Done with being an owner

Of course not all have a cost structure where housing costs are 40% of our budget. For middle class and up in will be 1/3 and less. Of ocurse if you levered up on mortgage debt that's another story.

at a certain point you need income increases to get rent increases, the demand is capped at a certain point as the ability to increase the percentage one spends on housing is not limitless and you see household creation levels falling, and households merging. inflation or no. some types of inflation obviously can cause rents to decrease if incomes are stable or falling.

Rents have in fact gone up almost lockstep with CPI. I know what chart you're looking at an you are cherry picking a 5 year peak in rents (2000 was the 5 year peak between 1998-2003) and what is close to a 5 year low in late 2009.

http://www.millersamuel.com/charts/gallery-view.php?ViewNode=1263479298xkoid&Record=2

If you look you'll see rents have hovered around 50 psf since 2006 (dropping during the shock in late 2008 and 2009) and now are on there way back to those levels. Rents were in the 40psf range in the late 1990s and the early 2000s. Going from 40 to 50 is in fact a 25% increase, which - gasp - tracks CPI pretty closely.

According to corcoran, the average resale psf was 982 (I do not track new condos because people I think paying a premium for "new" construction is unwise). This implied a "P/R" of 19.6. If Manhattan were to go to the country wide 15 year average of 17x, this would imply a downside of 15%, like I said before. However, note that many cities have had a "P/R" well over 20 for years. So, you can wait 5 years to get another 15% down - but I see the probability of rents rising significantly over the next 5 years as relatively high. And you have to put your money somewhere, and there aren't a lot of great opportunities now. So, if you have significant liquidity - like so many Manhattan buyers do - putting SOME of your money INTO A PLACE YOU CAN LIVE IN AND ENJOY - is not crazy. It's not a "get rich quick" scheme - it's a diversification / inflation hedge that lets you enjoy your life. Don't forget - some of us are old fashioned and actually intend to live in a place for a long while, and pay down our mortgage over a long period of time. Not everybody wants to wait until they are 45 to do this.

What people ignore is that Manhattan real estate was probably dramatically undervalued in 2000. It is my firm believe are unlikely to ever get back to the 12x ratios we saw. Give me a compelling reason we should be below the nationwide average P/R ...

Manhattan certain didn't feel undervalued in 2000 when compared to the 1990's...
Construction costs in Manhattan are much higher than they were ten years ago. Add to that Manhattan is an island with finite space for building(we'll leave out how zoning reduces that furhter). This should underpin housing prices somewhat.

Why would finite space for buildings and high construction costs make prices LOWER? Business school 101: barriers to entry ....

People don't realize in the 1990s that in 1998 prices just reached their 1988 level again, after beginning to turn around in 1992/3. So in fact real estate prices WERE depressed throughout the 1990s.

Prices fell about 1/3. Even if this happened again, and it might, we are more than halfway through it and already down 20%. Hence the "15% downside" I see at most, but I do think NY is a different place than the early 1990s and there isn't the same degree of oversupply (if you think this condo glut is bad look at the late 1980s!!!). No doubt I will be lectured on how history repeats itself, blah blah blah, and this is true, but it's also true people don't leave the city 1-2 years after the first kid anymore. You can debate the magnitude of this impact - but you've got to acknowlege it at least a factor.

underpin, means provide foundation for prices. I don't see prices collapsing.

Someone hit on this earlier, which is that many people are basing their decision on the current rental environment, which is more the exception than the rule. Yes, we've had declining rents for the past 18-24months, along with a flood of condo's that owners have decided to rent out, which are generally of higher quality than all-rental, or traditional landlord owned units. Just as many people (so I'm told) bought during the bubble b/c the 10%/yr increases distorted the risks of ownership, I think many people are basing their long-term rental decisions on the expectation that the current market (which is atypical) will exist for the entire holding period. Reports are already that rental vacancies, yr over year, have dropped from 2.46% yr ago to 1.54% (march '09 to march '10), and several big managers (i.e. Glenwood), have dropped their free-months concessions.

Some people don't buy in NYC until they feel like they get everything they want. One contemporary of mine waited 20 years despite having the resources to buy something suitable in the 80s or 90s. She paid dearly for the delay. Living in Manhattan, you need to be prepared to make sacrifices or pay astronomical sums. The elusive "forever" apartment is an excuse by those in the business to get you to trade your apartment too often, which is a costly mistake in commissions and taxes. Choose wisely, and buy a place you can afford; enjoy it for the long term. You may pay more for two, three, seven or even ten years. But in the long run you will save money on something you cannot do without.

1. At 15x, let alone 20-25x, rents for COMPARABLE properties (not the average properties measured in the national statistics), it is way more profitable to sell to owner-occupants than to hold to rent. Why be a landlord if you can make more money with less risk and work as a diversified lender buying government-insured mortgage CDOs, or sell the same management services to condo/coop owners at a higher price without tying up any capital at all?

If some investors seek to maximize returns, they will move units from the relatively cheap market into the overpriced one. Prices will drop, or rents will rise, until an investor is indifferent between holding to rent and selling. That isn't happening at 15x rents, which leaves the buy and hold landlord making less money for more risk than its lender.

2. Prices are far more likely to drop than rents to rise.

First, rents are more likely to reflect actual fundamentals: renters pay based on the value they perceive right now, rather than the value that they imagine some future buyer might perceive based on that imaginary person's imagined view of the next imaginary buyer in the further future. And builders build in response to that more stable demand.

Second, for rents to rise faster than measured inflation is pretty much impossible nationally over any medium term, since CPI is 40% rents.

Third, locally, rents could rise faster than CPI for a while if demand is unusually high (NY comes out of the recession far stronger than its competitors, incomes rise, or renters are willing to pay an ever higher proportion of income for housing) AND supply can't keep up (construction/conversion is slow, for some reason investors face sharply rising cost curves to supply more units). But while any of those could happen short term, none are likely to last medium term. Our main growth industries (finance, media, medicine, tourism and real estate) all have a certain downside risk and there is no real obstacle to new rental stock supply.

Medium term, rents are likely to reflect economic fundamentals, namely the cost of providing the marginal unit (if NYC is growing, the cost of construction/conversion; if not, just the cost of maintaining existing units).

3. A 15% drop in prices from current levels means that current buyers stand to lose most of their downpayment. That isn't a stable situation: few people would knowingly make that deal.

Thx u ar, financeguy, inonada..... At least someone got an A on Econ/finance.

Get it you re bullz, 40% of CPI is rent. It's fking circular you circle jerks.

we are in an unusual situation. we have more housing stock than usual AND we have hundreds of sites that are prepped and available for development. usually it takes years to clear out corners, demolish, etc. there are also numerous corners that are clearly vacant. smaller developers, in particular, may find themselves needing to sell their properties sooner rather than later, or find themselves foreclosed upon if they can't pay for their existing loans, thereby providing lower-cost land for development. owners of the vacant corners may be in the position of deciding whether or not to sell at a lower cost or reinhabit the buildings after all their efforts. most can't carry vacant property indefinitely.

And banks itching to finance new development.....

actually, sadly, they probably are. i'm sure they can find a demographics study similar to the ones they trotted out in 2004ish to justify additional building.

i just noticed brand new construction work on two stalled sites last week.

PMG: the nationwide average may be 20x. But, nationwide, the rental stock may not be as large. For example, Bronxville, NY may have a 20x average over its 100 year existence, but is that relevant?

W67: I feel left out. How come you aren't calling me a name, given that I'm a dumb owner?

it was but an oversight.

"That isn't happening at 15x rents, which leaves the buy and hold landlord making less money for more risk than its lender."

Not even the objective bears on this board agree with this statement at 15x. We had 7 pages of ROE calculations at a range of multiples, with input from all directions.

http://streeteasy.com/nyc/talk/discussion/20160-buying-now-beats-renting?page=7

"3. A 15% drop in prices from current levels means that current buyers stand to lose most of their downpayment."

Tautology

The cost of building in Manhattan is considerable. If you are going to wait until you see signs of new development on vacant land in Manhattan, then prices of existing housing stock will have rebounded. If I didn't own, I would be looking to negotiate in South Harlem, LIC, Williamsburg, One Brooklyn Bridge or Downtown Brooklyn. They're not my dream neighborhoods, perhaps, but the selection of new housing stock is ripe and negotiable. The upper west 90s and Yorkville are also relatively affordable and livable. I'd rather get a deal today, at favorable financing terms then wait a couple of years for a cheaper price, not knowing where financing will be.

"we have more housing stock than usual"

AR: How are you measuring this?

vacancies and new units. not very transparent, but given the large numbers of new units and the fact that we have not had much (possibly negative, even) net migration into the city i think it's safe to extrapolate. the population numbers i read weren't exactly current, but i've seen nothing to indicate otherwise since i read them.

i'd love more real-time demographic info, and i think it could be done, but it isn't.

AR, this 2 bed, 2 bath riverside drive prewar coop went to contract this month. Is this a high price?
http://streeteasy.com/nyc/sale/470975-coop-243-riverside-drive-upper-west-side-new-york

direct riverside park and river path access, new express 123 station, cross town bus, M5 bus, whole foods, ask price $680,000.
I sold a 2 bed 2 bath condo on W89 for $590,000 in 1998.
what are you waiting for? the deals are out there if you look. no one is going to hand them to you.

pmg, you don't get me at all. there are some decent deals out there, although not many, and i feel the risk is too high for most people. but in terms of me, I DON'T WANT TO OWN. the house upstate is enough of an albatross. at some time if i feel the retirement nest egg is huge enough i may buy a property as part of my estate planning that will be for our daughter. it will likely be all or almost all cash, so i'm not particularly worried about interest rates.

i have zero interest in a coop. i have zero interest in the uppers. the only thing that might tempt me is a large pre-war condo in the east village. it still probably wouldn't tempt me, but you do see the problem? my forever apartment doesn't exist.

i want MOBILITY and LIQUIDITY. i want to spend our retirement trotting around the globe, and i'm not so young that that is many decades away. so give it up, i'm happy. as much as it seems to pain you that i have no interest in buying, i don't. my goal in life is to maximize my enjoyment of it. owning wouldn't do that for me. i'm not one of the posters who tells people they are idiots to buy. i think there is downside risk that may or may not be acceptable given temperments and circumstances. i abhor any effort to create a sense of urgency because i think it is false. and i highly understand that many people truly want to own. sometimes i think it's for the wrong reasons (you most certainly can paint a rental aubergine if you so desire), but that's not my call to make. what is my call to make is whether or not i'd be happier elsewhere, barring a huge unexpected windfall.

why do you care?

"AR, this 2 bed, 2 bath riverside drive prewar coop went to contract this month. Is this a high price?
http://streeteasy.com/nyc/sale/470975-coop-243-riverside-drive-upper-west-side-new-york"

Doesn't seem like such a great deal. The one below it sold for $85,000 in 2008. I am sorry I missed that one.

That's a 1 bed, 1.5 bath with kitchenette and awkwardly-shaped windowed office.

it's also significantly smaller than what i currently have. doesn't allow dogs. no pictures. great, paying more for less.

You're right, I don't understand. To me owning a principal residence has been a blessing. The first didn't feel that way initially: it felt like a shackle, holding me to NYC when I otherwise wanted to flee. Fortunately, NYC was just entering its renaissance and although I was paying more, eventually I made a profit. My second apt, now that the mortgage is paid, feels like a rent controlled apartment only better. It doesn't make sense to move unless life circumstances demand it. Unlike a true rent controlled tenant, I don't have to live without a/c or a 40 year old stove or deal with a hostile landlord that wants me dead. I get a bargain cost due to home equity, and the comfort of a condo.

PMG: you entered the market at a specific time with a (unique-to-you) set of circumstances. That has a lot to do with how you view the market.

> > > Reminds me of the consensus opinion on Gold back when it was $350. Fortunately I did not listen..

> > Reminds me of the concensus opinion on dotcom stocks.
> > ;-)

> > Also, gold in real terms has performed pretty poorly...

> Actually stocks have done pretty badly last ten years. Gold much better, it was $350 it's now
> $1200 :)

As I said, reminds me of dotcom stocks... and the folks who took bows at Nasdaq 5k!

> Everone's renting, Why follow the crowd?

Again, I think your whole conclusion is based on a faulty premise. Being a contrarian is good.
Being a contrarian who can't tell what is the common wisdom in the first place is a very bad thing.

> Rents have in fact gone up almost lockstep with CPI

Might have something to do with the fact that housing is 40% of CPI, no?

> Construction costs in Manhattan are much higher than they were ten years ago.

So are prices... more so than construction costs.

> Add to that Manhattan
> is an island with finite space for building(we'll leave out how zoning reduces that furhter).

Of course, this was also true BEFORE the runup. and we have more total apartments than ever, so much for a reduction.

> This
> should underpin housing prices somewhat.

Only if we ignore how markets work.

Japan is an island, too.

>> i'm not one of the posters who tells people they are idiots to buy. i think there is downside risk that may or may not be acceptable given temperments and circumstances. i abhor any effort to create a sense of urgency because i think it is false. and i highly understand that many people truly want to own.

I agree. Certainly won't pretend there is any urgency to own. But it's not crazy given that if you seee a 15% downside risk at most and there are reasons people want to own (just like there reasons people want to rent) and there are deals to be had (not all things are priced exactly the same).

I too understand "wanting to spend your retirement travelling." However, in my situation, we are in process of buying a place where the cost fully considered (after taxes + maintenence) is maybe 5%-10% more than renting right now. I do think the rental market is on its way back. I don't see a huge spike near term, but I see a return to levels of a couple years ago. Then, I see rents rising WITH inflation therafter. So, I am fairly comfortble in my assesment that in 5 years our monthly costs to own the place will be less than it would cost to rent. Plus, the physical space is better than what we could rent. We can also very comfortably afford it so we can pay the mortgage down over time. Yes, you could reinvest the money (and we will reinvest most of it) - but I don't see great investment opportunities and I am risk-averse so see it as a diversification strategy and a way to guarantee that in 10-15 years I'll have nothing to pay for living costs in NY, except for taxes. You could theoretically just reinvest all of that money (instead of paying down your mortgage), but then your living situation - one of the more important elements of happiness - is beyond your control. There is something to be said for that. B

>>> PMG: the nationwide average may be 20x. But, nationwide, the rental stock may not be as large. For example, Bronxville, NY may have a 20x average over its 100 year existence, but is that relevant?

I agree. It's difficult to say what the "right" price/rent ratio for NY is ... but the argument that it must go back to its historic average is simplistic. Also, I think there is a real dearth of nice 3 br + rentals, so that's why I think you see greater P/Rs in the 3 BR category. Let's not pretend any of us know exactly what is should be. I'll admit I see even more risk of the P/R coming down than going up - but I see the "R" part going up over time - so you can wait and wait and wait for NYC real estate to MAYBE fall 15%. But what if it doesn't? Then you're paying more in rent 5-7 years than somebody would have to buy, and that person is 5 years into their mortage and finally starting to really pay some principal with that monthly payment.

PMG, and that's great. you were able to take advantage of a time when prices were very low and now you have no mortgage. that is indeed enviable, and many others who were in the position to buy at a certain point in time are holding onto what is indeed a good deal.

but comparing that to buying today isn't possible.

btw, despite the fact that my landlord took a day and a half to get me a new toilet seat (i could have called to move things along, but it didn't matter to me), it really isn't bad here. it was a little rocky before the special servicer took over, but other than the washing machines being out of order (and now they're working again) i haven't had anything that hasn't been addressed promptly. i will admit i would not like to have been a RS tenant previously, but we do have an attorney in the house.

"Why would finite space for buildings and high construction costs make prices LOWER? Business school 101: barriers to entry ...."

Guess you need to take business school 201.

If those factors are ALREADY factored into price...

> But it's not crazy given that if you seee a 15% downside risk at most

A 15% downside risk leveraged 3x, 5x, or 10x. Sign me up!
If thats an "at most"....

> and there are reasons people want to own (just like there reasons people want to rent)

And there are reasons I want to own a boat. Doesn't necessarily make it a good idea financially.

> and there are deals to be had (not all things are priced exactly the same).

A bargain about to become a bigger bargain is no bargain at all.

1. PMG/10023/Seg: The national 15x statistic is a measure of AVERAGE owner-occupied to AVERAGE rental unit. These two units are of dramatically different quality, given the massive failure of the middle class rental market in most of the country. Since NYC has more quality rentals, its average number should be lower than the national statistic. Even in NYC, however, there is a quality gap between the average rental and the average owner-occupied, so the ratio for COMPARABLE apartments should be lower still.

2. Seg -- The long thread focused on potential homeowners, seeking to determine a price at which it might cost the same to buy and rent. That inquiry will always give an above equilibrium price.

At equilibrium, prices are competed down to costs of the most efficient providers/investors, who face a different set of costs (e.g., fewer subsidies - no deduction for personal consumption expenses/implicit rent or personal interest) and different investment alternatives. When investors are indifferent between holding-to-rent and selling-to-occupant, the government subsidies in the owner-occupied market will go to buyers rather than sellers. Buyers who get and include the tax subsidy and who calculate their opportunity costs as the long thread suggested, will find that it is cheaper to buy than rent.

This is as it should be. The premise that buyers should be willing to buy if it costs them no more than renting is false. Retail buyers are holding a large, undiversified, illiquid asset in a volatile market. If prices for renting and buying are equal, rational buyers would refuse to buy unless they are extremely wealthy (and can easily diversify elsewhere or are institutional landlords) or unusually idiosyncratic (and willing to pay a premium for the extra rights to customize for periods less than the expected life of the improvements--not to paint aubergine but to replace the kitchen every 5 years).

Not all buyers are rational fundamentalists, obviously, and the power of faith (God has decreed that in five years markets will be flat and Adam Smith will be proven wrong on all counts), let alone momentum trading, is not to be underestimated. Still, the rational ones exert a gravitational force, and they will demand to be paid to assume the risk of ownership.

3. Buying makes relatively little sense for most Americans, who are too undiversified and too mobile to be the optimal bearers of this risk. The only reason we have sharp class distinctions, with higher income Americans virtually all owning, is massive government subsidy on the ownership side combined with massive market failure on the leasing side uncorrected by obvious regulatory fixes such as rent stabilization (i.e., long term leases with escalator clauses and leasee option to renew).

If we had a more rational set of regulations, the housing market would look far more like other markets (including cars, commercial real estate, airplanes, etc), where leasing and secured lending are usually virtually interchangeable.

As I said, reminds me of dotcom stocks... and the folks who took bows at Nasdaq 5k!

Somewhereelse, do you think we will lose 75% from peak? Then my gains will be erased, but I will still be better off than renting.
nyc10023, As long as we have inflation, owning beats renting LONG TERM even today.
If we "turn japanese" all bets are off.

As an investment, owning beats renting long term if (1) current price / rent ratio is sustainable and not higher than what it will be long term, and (2) inflation exceeds the market's current expectations built into your mortgage rate, and (3) incomes (and therefore rents) keep up with inflation, and (4) you have a lousy set of alternative investments for your down payment, and (5) government subsidies are not withdrawn, and (6) you make it to the long term without having a life change that leads you to want or have to sell.

If you believe both (2) and (4) simultaneously -- that you know better than the market but have no reasonable investment alternatives to a highly leveraged bet that ordinary market dynamics have been repealed -- I have some Synthetic CDOs to sell you.

Financeguy - these are some intelligent arguments.

I'd argue there aren't that many quality rentals in the family sized market: 3 bedrooms plus, and this ratio is higher for that reason. I think much of the reason NYC was so low for so many years is because people didn't want to stay and put up roots there to the extent they do today; this has changed dramatically. So, I don't ever think NY will go back to its historic average. Also, as you wisely point out "buying doesn't make sense for most Americans" because they are "are too undiversified and too mobile to be the optimal bearers of this risk" - this is less true in NY. It's a wealthy buyer pool AND NY is the epicenter of so many industries (when climbing the "finance" ladder one MAY be asked to move to London - not anymore, hah ha - or Hong Kong; but in ANY OTHER INDUSTRY, climbing the ladder virtually REQUIRES moving around).

And, yes, the government does subsidize home ownership - because, it was, until the housing boom spiraled out of control - good for communities; owners get involved in their communities, support the public schools, parks, etc. But it is what it is; it's a structural benefit to owning.

somewherelese - yes, it's already priced in. but it shouldn't be used as an arugment why prices will decline.

> Then my gains will be erased, but I will still be better off than renting.

Only if you don't do the math properly.

"If you believe both (2) and (4) simultaneously -- that you know better than the market but have no reasonable investment alternatives to a highly leveraged bet that ordinary market dynamics have been repealed -- I have some Synthetic CDOs to sell you. "

hee, hee.

"somewherelese - yes, it's already priced in. but it shouldn't be used as an arugment why prices will decline."

True... unless it was overpriced in, or the positive factor is now a little less positive.

But it certainly shouldn't be an argument on why prices won't decline, when the factors preceded the bubble.... and might have been reduced.

"The premise that buyers should be willing to buy if it costs them no more than renting is false. Retail buyers are holding a large, undiversified, illiquid asset in a volatile market."

This is a strawman. Why not put some meat behind it, rather than a 6-point checklist? What in your mind is the minimum return that an owner should expect to earn on his downpayment? Or the equity risk-premium above the fixed financing cost.

The cumulative effect of all the "AND" clauses in your checklist is misleading. While perhaps generally true more often than not, none the 6 is strictly true.

The thinking that a home is an investment is a cause of the prior housing bubble. If you live in it it's a home.

> The thinking that a home is an investment is a cause of the prior housing bubble.

That and other things, but, yup, that was at the core.

> This is a strawman

No, its not. Its been said over and over again that the rent/buy ratio defines whether folks should rent or buy.

> Why not put some meat behind it

Ah, methinks you don't know what a strawman is.

> rather than a 6-point checklist?

How is that anything other than meat?

But finance has a key point... it should be MORE than just breaking even, it should be much more.

Buying one apartment in one building on one street in one city in one asset class is about as opposite of diversification as you can get... especially when you add leverage in.

A cap rate analysis makes sense for an investor property. Rent vs buy works better for owner occupied. Not all buyers have to or should use the same metric.

> Why not put some meat behind it

Ah, methinks you don't know what a strawman

I should have said "put some meat behind the (implicit) statement that buying does not provide a sufficient return to the owner". This is a bit different, and it is NOT a strawman, but it remains unexplored in the post.

"How is that anything other than meat?"

All are good things to look at, but it's requiring so many criteria to met that it would rule out most of everything and imply prices sink well below equilibrium so long as the rules are in effect. If this is the prevailing view, I would think it could be discussed on the basis of multiples/returns/technicals, etc. How do we get from here to there? Certainly the path from here to there is NOT that investors begin adhering to a set of very unlikely compound probabilities.

the basic logic sounds to me about like saying: 50%^6 = 1.6%

WTF, who took out my saturday night reference... "the ignorant slut". Damn, these SE monitors must be 20yos.

nyc10023, how can I make fun of a mother of a newborn.... and the fact you are not shilling for the RE bullz ; )

kspeak, if you think that the RE bubble in nyc did not affect rents, you are smoking the good stuff. There was a study in Silicon Valley of how rents behaved below a certain vacancy rate (me thinkz 1.2%)...rents Skyroceket and you know what... are the borkers in silicon valley used this "unnatural/unsustainable" pumped rental rates to set => sale price of homes!!!!! hahahahahahahahahahahahaahaaaaaaaaaaaaaa

you know what happened when recession started....... yep.. rents fell like a rock.... and "homeowners" were left with RE assets based on an illusory "rents". No different than holding ENRON based on "earnings"... FLMAO....

Plz do not turn off the "rental" channel when the gory portions start... it'z gonna make you sick to your stomach. Enjoy the "homeownership" experience post a bubble.. and pls don't tell me you amortized the "lemming tax" credit to get your rent comp rate....

kspeak -- Family sized places are harder to find and the rental market is thinner when it gets over the rent stabilization levels, but it isn't that hard to change configurations, so the same processes should generally be true. Over the medium run, if large apartments command more, investors will combine small apartments and make more. If renting is less profitable than selling, landlords will sell. Supply will increase to meet demand and prices in different markets for similar products will equalize.

Higher demand means higher prices in competitive markets, only when costs rise as well. The cost to build is the cost to build, regardless of the form of ownership. How an occupant finances -- renting money from a bank directly, or renting from a landlord who rents from a bank -- should make virtually no difference in what they have to pay for the same product. NY's expense and attractiveness should all be reflected in rents and costs -- not the buy:rent ratio.

The explanation for current prices is very simple. It's a bubble. People are willing to pay to own because they believe, like several regular commentators here, that they are guaranteed to make money by owning. Prices will go up, because only party-poopers are pessimists, or because they did after the last time I bought, or because Santa Claus promised, or a because bigger sucker is born every minute. And when enough people believe this, prices DO go up and new suckers are born and Santa Claus does come to town. Until it stops, and then fundamentals slowly exert their gravitational pull back towards equilibrium.

Equilibrium, in real estate as in every semi-competitive commodity market, is when prices equal cost to produce the marginal item: if the city is growing, the price of building a new unit, or if it is not growing, of maintaining an existing one, or if the price/rent ratio is out of whack, of selling a rented condo to a buyer. I don't know what the equilibrium price is. But it doesn't take a lot of expertise to know it doesn't approach $1000/psf for a standard NY apt (or, Seg, to know that whatever return equity investors should expect on their downpayments, it ought to be considerably higher than government-insured mortgage investors expect).

Markets are not efficient, momentum can move prices far from equilibrium, and adjustment will be delayed by sellers who don't want to realize losses, government subsidies and congenitally optimistic buyers or financiers who want their money far away from their co-workers. This correction could take years and it won't be pretty or reflected in every quarter's statistics.

Still, equilibrium is like the sun's gravity: the planets don't fall into the sun, but neither do they travel away from it indefinitely. Or like the grass's effect on a herd. If you are trying to predict beyond the near term, you can't predict whether momentum will pull prices above or below equilibrium-there is no way to know whether people will be herding this way or that. But you do know that planets orbit the sun and the herd, for all its stampeding, eventually finds the grass. The herd could stampede into the dry desert, and the planets are not going to hit the sun while the system continues, but if you are betting where they'll be at an unknown date in the future, you improve your odds by assuming that they are no more likely to overshoot than to undershoot. Markets only stay at equilibrium when they fail, but prices don't move away from it indefinitely.

Knowing that we are currently above equilibrium tells you all you can know about the medium run: prices are far more likely to go down than stay steady or go up. And knowing that we are currently going down tells you one more thing: in the near term, prices are far more likely to go down than up. Nothing but faith and the Fed is pressing in the other direction.

ya.. kspeak.. you heffer

NY does not feel like a bubble. The market in 2005/2006 felt very different.
Multiple bids, Lines to be first to buy new developments, Easy credit. The bubble people are being bubble heads.

kspeak, I know 2000 was a peak, it'd be great if this inflation-adjusted chart went farther back than 1999:

http://www.millersamuel.com/charts/gallery-view.php?ViewNode=1263479338nkvcH&Record=3

However, I was more asking why you are not putting on a CPI trade specifically if you think there's inflation. I think that while aggregate rents nationwide are indeed a great proxy for CPI, local rents can fluctuate with local economies. If your inflation view in NYC-specific, fine, but I was under the impression that you thought it was more national.

W67 -- hm. You could be right about rents getting caught up in the cycle too, just as land prices do.

All this makes it difficult to calculate equilibrium -- but even easier to know we are above it.

And since we are not going to equilibrium so much as randomly fluctuating around it, what more do you need to know? Now is the time for all, except the most loose wallets, to rent.

When we get down to 12x rents -- the peak of the 1980s bubble -- we can argue about whether 12x or 8x or 4x makes more sense based on where we think rents are going. Then, predictions about the job market and who wants to raise their kids in the city will be important. At 15x and 20x, prices make no sense unless rents -- and building costs and incomes -- are going to skyrocket, risk has disappeared from the land, all alternative financial investments are losers but Wall Street bonuses are secure, or irrational buyer optimists are all on sugar highs. That isn't the world I see.

"What people ignore is that Manhattan real estate was probably dramatically undervalued in 2000. It is my firm believe are unlikely to ever get back to the 12x ratios we saw."

That is a naive statement. In 2000, S&P hit a peak of 1527 when its normalized earnings (10-years average grown to then-prsent value) were 37, for a P/E of 41x. Fast-forward a mere 9 years later, and we saw a low of 676 when normalized earnings were 60, for a P/E of 11x.

Do you really think it's somehow different this time? I get the idea that certain pockets of the market represent better value than others, that the money may not be a big deal to you, etc. However, to paint the current bubble-induced state of the market as "normal" while dismissing the state 10 years ago as "never-to-be-repeated" (simply because the world was busy chasing another bubble) seems like you're trying hard to convince yourself of something.

Re roots and why we subsidize homeowners: NY renters stay put much longer than homeowners do, here or in America. And are more involved in their communities. You are all aware of this, right? Look around you: the old-timers and the activists are the renters, not the owners.

If the goal were to create community, the means would be a well-thought out rent stabilization system and national public school funding. The subsidies to homeownership began as welfare for the auto manufacturers and suburban builders, were sustained as financing for white flight, were reworked to shift the primary subsidy to the financiers and have been regularized into a core part of the governmental mission to shift income upward. There is no defensible justification for subsidizing ownership over rental.

It's not a niave statement - it's well below the national average ... I think it had more to do with people "passing through" NY fiteen years ago.

FG, I personally think 15x would be a fine number in today's environment given where interest rates are sitting. I'm not saying that it's a slam-dunk, just not unreasonable financially with a certain viewpoint.

"It's not a niave statement - it's well below the national average ... I think it had more to do with people "passing through" NY fiteen years ago."

Request for clarification. Are you saying that 12x is well below the current national average? Or that it's well below the historical national average?

Below the historic national average which is closer to 17 over time.

I'm not saying the "bubble induced" state is the new normal. But prices have come down A LOT from the bubble. I could see NY reverting back closer to the national average, but not much below it. My point is that inflation could change the "R" pretty quickly. On the subect of inflation ...

http://online.wsj.com/article/SB10001424052748703957904575251771199558174.html?mod=WSJ_hpp_LEFTWhatsNewsCollection

we've proven it's a "niave" stmt.. next victim......

Riversider.. let me trade on your "feeling." Is that how you made all your billions... that plus the social security chks from the "govt" you hate so much.. and don't forget your co-op that never goes down.....

LMAO... left off the F to not hurt your feelings... wasn't i raised well?

'The subsidies to homeownership began as welfare for the auto manufacturers and suburban builders, were sustained as financing for white flight'

please explain the subsidies you are talking about

Yes, please explain these so-called "subsidies", because I'd like to find out how to apply for them!

E-Z P-Z: just use IRS Form 1040, Schedule A

> please explain the subsidies you are talking about

the mortgage interest deduction.

wow, I figured folks on a RE board would know that existed. But I gave too much credit...

"> please explain the subsidies you are talking about

the mortgage interest deduction."

A "deduction" is not a "subsidy".

Nice try, though.

"Below the historic national average which is closer to 17 over time."

Are you quoting 17x from this site?

http://money.cnn.com/magazines/fortune/price_rent_ratios

So what do you think the ratio is in Manhattan right now? Also, how much do you think prices have dropped in Manhattan from the peak? How about nationwide?

Given that the revenue is made up by higher taxes on others, thats exactly what it is.
Hell, you could even try looking at the dictionary.

Sorry to burst your bubble.

But other folks are paying for your deduction.

matt, seriously, you need some reference materials.

Britannica Concise Encyclopedia: subsidy
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Home > Library > Miscellaneous > Britannica Concise Encyclopedia

Financial assistance, either through direct payments or through indirect means such as price cuts and favourable contracts, to a person or group in order to promote a public objective. Subsidies to transportation, housing, agriculture, mining, and other industries have been instituted on the grounds that their preservation or expansion is in the public interest. Subsidies to the arts, sciences, humanities, and religion also exist in many nations where the private economy is unable to support them. Examples of direct subsidies include payments in cash or in kind, while more-indirect subsidies include governmental provision of goods or services at prices below the normal market price, governmental purchase of goods or services at prices above the market price, and tax concessions. Although subsidies exist to promote the public welfare, they result in either higher taxes or higher prices for consumer goods. Some subsidies, such as protective tariffs, may also encourage the preservation of inefficient producers. A subsidy is desirable only if its effects increase total benefits more than total costs (see cost-benefit analysis).

"But other folks are paying for your deduction."

Well, given the fact that for the past 15 years I've been paying more in taxes than what the median household in this city GROSSES, I find it inappropriate for you to suggest that others are in any way subsidizing ME.

SWE, you know I know the mtge interest deduction exists - I was just setting you guys up:

The mortgage interest deduction wasn't created in the 40s or 50s to 'encourage white flight or welfare for auto manufacturers' as financeguy implied. The mortgage interest deduction was a remnant from when ALL interest (auto loan, credit cards) was deductible before tax reform in the 80s, but mortgage interest was carved out. it was well AFTER most white flight and the great growth of the suburbs (I assume financeguys comments were to imply that home ownership = suburban development = highways & cars, i.e. 'welfare for auto mftrs'). If welfare for auto mfrs were the case, they would have provided a deduction for personal auto loan interests.

On a related note, if home owners are indeed 'subsidized' by the mtge interest deduction by the logic above, then you certainly can't argue that rent stabilization is not a subsidy, as landlords would be paying higher taxes if they had greater (mkt-rate) revenue.

On another note, the topic by the original poster is a loaded question. Those that are renters either by chance forced by circumstance or who made a decision will be inclined to voice a similar opinion. The captive renter would love nothing better than to have that schadenfreude moment and so they hope for the market to tank, etc.

printer I thought the rs eliminators argue that getting rid of rs will lower average rent

> SWE, you know I know the mtge interest deduction exists - I was just setting you guys up:

I know, you tried... which is why I had to counter so I could knock you down with the punchline.

You guys reached, and flopped!

"On a related note, if home owners are indeed 'subsidized' by the mtge interest deduction by the logic above, then you certainly can't argue that rent stabilization is not a subsidy, as landlords would be paying higher taxes if they had greater (mkt-rate) revenue."

Yes, rent stabilization is a subsidy, by definition. Only difference is, landlords pay (and I don't cry for them if they bought the building with that knowledge). But it is CERTAINLY a subsidy, as is the mortgage deduction.

"Well, given the fact that for the past 15 years I've been paying more in taxes than what the median household in this city GROSSES, I find it inappropriate for you to suggest that others are in any way subsidizing ME."

Those of us who make more than you and who aren't taking the deduction are absolutely subsidizing you.

Again, by definition.

"Well, given the fact that for the past 15 years I've been paying more in taxes than what the median household in this city GROSSES, I find it inappropriate for you to suggest that others are in any way subsidizing ME."

If you want to go down that route, that's not the way it works. You are leeching off those wealthier than you as you get more services and benefits from the government than you pay in taxes. You gotta be pretty far up the income scale to be at a point where the taxes you pay are higher than the benefits & services you get -- remember that the top 1% pays 40% of all taxes.

Oh puleeze rs. like your agenda(s) aren't abundantly obvious.

and the subsidies you are receiving

Matt, nada is entirely correct. a subsidy is a subsidy. I'm getting one or two myself.

It is true, the mortgage tax deduction is a subsidy.

omewhereelse
Yes, rent stabilization is a subsidy, by definition. Only difference is, landlords pay (and I don't cry for them if they bought the building with that knowledge). But it is CERTAINLY a subsidy, as is the mortgage deduction.

but here's where you are wrong - its not just the landlords that pay - we ALL pay, b/c the landlords have less revenue/profit, therefore pay less income taxes, as well as less property taxes, leaving mkt rate renters and owners to make up the difference. since the rent-stabilized renters are already paying with after tax money, their offsetting savings do not translate into higher tax revenue.

aboutready

printer I thought the rs eliminators argue that getting rid of rs will lower average rent

that's the theory, and I suppose that would mean an equalization of taxes, but for now those holding rent-stabilized apartments are being subsidized by the taxpayers.

Yep, controls on rent increase rents and reduce housing all other things being equal. How could it be otherwise? And giving one class tax breaks means another class picks up the slack.

"but here's where you are wrong - its not just the landlords that pay - we ALL pay, b/c the landlords have less revenue/profit, therefore pay less income taxes, as well as less property taxes, leaving mkt rate renters and owners to make up the difference. since the rent-stabilized renters are already paying with after tax money, their offsetting savings do not translate into higher tax revenue."

Well, of course, we all pay for all sorts of subsidies beyond the direct cost.
But I was obviously talking about direct cost.

Subsidies counteract efficient market forces, so there is always additional $$ lost somewhere. Its the area under the curve.

Just like the corn subsidies increase costs on other crops.

Printer it would seem as though we are being subsidized by certain landlords. I wonder how many of those own both market rate and rs apartments and how many have been subsidized by citizen taxpayer to create rs housing. it seems awfully murky and interwoven to me.

and irregardless of whether it was intended to benefit developers the abatements are a huge subsidy. but they promoted market-rate and then some development so that's nice I guess

Yep, abatements are a subsidy , the immediate beneficiary being the seller, but at least with abatements we are building providing low income housing which advocates of should appreciate.

the program was discontinued in large part because it was not being used as intended

To the extent society decides it is good social policy to help those at poverty level with housing, a tax credit directly to the renter wold be far better than the current policies.

> the program was discontinued in large part because it was not being used as intended

If we're talking about the abatements, it was discontinued because they ran out of money. They got more when it ran out the first time.

http://www.nyc.gov/html/hpd/downloads/pdf/421a-FAQ.pdf

This effectively kills it. I guess good news for Extell's Rushmore one of the last to qualify.

Eliminates the negotiable certificate program. Any property within the GEA
must provide on-site affordable housing in order to receive any 421-a tax
benefits. Since December 28, 2007, no new written agreements for negotiable
certificates projects have been issued. Existing certificates will not expire, and
can still be used, with some limitations (see FAQ below).