Buy when the smart money buys-now

one important caveat, they are not buying what is for sale, they are buying what has been abandoned (from a financial perspective). Most individual residential (single property) RE is still for sale.

yes and that is how bottoms are formed. look at miami/vegas/phoenix-prices have stablized as individuals are largely purchasing "abandoned" properties-foreclosures and short sales. most other sellers have lowered their prices to match these prices-capitulation.

I don't think they're buying condos, wannabuy. If you look at Zell's recent deal in the commercial residential space, he did it at 7x gross rent. Maybe Zell is the greatest-ever, but even a run-of-the-mill transaction in that space is in the range of 9x gross rents. Meanwhile, condos are transacting for upwards of 25x gross rents. Maybe you get a good deal, and you do 20x gross rent. Maybe you get the greatest deal ever, and you do 16x gross rent.

The condo yields are still off by a factor of 2 from the "smart money". Does that make you "smart money"? Or does that make you "dumb money"?

There are plenty of great places to put money at the moment, just not in NYC condos.

they're not buying condos but are buying commercial real estate. the same commercial real estate we keep getting told are going to sink all the banks and send the economy into a tailspin. why buy now then? because we are at the maximum point of bearishness, which has always been the right time to buy. to me this is a strong sentiment indicator we are at the bottom or RE both residential and commercial.

zell bought because zell got a good deal. macklowe needed cash.

somebody will buy pcv/st. does that mean it's a good time to buy a condo? no.

i don't think a lot of people are that bearish. many think that by spreading everything out over time we'll float our asset values back up and avoid a lot of damage. that's not really bearish.

Zell bought as an f-u to macklowe. Can't remove ego from the equation.

> somebody will buy pcv/st. does that mean it's a good time to buy a condo? no.

Idiots bought all the way down... suddenly, the newest idiots are a sign things are going up, when the millions before weren't?

"yes and that is how bottoms are formed. look at miami/vegas/phoenix-prices have stablized as individuals are largely purchasing "abandoned" properties-foreclosures and short sales."

well, funny, investors bought these properties 2 years ago then, too.

Was that a bottom?

somewhere: yes the dumb money bought at the top, not the bottom. exactly my point.

Am I wrong or is it a fact that both rentals and selling prices in commercial real estate in the city have sunk thrice as fast as residential? I mean, you read left and right of troubled firms vacating their leases, or subleasing at 50% of cost, and huge buildings sold at 50% below their 2007 prices, so yes, commercial may have bottomed, but LIC and Billyburg, and Gowanus shiny new condos asking 700-800 psf have a lot further to fall, and I don't think any smart money is going into them.

Buffett buys rail and says it's a 100 yr investment! Well by the time he kicks the buffet, guarantee rail would not have looked great, but give it another 50 years? You mean that kind of 'smart' money wannbuy? Flmao.

tromp-and those condos are selling in w'burg, lic etc. bottoms are messy and this one is no different. lots of conflicting data, highly emotional and completely irrational.

67...perhaps i should have put on this thread but i hope you comment on my "trigger" thread

wb woke up this morning in the mood for a tussle?

yeah the mortgage process made me grouchy

> somewhere: yes the dumb money bought at the top, not the bottom. exactly my point

The point you keep missing is that they bought in the middle, all the way down.... each time folks saying "the smart money is buying now". And then the market tanked more.

Often the smart money is just the slightly-less dumb money.

But its still dumb money.

i consider 2 years ago, your time frame cited(Q1 08), was very near the top.

Buying just after the top is a pretty dumn move in this case, too.

"they're not buying condos but are buying commercial real estate. the same commercial real estate we keep getting told are going to sink all the banks and send the economy into a tailspin. why buy now then? because we are at the maximum point of bearishness, which has always been the right time to buy. to me this is a strong sentiment indicator we are at the bottom or RE both residential and commercial."

You're trying to play a sentiment trade on a 10-year asset. I know you don't like to do so, but I'd suggest you look at fundamentals and macro trends for such a long-term investment. Zell's purchase at 7x gross rents is a world away from the 25x of the condo market, maybe you'll appreciate the difference in 10 years when you compare his investment to John Q. Condobuyer. In the meantime, maybe this'll give you some understanding of why Zell's going in at 7x:

http://www.realestatechannel.com/us-markets/commercial-real-estate-1/bob-knakal-massey-knakal-real-estate-new-york-housing-market-may-2009-apartment-data-trends-rental-rates-multifamily-housing-cap-rates-grm-791.php

His gross yields are at 14% when his cost of borrow is at 5%, netting 9% for staff, maintenance, taxes, and profit. For comparison, the typical 2006-2007 deal was grossing 6% with a 4% cost of borrow, netting only 2%. To put his current number into perspective, in cherry-picked 1992 gross yields were 25% with a 12% cost of borrow, leaving a 13% margin.

So yeah, Zell is probably going to make out just fine. John Q. Condobuyer, not so much.

Similiar assets do not move in tandem: compare NYC RE to Miami RE.

inon: gotta run to lunch meeting will get back to you later

Sounds familiar:

"Sun., June 10, 2007
When it comes to real estate, the questions on everyone's lips are: How low is low, and when's the perfect time to buy back in?"

http://www.msnbc.msn.com/id/19116753

Was there a week in the decline where someone wasn't calling the bottom saying "smart money buying now"

Enjoy lunch, WB. Always enjoy hearing your perspective even though we may disagree.

This article says Old RE money is still standing; New RE money is hurting. What does that have to say about seeing a bottom? A bottom could be here, it could be a year off, it could be three decades off. The fact that deals like ST/PCV need to be restructured, and that old money NYC real estate families would like to do a deal of a generation says nothing about plain vanilla NYC condo prices. What this article says is that the great NYC RE families don't do an endless number of deals and that they have discipline and use a lot of equity. Based on that description of buying behavior, taken all together, these families do not have enough buying power to turn the direction of the NYC housing market IMO.

The old money also don't leverage as much. That doesn't mean they buy at the right times, they just don't lose their shirts because they can handle the declines that might come.

at the bottom it always looks the worst; only the brave step in and buy.. at the top it looks the best and all the foolish feel comfortable and buy.

The sun'll come up tomorrow... bet your bottom dollar that tomorrow... there'll be SUN... tomorrow... tomorrow! GO Julia large....FLMAO.

The KEY to your stmt with regards to NYC RE.. is WHOSE apple shaped BOTTOM r we looking at? There r morons that'll lose their homes with a 5% cut in their income.. .and there are ppl whose got $mms in cash after their unleveraged homes... the KEY is to understand what kinda lemming you are bf you leap in.... cause NYC RE gotz nowhere to go BUT DOWN! LMAO...

There is an definitive difference between those few empires that can step in and execute 9 - 10 figure deals at a huge discount and appease the lenders with a new cushion and the normal wannabes on SE look for a 1 - 2 br apt.

w67th: it's going to snow tomorrow. but the sun will be out on friday!

ino: the price to rents ratio in nyc has always been out of whack compared to other cities. just too much demand even in this economy and people have always been willing to pay up. do i expect a V-shaped recovery? not at all. and i have been bearish on nyc RE up until Q4 '09. i became cautiously bullish and a buyer as certain indicators flashed green. i consider all assets discounting mechanisms with stocks being the most predictive. the perils this economy face are well-known. yet stocks and bonds are predicting economic recovery, RE had it's plunge and looks like a normal market now. no bidding wars and no firesale prices. just a regular healthy market where bids are accepted within 5% of offer for most apts. when buyers and sellers are in near harmony on prices we have a stable market. i am loathe to catch a falling knife nor chase a soaring asset in a bidding war.

"A bottom could be here, it could be a year off, it could be three decades off."

Truly refreshing. The most under utilized word on Street Easy "could". you should be commended for adding it to the discussion.

wannabuy: "the price to rents ratio in nyc has always been out of whack compared to other cities".

True. It is easier to rent luxury units in NYC, the rent stabilization system made renting a closer alternative to owning for most people, and the large stock of multifamily and rowhouses makes converting rentals to owner-occupied and vice versa relatively easy, and the banks figured out earlier how to loan to homeowners in multi-family dwellings.

As a result, until this bubble began in the late 1990s, prices were much LOWER relative to rents in NY than in the rest of the country, especially by the usual measure (median to median, rather than same unit comparisons).

The 7x rent that Zell is paying was absolutely unremarkable in the retail market for the whole 2d half of the 20th century: the usual rule of thumb for years was 100 x monthly rental value.

In functioning capitalist markets, high demand does NOT lead to sustainably high prices, let alone a higher prices for the same apartment depending on how it is financed (occupant borrowing vs. landlord borrowing). High demand leads to new supply until prices decline to the cost of production.

The only time changes in demand should show up in the rent:own ratio is when prospective homeowners start including future appreciation in their calculations of present value -- that is, they expect massive rental inflation or a real estate bubble.

The RE market is illiquid,poorly informed and heavily influenced by highly leveraged speculators who can create self-sustaining momentum for a while. In the medium run, however, neither Adam Smith's profit motive nor the law of one price has been repealed. Prices will drift slowly down until it is not profitable to convert rental housing to owner-occupied. Unless momentum drives it lower.

good overview...

I'm with financeguy.

On the price-to-rent ratio thing, wannabuy, we're at 2x the number from a decade ago. There are plenty of places in the country that have higher price-to-rent ratios like SF. What do you think the ratio was here a decade ago or in SF currently? Anything could happen, but I don't think you have fundamentals on your side by a long shot. Do you think price-to-rents have made are back to historical norms, we've made a special permanent move up in NYC price-to-rents, price-to-rents should increase indefinitely, or none of this matters?

but ino...of course, the logic seems compelling...except that

- it was out of whack for years, and trending toward worse for years, and arguably still getting worse if rents keep declining (not sure about the latter)
- empirically, where are the examples of switch from rental to sell that he cites?

- how do you explain -- just curious -- the fact that "failed" developments tend to switch TO rental

I buy his logic....just don't know if the evidence before us makes it nearly as clear as he says

my worry, by the way, is not so much that the ratio stays where it is, but rather more that it is hard to argue with such certainty that it will move to the logical level...

jim, we have NEVER had free money like this before. ever. that explains a lot. a ton. of the out of whack for years.

rents were HUGELY high in the late '90s. then money became cheap. the rest is history.

> I'm with financeguy.

financeguy is our new leader!

> how do you explain -- just curious -- the fact that "failed" developments tend to switch TO rental

Because they needed the money and couldn't sell. At least they could get some money rolling in to cover the mortgage. Yes, it was effectively the WORST time to do that, and it caused rents to decline further, but at that point they had to take what they could get.

Its like folks who sold stock at down 7k because they were out of work and had to. Did that make it the right move?

of all the charts floating around..is there one of real (inflation adjusted) mortgage rates..

Yep. Finace guy

OK, rs, so you didn't spell finance correctly. ok. but what finance guy is saying basically runs semi-counter to your positions here.

so what is it? RS's condos will retain value? or finance guy's theory of price correction will be correct?

"but at that point they had to take what they could get."....

why couldn't they just mark down prices and sell?....you could hardly argue there is no sales volume;and if the return from rents is to dismal why not sell?.....again, im not being argumentative for the sake of it, but i think assumptions need to be justified

"look at miami/vegas/phoenix-prices have stablized "

LOL. Yeah, a real bottom in Miami. There's about 50,000 condos for sale on Miami Beach and none are selling. The ones that do sell, go for cash, as a mortgage is nearly impossible to get.

Could you be a more obvious member of the real estate profession?

Let's all say it together, shall we? REALT-WHORE, REALT-WHORE!!

New York is not Miami.
Miami had a great Marx Bros. movie

wannabuy isn't a realtor, but a buyer...and the reference to prices in miami may well not be correct, but not out of some desire to hawk a broker bs

hugh...in any case, those places are hardly comparable to nyc because there has been nothing comparable in nyc in terms of speculative investment and relative size addition to the housing stock (in my understanding)

Riversider: Good memory! Cocoanuts was filmed in Coconut Grove, one of the most charming neighborhoods in Miami. Come to think of it, it may be the ONLY charming neighborhood in Miami!

Jim: On the surface, I agree with you - Miami real estate and NYC real estate have little in common. In Miami, you can buy a 1,500 sq ft condo (high end new construction!) on the water with resort-like amenities for $750K. Grovenor House is one example, but there are others. Continuum. Icon. Etc. In Manhattan, there is nothing comparable - BUT, you have NYC at your doorstep, not to mention the job base here is 100X what Miami is. In addition, some people in NYC speak english!

However, on a deeper level, lets not forget that this last real estate crisis was NOT a local phenomenon. It was driven by the credit crisis, Fannie/Freddie mess, etc. The old saw about "Location! Location! Location!" mattered less - everyone's ox got goared. In addition, it was the OPs point, not mine, that NYC real estate was going to do ok because Miami, Las Vegas, Phoenix had stabilized. I'm just pointing out that Miami has NOT stabilized. And in Las Vegas, City Center condo's are going for $150K for a 2 BR! That is stabilized??

My main point is that the nyc re problems in terms of local factors did not have the new housing stock built up in the really egregious meltdown cases. So, they have limited relevance to what might be ahead here. Nyc just doesn't have that huge new inventory to absorb (not to diminish the fact that there is inventory to absorb and i wish there was more discussion on here about what that means as percent of market stock, realistic absorbtion time, effect on marginal prices...etc)

As much as I find fault with the GSE'S, let's not forget that Europe had a real estate bubble and they had no Fannie & Freddie.

riversider...it's a good bet that government intervention in one form or another exacerbated the problems there...just a hunch..... :)

Jim, on switches from rentals to sales, there's Sheffield57 and Apthorp off the top of my head. Both missed the boat, of course. On the reverse you see happenning now, it's because a) they believe prices will turn; and b) they have no choice. On the second point, it may be because equity may get wiped out at current prices, or because lenders don't to write down the loan. As long as the developer continues paying interest, and the lender keeps extending the loan at artificially low rates given the risk of an underwater loan, the bank can pretend there's no loss on the loan and stay solvent. If they pull financing when it comes time to roll the loan, they have to book the loss and take a hit on their capital reserves.

I suspect it is that renting makes it easier to hold to pretend values collateralizing financing...more BS in this house of cards...maybe it will all work, time will tell

Jim-Why don't we see investors converting rentals to owner-occupied? If you look you do. The city is full of buildings that have been and still are being converted, from rental to coop/condo, from commercial to condo, from empty lots to highrises, from neighborhoods that upper middle class people wouldn't consider to gentrified. The rich neighborhoods are all far larger than they were in 2000.

But when the bubble ended, you get a transition: projects that were in process may find short-term solace in converting to rental. Developers who already have a building with costs locked in where they are going to lose their equity if they sell at current market price have a strong incentive to drag things out as long as possible. After all, if they sell now they lose their investment. Probably they lose it next year too, but what if a miracle happens? So renting is a good short term solution, if their lenders let them. And the lenders are letting them, because they don't want to admit how much they've lost either. But this "extend and pretend" can't last forever. Eventually regulators make banks recognize the loss and then the banks want to get whatever money they can out of the building, so they force a sale.

That's why the correction is slow. Developers and individual condo owners alike are holding on, hoping that the bubble will come back, renting to avoid default until the miracle happens. Slowly, though, some of them will give up and others will be forced to give up by their lenders. And either way, once the decisionmaker gives up on what they thought the place should be worth, they face a clear choice: rent, or sell at double the rental value.

Meanwhile, on the demand side, once buyers start thinking that prices might drop, they (and their banks) radically reduce how much they think they can afford. It's much harder to afford a pied-a-terre or a good school district when you expect to lose your downpayment than when every expert is guaranteeing that buying on leverage is the sure route to riches.

"my worry, by the way, is not so much that the ratio stays where it is, but rather more that it is hard to argue with such certainty that it will move to the logical level..."

No doubt. You should never confuse a irrational market with an inefficient one. In an rational market, prices are perfectly reflective of underlying fundamental value. In an efficient market, you cannot predict future prices. You can have -- and most people in the field would wholeheartedly agree -- efficient markets with irrational pricing. Just because a price is "wrong" doesn't mean you get to make money on it any reliably than any other investment that compensates for risk.

This concept has been around for a long time (e.g., Keynes and the quote "markets can remain irrational longer than you can stay solvent") and has a link with what are called "noise traders". A seminal paper on the topic is "Noise Traders in Financial Markets", which was co-written by our very own Larry Summers. You might want to take a browse.

I don't know the numbers, and maybe UD or others will correct me, but I think that annual sales in Manhattan are about 8k, and total inventory of owner-occupied units is under 100k. Also, there are about 8k empty units, and something like 60% of sales in the last two years of the bubble -- another 8 or 10k, at least -- were to investors who expected to flip. That's a lot of shadow.

It's different from Miami and Las Vegas because Manhattan has no middle class owner occupied housing, so the whole scale is different. We are a bigger city, but the Manhattan market, and therefore bubble, is not very big.

i dont know the number either...what do you mean "empty units"??...and you didn't mention completed or near complete (say be year end) new dev stuff,which some say is like 8000 or so, i believe (and i would suppose takes the number of have-to-sell inventory to unusually high levels)

FG, if you go to the data section of nychousing.org, they have a link to the census bureau with tons of information like that. I'm on an iPhone, and I'm too lazy to search for it at the moment.

"As much as I find fault with the GSE'S, let's not forget that Europe had a real estate bubble and they had no Fannie & Freddie."

Yes, because when you talk about Europe, you're talking about a place with no government intervention... right?

Well, places with no government intervention are not a dime a dozen: Beirut during the civil war -- no bubble there. Darfur -- nope, prices collapsed. Russia after the collapse of the USSR -- oops, prices soared.

Bubbles and panics are inherent properties of markets. You get them even in the simplest computer generated models of maximizing traders the moment you allow traders to trade on expected trades of other traders.

The problem with our government was that it didn't intervene enough, largely because too many people believed that bubbles were impossible -- and too many of its interventions were pro-cyclical: repealing Glass Steagal, allowing the I-banks to increase their leverage, reducing taxes on the rich, reducing interest rates, allowing securitization that shifted risk to those least able to understand it, implicit and explicit "too big to fail"/LTCM/GSE free credit default risk insurance, etc.

>>Steagall

> The problem with our government was that it didn't intervene enough

Or that it intervened in the wrong places.

Keeping interest rates artificially low for too long....
Mortgage interest deduction...