems about right since you want to imbue your hedge with a bit of your (in my eyes, valid) belief that RE prices are going to get compressed regardless of overall inflation.

Serious question. Say you have a $200K down payment that might be enough for a $1M place in todays prices. How do you size your hedge in office REITs and NY credit spreads?

Seriously, I dont take dirty hedges / tilts all that seriously. I assume treasuries would be a routine allocation in most portfolios. For reasons described, maybe I would swap more NY munis. I still think under these circumstances, overall inflation would not likely hit NY rents the way you think it would. Therefore, the rising rate impact would knock real estate down as rents would not respond to weak dollar driven inflation (as opposed to demand driven inflation). I don't think anyone is arguing for demand driven inflation. For instance in the late 1990s rents rose because it was demand driven inflation. Nonetheless, ratios were much more favorable than now. I am not considering hedging this scientifically, but the whole down payment in NY munis could be interesting...perhaps with some REITS. Say its 30% of my portfolio in a combination of munis and REITs generating a 4-5% yield, excluding tax implications on the REIT distributions.

How did I miss this discussion?
This is almost as bad as when Rhino broke down and attacked stevejhx for being a "gay translating accountant" simply because Rhino was losing an argument.