Fairly priced apartments

Oh nOOoooooooo... not anther buy/rent discussion..... why don't we just title it "R there people with more money than sense?"

THE ANSWER is a resounding YES. ppl buy pink lamborghinis to "prove" they can take a "hit".... sad but true... for the rest of us who'd rather pay for a kid's dinner in africa.... well.... you know...

w67thstreet
12 minutes ago
ignore this person
report abuse Oh nOOoooooooo... not anther buy/rent discussion..... why don't we just title it "R there people with more money than sense?" THE ANSWER is a resounding YES. ppl buy pink lamborghinis to "prove" they can take a "hit".... sad but true... for the rest of us who'd rather pay for a kid's dinner in africa.... well.... you know...
2 comments

so.
pink lambos show that you have no sense, but a 911 slow proves your a big wheeler dealer? where do sailboats and overpriced trophy watches fit in?

Oh Jim boner.

You're pink

With envy

lambo $300K to top 199mph, 911 turbo 199mph at $80K used..... i guess re rental borker is a "productive" member of society when compared to a crack addict.

oh, my 50 footer, repoed from a re developer sold at $.10 on the dollar. Let's see $200K from RE bubble developer and $150K from an FDIC insured florida bank whose lending criteria left something to be desired. See you teabaggers, ask not the gov't to lower my taxes.... takes it from the financial lemmings which abounds all around you. I figure my taxes will go up significantly but the "cost" of my lifestyle gets getting cheaper net net... so does my take home chk matter? or the fact those same dollars gets me better lifestyle sooner?

I guess a real estate broker is a productive member of society when compared to someone who last held a job during the Clinton presidency.

Come on, the bubble peaked years ago and we've had plenty of time for rationality to begin to return. Prices are going down even in the face of the Fed's best efforts, right?

There must be some place in this city where someone who wants to customize the kitchen can buy without having to drop an extra million for the privilege!

financeguy, you and w67thstreet can chat about finance. He worked for Dean Witter Reynolds Discover before being passed over for a promotion and then never holding a paying job again. Next he went into residential real estate where he got into lawsuits with his tenants.

I'm keeping my money in fairly priced stocks instead. I don't see any fairly priced apartments for sale. For rent perhaps, but not for sale.

w67thstreet
about 1 hour ago
ignore this person
report abuse lambo $300K to top 199mph, 911 turbo 199mph at $80K used..... i guess re rental borker is a "productive" member of society when compared to a crack addict. oh, my 50 footer, repoed from a re developer sold at $.10 on the dollar. Let's see $200K from RE bubble developer and $150K from an FDIC insured florida bank whose lending criteria left something to be desired. See you teabaggers, ask not the gov't to lower my taxes.... takes it from the financial lemmings which abounds all around you. I figure my taxes will go up significantly but the "cost" of my lifestyle gets getting cheaper net net... so does my take home chk matter? or the fact those same dollars gets me better lifestyle sooner?

you're a buffoon. who cares if your car goes 199 mph? you must have penis envy or something. really. you're justtification for not owning a home is so that you can buy toys, whether at bargain prices or not, an 80k car for a city dweller on top of a boat represent very poor spending choices.

Finance guy - maybe. I suppose you could make the case that a super-fancy co-op on Fifth, Park or any of those sidestreets is priced fairly at what, $1k/foot - we've seen closings at those prices on apts with no views or estate condition (22E88 comes to mind). Only because rental stock of C8s, 9s is impossible to come in that nabe, and certainly to buy that land and build from scratch would exceed 1k/foot.

Another niche that might fulfill your criteria is the very large TH on non-CP park blocks on the UWS. Over the last year, a few have closed at 500/sqft - certainly would cost more than that to acquire land and build from scratch.

It seems perverse but the larger, and smaller the inventory, the more likely you're going to approach historical rent-buy ratios.

When milk went up to $10/gal I thought about buying an acre of grass, two cows, and a pasteurizing machine. But then I learned I would have to get up at 4 in the morning to milk the damn things. In the end I decided $10 wasn't such a hardship after all. Same thing with my $200 jeans when I found out a yard of pre-washed denim was $3 and the labor to cut and sew them was $12.

So finance dude, here's my fundamental theory: people don't care as long it doesn't make their ass look fat.

Renting and buying are both ways of paying for shelter over time, and the similarities are far larger than the differences.

In Manhattan, at least, owners do not need to feed the cows themselves, so there should be no premium for renting on the "I don't want to do it myself" theory. Nor does the legal form of tenure affect the occupants' appearance in any obvious way.

So if most people don't care, the prices should be similar: otherwise, investors, who are paid to care, will switch units to the more expensive form, driving prices back towards similarity. Or if either form is priced above cost, investors will create more supply until prices revert to costs.

That's basic Adam Smith and Econ 101.

NYC provides a nice test case, and so far, capitalism -- or perhaps Adam Smith -- appears to be failing the test.

If market prices diverge consistently and over the long term from costs, and the law of one price is wrong, then the usual justifications for free markets fail.

There is no reason to put up with high rents or high land prices if they are purely arbitrary; in the absence of the free market incentives to production, "property owners" have no claim to profits they have not created or earned and for which they provide no value. Government regulation has obvious problems, but they pale by comparison with the problems of anarchy, unrestrained greed, and theft by the powerful.

So -- Where are the apartments priced reasonably relative to costs or rentals? Where are the signs of rentals being converted to owner-occupancy or new supply being built/converted/renovated? Or is the problem theoretical -- is there an alternative theory of why prices might diverge from Adam Smith's expectation, why Econ 101 is wrong, the fundamental theories of finance are erroneous, and the divergence is socially useful?

And if there are no explanations other than the monopoly power of the incumbent property owners, speculative irrationality, and market failure, how much longer will it be before the citizenry asserts its right to self-government and replaces a failing economic system with a better one?

i think the answer is embedded in your question.

first of all, the real estate market is far from a perfect market. it takes time (what appears to be a lot of time if you're watching it closely) to adjust.

as with other imperfect markets, it suffers from a lack of information as well as a significant amount of misinformation. there is no financial incentive for the broker community to suggest to any potential buyer not to buy.

NYC10023: I'm intrigued by your examples. Do you have an actual example of a large TH at $500 psf or a Park Avenue coop at $1k psf?

The rents and renovation/building costs that would be required to make those numbers make sense are high, but not so high that they are obviously impossible.

I don't have real numbers for rents for comparable renovated or unrenovated apartments, or for the costs of rehab or new construction. Do you?

financeguy:

Disagree that the rent/buy equation is that far out of whack right now. In other discussions, your largest disagreement with some others, (regarding prices relative to rents) is you don't believe an owner-occupant should model future inflation expectaions into an expected return.

Trying have to maintain some semblance of randomness, picking the first condo that came to mind, and the first rental unit in that condo:

http://streeteasy.com/nyc/rental/698571-condo-205-west-76th-street-upper-west-side-new-york

I don't want to start another interminable rent vs. buy discussion, so won't show lots of calcs. But if $3,850 is market rent for this type of unit then based on sale price I get to a 8.1% expected return on a 25% downpayment for an owner-occupant, higher than the lender's return. Is 8.1% high enough? Judgment call, but it seems within the realm of reasonableness. And future prices are not an input in this model.

However, probably the least predictable, and perhaps largest, assumption here is 2.0% long-term inflation. If instead of 2.0%, you use 0.0% -- then the ROE is effectively Zero. Suddenly a defensible purchase looks like a bad one.

Another point is there are signs that the rent/buy equation in the coop market is more advantageous to a buyer than the condo market, but that is hard to prove because of low supply of rentals.

In any case, while pricing may still indicate the slow bursting of a bubble, I don't think we have "market failure". Where do you see that?

22E88 - last ask on 12F, 3.495m. At 20% down, 5% interest rate (they only allow 50% down, but anyway just for this analysis assume 20). That's out of pocket 20k every month. I don't think that it's crazy to think that a 5 bedroom apt in good condition with views and in this location would rent for that.

311W75 - 4m, 7600sqft. While an estate sale, the upper or lower 3-bedroom duplex (elevatored, btw) are totally rentable with paint job and downstairs duplex needs to have carpets ripped out & new wood floors. Mechanicals work, fix on an as needed basis. Certainly many apts on UWS rent for 7k, 8k, in equiv. condition. At 20% down, 5% interest, that's 18k including RE taxes minus whatever for the rental unit. Now if you want to fix up one duplex, your costs go up, but so does the equiv. rent. Most people overspend on renos, but that's a personal choice.

317W77 - 3.8m, a touch under 7000sqft. High RE taxes that can be fixed with a C of O change & ripping out some kitchens. If you want to go ahead and change this to a single-fam (with elevator), put in 1.2m. Brings you to 5m. That's what, 19k with RE taxes. Last time I checked, you could get maybe even 25k for a rental this large in pristine condition & elevator. Note that I'm not looking at tax benefits, because I'm using that to offset lost opportunity cost on dp.

So my sense is, if you can get AAA location on UES and views and size (4+ bedrooms) for 1k/foot and 1.50/qft mtce, you're not far off from comparable rentals if they even exist.

For THs on the UWS, if you can get one for 500/sqft, not pristine but move-in, similar condition to say many of the rentals that dot the UWS, then you're also close to breaking even.

And for the latter, if you want to bring back to single-family configuration, and you're in a great location, I think you'll do okay (given current market conditions) spending up to 1.2m on a 7000sqft property (the economies of scale matter here, you would spend that on a 4000sqft property) reno.

For example - http://streeteasy.com/nyc/rental/707734-rental-11-east-68th-street-lenox-hill-new-york
But one room smaller than 22E88. A lot of the larger rentals are much bigger and $$$ as they are THs. So, monthly outgoing 20k doesn't look so bad.

http://streeteasy.com/nyc/sale/532221-coop-239-east-79th-street-yorkville-new-york

sold for $1mm. at 25% down, a 10/1 at 4.375% is $3,750 a month. add in the maintenance of just under $1400/month, and you are at $5,150/month before any adjustment for mtge interest deduction. After 7yrs of ownership, you're mortgage balance will be something like $650k. Assume a totally flat sale price, you net $930k from the sale, and take out $280k, or a net $30k. I think $5,150 is pretty reasonable for a good condition 2/2 on the UES. To get lower, you'd have to move further east. And of course, this is pre-mtge interest deduction, which, depending on your situation, can save you about $700/month or so.

Hmm, printer. I would need a better deal at that price point. Say a small 6-room for a little over 1m. Move-in condition.

Seg -- I'm looking for data and/or anecdotes and/or theory, not asserting market failure.

But the Harrison isn't an obvious example of rational pricing. SE shows an average 70 psf rental price and an average 1630 psf sales price (higher for current asking prices). That's a 4% gross return (before repairs, vacancies, insurance, etc.) for cash buyers.

A mortgage lender takes less risk than a cash buyer, and a cash buyer takes less risk than a leveraged buyer/borrower. Conventional mortgage lenders then unload most of their risk onto the US government via Fannie. So one would expect lenders to earn less, not more, than cash buyers of the same investment.

I only see three alternatives within ordinary market economic theories. Either investors believe in magic, they are paying now for future bubble price increases, or they expect massive rent inflation.

CC proposes bubble; Spinnaker seems to prefer magic. Bubble is temporary market failure. Magic is permanent market failure.

Seg argues (I think) expected inflation, or possibly expected rent increases without inflation. But the expected inflation that would be necessary to make these numbers work is massive and it doesn't show up in the mortgage rates. Why would RE equity investors be expecting massive inflation at the same time that RE lenders are lending at rates that imply no inflation? Alternatively, why would anyone expect massive rent increases without general inflation?

What do you think of my examples?

FG: Just to be clear, the Harrison is not the first place I would look to try to find rational pricing. It is one of the last places. I was trying to be somewhat objective and select a property that had a recent rent number, rather than sort through dozens of coop bargains.

I would be interested to hear what you think the required return should be. We don't have inflation currently, but 2.0% does not strike me as massive inflation; it is well below average inflation over the past 50 years.

Also I don't believe $1,630 psf is market for that building today -- I believe the 1,630 is an average that includes pre-Lehman and other toppy contrats. But to use your nomenclature for cash buyer, the Gross return on the unit I selected was 4.8%. Netting off CC/Taxes/Insurance got it down to 3.3%. Add in 2.0% inflation expectation and you're at 5.3% All with no leverage and no tax deductions. Fantastic return? No. But it beats today's return for the mortgage lender on a conforming mortgage, and as I said I strongly doubt Harrison comps provide the best example of value or rational pricing that exist presently.

Financeguy, don't you think some of the price support may be irrational, but no less valid? A desire to own, rather than rent, leads some to spend more for ownership than the strict financial calculation would suggest. It's no less irrational than spending $10,000 for a branded purse or $80,000 for a fancy car, when people could spend half and get a functionally similar product. I've met people who told me they "bought a place" with the same obvious pleasure than they would announcing they just bought the latest iPhone. A model that doesn't integrate pure consumption can't really explain current prices.

how long did it take for people to start to take for granted that home ownership was a way to big gains? to some extent,this sentiment began in the mid 80's and then got seriously derailed with the crash in '87. it picked up steam in the mid 90's and had a 10 year run that ended abruptly except in manhattan. why shouldn't it take at least 5 yrs with more and more anecdotal stories of losses starting to overwhelm the long term thinking of gains.

and despite everyone getting confused about timing, we are roughly two yrs from the first implosion. plenty of time to come.

"Financeguy, don't you think some of the price support may be irrational, but no less valid?"

Wouldn't it being irrational make it less valud?

NYC10023 -- if I'm reading right, your first two assume a 0% return on equity. I'm not sure what return is enough, but that's too low. Your 77 St townhouse example might be getting closer, if your numbers are right, but with no room for slippage.

Seg: Doesn't 3.3% speak for itself? That's not enough to take on the risk of deflation, let alone a crazy tenant or the 3.3% you need to set aside for a gut renovation every 30 years.

In your inflation example, what is doing the work is not the real estate prices but interest rates that don't reflect your inflation prediction. That can't justify prices unless you have some explanation of why buyers as a group would predict so much more inflation than lenders. (If you are confident in your inflation prediction, you should be shorting the 30 year Treasury market, not monkeying around with overpriced real estate).

Financeguy: if you take a non-amortizing mtge (i.e. no forced savings due to paying off principal), then whatever the tax writeoffs are would be your return on equity. Say your tax savings are 50k/yr, that would be your return on the downpayment. Obviously, rent deflation would cut into your return, while rent inflation would add to it.

Income-producing property of course, adds another wrinkle to it as you get a bigger mtge writeoff by charging your rent against part of the mtge interest payments and then you still get another 1m of mtge to play with.

And I haven't added transaction costs in and out. Owning less than 20 years would be foolish, IMO. But that's my borderline case for acceptable properties. >$1k/ft on the UES, uberprime areas, forget about it. $1k/ft - maybe, esp. if you have a long time horizon. $700/sqft would be very attractive.

swe, only if you expect economic actors to be fully rational, which of course is crazy. Are we talking reality or theory?

pssst columbiacounty --- [whisper]yeah, we know. but in the meanwhile there's a lot of time to kill. ergo these threads[/whisper]

FG: I'm not sure there's much disconnect between what I'm assuming and what the bond market's assuming. 10-year TIPS yield about 0.4%. 10-year treasuries yeidl 2.56%. That implies 2.12% inflation vs. my 2.0%. For 30 years, the TIPS are 1.52% vs. treasuries at 4.14%.

You are thinking like a landlord/investor. (And, apparently, like a bond trader.) Which is fine, but for the owner-occupant there are some practical realities that don't square with your equilibrium model for the marginal investor.

1. Regardless of why long-term interest rates are so low (there are dozens of theories), it's the actual rate that matters to the buyer, not the *reason* for the rate or the future movement, which must be indeterminate for anyone without a crystal ball. If a creditworthy buyer wants to buy, and someone offers a 30-year mortgage at near record-low levels, a lower rate impacts affordability. And affordability impacts prices.

2. Tax deductions exist. As long as they do, the analysis for the marginal investor is not the same as for the owner-occupant.

3. For an owner-occupant, the crazy tenant is not a risk he is taking (he hopes so anyway!)

I don't disagree with looking at it from an investor/LL perspective, depending on objectives. But the owner-occupant perspective is not invalide I don't believe.

Maly - in functioning markets, prices drop to costs because of producers not consumers. Consumers may be happy to spend more, but they don't have to, because investors increase supply until prices drop.

Flat prices will allow developers to catch up with the high demand that the bubble created, and dropping prices will teach the teachable, even if slowly, thus cutting demand.

Meanwhile, Maly's luxury buyers will continue to overpay from time to time. If there are enough of them, that may make price adjustments very slow. But even luxury buyers won't pay $1000 for an Iphone when the vendor next door is selling it for $500.

Seg: Owner occupants who are willing to give the seller the full benefit of the tax deduction and who rate their own risk of being a lousy tenant at zero function like Maly's luxury buyers and the rational buyers during the bubble: they can drive prices up short term, but in the long run, they shouldn't have to. Prices should drop to marginal cost of production, just like in every other market, because otherwise producers are making super-normal profits and when that happens, more producers appear until the super-normal profits go away. Which can take a long time. Hence, the wait.

and so, financeguy, what is the cost of production for UES, 79th & 2nd, 2/2 place that I showed you previously in which cost to own is the same as cost to rent?

Here is another way to look at the fundamental problem.
NYC apartments still clearly cost more than it costs to build them or convert rentals (e.g., investor owned condos) into owner-occupied. So we should expect supply to rise.

Meanwhile, we already have more high priced apartments than high incomes, by a large margin. Very roughly: $500,000 household income puts you in the top 1/4% of the US. Assume that in NYC, only the top 1%. That suggests about 5-10,000 households in Manhattan with enough income to support a $1.5m apartment. There are currently 3000 such apartments listed for sale on SE. If apartments sell every decade or so, then maybe there are 3-6 times as many $1.5m apartments as there are people who can afford to buy them from income alone.

In other words, current prices are supported largely by people who are selling one overpriced apartment to buy another one. Most of them have mortgages, so when prices go up, they get rich faster than prices go up, and when prices go down, they lose their ability to pay faster than prices go down. As prices drop, they will push prices down ever more.

So we should expect demand to drop as prices drop, but more so.

That's the theory. But the theory has no time frame in it. CC says people learn slowly; it could take a decade before they stop expecting prices to rise. Everyone agrees that people with paper losses are very slow to realize them. Builders are also slow, and they were slowed down even more by the financial crisis.

So slow, but how slow?

And where are we in the process right now? That requires data that I do not have, but perhaps you do...

What does it cost to build or renovate?

How many condo investors are nearing the point of giving up on the faith that prices will "come back", so that they can see that they will make more money by selling at current prices than by holding on?

w67thstreet said: "Oh nOOoooooooo... not anther buy/rent discussion..... R there people with more money than sense?"

I second that motion! lol

FG: that's why I gave you examples that were not easily duplicated/"produced" by builders.

Printer -- cheapest cost of production is either an investor deciding to sell a condo rather than rent it out, or a builder putting up a new unit.

For the first, the question is how much would an investor making (or imagining it is making) by owning & renting vs an alternative. I can't figure that out from your numbers.

I'd guess an investor not expecting bubble returns would want something like a 6-12% gross return, so prices should be around 8-16 times annual rents -- at the high end for optimists who think NYC and finance have a bright future, at the low end if low interest rates signal fear of continued recession or deflation.

For the second, it is cost of building. $500 psf plus the value of the land as a parking lot?? Half that? Double that?

financeguy - what a huge logic miss- you are assuming that only full time, working residents buy places in Manhattan. and your contention that only 5-10k families make 500k or more is low. not to mention, that depending on the downpayment, which many get from family, you don't necessarily need that much income.

http://envisioningdevelopment.net/map

check out this site for an idea of how many high income families there are in manhattan.

NYC10023 -- at the right price, builders kick out RS tenants or industry, restore wrecks, gentrify or create entire new neighborhoods, build new pre-war coops, convince the city to create new parks or improve transit, etc. Anything can be, has been, and will be duplicated in NYC. The only question is whether it costs $3000 psf or $300 psf to build the new version.

Printer -- Thanks for the data.

Not sure that it contradicts my guess. It shows 70,000 families making 192k + in Manhattan. Nationally, there are over 10x more households at that level than at the 500k level, so this is consistent with my guesstimate.

Buyers, we agree, buy based on wealth, not income. And most of that wealth is the result of the same high prices it supports. So high prices are supported by ... high prices, always an unstable situation.

yes, the higher the number of wealthy individuals in the world, and the greater their wealth, the greater the chance for price appreciation in manhattan. we saw the inverse in '08-'09. this isn't a particularly revolutionary insight on your part.

I love these threads.

financeguy - under current market conditions would one be able to afford to buy and build product similar in quality to 22E88 at 88th between. 5th & Madison for under $1000/sqft? Your argument is circular because the price of buildable sqft is directly related to the "bubble" price the finished product will command. And you are ignoring the built-in difficulty of acquiring buildable land once that land has been converted into a "Gold Coast" prewar co-op. Nothing is impossible, but there is a gulf of difference between being able to acquire an apt for 1000/sqft and acquiring the whole building at that price so you can tear down and sell for 3000/sqft (IMO completely feasible for a new-build condo at that location).