Best apt in downtown Manhattan for $1.15MM?

I, too, was looking for over 6 months and couldn't find what I wanted -- a civilized lifestyle-- for my budget just under 2mm. Imagine wanting real closet space, a w/d, enough room to breathe!! The fact that you can't find a decent "living" space w/ decent amenities for a $1150 plus budget, just goes to show that the market is out of whack. I bought an investment place in Miami that is 2000 sq ft w/ a 400 sq ft terrace directly over the ocean. Top amenities -- gym, spa, hotel services, free parking-- for a very, very reasonable price. Every time we are there we ask ourselves why we are choosing to live in NY when we can live like humans that feel entitled to real closets --and a 70,000 sq ft gym over the ocean right downstairs--- in Miami.

Rent for two years. Relax. Watch the market go down. There was a poster recently on SE who lamented that he and wife graduated Harvard and couldn't afford a liveable apt on their (I think their combined 400K?) salaries. To me, that was a great tell. If upper middle class can't afford a good apt, prices will come down. We just went through a monumental economic shift. No one knows what will happen except everyone agrees the good ol' days are gone. It takes a while for owners and developers to give up their delusions of their RE pot 0' gold. Chances are very good the market will be down from here in two years. What is your hurry? Be savvy. Save your nest egg. RENT!

apt23 - tell me how you can confidently tell the op to sit and watch the market go down when everything in range gets sold from under him/her? Further legs down have been predicted for a year now and downward trends in inventory continue to defy expectations.I just don't see what will keep people from buying if freezing of credit and a deep recession shedding 600k jobs a month didn't do it.

NYCAPT - I would personally recommend you not to get too caught up in square footage. I've seen plenty of 1200 sqft spaces less efficient and live smaller than a well laid out 900-1000 sqft space.

good post apt 23--true all that

if our best/brightest young people can't afford decent housing in this city, who will support absurd pricing?

i refuse to believe there are jetloads of wealthy who are chomping at the bit to pay 2 million dollars for 2 bdrnm apts in NYC. somewhere in theis mess are people who live/earn here.

This is where i have a question regarding why people feel market is going to go down.

NYCapt seems to have a very strict set of criteria that he feels he must meet. If after looking at over 40 apartments and none met with his approval except a couple where he did not it seems want to spend a little extra money to be in what he wanted, how is that people would say don't buy now? I would say he has no choice but to buy it when he finds that perfect apartment. Especially if he keeps getting outbid because he is trying to get under ask. My question to him is if you have 400k to put down, if you really liked the $1.2 million apartment would the extra little bit of mortgage have completely blown your budget?

I still have issues with the definition of what livable is. All of us here presumably live in the city and made the choice to live here even though spaces are smaller and layouts are never the best. So apt23 this couple from harvard making 400k, what was their definition of livable. Was it they needed 2000+ sf? Because i have to tell you if they were making 400k that means that unless they already had debt from school or something like that in theory they could afford a lot. Or is it they have a lot of kids. Where is there monthly income going?

And the last question and i asked this of someone a few weeks ago, why are you buying? And I mean this in the is this your home for a really long time or are you going to try and sell in 5-6 years. Anyone looking at this as an investment and a home will always get hurt in my opinion. If you are buying for a place to live, why should it matter if you buy this year and it is worth 10% less in two years. If you are not looking to flip then of course the value will come back and be worth more in the years down the road.

I am buying an apartment now and am actually buying a little more apartment then i currently need, but look at it that i do not want to flip if 5-6 years and pay 10% in transfer taxes and broker fees to upgrade and hope that my apartment has gone up enough to cover all this so that i do not lose money.

And wbottom there are lots of people making good money who want to pay 2 million for a 2br apartment and more.

Look at it from the rental market, The corner on 72nd and broadway is over 50% full now and there apartments go over $10k per month.

Apt23 - you hit my feelings exactly on the head. It is absolutely ridiculous to me that we have to struggle to find a 'nice' place with space. Honestly we could probably afford a pricier place outside our budget of $1.15MM but it's more about the principle of the matter - I simply don't feel right spending any more on a first home purchase.

As you mentioned with your example couple, we too have a combined income this year of $500k+ and we understand how fortunate we are to be in this position, but yet, even we are struggling. To find a nice place inanhattan. How can this be? Is the market really that wealthy?

Spinnaker - I understand your point. If very place we have bid on is going for asking, how can we say that the market has to adjust down? This makes complete sense and it's just difficult to explain. If upper middle class cannot even afford a space then does that mean it's only upper wealthy individuals who are on the market?

I just can't believe that prospect - something feels off. There cant be THAT many people making $500k+ looking for large 1 or small 2 bdrs places. Perhaps people are taking bigger mortgages than they can afford? I have no idea.

APT23 - tell me more about your investment decision in Miami. Any links of the property you purchased? It's tough for me to swallow the $60k in rent that we will be tossing away on a $5 apt in the city - how did you deal with this?

NYC - I won't ask you to explain what it's like to struggle on $500k+ a year but it has piqued my curiosity and seems no less off and unbelievable than the heady market about which you complain. Stay cool and good luck.

Mikev - exactly.

Sorry for the typos. I'm on my iPhone.

Mikev - the point is not what we can afford. Spending over a mil on our first place while we are relatively young already feels a little crazy. I fear that it's way too easy to get caught in the potential trap of an
overpriced manhattan market. Like you said, "why not pay more for the place you really like". This feels like the very problem with this market. Too many people stretched too thin.

Yes we have $400 to put down but we DO NOT want to go into jumbo loan territory and it's high interest rates. We prefer to stay under $729k mortgage.
Most coop boards require a year or two in the bank available to show. This puts our max at $1.1mM for us to live within our means.l

Keep thinking, keep talking and keep looking.

If more people had taken your approach, things might well have gone very differently. Steer clear of the greater fool theory.

P.S. don't assume that rental is throwing away money. Think of it as a defined hedge against the significant uncertainty of the overall economic climate.

Why not look for a condo over a coop. I avoided coop. For condo am doing a 1st and 2nd mortgage. Did a fixed for the $729k and a Heloc for the difference which i will agressively pay off. This way you stay out of jumbo land.

I will once again point to history. The real estate market and the stock market are sort of the same in no one can really predict which way they will go. That is why some people say up, while others say down.

My brother bought a studio apartment from a motivated seller in 1994 which was the bottom of that market it turns out for 80k, i sold it 10 years later for 400k. My point is twofold, there was no guarantee that was the bottom which is why my brother did not spend another 30k on a 1br, because he was concerned, but also that if you hold something for a decent amount of time it will go up.

while people can argue the market is to high, remember we are still back down to 2005 prices or maybe a bit more now. Wall street has not collapsed and while there is no big job growth now, there will be again.

My issue is that something is only overpriced if you feel that you are going to stare at market value every day. I asked my wife that question when we were looking and her point is that we are purchasing a home to live in for a very long time, why does it matter if two years from now it is worth 5-10% less when i am not looking to sell.

So people can go back and forth on this issue, but to me it comes down to whether you are buying a home to live in or an investment that you are concerned about getting out of.

Supposing it's worth 30% less and for an unanticipated reason you need to sell?

Mikev - we hadn't thought about the two loans. I will look into this - thank you for the suggestion.

We are planning on living in the apt for 3-4 years then buy a larger space and start a family outside the city. If we are fortunate enough to pay down the apt to be able to rent it out, that would be ideal. But IF something crazy happens and one of loses our jobs or something we would need to sell. Either way, I agree with you that the numbers work versus paying $60 k per year in rent = $240k wasted after 4 yrs. Even after closing costs we are better off than renting.

My point was simply that it's crazy how high prices have driven for renovated 1000 sq ft places. It is tough to believe there are so many legitimate purchasers, but I guess this is indeed the market.

NYC -- Your problem, if you think that's a fair word, is that you are underbuying. In my book I wrote that buyers generally feel comfortable with a loan balance of 2x-3x income. Your cohort (or maybe your competitive set) is probably following these guidelines, so you have expectations of a $1.4 million apartment, but you want to get it for $1.1m.

There are two groups of people who generally have this problem: 1) celebrities (I work with some and I often hear things like "I just want a place like Amy Poehler's place" but from people who have half the budget) and 2) Young Wall Streeters. Finance people tend to have a very keen sense of value at the margins, which prevents them from making moves like bidding asking for a place they like, or borrowing money at rates that feel "high" to them (what are jumbos at now? no higher than 6%, right?)

You can either completely change the type of person that you are (which is unlikely and I'm not advising it) and move your budget radically higher, or you can realize that you have set up a hunt for a needle in a haystack, and be patient.

In the current market, a co-op will come up that fits your requirements. In fact, if you re-sign your lease for another year I promise you will find something.

ali r.
DG Neary Realty

mikev--first you launch an unintellible defense of value in NY RE

then you say this:

to me it comes down to whether you are buying a home to live in or an investment that you are concerned about getting out of.

i consider real estate an investment i choose to make based on anticipated performance and the possibility that i might need to exit said investment at any time, in spite of what i anticipate to be a long hold period

if you are of the ilk that real estate should be considered a home and not an investment when exit potential needs to be considered, you are unique among those who post here

i was in a desperate mode also in spring of '09. try slashing a few things off your "must have" list and change your search criteria, you may be surprised. in a moment of despair i started looking for places that were 20% above my price range, and found a great place, much bigger than i thought i could get, that needed work and had an unbelieveably low maintenance. i got the place at a nice discount from asking, and although i had to cough up more upfront, it is much cheaper on a monthly basis than the lower-priced places i had been looking at, due to the extremely low maintenance. so you never know how much it may open things up if you let go of a few ideas. that said, if you have the risk of having to sell, make sure that if you do decide to buy in this market (very different than last year's market) that you find yourself a place with a nice, flexible subletting policy so you have at least some net.

Not to beat a dead horse, but if the gov't didn't bailout the financial sector, we wouldn't be reading this sort of thread.

Where do you think ALL of that money went? The bailout was an extreme wealth transfer that not only maintained outrageous salaries (linked to unrealistic risk taking) but allowed the fortunes of many to NOT be wiped out. The combination of this means you have a great deal of newly emboldened (and falsely confident - at least as far as real mkt economics is concerned) uber rich that have been spared by Uncle Sam (whether they admit it or not - and I assume that 99.9% don't) - some of which might be actually better off now than they were before the crash.

While making $500K a year is a lot of money in the normal world, it doesn't compare to what has been made and sparred over the past 2 years - and that is after many in RE/Emerging Mkts made a killing from 2001-2006. A lack of government regulation (lending/derivatives) and rock-bottom interest rate policy has created an environment of excessive asset price inflation that, in turn, has fed a money making machine the world has never seen - not just on Wall St., but in much of the Emerging Mkts as well. This money has been funneled primarily to the top 0.5% of the world's societies and guess where many want to own an apartment... (Answer: pretty much exactly where you are looking...)

Besides the crazy income/wealth world, you have today's unrealistically low interest rates helping people buy places that they normally wouldn't be able to afford. Many are doing so b/c they are afraid if they miss THIS opportunity they NEVER will be able to afford a place in Manhattan. So they go out and spend 50-60% of their income on a mortgage... insane...

So what will change this?

Higher interest rates - but don't expect the Fed to raise them when they really need to or as much as they should. It is more than clear that the Fed is no longer is an objective, neutral entity and unfortunately has become a key component in the price inflating machine that drives our economy. God forbid RE prices fall back in line with their 1999 levels because with the way our economy / financial system is structured many institutions/businesses would go under. My opinion of that is "too *$ing bad", but the Fed is focused on allowed this fairytale economy to continue to chug along - rewarding those that take unrealistic risks and punishing those that are prudent.

Double dip recession - As the effects of the worlds' stimulus explosion wear off, there is the potential that uber rich might feel "pinched" again and pull back from buying into a declining NYC RE mkt.

NYC gets uglier - A couple of high profile murders / rapes or a general increase in the crime rate just might cause some to think twice about buying in NYC, but realistically this will impact borderline neighborhoods more than the prestigious ones.

The overall point is that most just don't understand that today's salaries and wealth aren't a natural and healthy consequence of stable and sustainable economics, but the byproduct of interest rates / government spending (and lack of oversight) that drove an historic 12-year asset bubble that is still being kept inflated by gov't policies. They assume that if between 1998-2010 RE prices went up 3%/yr and interest rates were at 8.5% everything would be the same as it is today... the fact is that if that had taken place, Streeteasy wouldn't exist b/c no one would be taking about RE as an investment. But guess what, that is EXACTLY how it was pre-RE boom and we somehow managed to get by... as hard as it is to believe today...

Overall, it shouldn't surprise you that you can't find a $1.15M place in NYC given that is relative pocket change to many who have made their fortunes in this Hatchy Milatchy economy we have experienced over the past decade.

My recommendation: Wait and rent. Buying now exposes you to medium-term (5-10yr) downside and relatively little upside, unless the gov't doesn't something else crazy (which we just don't have the tax revenues to do).

Apt23: you are both beauteous and wise. There is something very wrong with the RE market if a 500k income (with no other huge debt or multiple private school tuitions) doesn't get you a C6 or better. I stand by that.

But, but, but. There is a small chance that the nicer bits of NYC are evolving into the playground of the uber-rich. And EVERY friggin' time I think there can't be any more people who have that much $ to toss at a large, "family-size" apt on the UWS, I am wrong. And yes, I know a fair # of people who bought at March 2009 lows and are sittin' pretty. As in, who cares if you spend 3m+ on a place when you just made 2m in the market (and you think that you can time the next low).

Color me bitter because I can't time the equity or bond markets :)

What is the difference between throwing away money on rent and throwing money away on interest, taxes and maintenance? It's equally gone in either case.

If you borrow 729k @ 5%, you will throw away 36k/year on interest. Moreover, the roundtrip costs of buying and selling are close to 10% -- amortized over 5 years, that's another 20k / year. You get something back from the tax subsidy on mortgage interest, but you also have to pay real estate taxes and maintenance fees, which often amount to 3-4% of value/year. So, in a flat market, you are throwing away about the same amount on "owning" as "renting".

So, the real financial issue is not "throwing away money." It is whether it makes sense to buy a highly leveraged, undiversified investment that is 30-60% overpriced by any fundamental analysis (e.g., price:rent ratios; price:replacement-cost ratios; relative risk adjusted expected returns) in a market where the trend and other technical factors are also pointing downward, at a time when government price support is being reduced, when foreign demand is being reduced by a strong dollar, when upper middle class demand is being reduced by tightened lending standards, fear and massive loss of capital, and when macro-economic policy (fiscal contraction in the midst of high unemployment, corporate disinvestment and increasing personal savings) seems to bear a significant risk of deflation.

Can you project an expected return that could compensate for the high risk that prices will drop to fundamental levels and then increase only with inflation or that market psychology will press prices below fundamental value (as usually happens after bubbles)? Do you have a story that explains why 'this time is different' and we should not expect a long, slow, grinding decline, at least until some combination of price declines and increases in costs and rents bring prices closer to fundamental value and historical trends? Do you want to be long (buy!) or neutral (rent!) this market?

Are you getting a deal that compensates for the absurdity of an undiversified investor (you) replacing a diversified one (a publicly traded landlord)? Concretely, if you lose your job, or your parents get sick, or you have twins, or your kids need different schools than you anticipate, and you need to sell, can you handle the risk that you will have lost your downpayment and not be able to buy another place elsewhere?

Then there are the specific NYC issues. Are you being compensated for the risk that NYC's main industry - finance - may ultimately suffer for its mismanagement of the last decade, reducing a major source of RE demand? What about for the risk that a dysfunctional political system will mismanage the after-effects of the private sector's binge and purge, leading to a worse recession or weak recovery? If your income is also dependent on the general health of the NYC economy, are you being compensated for your extreme lack of diversification?

Several commentators suggest not thinking of buying as an investment, but as pure consumption. Borrowing heavily for a consumption item is almost always a major financial error. Are you really prepared to kiss goodbye 10% or 20% or 50% of the price of your apartment -- your entire downpayment and then some -- for the right to say "I own it" for 5 years?

Of course, even if you are just consuming, you might want to ask why you should pay more to have one legal label ("proprietary leaseholder, shareholder and borrower" or "tenant in common, mortgagor and condo owner") on your right to consume an apartment instead of another ("leaseholder"), the same way you would if you were deciding whether to finance your car by a lease or a loan.

The key legal differences are two: first, the financial effects discussed above, i.e., who takes the risk of a market correction, and second, the right to renovate. If you view your apartment as pure consumption, the question is how much extra, above the cost of a rental, you are willing to pay for the right to renovate. Ask yourself: am I interested in spending $400k (and possibly more) in order to have the right to pay for a new kitchen? If the answer is yes, ask yourself, "if I offered to buy a new kitchen for the landlord in return for a five year lease, wouldn't that cost less than a 30% market correction that would still leave NYC RE high relative to its fundamentals?"

Wow - thanks for the post financeguy. Lots of food for thought.

Financeguy asks all of the right questions. Well said.

"What is the difference between throwing away money on rent and throwing money away on interest, taxes and maintenance? It's equally gone in either case."

Totally.

As is the money you pay over what something is worth. I considering paying $1 mil for something worth $500k (however you value it, but lets say its equity or the rent savings) then you are throwing that away, too.

The assumption that every dollar one spends on an apartment one owns they "get back" is just moronic.

Of course, its what led a lot of people to make a lot of very, very (,VERY) bad real estate decisions.

financeguy, that was brilliant. I'd also add the risk of NYS &/or NYC going broke. If that were to happen, RE taxes would soar, among other things.

Yeah. Hey, why don't y'all get permanent residencies in resource-rich 1st World countries (Aus, Canada)? Then you can escape from the inevitable financial armageddon. I doubt the U.S. would care if you were mtged to the hilt. Just keep some extra Swiss francs and gold bullion around.

I don't think ya can escape the inevitable financial armageddon. There's no where to run.

Why do we always go from down 30% or so to guns on the street?

How does the Sheriff in Columbiacounty feel about that?

You still think you are imagining me?

Has that worked for you in the past?

Watch this stupid

Now what happens?

Did it work? Please report back if possible.

"Several commentators suggest not thinking of buying as an investment, but as pure consumption" - very smart commentators. just ask Ben Stein.

My husband and I are in the same situation as NYCAptHunter although our budget is a little lower ($800K - $1m) and our combined salaries are probably lower as well. We are not looking in prime Manhattan as it is clearly out of our price range for the 2 bedroom/1.5 bedroom (similar stats to what NYCAptHunter is looking for) but are looking in Brooklyn, Manhattan, Queens, etc. (somewhere in a comfortable commuting range).

We probably can afford more but we want to stay within the $729 loan FHA limit. We are having no luck and decided to stay and rent. Currently, we probably save over $6,000 a month (more if you include retirement savings) while renting. What to do? We figure that if we don't buy, eventually we can retire early at our rate of savings and buy a nice house for $200k-$300k elsewhere and relax. This idea seems better than the ball around the neck that a NYC apartment might be when the maintenance is about half the cost of a rental. However, if the market does come down substantially - a home purchase might make sense.

Consider the long term implications of buying an over-priced apartment in NYC. It might be better if you just save the money, buy a dream house elsewhere and retire early.

ichi: yeah, this goes back to the unsustainability of prices. On an income less than 25% of yours, we bought a 2b2b in primish Manhattan in '00 (after said apt had doubled from the bottom). So, how can prices be sustainable?

10023 - horrible pricing can always be sustainable. Not ceteris paribus, but things do change. Every time the Landmarks Pres comm declares a historic district that district can become more expensive. If the 2nd ave subway or the #7 extension are halted that would restrict the potential of those areas (reducing "prime/primish" supply. While Manhattan really is an island, there has always still been room to expand. But if those possible expansions aren't allowed to happen that can reduce potential supply and hence price. This happened is what lead to the skyrocketing prices in the Bay area.

Those who got in early and cheaply don't mind changing the environment for potential new supply. For many that is a feature, not a bug.

ichimunki...I think your strategy is very smart but I if its a plan B I wouldn't give up on finding a Manhattan place. Don't know how you define "prime" but it generally does include Gramercy Park and I know of a 2 bedroom (real 2 bed not converted jr 4) apartment in a nice, doorman building that is well within your range. Only 1 bath, but nothing is perfect. No brick wall exposures either, view isn't glamorous but it is very light and airy. I'm not a broker, but I would look it up in SE if you are interested.

AV:
However, the actual reality in NYC is that potential supply has vastly increased over the last few years -- many sections of Manhattan and nearby that were formerly no-go areas for the well-paid are now acceptable, zoning has been loosened all over the city, changing commercial needs leave many office/manufacturing buildings available for residential conversion and vacancy decontrol and weaker tenant protection laws make it easier to convert rentals to owner-occupied.

Actual supply also increased, as the loose credit and high prices of the bubble led to large scale new building, renovation and conversions much of which has not yet been absorbed.

So our actual situation is one of a larger number of units than a few years ago, with further increase to come. Is there a corresponding increase in the number of potential buyers?

On the demand side, during the bubble, many buyers were "investors" expecting to make a return from the bubble itself, who paid prices that made no sense for buy-to-rent investors. These "investors" created extra demand that had no connection with the underlying economics of the city (i.e., jobs). Presumably, that demand is gone going forward and the old purchases will slowly unwind as bubble-buyers give up on their dreams. Similarly, during the bubble, out-of-towners could buy a pied-a-terre and assume it would be free--monthly loses would be covered by capital gains; with the end of the bubble, such empty units become an expensive luxury. Also, homeowners who bought before the bubble suddenly discovered that they could afford far more than their incomes would suggest; as prices drop, so does this source of demand. Similarly, buyers during the bubble saw little risk in borrowing the most possible since if they ran into trouble they could always sell for a profit; when buyers face the possibility of losing money they become less willing to stretch.

So, for the same number of jobs, the same degree of credit availability, and the same quality of life, we can expect demand to drop.

Accordingly, if the recession ends quickly and has no lasting effects, the likelihood is that the increased supply created by the bubble, together with the drop in demand with its demise, will lead to lower prices. Since each wave of lower prices results in lower demand, the process is likely to be long and slow, lasting at least until all the existing developments have sold out and likely longer -- bubble "investors" are likely to give up on hoping for a rerun only gradually.

Longer term, if jobs and thus real demand increase, construction/conversion should be able to meet it, so unless the capitalist market has stopped working, prices should drop to and then track the lower of construction or conversion costs.

ichimunki - while your handle may be the best I have seen on streeteasy, I'm not so sure of your numbers, unless you are currently living in a van down by the river.

I agree we are missing something with ichimunki's math. are they paying low rent? or is it that their salaries are high and they have a lot of savings. How does that 6,000 per month change if they were to buy and pay a mortgage instead? if they stay within the 729k mortgage it is around $3800 a month in payments right now, prior to interest savings on tax return. so then it is common charges or maint that get added. I do not see how they would not be saving either way.

Financeguy i get what you are saying. But i am not sure if i agree with your they will build more to meet demand if jobs increase. i am not sure if you are saying construction costs will be cheap so that the new constructions won't be expensive? I do not seee why people would not be buying current supply. I do not see how you are seeing a decrease in price if you are saying there is job growth and demand. No developer is going to build a new building if as you say there is already excess supply that we don't even realize is there when all those "investors" sell out.

Overall you are talking supply and demand. Last time i checked normally increased demand increases price. You are saying that longer term increase demand will cause price to drop because of construction/conversion. once again if there are already units available why would a devoloper build a new building they are not confident to sell out. SEcond conversion of what, a rental building or a warehouse?

I don't think anyone would argue that prices may decrease a bit over time right now, but not these doomsday scenarios saying that apartments are up to 50% overpriced. If apartments dropped that much you are also stating that rents are way over because at some point if apartments dropped 50% rents would also have to plummet as there would be no incentive to rent because it would most definitely cost more then just buying.

so financeguy, how do you reconcile what you are saying with the OPs experience that he is has consistently been outbid for apartments? When it comes down to it, prices have corrected with incomes - the buy/rent ratio is basically the same as it was pre-correction, and demand has been at pretty strong levels for the past 12 months. We have around 8-9 months supply, which is certainly not a marker of a crazy oversupplied market.

you're like the story of the 2 economists who see a $10 bill on the ground and don't pick it up b/c 'if it were really there, someone would have picked it up by now'. pretty theories and actual experience are vastly different.

Mikev: Actually, there is no "normal" expectation that increased demand increases price; in most manufactured goods, for example, the reverse is true. The usual Econ 101 expectation is that increased demand is met by increased supply. Equilibrium price is when price = marginal cost of production.

Equilibrium is NOT when it costs the same to rent and buy. It is when INVESTORS are indifferent between owning-to-rent, selling to an owner-occupant, developing or not developing. How much of a price drop that requires depends on how much of a return investors require, given the risk.

If you think that 3% returns is about what an investor ought to be willing to accept for running a NYC rental property, then prices aren't far off. If you think that equity ought to earn more than debt, and non-FNMA but still subsidized mortgages are running over 7%, then you ought to expect a major price drop.

Look at the iphone, financeguy is right.

Well if you are talking about living in my home for 10-15 years, even if it increased 3% a year, i think it is a great place to park money which may come out all tax free. for example if i buy a $1 million home and keep it for 15 years and assume 3% price increase by year 15, it is worth over $1.5 million, after costs i am around 350k profit which since primary home i get tax free. that same 350k is going to cost me at least 30% in federal, state and city taxes and also assumign that fed does not raise long term cap gains rate from 20%.

sure you could argue that i could have parked the money elsewhere and done better, however i am also enjoying my own home, not paying someone else money to live in a space that i can not really make my own and that is value in itself.

sure you then factor in the investor who really can not find an apartment now that makes sense unless they are willing to take a cash loss each month with the hope that prices increase. Not my idea of a good investment and depending on you income level you also lose the ability to deduct the loss.

I would think part of what you would need to work your analysis is how many apartments are owned by "investors" and how many by owner occupants to figure out how much supply that is out there that would cause your crash in prices. Becuase judging from what i was seeing when i was looking on the UWS apartments were getting sold relatively easily and not staying ont he market so long to people who are not looking for an investment property.

Printer: The economists in your joke believe that markets are always in equilibrium. That belief is false. It is also in direct contradiction to the fundamental theories of capitalist economics, falsified by the existence of bubbles, and irrelevant to the story I told.

Equilibrium is important even though markets never hit it, just as gravity helps predict the orbit of the planets even though the earth only ends up in the middle of the sun when the orbits end.

Knowing the location of the sun gives you some sense of where the earth is going to be: it isn't going to be at equilibrium (in the sun), but it also isn't going to head out to Alpha Centuri. If you know that the earth is unusually far from the sun and heading towards it, you can make a good prediction about where it is heading in the near term.

More important, if you don't know what date you are interested in, the center of the sun actually is a pretty good prediction for the location of the earth: it is always wrong, but on average less wrong than any other prediction. Equilibrium is useful in the same way.

If you want a sense of where prices are going to be at some indefinite time in the future when you might want to sell -- which is the most important thing most potential buyers should be worrying about, because that's what tells them if they can afford current prices -- the best you can do is to try to figure out where equilibrium is -- i.e., what MARGINAL COST OF PRODUCING NEW HOUSING is. Prices are highly likely to fluctuate around that number, although both bubbles and panics can make the fluctuations unexpectedly large.

The costs of construction/conversion are obviously well below current prices, so a permanent downward shift in prices is highly likely.

***

The explanation for the OP's experience is the same as the explanation for the last decade: We were in an enormous international real estate bubble, one of the largest ever seen. The NYC RE market has been well above equilibrium for a very long time -- that's why we've seen massive building, expansion of neighborhoods, conversions, etc.

The bubble is now in the process of popping. Therefore prices are overwhelmingly likely to trend downward: both equilibrium and momentum are pointing in the same direction.

Contrary to the metaphor ('popping'), however, RE bubbles unwind over many years. In most historic examples (e.g., the NYC late 1980s bubble), much of the adjustment was by inflation -- nominal prices dropped very little, while rents and costs rose to match them. Today, with inflation low or non-existent, this bubble is likely to "pop" very slowly indeed.

Anyone buying now should expect that inflation-adjusted prices will drop a great deal. They dropped 30% after 1987 and this bubble was far larger. Nominal prices are harder to predict. The speed of the drop is far harder, probably impossible, to predict.

If you have decided to buy and are trying to time your purchase between now and 3 months from now, equilibrium downward pressures may be less important than UD's microdata on momentum. But now or 3 months from now (barring some new crisis or unusually rapid price adjustments), you are going to be throwing away large amounts of money; the question is whether you are getting something -- the right to renovate, the right to deal with a coop/condo board instead of a landlord -- worthwhile in return.

Mikev: That's exactly what made the bubble work: assuming that prices will rise above costs makes it possible to justify paying any price. Assume the same thing about your iphone and it'll look free too.

But in the medium run, markets only work that way in bubbles and bubbles don't last forever. If you pay far above fundamental value, you are more likely to lose money than to earn 3%. Even if you paid fundamental value, 3% going forward would be very optimistic these days: historically, prices track inflation (because cost of building does, too) -- and the markets are predicting no inflation as far as the eye can see.

Prices are set by the marginal, not the average buyer. Absent bubbles, the marginal buyer is an investor who will choose whether to be a landlord or sell to you based on which is more profitable. I don't need much data to know that there are enough of those out there to keep increasing supply until prices drop from where they are now. If I were you, I'd redo your calculations assuming a 50% price drop before a 2% per year inflation increase.

And I'd also think about what happens in less likely situations: the Republicans win the next three elections and we have deflation and mass unemployment among the young; the Democrats grow a backbone and regulate finance profits back to the level of the 1950s; you need to sell unexpectedly for some reason at a time when prices are below equilibrium.

Those are risks, not likelihoods, but they are risks that owners take and renters largely avoid.

Conversely, the risk -- a problem for renters -- that a sudden wave of finance profits and new jobs drives demand up in NYC sharply and construction doesn't keep up, or the risk of down zoning by the next mayor, or that immigration reform, re-unionization and a low dollar double the cost of construction.

you will have to explain where you are finding a massive exodus of owners whether owner occupied or investors who are going to walk away with a 50% loss. Because by your theory the fact that at least employment has stabalized or is increasing makes no difference and that the 20% drop in prices or whatever it is off peak when unemployment was up, has less of an impact on price.

I mean i could understand you trying to sell me on 10-20% potential drop before prices stabalize and increase, but a further 50% erosion of prices without us falling into a deep recession makes no sense.

But to further this along, i am looking ot live somewhere, not invest. I want someplace to call home and do with it as i please, which is why condo over coop. even if i walk away with no gain in 15 years, it is still worth it because i have enjoyed the use of it. Same would go for a car, the minute i pay for it, drive it off the lot, it is now worth much less then i paid, did that stop me from buying?

Also there are plenty of people who will argue that the rationality you are tryign to place on manhattan real estate to be like the rest of the country does not work. at some point you run out of land to keep building. Look at Columbia and NYU they both bought up large amounts of land to expand their schools. The jobs and students that will come from that will also create demand for more housing.

The point is as you stated what are you getting in return and is it worthwhile and i would argue that if you are truly going for home ownership the potential short term drop in prices is worthwhile. However if i was liek a lot of people here who keep talking about owning for 5 years or less before moving on to my next place, I would not buy, I would rent.

financeguy - spend a little less time in the stars and your textbooks, and a little more time on this place we call Earth, and maybe you'll figure out how things really work.

i have a feeling you are a big fan of those master historians Marx & Engels - quite a theory they had, no?

I like the whole permanent downward shift in prices idea, looks like we're heading for the middle of the sun after all.

How many credits do I get if I read more of this stuff?

What part of ordinary market economics strikes you as Marxist?

I have been watching the real estate market in NYC for years and have bought and sold several apartments in the last 6 years or so, and always been lucky with timing. My current apartment is in contract. My partner and I have combined income of between 500 and 600K. We are in contract on a place at just over 1.2M and will put 25% down, as we need to put about 150K into renovations on top of the down pmt. We too would like to avoid the Jumbo loan interest rates, so we are opting for a 7-year ARM at about 4.3%, figuring we will either sell or refi before that time. We are buying this place at a 2004-2005 price, and despite all of the nay-sayers, I cannot imagine that prices will go much lower than that. NYCapthunter, I say bite the bullet and get an ARM if the rates are scary. You are coming into the hot summer months when places are more difficult to sell, and sellers may take less. Remember, rates are at historic lows...I remember when my parents bought a place for 1.1M in 1999 and they were thrilled to get 7%! Also, get a good Broker if you don't have one. Everyone thinks they will save money if they go it on their own...doesn't happen.

Thanks for all the comments.

Financeguy - I'm curious to hear what advice you have regarding our situation (more details this time):

In the pat week we found a place that we think is a good value - it is being sold by an executor of an estate who needs to recieve the cash ASAP to distribute to the beneficiaries of the will. Therefore, he has priced it aggressively 28% below any other price per sq/ft listing in the building over the past five years. We will probably end up around $975k final sale price. As mentioned befor we have $400 to put down, of which we will have to reserve $40k for upgrades/renovations. This puts our mortgage at $615k at a fixed 30yr rate of 4.6%.

IF we both re fortunate enough to keep the same jobs we have had for the past five years we should be able to have the entire mortgage paid off in 3 to 5 years. At which point we expect to move outside the city and buy a house. We hope to rent the apt out at that point. The historicals on the building and this apt specifically put the expected rental income at $5k. Maitenance/tax total $1500 per mo.

I understand your point that I'm not necessarily "throwing away" $60k in rent if we opt not to buy, but even with a 15% market decline in 5 years the numbers still make sense to me. $60k rent x 5 yrs = $300k.

I gave you the numers for purchasing: $615k mortgage at 4.65% and total taxes maintenance = $1500 per month (pre tax savings). Assume closing costs at sale of 10% although i expect to sell on my own. Even if we are forced to exit in five years instead of renting it out, I think we are better off.

Does this make sense?

I would certainly defer to finance guy for the analysis but would point out that in the span of two days, you went from " there's nothing to be had that's reasonably priced" to finding this place. That is one of the main problems with the NYC real estate market.

I really don't get it. If you're leaving in 5 years, then you should absolutely treat it as an investment. It doesn't quite work for me, with those numbers. You're okay with getting a yield of say, 40k annually (yes, yes, I know rents may go up but so will taxes) for the next 30 years on a million plus asset that has huge transaction costs if you should choose to sell.

No, it doesn't make sense. I suggest looking hard over the next 3-5 years for a great deal in the burbs while you rent in the city.

The point is that we will be living there for five years. Lets say we sell in five yrs our transaction costs would be $100k = 10%. We would have spent $300k on rent. This gives us a 20% buffer for market changes and still come out on top, right?

I don't get your strategy:
1) Are you paying off your loan for sure? If interest rates go up, there will better places to park your spare cash, rather than sinking it into your apt? Will you have the inclination to still keep paying your loan off.
2) Are you selling or renting after the 5 year period or are you basing it on the value at that point? If your apt is under what you're buying it for, are you renting until it recovers?

You're spending a million to save 200k in rent (I'm taking off the transaction cost right away) and possibly having that million dollar sunk into something that will be worth less in 5 years. I have a difficult time visualizing that you will actually pay off the loan if there are better places to invest over the next 5 years, esp. if rates go up.

If you are leaving anyway, I'd rather stay liquid and have the million dollars to invest in more liquid things and cough up the rent.

I think i am missing something on your math.

Rent = $60k per year
Maintenance = 1500/mo
Mortgage interest = 2383/mo (ignorning paydown of mortgage)
Owning per year = $47k per year

So you are only saving $13k per year, more if you are paying down principal. But if you are paying down principal you are risking a cash loss.

So going by what you said if you have $100k in transaction costs in 5 years and the value of the apartment does not change you loss 100k in cash, your savings are about $65k before factoring in additional tax savings. So even if you gross that up and say it is close to 100k. You have zero cushion if market actually declines over the next 5 years.

Let me know if i am not factoring in something.

AptHunter, the only wrinkle that you might get hit with is that if the place is truly 28% below everything else, the condo board might refuse to waive its right to purchase, and instead buy the apartment out from under you. Make sure your agent is on top of that.

ali r.
DG Neary Realty

I think NYCAptHunter has 2 diff. strategies. #1: pay off mtge entirely within 5 years, so very little interest paid. He/she would lose transaction costs + diff. in value + mtce only. #2: Keep mtge and rent it out indefinitely.

I'm with NYC10023. Here's why, longer:

Usually -- though obviously not always -- market prices are set by investors, particularly in markets (like Manhattan) where it is relatively easy for investors to move comparable units from the rental market to the owner-occupied market. So, it is reasonable to expect that prices will trend towards investor value.

In non-bubble markets, investment value is just a function of the net income the unit is expected to generates (capital gains are irrelevant, since they are just the NPV of the future income).

Your numbers show a rental return of less than 40k/year, not including any maintenance, vacancies, hassles, etc. So, as an investor, you expect a return on investment of less than 4%. The bank is demanding more than that for less risk. So your return on equity will be less than 4%, and less than the bank.

Those numbers are not stable. Normally, equity investors -- who take more risk and do more work -- expect to be paid more than lenders.

One possibility is that the market expects a rapid increase in rents, so that your return will quickly be higher. That would also suggest a rapid increase in incomes and inflation, but the market clearly does not expect either of those.

The other possibility is that the bubble is still affecting prices -- there are still enough people who believe that prices can rise indefinitely just because they did so in the bubble, or Americans are optimists or the Landmarks Law says so (see, e.g., in this thread, Mikev or Printer, who thinks that predicting price drops requires being both a Marxist and a Chicago School market fundamentalist), and thus they are willing to overpay now because they expect someone else to overpay later.

If the second possibility is right, you should anticipate price declines to bring the expected return on your apartment into line with other investment opportunities. Being a landlord in NYC is risky (it is not hard for a tenant to stay in an apartment for a year or more without paying rent, and it is virtually impossible to recover from one who trashes your apartment) and it is a lot of work (the law limits the degree to which you can defer maintenance). Plus, of course, prices and rents and taxes can go up and down, and the value of your investment depends heavily on the competence of the city government, the fickle fashions of youth, the ability of the media to find a new funding source, and the continuing ability of the finance industry to skim 40% of US corporate profits in return for destabilizing the national economy and exporting our jobs. So absent bubbles, investors will expect a significant premium over easier investments.

The bank is taking far less risk and far less work than you. Below the FNMA limit, the risk is nearly all assumed for free by the US Government. Without that, the bank would charge you at least an extra percent or two. Non-bubble equity investors are going to want several more percentage points above that.

So, I'd expect prices to come down to the point where return on investment is 6 or 7%, at least. Recent post-bubble bulk sales to sophisticated investors have been at expected returns more like 10%, which is about the average of NYC retail prices from 1940-2000, so 7% is by no means an extreme prediction. Even 10% is not close to the historic high.

If rents and expenses are relatively stable, that suggests a price drop of a third or more for your apartment. Such a big price drop will take time, but 5 years may be long enough.

If you have different views of the market's future view of future rents, costs, etc., you can generate different predictions. Play with it.

Just be explicit about what you are assuming. To generate a financially sensible deal here, I think you'll need to make assumptions that either are obviously very optimistic about the next five years in NYC's economy, or involve the bubble continuing indefinitely.

Here is another way to look at it. Your numbers make renting cheaper EVEN IF THE MARKET IS STABLE: you are assuming that this place will cost you -- in purely rent equivalent money $3850/month (interest, taxes and condo fees) plus roughly $1500/mo in amortized transaction costs (10% to buy+sell, divided by 60 months). Less the tax subsidy for owner-occupied apartments, which might be $550/mo, depending on AMT, etc. (only while you live there). Plus depreciation -- if half the value of the apartment is the actual physical apartment and it needs a major rehab every 25 years, you are probably using up $500-1500/mo worth of value by just living there, which you will need to restore in repairs or you are likely to have to accept as a price reduction when you sell. So, as a start, it looks like you are paying MORE thrown away, used up, never to be seen again, money per month to own than to rent. (Ignoring your downpayment and any principal repayment).

Then compare that to just paying the rent and putting your downpayment in a different investment. For example, mortgages on NYC apartments -- you'll make more with less risk. And if the thought of investing in NYC mortgages at 4.3% strikes you as a poor deal, remember that by making the equity investment in the unit, you are taking on more risk, with less diversification, less liquidity, and no ability to demand that the US bail you out if it goes really bad, for an even lower expected return.

***

That said, if your living taste is idiosyncratic, so renting a condo isn't going to do it for you, and your money is ample, so that you won't be too bothered if it turns out that the effective cost of this place is, say, an extra 5k/mo (that's the effect of a 30% price drop) -- go ahead. You only live once, and you are making lots of money.

Maybe you'd rather gamble on spending somewhere between $5k - $10k/ month with tail possibilities above and below, instead of a certain $5k/month, in return for the right to buy your own refrigerator. Or just buy a fridge.

Finance - Nice analysis.

But you know people don't think that way. Else bubbles wouldn't happen. And a lot of people made a lot of money betting on NY R/E and ignoring fundamental analysis.

It is like shorting stock in the .com era. Just because I know they can't be sustained at their levels doesn't mean they can't continue to go up past sustainable levels for a while. And R/E bubbles don't pop quickly.

Av -- I agree. I wouldn't use a fundamental value model like this to do short term trading. Fundamental value is only a small part of prices at any given time -- much more is "animal spirits" or investors' predictions of what other investors will think in the future about still other investors' behavior in the still more distant future. That's why I think of fundamental value as a gravitational force. It is hard to understand the behavior of birds if you ignore gravity -- or imagine that it is the only force on Earth.

Still, when you know -- as you do now -- that current prices are wildly above fundamental value, you know something quite useful: at any random point in the future, the odds are far stronger that prices will be closer to fundamental value than that they will have diverged still more.

Fundamental value is highly debatable. A priori, I can't tell you that 8 x gross rents or 12 x gross rents is an impossible guess, or whether prices should be below current construction costs or even what current construction costs are.

But when you are seeing prices that cannot be defended using any fundamental analysis -- bubble prices that make sense only if you use future appreciation to justify current prices -- AND you know that the general trend is downward, so that there will be no future bubble gains, then you know something far more useful than any detailed model. Gravity and momentum are pulling in the same direction. Prices are highly likely to drop, and are more likely to go below fundamental value than to increase further above it. Buyer beware.

It's the 5-year window and paying $1m and having to hold an illiquid asset with a sig. risk of downside for the privilege of saving 300k that doesn't make sense.