I am curious....

Prior to the formation of the Federal Reserve in 1913, America didn't have these toxic boom-and-bust economic cycles.

I am talking about modern history. For instance... I am sure in the 1986-1987 timeframe people did not expect a mid 1990s type of opportunity.

PS: I'm pretty sure you're wrong in saying the Fed gave birth to the boom/bust cycle. Its human nature. Its always been so. There were umpteen boom and busts in the 19th century.

"PS: I'm pretty sure you're wrong in saying the Fed gave birth to the boom/bust cycle. Its human nature. Its always been so. "

I'm not wrong. It has NOT always been so. Read your history.

Are you honestly taking the position that there were not property, stock or other boom and busts before 1913? Seriously?

2 secs of research:

Examples of "Booms and Busts"

the Tulip mania of the 1630s, in Holland[1]
The narrow gauge railroad movement of the 1870s in the United States
towns such as Bodie, California that prospered during the California Gold Rush of the late 1840s and early 1850s then became ghost towns[2]

Those were incident-specific "busts", not system-wide orchestrated boom-and-busts like we've had in the 20th Century forward.

http://australia.pimco.com/NR/rdonlyres/1A1407AF-4FB0-4257-AF0A-BE7E9BC065ED/3513/Chart2.gif

The Panic of 1893 was a serious economic depression in the United States that began in 1893. Similar to the Panic of 1873, this panic was caused by railroad overbuilding and shaky railroad financing which set off a series of bank failures. Compounding market overbuilding and a railroad bubble was a run on the gold supply and a policy of using both gold and silver metals as a peg for the US Dollar value.

matt, prior to the reforms that were instituted post-depression our economy was ENTIRELY characterized by a 5-15 year boom and bust cyclical pattern. read your history before making such claims.

okay, maybe 20 years.

Matt, is the distinction you have made here something that anyone else in the world supports? I can handle the argument that Fed action may not help...that it may harm / exacerbate boom and bust cycles unwittingly...but that they didn't exist before the Fed...I mean that's just so Matt of you to claim.

The Fed use to RAISE and LOWER interest rates, now we have permanently near zero interest rates and QUANTITATIVE EASING. I'd say we're in a new era.

PMG, at least thats an argument for permanently higher valuation multiples...tho I am not sure why you assume the Fed will never raise interest rates again. That's more of an assertion than an argument.

My assertion is that if we have a double dip recession, are starting fed funds rate is 0.25%, not the standard 5, 6 or 9%

My original question is not one of the next few years....Its trying to understand why people think real estate will never get cheap again (vs rents) like it always gets at points in the cycle.

At this point(Since the Tech bubble) the Fed is doing more harm than good. Most investors judge risk relative to a risk free rate of return(Treasury). But at zero percent treasury securities are not so much risk free return, but return free risk. Many investors would gladly settle for a low rate of return in Government bonds in place of taking risk, but the government has chosen to limit this option. It's a big cause of much of the last twenty years of instability one case in point being institutions investing in mortgages of dubious quality or cdo's of even lesser quality. And just so not to make this a strictly U.S. phenomenon in Japan where they also have zero interest rates, the government has turned half the population(namely Japanese house wives) into day traders who short the yen and invest in Australia)

I cannot envision high per cap rates in real estate without a total collapse of Treasury prices, (meaning treasuries offering high real yields.

This is an interesting question.

It's certainy possible we coud return to 90s "price-rents" like 8-12x.

It's my view this is less likely. First, I don't think nyc price/rents are as out of whack as people claim, especially for coops (condos are on the whole more overpriced - I think these will fall farther than condos, though I'm the first to admit they aren't really seperate markets). I think you see it more in the 3 BR category + but I think this is in some ways due to the lack of great rental options.

Anyway with rents a shade under $50 psf (I think th, and coops around $850, that's a little over 17x. It may be more like $45, so then that would be 18.5x This is pretty close to the nationwide average - I've seen stats this is between 15x-17x.

Consider San Francisco, the other city with a majority renter population - something like 65%-70%, not much lower than NYC - has had a price/rent ratio historically around 20x (it was up to 30x during the bubble).

It's my view that the inflation we'll see on the other side of this moral hazard will bring raise rents and make the buy/rent math a little more favorable

Certainly no harm in being patient. Prices aren't going to go up = what would be the impetus?? For us, though, it came down to wanting to buy so we could start amortizing down the mortgage now, rather than 5 years from now, so we could basically have the mortgage paid down before our kid starts college. Have a 30 year mortgage but paying it down likes it's at 15 year mortgage. There is opportunity cost to this money for sure, but where the heck else do you put it? There is real risk in stocks, bond prices will fall if rates go up, so we're pretty much now just in cas - and we're still very liquid.

Markets do tend to overshoot on the way down, and I'd be lying if I said this isn't a concern I have.

This is really funny: "Prior to the formation of the Federal Reserve in 1913, America didn't have these toxic boom-and-bust economic cycles."

The Federal Reserve was created precisely to break "these toxic boom-and-bust economic cycles." Check out the economic history of the 19th century.

Be careful what you wish for, The implication of high single digit or low double digit cap rates would spell disaster for commercial real estate rolls and the institutions with exposure.

http://www.reuters.com/article/idUSTRE64E1AZ20100515

Reuters) - Keeping interest rates low for a long time can create ripe conditions for dangerous asset price bubbles, a Federal Reserve official said in a Wall Street Journal interview published on Saturday.

Thomas Hoenig, president of the Kansas City Federal Reserve Bank, said it was "understandable" that the U.S. central bank cut interest rates to near zero during the financial crisis, but it was time to at least start reconsidering that stance.

"We've gotten through the crisis," he said. "We are not out of the woods, the economy isn't booming, but we are now in a position where we ought to be thinking about the long run. That's what central banks should do."

Hoenig has dissented at the past three meetings of the Fed's policy-setting committee because he is uncomfortable with the central bank's pledge to keep rates ultra-low for "an extended period" of time.

He said keeping rates near zero gave Wall Street banks an advantage over Main Street because financial firms could borrow at low rates and lend or invest for bigger returns.

"I can't guarantee the carpenter down the street a margin. I really don't think we should be guaranteeing Wall Street a margin by guaranteeing them a zero or near zero interest rate environment," he said.

The Fed has said that its low-rate pledge will stand as long as the economy is weak, unemployment high, and inflation low. But Hoenig said monetary policy "has to be about more than just targeting inflation.

"It is a more powerful tool than that."

He also said Greece's debt crisis was a lesson for the United States, which has its own massive debt pile that could eventually drive up interest rates if creditors grow uncomfortable with cheaply financing large deficits.

Rates can't really get much lower, so it's just a matter of how much they rise and when ...

You're right about the implications on commercial real estate.

In residential, high rates obviously hurt but the nationwide historic P/R ratios reflect times when rates were high so I think people sometimes overstate the impact of residential; this is not to say rates don't have an impact, but people were buying houses at 15x rent when rates were 8% before the bubble. High rates are also likely to be accompanied by inflation and raising rents ...

Rhino,
Interesting topic.
Just a thought...
All boom and bust cycles are not the same and conditionals that accompany these cycles are different than those of the past. That being said, It's easy to forget the glacial movement of the residential RE market. I will recall for all of you the crash of '87. '88 and '89 looked a lot like the RE market dodged the bullet. By '91 it was clear that it had been mortally wounded. I can't shake the feeling that this cycle will be no different. As we kick the can down the road, the road eventually ends. 2 or 3 years from now we might be looking at a much different picture wrt pricing. A two bedroom on the UES which is entering the market today at 1.35M is close in price to that same property entering the market in August 2008. For those of you with treads, worn a bit, may remember mortgage rates in 1979. Imagine what those rates would do to the expectations of that two bedroom seller today. This market has some more surprises for us and I do think they will be to the down side. The problem is kids...It's like watching paint dry or grass grow.
Patience and Fortitude my friends...Patience and Fortitude....

japan, my friends. japan.

ahsoooo

can i get just one day of peace w/o some lemming trying to convince me that 15x at 8% in 2001 is the same as 15x at .001%... f'ing bubble deniers all around. nimrod have you seen any ppl living above their "means" the last 10 yrs? Cause how that was all paid for? Yeah, they rode the 15x rent at 8% all the way down to 25x rent at .001%..... guess what? The lemming train just crashed.

FLMAO... take your newborn out to get some fresh air and stop trying to stop the credit compression to 1999 prices... your "2004" price is toast. And pls, just bc a cab is gold colored... it doesn't make them any safer. Strap your toddler in or take the bus/train you lazy mother.

FWIW, when our child was a newborn I'd ask my wife if we could just take a cab w/ said newborn in the car seat w/o base station to columbia east 60th for the chkups... she'd look at me and say?

"you pay $1,400 month car payment. $500/ month garage, $2K/yr insurance and NOW you wanna save $50 on the garage on east 60th"

AND I wasn't leveraged to my nipples in the greatest RE bubble in nYC history... flmao.

Clip coupons kspeak.... amazing how ppl spend so so so much time trying to save $.50 on diapers but can't stand to do the "math" in this bubble cycle.

how dare you personally insult me. seriously.

I think that RE will decline some, but not much and not quickly. Unless and until we have another major major shock to our system, whatever that may be (devastating and long war, natural disaster, epidemic, some serious fundamental and widespread impairment of our financial or technology infrastructure). At that point it will be swift. But as long as we continue the normal course as we are now, even with some major negatives in the news (jobs, oil spills, European problems, tea parties, wars/military efforts in Afghanistan and Iraq that the average American views as background noise) we won't be seeing real estate moves on a wide scale to long-term pricing means, let alone below equilibrium levels.
We will see increases in rent, largely in the medium term due to increased operating costs for owning property as well as the competitive pressures and increased lifestyle expectations that force owners of older and lower quality properties to upgrade. But that just impacts the competitive short-term equations of renting compared to buying to the benefit of renting. And so I'll call it again and say that now is a good time to sign a two year lease (although not as good as eaerlier this year).

kspeak.. .I only do it bc I care about your child more than you do.... not personal. I yelled at a guy for smoking in his car with a toddler strapped in the back.

"Parenting advice, you can count on" w67

patience and fortitude... which the japanese have been displaying for 10 + yrs.....

I thought you had me on ignore and you promised not to spk to me.

Hold firm... kspk.. hold firm..

I'm going to indulge you for fun this one last time

1) I use a carseat so I'm not sure how I'm endangering my infant
2) Calling me lazy is just ridiculous. I work full time in a very demaning job - a job which pays well enough to provide a nice life for a family in the city as the sole breadwinner, which I'm not, but in my male dominated field you better beieve most of my colleagues are - and have survived and kept my job through every downturn. So much for your "first year anaylst from kansas" theory! And I'm a great "mom" as well.
3) We are not in any way levered to the hilt. Either of us could pay the mortgage with our jobs alone. We have years and years of cash in the bank.

1) a car seat is not properly installed unless the third strap goes over the back of the seat back and is hooked into the "latch" on the latch system. I really doubt you ask the cabbie to open the trunk to put on the third "crucial" strap.
2) see point 1
3) leveraged to the tit (stay with me)..... then why are you so adamant that it stay at 2004 prices? FWIW, when I buy, which I intend to do in the next 1-2 yrs... I will be the LAST one on SE telling ppl that the bleeding will stop.

And if years and years of cash in the bank if so "comforting" to you.. .how about if I add in another "year"... more comfortable now?

splaken, kind of like europe imploding? you think that won't affect financial markets?

i have no f'ng clue where we'll wind up. but it's not looking like it's going to be up any time soon, and it's looking like it could be quite a bit down. if i were a betting type, i'd be exiting the casino, as the game is still rigged for loss.

kspeak -- you make some very good points, and it sounds like buying was a thoughtful, rational decision for you. My husband and I were in a similar position and recently bought as well -- our "forever" apartment, for the long haul. We're very happy and have no regrets. Don't let w67th run you off the board with his personal attacks; he often resorts to name-calling and rudeness -- it's not about you, it's about him and his real estate envy, or whatever it is that causes him to spend so much time on a real estate board insulting people who want to buy real estate.

w67th - since you are actually appearing to read my posts, i will actually respond

1) you got me on the carseat. but we're talking 1x a month - we pretty much walk everywhere. i'll take this "risk" over the suburban mom who has a perfectly installed carseat but whose kid spends 3 hours a day in the car. my accident risk is still lower. if this is lazy, it is what is is. people freak out way too much these days. as i said to my husband when we were shopping for a new carseat and noticed a booster seat that said "for children up to 95 pounds" there are plenty of women running around NYC on the charity circuit who don't weigh 90 pounds. whatever happened to enjoying your life, enjoying your children, letting 'em fall down and make mistakes? maybe it's because of this attitude i can "do it all" as they say - and still have a great relationship with my husband.

2) I'm not adamant about anything except for what I said above - enjoying your life, enjoying your children. I'm acknowledged that anything is a possibillity. And I've never said the bleeding will stop? I've said more than once another 15% decline is something I see as very likely ....

"The Federal Reserve was created precisely to break "these toxic boom-and-bust economic cycles." Check out the economic history of the 19th century."

And it failed miserably.

what happened to your earlier statement: "Prior to the formation of the Federal Reserve in 1913, America didn't have these toxic boom-and-bust economic cycles."

gotta go buy a tamron 28-300 lens to capture images of my kids bf they get too big to hang out w/ the old man...

miette/kspeak... my rancor at the said NYC RE mkt is not against you or anyone who can "afford" to buy comfortably. Truth be told, a family member dropped $7MM in NY RE this quarter... the dude is NOT A LEMMING cause he paid CASH and has enough CASH to never worry about carrying said RE, against my financial advice. We still hang out and have fun and will be vacationing with him on the Big Island this August.

Think of your baby kspeak... she/he works hard for 25 yr and finally gets a "real" job, but a bubble forces him/her to rent while ppl that got in early live in $50MM PHs... how is that fair? It's CRAZY in the same way a "powerball" winner gets to join my yacht club.

Now if you will, this nyc re bubble was on a scale so much greater and so much more evil than having the entire nation play powerball whether they wanted to or not. Now that the music has stopped ppl that had nothing to do with the powerball is having to bail out others who took full liberties, this includes you kspeak/miette. Congrats on being the baileroutters, unless of course you greatly benefitted from said credit/leverage... then net net.. you are "morally" even. :)

"For us, though, it came down to wanting to buy so we could start amortizing down the mortgage now."

You can start amortizing your mortgage with having one...Its called saving!!!

"without having one" that is. Its pretty sick when the mindset is you need to borrow in order to save. WTF?!?!

" High rates are also likely to be accompanied by inflation and raising rents ..."

Yes, which creates an attractive buying opportunity, like the mid to late 1990s!

Kicker here and now is...we can have higher rates without rising rents given the employment realities. In other words, worst case (for owners).

Splaken....wasn't it three weeks ago that people struggled to see what could stop the S&P 500? Just because a bear can't guess what it will be that will knock 17x rent multiples to 12x or 10x or 8x doesn't mean its any less unsound to pay 17x.

Rhino, before you criticize ...

It's not borrowing in order to save - I fully get the criticism of the "I'm just throwing away money on rent" when in a mortgage, especialy the early years, you're really just paying interest.

The place we bought, all things considered, our all in monthly cost is what we'd spend to rent a 3 bedroom, if we paid it down like a 30 year mortgage. This cost is $8k a month, before the tax deduction. There really are no property taxes, so nothing to add. So this portion of the cost is a wash with rent.

Now, we may chose to pay it down like a 15 year mortgage instead. The extra monthy cost is $3,600 to do that. This means over a 15 year period, we'll be paying an extra $650k that we could have put in the bank account instead. However, in 15 years we will own our place free and clear. Let's assume that it costs the same amount in nominal dollars as it does today (even if you bought in 1987 this would have been true 15 years later). We'll own the vaue of our place - around $ 2 million - free an clear. Deduct $650k that we could have put in the savings instead. Deduct the downpayment. The other portion of the money spent to own would have been spent on rent, so thats a wash. You still have another $1 million you wouldn't otherwise. So no we are not being stupid. Not to mention that rents over a 15 year period rents are likely to rise - in 15 year I won't be able to rent a 3 bedroom for $6500 a month (our post-tax ownership cost)

w67th - i can assure you what I do has nothing to do with excessive leverage, nor my husband. or derivatives or any other weapons of mass destruction.

and Rhino - here your pointabout the 1990s and high interest rates and rising rents. but, the 1990s may just have been an anomloy. on a whole other thread I point out that between 1979-1981 the blended cost of coops and condos was around $250 psf - thats $750 psf in today's dollars. that's when rates were 16%, inflation was crazy, nyc was dangerous, and before the 1980s wall street boom. let's be careful assuming the 1990s is a normal state. i may be wrong and it may happen again; but consider this may not be the "natural" state.

"The place we bought, all things considered, our all in monthly cost is what we'd spend to rent a 3 bedroom, if we paid it down like a 30 year mortgage. This cost is $8k a month, before the tax deduction. There really are no property taxes, so nothing to add. So this portion of the cost is a wash with rent."

That's cool. But lemme guess you made a big down payment and you are not even charging yourself interest you could be making in an ultrashort bond fund.

This said, when you can buy a lifetime place, I can understand not wanting to dally around. $8k before tax deductions sounds good for a nice three bed.... But was it $1.5mm+ and did you put down $500k+?

The issue here is you will likely be right in 15 yrs....I am only wondering if I will be much more right within five years.

"and Rhino - here your pointabout the 1990s and high interest rates and rising rents. but, the 1990s may just have been an anomloy"

Were they? Or is 2004-2008 the anomaly?

This was the point of my starting the thread...were the 1990s an anomaly...or is rising rents and low price to rents a condition that comes along every twenty years ago. Even if it meant buying at current market levels, or slightly higher...I'd rather buy under those conditions 1000x over then buy under current conditions. My question is, historically speaking is this silly? My guess is that its not silly. ...particularly if like me, you plan to come up with a real down payment.

Yes, I did not account for the downpayment - was thinking this as I posted, but it's not something we overlooked. At 4.5%, that would double in 15 years. We still come out ahead .. and, we bought 25% below peak (my neighbor has the identical house and paid 25% more in 2008) ... it's highy unlikely that in 15 years it won't be worth a hair more in nominal dollars. I do certainy expect it to underperform inflation, though, even significantly underperform inflation.

Could we get better than 4.5% after taxes? I'm not so sure. Our tax rate is basically 50% so that would mean almost 8% pre tax. Besides touching bonds is hugely risky too - if rates go up prices will plummet. Had money in munis for a while but state gov'ts are sketchy right now. People forget that right now there are not a lot of great places to put your money.

I think the 1990s was an anamoly. I could be wrong. I think it was a combo of a lot of things - for one, violent crime peaked in the early 1990s. It took a lot of time to recover from that perception.

Also the stock market was on a tear. I remember co-workers of mine - this is funny - were actually submitting their expenses on their corporate cards immediately then floating the balance and investing the money in the stock market. I never did this but it's telling about those times. Absolutely nuts, but people thought that way

tax rate 50%? you should be renting.

the 1990s had relatively LOW crime rates. i don't think it took long to recover from the perception, i think people thought there was more potential in the public school system. good luck with that going forward.

My starting question here is - were the 1990s an anomaly...The answer, I think, is that in terms of price to rent, 2004-present is the anomaly.

I certainly sympathize that 4.5% after tax is a tough return to find. However, keep in mind that you are borrowing at 5-6% on the majority of the investment...so your actually cash yield on your investment is probably much lower than 4.5%. The answer here may be that in a market with such low interest rates, you are not compensated to put money to work at all...

All this said, this sounds like a place that suits your for life and as such, it probably can't hurt you. I struggle more with the decisions to buy one beds and two beds that are discussed on this board. Frankly, I can't afford to buy a three bed right now, nor am I comfortable with the long term financial commitment to private school that it would entail. We love our 2/2 rental and I'm not tempted at all to try to outdo its finishes by spending $1.2mm, to earn a cash yield on the order of 3%.

I think the intellectual difficulty with rates of returns on downpayments is that over the long term, you'll likely do okay...over 5-7 years or less, their is no riskier investment in the world, due to the impacts of transactions costs and leverage.

no, in fact, violent crime peaked in the early 1990s. aboutready, you are factually just wrong on this one

http://www.disastercenter.com/crime/nycrime.htm

I don't know where you're going with the conclusion that tax rate 50% means you should be renting. i just walked through our "housemath" above.

Europe is not imploding. There are strong countries and weak countries together in one big union. The union might fail. All of history suggests that it would fail. But that doesn't mean that every country within will fail. The Germans got through unification and will remain in a leadership position.
Look at the Euro compared to 1999. It's up, still.

Re the S&P. The S&P might have hit a YTD low on Friday, but it is not now at a low. It isn't at a 52 week low by any shot. Even if it were, you are pointing to a fast, liquid market, and short-term results. But your question posed above was a long-term 20 year question.

Will there be weakness in NYC real estate, I've said yes.

the other thing is that things don't remain as they are. you can make your calculations based on current prices, investment opportunities, etc, but that doesn't mean squat down the road.

yes, today your cash isn't doing much for you. tomorrow? and the value of your real estate investment is dubious at best.

I think Housemath breaks down because its tough to find nice 3 bed rentals. This said, your argument that the 1990s (8-12x price to rent) are anomalous just dont foot with history. Essentially and indirectly, your argument is that interest rates will be permanently low...which in the middle of a deep recession, is tempting but likely unlikely.

>>> over 5-7 years or less, their is no riskier investment in the world, due to the impacts of transactions costs and leverage

I completely agree. 5 years is really not a long enough time to buy a place, 7 years isn't really either, especially after the runup, I woud not be looking at those kinds of time frames.

2004-2008 was a bubble for most of it probably too if not all of it ... but prices were kind of back to 2005 levels last year at least for a while ...

i don't really know where you are going with the cash yield on your investment .... the only relevant things I think are the opportunity cost on my downpayment and any extra $$$ I spend paying my mortgage that I wouldn't on rent.

"yes, today your cash isn't doing much for you. tomorrow? and the value of your real estate investment is dubious at best."

Right, you can piss on cash..but it buys more S&P 500 than it did 5 years ago...it buys more real estate than it did 5 years ago...its better than most anything other than gold over 5 years.

splaken, really? yes, it will probably pull itself out of the abyss temporarily (ala the baltics, kind of like the us, very much like the recent bailout facility), but long run? good luck with that.

and good luck with our own municipal crap.

We disagree

"i don't really know where you are going with the cash yield on your investment .... the only relevant things I think are the opportunity cost on my downpayment and any extra $$$ I spend paying my mortgage that I wouldn't on rent."

The issue here is youre not getting the right cash return on your risk....historically speaking. Your counter is you don't care, because its tough to find a rental as nice as what you have and its tough to get 4% after tax on your money... But the latter argument is more a reason to be in cash than it is a reason to buy a place by default. The reason to buy a place right now is because its your last place and you dont care about regret you may feel in the next five years.

aboutready, yes, my cash may do more for me than 4.5% after taxes down the road. but to say in 15 years my real estate in NOMINAL dollars will be worth LESS than today is pretty aggressive. as I said, even if you bought at the peak in 1987 or 1988, they recovered within 10 years. also, may not have - probably did not - have caught the bottom but didn't get the peak either. also, to say that in 15 years I'll be able to rent a 3 bedroom for the same price as today is probably not true ESPECIALY in a rising interest rate/inflationary environment. so yes, I can probaby get more on my cash 5 years, but I'll probably eventually have to pay more in rent than my mortgage will cost me ...

Rhino, my argument is absoutely NOT that interest rates will remain low permantely - see my example of the late 1970s/late 1980s .. NY real estate was $750 psf in today's dollars, and rates were 16% and QOL was horrible. Also, 8-12x is well below the national historic average price/rent ratio.

kspeak, you want to take a f'ng look at that chart or no? the one you posted? which shows that the violent crime index peaked in 1990? as i said?

after that crime declined rapidly. crime was awful the late '80s. early '90s it started to decline.

"Also, 8-12x is well below the national historic average price/rent ratio."

Whats the historic average for NYC? It aint the 18x+ we're looking at right now!

and i said the 1990s, as a decade. please, don't waste my time with misrepresentations.

i'm starting to think of you in a riversider sort of way, kspeak. i can talk any way out of any orifice and be deceptive.

FYI 15x is as good an average as any...And if I could buy my rental at 15x, I might...

Rhino86, I'm not sure there is a reliable indicator in NYC. Historically in NYC, the rich owned, and others rented. We have such a huge rental base covering a big spectrum of the market. This started to change as rental buildings turned co-op but those seem to be the type of data that would be unreliable for measuring. Also, rental control laws, which cover a large portion of NYC, would also lead to unreliable data. Condos came in to play in the mid 1960s I believe.

Nothing new here, really....owners argue that NYC was a crime ridden cesspool in the 1990s and 8%+ mortgage rates are an artifact of history...okay. Listen, if you can bear the risk of buying when the government is doing all it can to keep interest rates down...and you dont care about the risk reward that creates..go ahead.

Rhino also still sitting on lots of cash post purchase - well in excess of our downpayment. I think cash is a great place to be right now. We're actually in all cash EXCEPT for the purchase.

Yes agree not getting the right cash return on our risk. But we're also living in it. And it takes away the uncertainty of NOT owning a place, and the uncertainty of rising rents. Rents may rise less fast than inflation but they will rise over 15 years in nominal dollars. And we're locking in a payment we can afford. And then when the last kid is in college, we have no rent to pay. Yes we have $1.5mm less than we would have otherwise. But say this yields 5% after taxes which is an aggressive assumption for a risk free, post-tax amount - that could pay rent on a $6500 place maybe. But a 3 BR won't cost $6500 a month in rent then.

Splaken this is all well and good....but look at the data...valuations went into uncharted territory after securitization caught fire and now that's not going to fly the same way ever again. I dont see why anyone would bet on never before seen valuations sticking.

Kspeak, we may be at 2005 prices, but rents are much lower, so all valuations ratios are as high as ever.

NYC was not a crime ridden cesspool in the 1990s. Certainly the early 1990s were tougher than the later 1990s, but it was not a crime ridden cesspool.

"valuations went into uncharted territory after securitization caught fire " Yes

" and now that's not going to fly the same way ever again" Never say never. But certainly for a decade you are right, I believe.

"I dont see why anyone would bet on never before seen valuations sticking. " Nobody is. They haven't We are not at 2006/7 prices today. Though I'm not sure we are below 2004 prices today.

so kspeak, what about that crime rate? what about the fact that the city doesn't have anywhere near enough spots for the K kids coming up? and don't even get me started about middle school. they're so far away from what will be needed, just think of how you'll get your kid educated.

kspeak, you like what you've done. good for you. but it's not necessarily a good decision generally. and not necessarily a bad one, depending on many things. but you really can't categorically label buying or renting good or bad.

Kspeak, you'd have more than $1.5mm...the money you are using to pay down principal would be earning a return.

You raise the right point though. You are locking in a monthly payment. If you think that monthly payment (padded for an equivalent risk of down payment) is attractive....so be it. I'd say your down payment should be "charged" for equity risk on the order of 8%....or be easy on it and charge it 4%...Is that still a great monthly payment. I'm gonna guess its not. Lets say tax benefits = opp cost on the downpayment. Is your place nicer than what you could rent for $8k? Maybe it being yours makes it nicer. That said, in 15 years, how much will you have to spend to refurbish it for sale. The calculus isnt easy.

Rhino again not arguing that 8% interest rates are an artifact ... but NYC cost $750 psf in today's dollars 30 years ago when rates were 16% and Wall Street was miniscule and crime was high. This period may have been an anomoly too certainly but it's an interesting datapoint.

aboutready the fact is that violent crime in the mid 1990s was 2x what is today. and public schools are better. and it takes a while to get out of peoples momeories.

SPlaken when I say valuation...I mean cap rates and price to rent ratios...which are comparable to 2007, despite price levels for purchase being equal to 2005.

kspeak, if violent crime in the mid-1990s was 2x what it is today, and today is quite low, then you aren't proving your point.

Kspeak why do you keep inflation adjusting everything? The only inflation that matters here is rent inflation. And regardless of everything else you are saying 18x+ price to rent ratios in Manhattan are the anomaly. The anomaly is buying an apartment for cash in Manhattan and only earning 3-4% on your money. This is an anomaly of the post 2004 era.

You believe that today's price to rent ratios are comparable to 2007? i.e. both numerator and denominator have fallen similarly?

Yes I do Splaken...about 25% for both.

aboutready, i have never, EVER said renting is bad. Ever.

Middle schools are improving as this first babyboom of NYC kids reaches that age - and so is the school overcrowding, they are building schools in FiDi for example. But for us we have cash in the bank for private. We may or may not decide to go that route but it's certainy an option.

Listen maybe NYC should average 15x price to rent, in light on the evolution of finance and the quality of life improvements here....which means maybe we are only 15% overvalued...which may correct itself by a recovery in rents....and may be partially compensated by low interest rates. Leaving interest rates aside, the core issue here is whether or not the rent gap to other major cities can be maintained, given the long term prognosis for the finance industry.

I'm not inflation adjusting anything in my housemath calcs. All calcs in nominal dollars. I'm just saying the post-taxes interest on the nominal $1.5mm I would have extra in the bank - $6500 - is unlikely to be able to rent me a $3 bedroom in 15 years.

I did inflation adjust the $750 psf of the 1979-1981 period, because you have to in order to make the comparison. It was around 250 and CPI is up 3x.

I don't have data on Manhattan's 100 year average p/r. We do know how low the 1990s was What I do know is that preubble averages across the US are around 15x-17x for buy/rent, and this refects periods where rates were much much higher. I maintain that I don't understand why Manhattan shoud be LOWER than the "umnbubbled" national average price/rent ratio. People point to the "city of renters" should make it lower, but San Fran is too and there average is greater than 20x.

I don't have a crystal ball, I could definitely be wrong and the argument that prices overshoot in the other direction is very very valid. But I'm not convinced we'll have a 1990s buying opportunity again.
I don't dismiss it as a possibiity, but I don't see it as that likely either.

There is no harm in your waiting to find out - prices aren't going to go up, so no urgency to buy. Our situation was somewhat unique.

The interesting part of home ownership is in one sense risky - because if you have to sell you can lose more than your downpayment.....In another sense, its low risk because you lock in a payment in a world where rents trend up.... I fear what 2000 level rents in NYC are telling us about the city's long term trend.

And rhino maybe the rent gap to other cities will come down. I think a right size wall street is at least mid 1990s level (pre the leverage/derivatives boom). But rents are pretty much at the same level on a real basis as the mid 1990, have only risen a little faster than inflation.

The 15x calc is where I get my 15% down from here number. But people are right that markets overcorrect on the way down ... but as a long-term holder I think in terms of equillibrium pricing since up or down from that is all specuation anyway ...

kspeak, you must realize that many others don't have the money for private at middle school. oh, and good luck getting in for middle school.

Kspeak if you think right size Wall Street is mid 1990s....then I think you have more downside in values. Remember, 1990s Wall Street entailed a tiny hedge fund industry. The hedge fund industry is not going back there.

What is your place's price to rent on your purchase price realistically? Just curious.

Also, do price to rents nationally incorporate as large a % of cooperative apartments? Technically a coop apartment should have a lower price to rent, because you ownership interest suffers control and bears a share of an underlying mortgage. Manhattan condo price to rents are much higher than coops. 25%+ higher.

Rhino86, I say mid 1990s level to be very very conservative so as not to prove attacks from the bears on this board that I believe the Wall Street growth is sustainable, because I most certainy don't.
I think my point is rents by my calcs are only up about 20% from the mid 1990s on a real basis. So I don't think 2007 rents are really that tied to a huge Wall Street. Rents really only went up with inflation between 2000-2007 and maybe actually slightly less fast ... I think because people were buying.

Anyway, we have a townhouse so it's a harder comparison to make. And you realy can't rent townhouses indefinitely. They are usually 1-2 year gigs when the owner is travelling. So my equivalent is a 3 bedroom because that was the alternative.

Aboutready - I know how tough middle school is in NYC. Let's admit two things: 1) the middle school situation IS problematic and also 2) that it does appear to be improving rapidly. Let's also not forget how liberating the middle school years are for NYC parents compared to the suburbs - kids can get around on their own here! So there is incentive to stay in that way - not at the cost of one's child's education but a lot of progress is being made on that front. Many of these people are the parents who chose to stay in NYC with a family in 2000 and fought to make their local elementary schools better. But we could do private the whole way through if we want to ...

"I think my point is rents by my calcs are only up about 20% from the mid 1990s on a real basis. "

Rents shouldn't rise at all on a real basis, should they? Or is your argument the city has improved 20% in real terms on the aforementioned crime stuff? I guess I'd argue that a 20% REAL rise in rents is WELL dependent on a bigger better than 1990s Wall Street.

I think the problem is, regardless of what some can do, many of the people who used to think private was doable will think the better of it. I'd be interested to know what 1990s purchase affordability levels would mean for values...and price to rents.

Rhino that's a very good point. But the comparison to NYC given the price points of apartments need to be to houses in nice areas, given the price point, instead of las vegas condos. In good school districts the yearly property taxes are often well in excess of what one's yeary cc/maintence would be. In Westchester a $1.3 mm house can have $30k a year in property taxes.

I think rents rise a bit as incomes go up .. supply and demand - yes, the supply isn't totally capped as some people spread out and gentrify new areas, but there is more $$$ demand competing at the same time.

On a real basis I think rents are about where they were in 1998 - they rose about 50% between 1995-2000. And the real dramatic decine in violent crime rates began around 1995 even if the true "peak" was before that. So today's rents at 1998 levels in real terms. So I'm comfortable with that. And I do think Wall Street is most likely permamantely bigger than 1998 - although it's not 2007 size either.

Look, I have absolutely no idea what is going to happen; if I had a crystal ball I'd be richer than I am. Yes, there is a chance the 1990s pricing will happen again, and I see zero downside to you waiting for it to come down. I think flat prices are a BEST case scenario, 15% down is probably more liekly.

But, because of these reasons it's my view 15% or less decline is most likely for these reasons:

- 15x rents is a normalized, pre-housing bubble, price/rent ratio
- Dearth of 3 BRs in the city and families staying
- I only have access to 30 years of data, but looking at the early 1980s/late 1970s, NYC was $750 psf in today's terms ... yeah maybe that was a bubble too but there was no real wall street, rates were 16%, crime was rampant .. i realize wall street has issues and rates will go up but it's still interesting
- SF a city with structurally a high % of renters has an average closer to 20x (pre-bubble)

That said, pyschology is important, we may have a double dip recession, families may decide to leave the city, and markets overshoot on the downside. but, as i said, i don't like to speculate on that end ... try to focus on equilbrium pricing ... otherwise it's like technical analysis of stocks, but guess that works for some ...

Equilibrium pricing, even by your math is 15% lower than here....and markets overshoot. 1990s level afford ability is likely more than 15% down from here.

Rhino that's right ...15% down is equilibrium pricing, that's why I think this is more likely than flat.
But a tradeoff I was willing to make for the reasons above.

It may overshoot - I think the reason it may NOT is that NYC buyers are a little more liquid than most, so they can hold on a bit longer, and I think rents are going to creep back up esp. with inflation on the horizon. There is no inflation yet but it tends to lag by 1-2 years, and the government is trying to print its way out of this. Also, rents mildly underperformed inflation in NYC over the past decade and I think it's because so many people were buying, so I think they may tick up a bit. I know people say the economic situation is too bleak for that, and they may be right, but NY state unemployment appears to be coming down and a friend who runs recruiting at a major Wall street firm said analyst/associate recruiting is back to where it was 3-4 years ago. So this is the reason I think this may not happen ... but 15% down is a way more likely scenario than flat.

I bought a Harlem townhouse - so admittedly my comparisoron is a little skewy to a 3 BR rental - my neighborhood is worse, but for me the QOL is the same as having a 3 BR in a prime neighborhood. I have a nicer physical space and a backyard and fireplaces and 13 foot cielings and $4000 + feet of space, but I'm no longer in the West Village. Surprisingly though I like the neighorhood more than I thought, there are just enough brunch spots, great transport, no lines at the playground, 3 gourmet grocery stores nearby, and a few good dinners spots and a couple excellent ones. And I'm still zoned for District 3. But I also bought as prime as you can get in Harlem - literally probably the best street in South Harlem, ultrawide, etc. So I'll admit it's not a perfect comparison, but one that works for me. And I'll be somewhat honest when I say I saw more urgency than most situations - so few townhouses on the market at any one time, and the improvement in Harlem throughout the downturn of the last 2-3 years has been astonishing to me, and even in the best part of Harlem they are 1/3-1/2 the price of something in the West 100s near the river, which has the same school situation (good District but not neighborhood school).

One last thing on the housemath thing - we bought something where we could prepay the mortgage. we're borrowing at 30 year fixed at around 5% and right now can't get any return like that on a savings account, and, as I said, it's not like I want to be in stocks or bonds right now. But if rates spike we certainy won't be doing that so it's a nice hedge in that way ....

Again, very specific situation that works for us ....

Once you own prepaying your mortgage is a great risk free rate of return. The problem is that the purchase may have been at a 3 percent cash on cash return!!!

Kspeak: woh, many posts on a beautiful day. I am deep in the school thing, btw, the CEC is having a meeting at P.S. 199 6:30pm. Public welcome. I don't understand why you think it's important to be in a "good" District. As far as I can tell, it's all about your locally zoned school. There are a few good public middle schools, but no new good middle schools. The Upper West Side parent body is getting mobilized to fight for more middle school spots.

AR: as far as what middle-class parents will do, the blessed saving in this is that most families rent (in the southern part of D3). So if they get scared off by the middle school issue and overcrowded class thing, they'll move.

Rhino: few people have addressed your original question. I think it is a very hard question to answer for "prime" Manhattan because over the last 100 years, rental units have outnumbered owner-occupied units. When I think back to what (based on archived articles) the makeup of UWS was in the 50s-90s, I am not sure there was a meaningful rent/buy ratio. Very hard to compare with other areas. When the bulk of apartments were rentals prior to co-op conversion, the only "owned" housing tended to be cutup brownstones that pioneer gentrifiers had extreme difficulty in getting mtges for.

W67: How come you're not addressing kspeak's main point (I don't know if it's true, don't feel like researching)? Her point is that the rest of the States has historically been 20X (I presume over a variety of different interest rates), so why not Manhattan? My answer would be that the nature of the housing stock is different. BTW, interesting data on why booster seats may be completely unnecessary is out there.

Should elaborate, CEC is having a meeting to address various overcrowding issues. Next meeting open to the public is at P.S. 199 tomorrow at 6:30pm. Public welcome.

"...has there ever been a 20-year period in real estate history that didn't present the patient buyer with a very attractive (define however you like) opportunity? I am genuinely curious. If not, please tell me why "this time is different"."

Let me re-phrase that to make a point: "Has there ever been a 20-year period where a patient owner, no matter when they bought or where the market was (NB the 20 year period starting on the purchase date), couldn't sell at a reasonable profit?" (NB this means that the owner is smart enough to get out before the market bottoms out again and picks a time to sell within a few years on either side of a peek).

"W67: How come you're not addressing kspeak's main point (I don't know if it's true, don't feel like researching)? Her point is that the rest of the States has historically been 20X (I presume over a variety of different interest rates), so why not Manhattan?"

That's because he's a smarter man than I am. This is not meant to be inflammatory, but I think kspeak has made up her mind about things (one would hope so given that it's a done deal) and is going through justification through what I'll term "a thousand little lies". The 20x figure is actually something like 18x, and it comes from a recent 15-year average where the bubble skews the numbers. She attributes 16% interest rates and to 1979 (it was more like 1982, actually) but fails to mention inflation expectations back then when people really did think rents would go up 10% a year indefinitely. Her analysis fails to account for the down payment until she is called on it. She compares a Harlem townhouse to a prime-located 3BR because of how she perceives the QOL. Crime was at a peak in the 1990's

In other words, she does not make a dispassionate analysis. In the process, it wears you down: 10% here, 5% there, etc. I found myself tired of arguing: a good financial decision really shouldn't be this hard to justify. It should be pretty damn easy. I don't think kspeak is doing the "little here, little there" thing to be combatitive: I think it happens subconciously.