when do all the investors start puking apartments from the severely negative carry??

for the foreigners, whenever the $ goes up significantly against the euro. everyone else, who knows.

to my surprise small time investors are holding on. prices are back only to 2003/4 so far, so maybe they are just barely breaking even. if prices were at 2000... then it'd be another story (the young small time investors/speculators bought around 2002/3/4).

Should not be a surprise. This is long observed behavior, where investors refuse to take a loss and decide to hold on. Investors remember what they paid and as a group are less inclined to take a loss unless they are forced to. When prices are down, the sellers tend to be estate sales, sales forced to job loss etc. The opposite is that when the price is higher than paid, more buyers will be inclined ot sell and take a profit.

"where investors refuse to take a loss and decide to hold on."

true, nobody wants to take a loss on real estate especially for some reason (as if in stocks it's more acceptable or more of a private loss?). but here the lack of skin in the game is changing a lot this attitude. people used RE as a tax shelter, as $ earned that wasn't punished by the high labor taxes that give you back so little in services. why not sticking it to uncle sam when it just doesn't work?

the ones i know don't strike me as people that could hold on. but i might be wrong. how many of those that bought to rent could hold on to a vacant unit with high carrying costs? they were super cocky about their RE moves though. bet they feel somewhat different as we speak.

"This is long observed behavior, where investors refuse to take a loss and decide to hold on"

Wow, that "real estate takes a long time to bottom" argument sure is holding up well...

A loss is only theoretical until the investor decides to sell. If an investor bought in a good building with reasonable monthlies, bought all cash or didn't leverage their purchase to the eyeballs, and can keep the unit rented, why sell now? Especially if a tax abatement is in effect and has many years to expire or they have a fixed rate loan with no risk of resetting. As long as the carry is less than the monthly rent and has a good tenant in place, the investor is still making a profit each and every month. It may not be the rate of return they had expected 3 years ago, but still a better alternative than losing 20-30% on the resale if the building's resale market is not doing well. Some buildings resales are doing surprisingly well and some aren't, so its very much a 'property specific' issue down to the unit line, exposure, view etc... All those factors make for a successful investment. It's much harder and more complicated than many at the peak of the market had hoped it would be, and that's why being a landlord is certainly not for everyone. The same can be said for any investment. I'm not a day-trader for that very reason.

It's in the adverse scenarios where an investor decided to try his/her hand and become a first time landlord, didn't pick the right property, leveraged too much, or worse yet took out a ARM loan that has reset or will soon. Now they HAVE to sell. It's fairly easy to discern these sellers. Many of their units are both on the market for rent and sale at lower than market rates. They will take which ever happens first to stop the bleeding. Fortunately, the reality for these investors is that in nearly every new condo built in the last 3 years, there is now a resale comp to point to. You couldn't say that 6-9 months ago. Now that investor who is in a bit of trouble can make an informed data suppported decision as what to do next; whether to sell at a loss or try to keep it rented and ride out the storm.

"If an investor bought in a good building with reasonable monthlies, bought all cash or didn't leverage their purchase to the eyeballs, and can keep the unit rented, why sell now?"

how many of those are out there? prices are set at the margin, so even if 15% of the speculators/investors have to capitulate prices will go down a lot.

I have no idea how many are out there admin. I suppose you could find out by looking at all recent condo purchases, eliminating all owner occupied units or cross referencing the rented units, back checking the ACRIS on said units to see which have large principal loans in place, then still you'd have to know each individual owner's financial picture to tell if they truly needed to sell or not. Very hard to do especially considering the number of LLC owned units. It would be very interesting to do for one individual building if a buyer was really keen on the property and wanted to steal a unit, but I can't even imagine the time it would take to sort that data for the entire NYC market. Sounds like a job for J. Miller's matrix, but not for me.

I agree if 15% had to sell prices would decrease quite a bit, but from my perspective that 15% figure is strictly crystal ball fodder.

> how many of those are out there?

Exactly. We're talking about a market where stuff was pricing out NOWHERE NEAR breakeven on monthlies... and, with rents down, now all of a sudden, everyone is comfortable and able to ride it out?

expect a lot more puking...

> A loss is only theoretical until the investor decides to sell.

Sounds like someone who just lost a ton. (and its not true)

> how many of those are out there?

Exactly. We're talking about a market where stuff was pricing out NOWHERE NEAR breakeven on monthlies... and, with rents down, now all of a sudden, everyone is comfortable and able to ride it out?

expect a lot more puking...

> A loss is only theoretical until the investor decides to sell.

Sounds like someone who just lost a ton. (and its not true)

@SWE, All you have done is proved my 2nd paragraph in my first post. I gave you the tell for a troubled investor. And way before you would hear about it on realtytrac. Feel free to find as many as you like. You're welcome. The only way to know a LL's total monthly carry is to see what their principal loan is. And you'll NEVER find the actual rent roll unless you're writing/depositing the check as there is no ACRIS for rentals, so you're argument on breakeven is purely guesswork.

Next, I buy a commodity at $1 which now trades at $0.50. I decide to hold. Exactly how much have I lost?

Realized losses and unrealized losses are both losses.

A paper loss, yes. A capital loss, no. Also, you need to define the loss. As notadmin already pointed out, many investors use real estate as a tax shelter. If a landlord owns property and is operating at a minimal loss monthly, that's not such a bad thing at the end of the year to someone who can afford it. It would hurt more to sell than hang on.

If you have an investment you think is coming back (and most investors do), you'll keep pumping money into it 'til the cows come home. If you bought a $1M condo as an investment, you probably put $200K down, you probably have other assets, you probably care about your credit. Most importantly, you probably have a $200K+ income that can comfortably afford to "invest" the $30K-a-year negative carry indefinitely. They'll carry their investment for 15 years, bleed $450K in the process, sell for $1.1M, ignore the $100K transaction costs, and claim a 50% return on the $200K investment. "Not great, but would've been the same in a savings account." Never mind the $550K elephant in the room.

To make a long story short, don't hold your breath.

> All you have done is proved my 2nd paragraph in my first post.

Actually, it was wrong.

> Realized losses and unrealized losses are both losses.

Its amazing how many folks miss that. because if you ignoring something well enough, it didn't really happen.

> A paper loss, yes. A capital loss, no.

So, even worse... you can't take the deduction. Nice!

> As notadmin already pointed out, many investors use real estate as a tax shelter.

Now, this is getting funny. I MEANT to lose money.

> If a landlord owns property and is operating at a minimal loss monthly, that's not such a bad thing
> at the end of the year to someone who can afford it

Since when does the ability to stomach a loss make it anything other than a loss?

Is there glory in losing all your money slowly? Sounds like losing it quickly qould be much more fun.

Most folks who saw their 401ks go to crap didn't sell, yet crapped in their pants (for good reason).

Amazing, folks seeing the same losses in RE think they aren't affected because they "don't have to sell". Neither do the 401k folks. Many of them have other assets, too. But the losses are real.

But pretending the loss didn't happen is just ignorance.

Say you had $500,000 in the stock market when it dropped over 50%. If you took that original $500,000 and put it in an apartment which is now down 25%, which way is better?

It's wrong to compare a loss of value on RE to a loss of value in stocks. You don't have the same volatility in Real estate.
I find it unbelievable that some owners may expect the value of their property to come back to peek value especially after the market unusually increased 600% in 7 or 8 years due to free money made available.
Now the government is fixing the problem, it's gonna be slow & painful for recent buyers to see their value drop even more.

csn...which one has come back?

"Say you had $500,000 in the stock market when it dropped over 50%. If you took that original $500,000 and put it in an apartment which is now down 25%, which way is better?"

Two answers to this:

First, the market was down over 50% and has come back about 65%. From the October 2007 peak, the broad averages are down 25% or so. If you paid cash for the apartment, you're about equal on paper except (i) the apartment purchase set you back you transaction costs, (ii) your investment is concentrated in a single, highly illiquid asset that has even greater transaction costs associated with selling and (iii) you've had less volatility in the apartment asset on the way to arriving at somewhat the same place on value. To me, (i) and (ii) outweigh (iii), but to each his own.

Second, the analysis above assumes you paid cash for the apartment. If you borrowed, then there is no (i) and (ii) is better than (iii) discussion, the apartment is just plain worse. Up to 25% down payment you're out all your equity plus closing costs and even at 50% down, you're down half of your investment vs. 25% in equities. And as a bonus, your monthly carrying costs in this equity vaporization plan are way above the equivalent rent. So you've got that going for you.

I'd put it this way. The person who put $100K or more down to purchase an apartment in March 09 instead of putting this money in the stock market have made the biggest mistake in his life!

Say you bought SPY (S&P 500 Index ETF) exactly 3 years ago. You would have paid 142.13, and it's now at 110.22, so you'd be down 22.5%. However, you would have yielded 1.75% in dividends each year, so overall you'd only be down 17.25%, or $86.25K down.

Say you bought a $2.5M apartment with that $500K down payment using a "conservative" 20% down payment. You'd be down $625K on the sale price, first of all. Second, your after-tax monthlies would have exceeded your rent benefit by about $75K annually, so there's another $225K down the tube. Finally, assuming you hold the place for 10 years, you need to amortize the 10% transaction costs to 1% per year, let's call it $20K assuming the $2M price. So you'd be down a total of $870K, or -174%.

That's 10x worse than investing in S&P. If you took your $75K negative annual carry an put it into the market over the past 3 years, that -$86.25K would have shrunk to about -$50K.

Well, lets make it simple... if you put 20% down precrash, you pretty much lost ALL of your investment.

Even Bear did better than that...

If all the anecdotes about how you make money on the way up all included major leverage, then you certainly can't suddenly forget about it on the way down.

BTW, I also bought SSOs near the bottom. 2x leverage. Nowhere near most of this new construction mortgage stuff. I'm up.... 130% on some.

(* sarcasm on *)

That sucks. You should have bought futures and done it w/ 10x leverage.

(* sarcasm off *)

ha.

I'm not a leverage guy... the only reason I did the double downs was to buy S&P essentially but not put as much cash down. I wasn't specifically looking for leverage, I was just buying ahead of the income. (and the value of the SSOs was only a fraction of what my S&P exposure was).

Essentially, just a little icing.

Where is Rhino? We need a definition of cap rate here to make this discussion better.