What can you buy in July 2007 vs. July 2010?

Well, I know that I had a contract on a new construction condo downtown signed in Dec 2007 for 3.9M and had everything set to buy at a rate of 5% for a 7/1 ARM in apr 2008.

I was offered a right of rescission which I took, and now that same condo resold for 3.25M just a couple months ago. And the interest rate on a 7/1 was 4.5% at that time.

Interesting food for thought, Sunday, particularly on arguments for buying less. On the other side of the "lost down payment" argument is 3 years of savings for down payment. Assuming you were renting the equivalent of what you're buying, 3 years of saving negative carry at 2% covers becomes 6%, or almost a third of te down payment.

I think the biggest differences that had made it more "affordable" in the past is the existence of sub-20% down payments and the fact that it's no longer common knowledge that home prices go up 5-10% every year.

dc, Sorry if my question wasn't very clear. I wasn't asking if prices went down as it clearly did.

In your example, what if the scenario is:
1. you had $3mm in cash and stocks in 2007
2. was going to use $2mm in down payment, so that you will have $1mm left after closing
3. In 2010, you're only left with $2mm in cash and stocks because of stock/mutual fund losses
4. In 2010, you only have $1mm for down payment and asking for $2.25 loan vs. $1.9mm in 2007.
5. As a result, maybe in 2010, you can't afford the same lower priced home from 2007.

Of course the above numbers can be easily adjusted to come up with a different conclusion. i.e. smaller loss in down payments or bigger drop in price...

inonada: "On the other side of the "lost down payment" argument is 3 years of savings for down payment."

For many, a significant part of the down payment is from "family money." That family money was likely sitting in stocks and mutual funds, etc...

If daddy and mommy have less in their retirement fund, their contribution to their kid's down payment will likely be less.

Ah. Call me old-fashioned, but In my social circle, there's no handing down of money from moms and pops.

What fraction of "rich" people (say net worth over a million?) that you know were self-made vs. handed-down? I know many of the former type, from many walks of life, and few of the latter. I wonder why. Perhaps it's because of my background and the type of people I'd rub elbows with, perhaps it's because I'd tend not to befriend the family-money types, perhaps it's because the family-money types feel some sort of secret shame and try to hide the fact?

I think in the last10 years there's been a huge shift, nada, not surprisingly coinciding with a growing and enormous concentration of wealth among the haves. it's like prepping the kid for the erb's (which wasn't necessary 10 years ago), everyone is doing it, rising the bar for admission/price of housing.

my parents helped us purchase our first condo, which required approximately $6000 to close. they loaned us $2000. somehow that doesn't seem the same, does it, but without that help we wouldn't have been able to close. the times sure have changed.

Sunday, I think you also need to consider the large increases in maintenance/taxes/cc's.

raising the bar.

inonada, most of the people I know bought there homes with help from their parents. Parents' contribution are mostly around 30% to 50% of the down payment. Their parents were not "rich", but because their own homes were mostly paid off and their stock/mutual funds accounts had a decent amount, they were able to help. My friends were not too proud to admit they got help from their parents. I know some who even took out an equity loan to help their kids. However, many lost a significant amount in the market in 2008.

What are erb's? SAT and the like?

Agreed, $2K doesn't seem the same. There's a difference between "here's what you could save in several months" and "here's what you couldn't save in a lifetime".

Having your retired/retiring non-"rich" parents take out a home equity loan? Yikes!!! At least the sense of shame is there...

nada, back then it didn't take a lifetime of savings. and $2000 was a third of what we needed. most kids graduating from college these days who don't have reasonably well off families have a big chunk of student loans. many of them will be lucky to get out of the parents' basement. incomes have only kept pace with housing costs for those in the top 5 percent since around 2002, I believe.

the erb's are an incorrect but commonly used acronym for the test given to kids in the city. it's the test given to the wee ones to determine private school admissions.

ar, you're right, the increases in maintenance/taxes/cc's should be included under the "buy less" list.

inonada, feeling "shame" for receiving help from the parents? It really depends on the relationship... I remember reading about this group of hunters who always cut up the meat and share with all their neighbors. You would be considered a terrible person if you do not accept the "gift". The idea is that if you don't accept now, that means you'll not be willing to share in the future.

My friends do not feel that they are "entitled" to the help, they feel very lucky that they can and also understand how hard it was for their parents to save that money. I'm fairly confident that my friends will take very good care of their parents in their old age.

My parents will not be able to help me when I upgrade, but if they could, I would welcome the help and not feel shame in accepting either.

In my original question, it can be the same person in 2007 and 2010, or a typical 35-year old in 2007 vs. a different typical 35-year old in 2010. The latter referring to 'the next generation of buyers'... Sorry I can't explain this better.

"inonada, feeling "shame" for receiving help from the parents?"

Your words: "My friends were not too proud to admit they got help from their parents."

I know, not feeling proud is not the same as being ashamed, but still...

I'm assuming that your question is for buyers who are putting down a 20% down payment. If you are planning to put down at least half in cash, a lower sale price and lower interest rates should mitigate in favor of buying now as opposed to 2007. Having that amount in cash for a down payment should help you easily qualify for a mortgage.

I have to say that I'm consistently impressed when I read in SE of a young person/couple in their 20's/early 30's who purchases their own home no matter how they get their downpayment.

lobster, sure, if the current buyer can still put up 50%+ downpayment. I am actually saying that people probably can afford less downpayment now. Ok, I know that recent transaction have higher downpayments, but that's just because the only ones who can buy are the ones who can afford the higher downpayment requirements or paying in cash.

inonada, when I wrote "My friends were not too proud to admit they got help from their parents.", I meant that they did not try to hide that fact. They tell me how much they appreciate that help and understands they could not have bought the place without their parents' help. I can see how it could have been misinterpreted. As for your opinion that they should feel ashamed for accepting that help, I don't share that opinion.

There are 2 separate answers to this question. For a speculative buyer or a flipper, without question you can buy significantly LESS in 2010 than in 2007, for both the reasons Sunday mentioned.

For a financially-sound buyer with a deposit, it's a tougher question so why not put some numbers behind it.

For round numbers let's say a buyers wants to buy a place = to 100% of net worth, say $1 million. Assumptions: 20% down payment; assume entire net worth from 2007 was in the stock market with a 30% loss from 2007 to the present; RE is down ~25% over same time period.

A) 2007:
$1 million apartment
$200k downpayment
6% mortgage
$4,796 mortgage payment
$800k remaining in non-RE assets

B) 2010:
$750k apartment
$150k downpayment
5% mortgage
$3,221 mortgage payment
$550k remaining in non-RE assets (1MM * 70% * 80%)

So who can better afford this identical property? All else equal it's (B), with a 29% lower mortgage payment. Higher taxes/CC could eat into that, but not entirely, and this would eventually converge to the same place.

But who would you rather be, considering (A) has avoided the stock market losses and retained greater total assets? If (A) was astute enough to get out of the stock market in 2007, you'd rather be A. But from a pure "what can you buy" perspective, I think B wins.

Sunday, understood. Different strokes for different folks. Parents have a tendency to overindulge their children, and most would rather live in a hole just to have their kids live more comfortably. Case in point, when I was 16, my mom had my brother and I drive her brand new car while she drove the old one. This will carry on forever as far as many parents are concerned: I know of people in their 40s getting money regularly from retired parents. At some point, it's on the shoulders of the kids to tell the parents to stop. For me, that was at age 20.

My parents spent everything they had to make sure we had the necessities and moved us away from really bad neighborhoods. After paying for rent and food, they had nothing left, so no retirement fund. Now, my siblings and I pay for their housing and other expenses. They wanted to move into public housing to reduce our cost, but we said no because we know it would not be as safe and my mom would not have her little garden to keep her busy. I like to believe my friends will take care of their parents just the same. I could not be friends with them if they wouldn't.

Seg, I think your example is a bit apples-to-oranges.  Why would one guy take the non-RE assets and hold it in cash while the other put it in stocks?  May as well have said "lost it all on number 31 in Vegas".

The more appropriate comparison would be:

A)
2007:
$1 million cash put in as
$200K downpayment for $1M apt
$800K in stocks
2010:
apt at $750K with $800K mortgage
$560K in stocks
Balance sheet: $510K net -- $1310K assets, $800K liabilities

B)
2007:
$1 million in stocks
2010:
$150K downpayment for $750K apt
$550K in stocks ($1000K * 0.7 - $150K)
Balance sheet: $700K net -- $1300K assets, $600K liabilities

Interest rate differential may be there as you point out, but person A does have the option of refinancing by bulking up equity from other assets.

The point here is that a 25% loss on a 5x levered asset produces a 125% loss, and one from which you cannot walk away.

inonada, I know you are just going with the given example, but do you think people really have that much left after closing? Except for the really rich people, I would be surprise if they had more than 1/3 of the downpayment left after closing. i.e. If they had $900K, they would probably use $600K in downpayment, meaning they would want to buy a home that would required 600K downpayment and whatever loan they can afford.

I agree Sunday, most would not spend so "little".

Shall we go with $300K net worth? In case A, they'd buy a $1M place putting down $200K and put $100K in the market in 2007. Fast-forward to 2010, they've got -$50K equity in the house and +$70K in the market, so wiped down from $300K to $20K. They can probably afford to live on.

In case B, they've got $210K in 2010 after the drop. They put down $150K on the $750K house and have $60K left over. Their net worth is $210K, 10x higher than case A.

Of course, case A has more liquidity: they have $70K in the markets vs. $60K. Also, when they bought the place they were "richer" and the lenders were willing to hand them more rope than they should take. So yeah, in that sense they could "afford" more. In fact, case A could have "afforded" a $2M place in 2007 doing a 10% down payment. Case B would not have the option of a $1.5M place in 2010.

There is a difference between what you can do and what you should do. Many, many people ignore that difference IMO.

"Why would one guy take the non-RE assets and hold it in cash while the other put it in stocks?"

Understood. I was trying to extend the original premise a bit, and see if by avoiding stock losses a 2007 RE purchase could (conceivably) have turned out better for a buyer than waiting until 2010. As you noted, the only way it could be true on a net worth basis is if person A invested their non-RE assets differently than person B.

Sunday, your comment really helped clarify your argument for me. Basically, how can a young person/couple afford to buy a home? Prices are still very high in this area and you need a substantial down payment. Personally, I only know of one single friend who got help from her parents to make a down payment on a studio alcove apartment. That's why I'm always impressed when young people can afford a home at an early point in their lives since the amount of money you need is so high. Not everyone makes such a high salary that they can afford to buy a home at age 30.

inonada, even from reading the SE postings, you see that many still continue to talk about what they can buy vs. what/when they should buy...

lobster, yes, I think more people will have to wait until they're older or settle for something less, that is unless prices come down a lot more. I also don't see the -25% off that people are seeing, when comparing closing prices from peak to current.

Prices are set by supply and demand.

In the long run, supply tends to be more important: if prices are above costs of production, profit-maximizing investors will eventually create more supply, by building, renovating, or moving units from the rental market to the sale market. This sets a long run ceiling on prices. Prices above the marginal cost of production create a super-profit opportunity, and sooner or later, investors increase supply until prices drop back to marginal costs.

This is why long run studies of housing prices consistently show NO appreciation above inflation: over time, prices reflect costs and building costs don't go up faster than inflation.

***

However, real estate supply is relatively fixed in the short run because it takes a while to build or move units from rental to sale markets. So in the short run, demand affects prices dramatically.

Generally, in the short run and assuming a relatively fixed supply, the market price is set by the marginal buyer, i.e., the one willing to overpay the most.

If you assume that that the marginal buyer is willing to pay as much as s/he can, rather than a sensible amount, then Sunday's original question can be rephrased: "Is there as much buying power out there to support prices as there was?"

Answer: No.

(1) The number of high paying jobs is down, at least slightly. (2) Assets held in the stock market or the real estate market have dropped significantly and no asset class has increased commensurately. (3) Foreign investors have had a significant drop in purchasing power due to the rise in the dollar (and drops in their home markets). (4) Credit is tighter than 3 years ago (although looser than 1 year ago).

So ABILITY to pay has almost certainly dropped. What about WILLINGNESS?

Anecdotal evidence of this board suggests that the marginal buyer still believes that real estate always goes up "over period of five years or more", so the bubble mentality is still supporting prices.

If these buyers move to a more accurate understanding of the risks they are taking, they may be less willing to invest their entire net worth and 30% of income in a single, highly leveraged, undiversified, overpriced, depreciating asset with negative expected return. Some may even conclude that the massive government welfare payments to homeowners (partial pass-throughs of Treasury and Fed subsidies to banks and free insurance of lending risks; income tax subsidies) are not high enough to compensate for the market risk.

That would speed up the inevitable adjustment. Otherwise, the return to cost-based pricing will be slow and long. Supply increases only slowly and inventory (the supply available for sale at any given date) is affected by many things, including potential sellers who are competing for a diminishing pool of bubble buyers.

financeguy, good analysis.

I wonder how many people know about the following:

"Molly McDonald, an archaeologist with the firm AKRF, said that about one-third of lower Manhattan is man-made, constructed sometime between 1797 and 1836. Prior to 1797 the site of the ship was part of the Hudson River, as was about half of the ground zero site."

http://www.cnn.com/2010/US/07/15/new.york.ground.zero.ship/

financeguy,

I'm curious -- how do you explain that developers have continued to build new luxury RENTAL buildings during the bubble and post-bubble world? Logically they should be doing just what you suggested -- maximize the offering of new sale units to capture the "super-profit" before it's gone. Personally, if I believed we are in the 3rd inning of a deflationary march to cost-based pricing (for sales and rentals), then the last thing I'd want exposure to is a large portfolio of rental units.

I can see a few ways to reconcile this. One is that investors in new rental construction are not behaving rationally. Another is that unique circumstances (permitting? tax?) that make certain rental buildings feasible even in a long-term deflationary worldview. Finally, one could suggest that the rental supply has not increased as fast as the supply of new/converted condos (I don't know whether this is actually true).

In any case, for those who subscribe to the cost-based/super-profit way of thinking, what is your first thought when a brand-new rental tower goes up?

not to oversimplify, but builders build because its their business. they may build less, but they build as long as they can put together the financing to continue.

seg, from what I've read developers decided to build these rental towers primarily for two reasons: they thought that demographics, particularly the maturation of a large number of young adults leading to roommate decoupling and household formation, would accelerate demand significantly over the next decade, and because money was so cheap they elected to build them on the early side given current demand levels.

Friction.

Building decisions need to be made in advance, so builders/lenders may have feared that by the time the building was ready, the condo market would have corrected, eliminating the super-profits for owner-occupied. Since this bubble was unprecedentedly long, a developer could rationally have predicted a risk of it ending at any time after 2000. In the last couple of years, presumably lenders would be much happier financing a building that is projected to make a profit on rents -- which are far less likely to depart from fundamentals -- than one that requires less predictable sales prices to work.

Leaving aside timing, some developers may have more expertise in rentals and thus prefer to build rentals even if owner-occupied would be more profitable for someone else.

Large landlords, being diversified, are better risk bearers than individual homeowners, and so rentals should be more profitable than building owner-occupied in stable markets. Developers using models that reflected costs rather than the actual bubble experience may conclude that rentals are profit maximizing.

And so on.

Prices ordinarily set at the MARGIN: by the most optimistic builder (thinking its costs will be lower) or the most pessimistic seller (hoping to get out before disaster) or the most profit-hungry landlord (seeking short term returns) makes a deal with the most optimistic buyer (expecting a high future return).

But in real markets where people don't have perfect information, disagree on the future, and so on, there is plenty of room for transactions that are suboptimal as well.

Just because it is more profitable to sell to bubble-crazed homeowners does NOT mean that every landlord is going to sell or every developer is going to switch to condos. It just means that over time, some will -- enough to press prices back towards costs.

On the parents-helping-kids front:
Back in 2007, I met a young, unmarried upper-20s couple, which actually took this to a whole different level.

Both of them were given down payment money by parents to help with buying a place.
Instead, they each put the money into separate investment properties and continued living at home.

They were living out in outer-outer boroughs like Flushing or something, and bought in brand-new condos built in places like LIC/Billyburg/etc.

Between the two of them I believe they owned and rented out 2-3 properties and were at that point looking at more.

Imagine that?
Give your kids downpayment money, and they don't even have the decency to move out of your damn house.
Ouch.

I haven't heard any updates in 3 years but have been kind of itching to find out how that all went down..

Here's a question, lets say you sold out of your place toward the peak, call it July 2007 to be consistent with this article. And you moved into a rental. You are a family with kids and the school district was important to you.

Now when you rented in July 2007, the rental market was very strong too. So even though your rent to buy ratio totally made sense to be making this move, you have a relatively expensive rental on your hands.

I suspect that apartments for ownership are down a greater percentage than apartments for rental, even though both are down. But, you are in a rental priced during the top, and again, you have a family with kids and the school district is important to you. Not to mention moving is a hassle. And the landlord may not feel at all compelled to negotiate lower with you - why should they?

So, you have a 2007 priced rental, and apartments to buy are down whatever percent now. So the rent to buy ratio FOR YOU is perhaps now starting to look attractive. How do you view this situation.

Of course as I type, I figure, if you are willing to move to buy, you'd may just as well be willing to move to rent a new place at a lower price. So, I guess I no longer have a question, but I'll post anyway.

Interesting question. If I could have bought in '07 but didn't, I would be shaken by the financial world's cataclysms that I wouldn't have bought in '10. It is poor assumption that my dp money would be in equities.

If I were a diehard new yorker, and could not imagine anywhere else that I would rather be even if our water supply dried up overnight then I would be spoiled for choice if I had a 40% dp in '07 but didn't pull trigger.