ATTN: stevejhx -- POST HERE

you are in kyle's camp on this "wherewithal" stuff, arent you, juicy?

What does that mean Wbottom?

as in kyle's last post, about ten back from this

does your happy kyle camper status include points made there?

Yes, I agree with what kyle is saying. You, however, will try and "read between the lines", attempt to interpret what he is saying, or even go so far as putting words in his mouth to spin it to your own point. This will require me to re-clarify a hundred times, attempt to tell you what I think kyle meant, how your interpretation is off, etc, etc. So lets just cut the bullshit right here. When I read kyle's post literally, I agree with what he said. I have no idea if he meant something other than what he wrote, or how in the hell you will interpret it and I don't really care.

You seem to have a sudden fascination with my opinion of kyle's posts, why would that be?

probably boredom

neither bored nor, certainly, fascinated--mildly entertained

and kyle's post is garbage--moneyed people can be extremely frugal and calculating; and some can be cavalier and spendthrift--there is no rule on this, and a misunderstanding of this has nothing to do with differences here at SE over rent/buy and real estate in ny generally

camp happily! not so angrily

and it IS going doooowwwwn

"moneyed people can be extremely frugal and calculating; and some can be cavalier and spendthrift"

Of course, but they can also be what kylewest said. This is what I mean by interpretation. You read kylewest's post and assume his statements are absolute. He was simply pointing out that there are buyers out there that aren't "extremely frugal and calculating" and to force them into the same formula would be silly. Somehow, you read it as "rich people don't care about money". Maybe it's that I am familiar with kylewest, you take things way too literally, or you just want to argue about something because you are board. Whatever it is, I am 100% positive you are reading it wrong.

"there is no rule on this, and a misunderstanding of this has nothing to do with differences here at SE over rent/buy and real estate in ny generally"

What's funny is that this statement makes the exact the same point kylewest does, but from a different angle.

"board" = "bored" yikes!

pregnant wife. but JM i must confess i kind of read it as a "the rich are different" theme as well. while i think KW has added a tremendous amount of insight to the board, to just assume that everything he says is sacrosanct is a bit much.

it's true that all people can't be painted with the same brush, and different people have different motivations. i'm ok with that. and i'm ok with someone spending whatever assuming it's well within their means and they have no probable need to move in the near future (or they don't care if they take a loss). but having looked at too many comps to be healthy, that's often not the case. risk is risk. everyone's appetite for it is different. but many people don't even consider the risk. or the options. i don't even know what goes into steve's or rhino's rent-buy calculations, to me it's just a bit of common sense and maybe a decent on-line calculator.

the bottom line is that we are still in very uncertain waters, so sally forth with some caution. is every buyer a lemming? certainly not. are some? most decidedly.

The lack of good rental options drove me to buy after I sold at the peak for my old building. I wish I could have been more flexible with respect to location and condition, but 2 years of renting proved me wrong. In the entire time that I've owned again, there have only a couple of rental properties that have come on the market that I would have considered. I would definitely be safer financially renting, but much unhappier with both condition & location of the rental. At the end of the day, I decided that I was okay with the risks.

Wbottom, weren't you getting on my case about a supposedly unintelligible post? It is to laugh. I'm with JuiceMan on this.

ar, great post. I think you're absolutely right - be cautious but don't be unflinchingly rigid. Lemming is not a synonym for buyer, but there is definitely some crossover. And dare I say, there are some renter lemmings too. From all walks of life, really.

The nice thing about having a foreign passport is that the last time I checked, they didn't extradite you for not paying your debts. Also, I'm not sure how U.S. creditors would come after your foreign bank accounts :)

That's spot on nyc10023. No one talks about these "special circumstances" in rent/buy scenarios, but it is very, very real in our neighborhood (as you know well).

I agree AR, except for the "rich are different" comment. Don't mean to be a kylewest groupie, but he has too much class for that.

Bjw, how the heck are ya?

JM: to tighten the "buying" noose further, the zones for good schools are small and not a lot of rental choices unless you love Trump. Pray for a kid of the same gender :)

Well, it is the end of the day and you have to give credit where it is due: Stevejhx STILL knows how to get 'em going and frothing. No one stirs the pot better. Just a day or so and over 200 posts. Not bad for a thread where pretty much none of us (myself included) posted anything we haven't said before. I think we just really like each other's company--God knows no one else is ever going to read this stuff.

"God knows no one else is ever going to read this stuff."

I don't know - perhaps there's a Nobel Prize for stuff-to-do-when-work-is-slow looming for us all?

Now then: "You speak in such vague terms when you're in a bit of a tight spot explaining yourself, huh?"

I've been accused of a lot of things, but being "vague" has never been one of them.

"$1, however slight, is indeed a premium."

Please. Such foolish nonsense is deserving only of LICCdope. Or spunky.

"Clearly you assign some value to ownership over renting."

Under the right circumstances I do; under the wrong circumstances I don't. I value ownership over renting when it's cheaper, and I value renting over ownership when its cheaper. That's it.

"The question is how much? Is there a formula for that?"

How many times do I have to post what that formula - nay, formulae - is? How dense are you? I believe earlier in this thread I posted 6 or 7 such formulae, all recognized by economists as valid. What I don't recognize is the stupidity of people who say that if you buy a property in cash and then get the exact same amount back when you sell it - excluding transaction costs, naturally - that you have, in effect lived free.

All the while threatening to lose $1 million.

"Or are you willing to allow that it might be different for different people, as kyle alluded to in his last point"

I've never said anything but. Each decision is individual. However, the micro does not preclude looking at the macro, evaluating the evidence and seeing how a market as a whole reacts. That's where those formulae came from.

"and that maybe it doesn't make sense to blindly criticize others for not using your exact number?"

I've always said that the different ways of looking at the value of property will come up with slightly different numbers. I've always said that I would accept any rational, reasoned, and empirically proved and academically accepted way of looking at the real-estate market.

What I won't accept is the nonsense that JuiceMan and LICCdope come up with on a routine basis, like - viz. above - if you buy a property in cash you live in it for free.

Or that people who manage bond funds don't trade bonds to do it.

With no empirical data to support their positions, just "Things are different here." So different, in fact, that Juicy has been proved wrong by his own posts: Manhattan real estate is not different from real estate anywhere else. The price is tied to income and leverage. It is in the process of returning to its historical norm. Period.

Unless someone can show me where there is proof otherwise.

"I've been accused of a lot of things, but being "vague" has never been one of them."

Ok, so that means it can never happen. Clearly my bad.

"Under the right circumstances I do; under the wrong circumstances I don't. I value ownership over renting when it's cheaper, and I value renting over ownership when its cheaper. That's it."

So we're back to square one on this - you think there should be no premium to own. But you also say that everything being equal, you'd prefer to own. You're always talking about economists and formulae, yet you fail to grasp one of the simplest concepts of econ - amazing. If you consistently pick one option over another, it means you prefer it and are willing to pay more for it. That's just not arguable.

"I believe earlier in this thread I posted 6 or 7 such formulae, all recognized by economists as valid."

Bull$h!t. You posted a formula to determine exactly what the premium for ownership should be, AOTBE? Apologies if I missed it, but when you seem to deny the basic premise that there even is a premium, I fail to see how you could have posted 6 or 7 formulae (let alone one) to calculate it.

"if you buy a property in cash you live in it for free."

I don't believe either of them said this, but they are obviously free to clarify.

"But you also say that everything being equal, you'd prefer to own."

If by buying I can lock in a stream of rent payments lower than a stream of market rents, or even the same, then it would make sense to do so.

"Bull$h!t."

Really? Go back to the prior page, where I post:

1) Cap rate
2) Price-to-rent
3) PITI
4) PTI
5) P/E ratio
6) Imputed rent

Enough, or do you want more?

Read the thread, you will see where Juicy says that if you pay in cash you live for free - that, in any case, is the only logical conclusion from his argument.

Which is it, Juicy?

"You, however, will try and "read between the lines", attempt to interpret what he is saying, or even go so far as putting words in his mouth to spin it to your own point."

"Maybe it's that I am familiar with kylewest, you take things way too literally,"

Is comedy what you intend? Or is this just randumbness?

I still think, steve, your not wanting to buy in NYC is more than just rent/buy ratios. Coops are hassles, condos are more overpriced than coops or new rentals, BUT ............. you have a white elephant out on a sand bar. Same with AR. If she didn't have her house in the boonies, she could afford more "house" in Manhattan than she can now. On another note, imagine what rent/buy ratios would be like if mortgages for NYC condos were 8%.

"If by buying I can lock in a stream of rent payments lower than a stream of market rents, or even the same, then it would make sense to do so."

By definition, lower payments means all other things are NOT equal. So again, if the sum of those payments end up being a couple bucks more to own, you'd apparently rent. In other words, you don't think there should be any premium to own. Why does it feel like I'm repeating myself?

"Enough, or do you want more?"

Yeah, like I said, those are not really what we're talking about here. If we're calculating a premium for ownership and you have a formula, you should be able to spit out a hard number, or at least a fairly narrow range. So, again, bullsh!t.

"What I won't accept is the nonsense that JuiceMan and LICCdope come up with on a routine basis, like - viz. above - if you buy a property in cash you live in it for free."

The spin keeps on coming. Never did I say "you live in it for free". Go back to my 4 very simple questions at the beginning of this thread which you first, got wrong and second, won't answer.

stevejhx: "or even the same"

bjw: "lower payments means all other things are NOT equal"

What about "the same"? Does that mean "not equal" too?

"you don't think there should be any premium to own."

No, I don't, and historically there hasn't been one. If you can find any data or formula for calculating that "premium to own" - which you can't because owning is riskier and therefore MUST be cheaper according to all economic and finance theory - then please advise.

It simply doesn't exist.

"If we're calculating a premium for ownership and you have a formula, you should be able to spit out a hard number."

That's bizarre: I'm not calculating a "premium for ownership," you are. You should be able to spit out a hard number, not me, because I don't think it exists.

So - spit one out.

What are you getting at Wbottom? Besides the fact that you don't seem to understand the written word you seem to have developed a fascination with me. What is it you are looking for? Do you have a specific question for me?

Where do you get "live for free" out of this?

Say I buy a place for $1,000,000 and finance it 100%. Assume my payment is $6,000 / mo with $5,000 being interest and $1,000 being principal. Now say I make my first $6,000 payment:

1) how much do I now owe on my mortgage?

Now say I sell the place immediately (on exactly the 30th day) for $1,000,000.

2) how much do I give the bank in order to pay off my mortgage?
3) how much am I left with?
4) Net of transaction costs how much did it cost me to own that place for the month?

This is the level of stupidity we need to stoop to when having a conversation with steve

not me lowery. anything i'd purchase would be far below what we could afford. the house upstate is irrelevant in my decision, at this point. a mere bauble.

Arguing with steve must be like arguing with a mental patient. He accuses you of saying things you didn't, he makes the most inaccurate and dumbest statements in an obnoxious way, instead of admitting he is wrong he distorts statements, misapplies concepts and tries to bully the argument.

He will place a premium to own, but only if there is no premium to own. That is an example of steve's contradictory logic in a nutshell.

Sad, sad, sad.

Now steve is back to his idiotic Break Even on Day 1 theory of the rent-buy comparison.

I've never seen anyone come up with so many dump premises to support a fundamentally flawed opinion.

steve, you don't understand how bond funds are managed. You should just stop trying to comment on it, because like many other things, you just expose yourself as a fool.

based on AR's prior comments, the years of saving and luck with income, have put her in a position to easily afford to buy plenty of home, when she feels it prudent to do so

same applies to me--and i've got a nice little shack, too--it's worth about an eighth of what i plan to spend when the NY mkt seems compelling--neither situation is/will be a source of financial angst

steve has said he can/will buy when appropriate--

sad you have to question people's personal circumstances to deflect attention from the points they make

"What about "the same"? Does that mean "not equal" too?"

Which is why I said "a couple more bucks," to see where your preference lies. Regardless, then you say: "owning is riskier and therefore MUST be cheaper according to all economic and finance theory" which means it CAN'T be the same. So you're contradicting yourself still. Which is it, Steve? All things equal, you'd choose owning? But it must be cheaper? How much more would you pay to own? Or if it must be cheaper to own, how much cheaper would it have to be for you to buy? I'm looking for your preferences here, but like I said, you've been incredibly vague (or maybe extremely confused about your own opinions).

"So - spit one out."

When I asked you for a formula, that was completely tongue-in-cheek, which you obviously failed to grasp (but that's the least of your worries, given the other things that seem to escape you here). If you read my posts, you'd see I think that number is different for different people, but you replied that you'd given me "6 or 7" formulas to calculate this.

BJW, Steve, et al.: Your debate on how to calculate whether CONSUMERS get a better deal renting or buying on how much of a premium you'd be willing to pay to own is missing the main point. As nearly everyone seems to acknowledge, whether consumers will get a better deal buying or renting depends on future prices: in this highly leveraged illiquid investment, price changes are vastly more important than monthly costs. But future prices are NOT likely to be determined by whether consumers are willing to pay a premium to buy or rent (unless you predict a resumed bubble or a massive collapse of consumer demand, which no one here seems to be doing).

Under standard Econ 101 competitive market model assumptions, it is impossible to have a stable market with the same product selling for two different prices -- SUPPLIERS will simply shift product from the low priced market to the high priced one until the prices converge or the low priced market disappears. Of course, this can take time, which is why bubbles are possible, but in the medium run, SUPPLIERS ensure that renting and buying are roughly similar in price because SUPPLIERS have no reason to place a premium on renting.

So, either you think that the standard model is inapplicable to NYC's real estate market -- that something stops condo owners who are renting their units from selling them if they can make more money that way, or something stops rental landlords from converting their units to condo/coop ownership -- or you must conclude that the current prices are unstable.

If the latter, either rents need to go up or prices down so that LANDLORDS are indifferent between renting and selling. Or, if the number of consumers willing to pay a premium to own is sufficiently large, the rental market must disappear (as, indeed, it has in most of the US for price ranges catering to people who can collect the government subsidies for homeownership). Or the bubble needs to come back (in a bubble, landlords will be willing to lose money on the monthly rent in the hope of capturing bubble capital gains later).

Either you need to explain why the law of one price does not apply in NYC, or you should focus on the rent/sell analysis for LANDLORDS, not consumers. It doesn't matter if buyers would be willing to pay a premium to own -- in a non-bubble market, they won't have to.

Wbottom, can you answer these questions?

Say I buy a place for $1,000,000 and finance it 100%. Assume my payment is $6,000 / mo with $5,000 being interest and $1,000 being principal. Now say I make my first $6,000 payment:

1) how much do I now owe on my mortgage?

Now say I sell the place immediately (on exactly the 30th day) for $1,000,000.

2) how much do I give the bank in order to pay off my mortgage?
3) how much am I left with?
4) Net of transaction costs how much did it cost me to own that place for the month?

LICC: "He will place a premium to own"

Nope. Unless you consider $1 a premium.

"Now steve is back to his idiotic Break Even on Day 1 theory of the rent-buy comparison."

Where have I said "Day 1" in this thread? It is you who are using the Day 1 theory, when you twice include the "mortgage interest tax deduction" from Day 1.

"that was completely tongue-in-cheek, which you obviously failed to grasp"

And finally - again - here is the ridiculousness of JuiceMan's question, which merely needs to be reprhased slightly:

"Say I buy a place for $1,000,000 and PAY FOR it 100% IN CASH. [...] Now say I sell the place IN 10 YEARS for $1,000,000. [...] Net of transaction costs how much did it cost me to own that place for the month?"

That is the same question that JuiceMan asked, with slight changes noted in capital letters. And the answer is, IT COST ME NOTHING TO LIVE IN THE HOUSE FOR 10 YEARS.

Which is astonishingly asinine, yet it is the logical outcome of JuiceMan's theory of home-ownership costs.

This is the level of stupidity we need to stoop to when having a conversation with JuiceMan.

Obviously.

"whether consumers will get a better deal buying or renting depends on future prices"

I didn't miss that point. In fact, I stated it outright. However, Econ 101's supply and demand models are used for consumable goods, not for fixed assets. It assumes perfect competition and perfect information, neither of which exist. It is entirely inappropriate to this discussion, which is why no one but you uses it. The formulas that economists used are posted above.

1) $999,000
2) $999,000
3) how much did you start with?
4) $5,000 to finance owning the place for that month (minus the transaction costs or do you mean before transaction costs?)

What does that mean that Econ 101's supply and demand model are used for consumable goods, not for fixed assets? Is there no supply of fixed assets and no demand for fixed assets?

So, Steve, what aspect of the imperfect competition and imperfect information in NYC real estate would lead landlords to prefer to make less money rather than more money?

'Which is astonishingly asinine, yet it is the logical outcome of JuiceMan's theory of home-ownership costs. "

steve, what world do you live in? Are you really here with us or are you in some other matrix?

financeguy,

a landlord is not going to turn a rental into a condo unless there is a premium for doing so. What that premium has to be, I don't know. First, there are the costs of doing so - filings, getting rid of existing tenants, renovation, taxes, etc. Then there is the risk that the premium declines or disappears during the lengthy time it takes between starting the conversion and selling the last unit. So that premium can exist, be quite substantial, and still make economic sense.
Finally, many, if not most, rental buildings are in portfolios that value the income stream, have a very low cost basis, and are not interested in realizing those gains as a lump sum.

Yes but people keep building rental buildings.

"what aspect of the imperfect competition and imperfect information in NYC real estate would lead landlords to prefer to make less money rather than more money?"

The problem with using the same economic model as for apples and oranges is that there is not a larges supply of properties, they are not homogeneous in nature, they cannot be easily produced, they almost always are financed, etc., etc.

In other words, there are significant barriers to entry and market frictions that make the model inappropriate.

For instance, taking printer's point one step further, though it is possible to convert a rental building into a condo or co-op, it's virtually impossible to do it the other way around. If a rental building is financed using the normal financing, there would be mortgages and other covenants that could prevent the conversion. You just can't willy-nilly build buildings like you can manufacture pens.

Location, location, location.

Thus for investment property, the cap rate is normally used. For owner-occupied residential real estate, imputed rents and a number of other measures, indicated above.

Juicy, I'm really here. If you take your argument to its logical conclusion, then you get that you live for free. Isn't that true? If it's not, how do you answer this question:

"Say I buy a place for $1,000,000 and PAY FOR it 100% IN CASH. [...] Now say I sell the place IN 10 YEARS for $1,000,000. [...] Net of transaction costs how much did it cost me to own that place for those 10 years?"

"it is impossible to have a stable market with the same product selling for two different prices"

financeguy, sorry, but we don't always have to talk about price movement on this board. Yes, prices fluctuate, and yes, I also believe pricing is currently unstable for the most part. Unlike you though, I think markets are almost never in equilibrium, so there is usually a disconnect, even if things may trend around a supposed equilibrium over time (which is something, I think, Steve would agree with).

"it is impossible to have a stable market with the same product selling for two different prices"

And that's the rub. This is not exactly the same product.

Steve, still waiting for you to answer my questions above...

Adultfacebook me when the posts hit 999. Thxs all.

You have to answer question 4 first steve, and stating that there is not enough information is a cop out.

"Say I buy a place for $1,000,000 and PAY FOR it 100% IN CASH. [...] Now say I sell the place IN 10 YEARS for $1,000,000. [...] Net of transaction costs how much did it cost me to own that place for those 10 years?"

It cost you any maintenance required to keep the value at $1MM, and any taxes you had to pay for ownership of the property.

Which questions, bjw?

I've given my answer, Juicy - the way you phrase the question it can't be answered. Which is also the answer to my question, which is why you won't answer it: it's the same question as yours, just rephrased.

Steve, read again (with some clarifying edits):

"Which is why I said "a couple more bucks," to see where your preference lies. Regardless, then you say: "owning is riskier and therefore MUST be cheaper according to all economic and finance theory" which means it CAN'T be the same. So you're contradicting yourself still. Which is it, Steve? All things equal, you'd choose owning? But it must be cheaper (ie: not equal)? How much more would you pay to own? Or if it must be cheaper to own, how much cheaper would it have to be for you to buy? I'm looking for your specific preferences here, but like I said, you've been incredibly vague (or maybe extremely confused about your own opinions)."

I can answer your question steve, it is very easy. What it costs you is the opportunity cost of your equity ($1M) over the 10 years. Just like you would factor in the opportunity cost of your down payment or your principal payment when doing a rent vs. buy analysis with a mortgage. This is simple stuff steve and I have been very consistent on this. Not to mention it has nothing to do with the fact that you won't answer question 4.

Also note that this isn't "free" nor did I ever say it was.

Wbottom, since steve won't answer it why don't you?

Say I buy a place for $1,000,000 and finance it 100%. Assume my payment is $6,000 / mo with $5,000 being interest and $1,000 being principal. Now say I make my first $6,000 payment:

1) how much do I now owe on my mortgage?

Now say I sell the place immediately (on exactly the 30th day) for $1,000,000.

2) how much do I give the bank in order to pay off my mortgage?
3) how much am I left with?
4) Net of transaction costs how much did it cost me to own that place for the month?

Hmm. I've been accused of being vague and rigid at the same time. Some people....

WB is correct - any premium paid to own rather than to rent would be based on a) how long you intend to live in the place; and b) what you expect future rental and sales prices to be. If you anticipate that housing prices will rise significantly in the future, you will lean towards buying; ditto if you expect market rents to rise in the future, provided that they rise in excess of owners' carrying costs.

Is that clear, now?

No, you're being evasive - I asked what YOUR personal preferences are.

From what you've said:

If carrying costs are greater than rent, even by a small amount, you'll choose to rent, since it should be cheaper to own given the greater risk.

If carrying costs are exactly equal to rent, you'll choose to rent, since it should be cheaper to own given the greater risk.

If carrying costs are less than rent, you might choose to buy. But at what point exactly? 10% less? 5%? 50%? Let's hear the ins and outs of your thinking.

I think that I've been very clear, yet again.

Juicy says: "What it costs you is the opportunity cost of your equity ($1M) over the 10 years."

And I said:

"If you could have rented the same place for $3,000, and you instead chose to pay $5,000, then it cost you $2,000 to live there. If you could have rented it for $7,000, and it only cost you $5,000, then you would have made $2,000 on the transaction.

"PLUS the lost opportunity cost of investing that $1,000,000 elsewhere. If the risk-adjusted rate is above the mortgage rate (which it is in today's environment), then you also lost the difference."

The only thing you don't calculate, Juicy, is the difference (plus or minus) of the rental alternative, but it's necessary because YOU NEED SOMEPLACE TO LIVE.

So subtracted from the opportunity cost would be the value of the rental stream that it otherwise would have cost you to live. Therefore in your answer you OVERESTIMATE the opportunity by failing to take rental alternatives into account.

"I think that I've been very clear, yet again."

By not answering the question? You're just being evasive. Yet again. This is getting boring.

I own a gold watch. It was inherited from my grandfather. How much does it cost me to wear it every day?

no time to write as i sit in this f'ing meeting, but pls explain what is wrong with steve's answer

clearly the cost differential between living in owned apt vs rental apt figures in--at times that benefits owners--not now of course

There's nothing wrong with my answer - bjw is demanding a precise answer to a hypothetical question. If he were to give me some specific examples I could answer, but it's not possible to set down such a rule for all cases in general. The best one can do is set forth a methodology - a theory under which to make the evaluation.

Which I have done repeatedly.

No Steve, it's pretty simple. I'm not asking for the general population - I'm asking for your guidelines. What you would do. You seem absolutely incapable of answering that.

"If you could have rented the same place for $3,000, and you instead chose to pay $5,000, then it cost you $2,000 to live there. If you could have rented it for $7,000, and it only cost you $5,000, then you would have made $2,000 on the transaction."

You are not answering the question and in your attempts to evade it, are sounding more and more foolish. I didn't ask to compare the cost to own for one month to the cost to rent. We can do that later. I asked "Net of transaction costs how much did it cost me to OWN that place for the month?" Just tell me what it cost to own it steve. Is your answer:

a) $6000
b) $5000
c) $1000
d) the opportunity cost of $1M for a month

What it is steve?

bjw is asking steve what premium he would place on owning over renting, or what premium he would place on renting over owning.

steve responds with evasive and contradictory answers.

Unless you are paying all cash, you cannot measure the opportunity cost based on the purchase price. You measure opportunity cost based on the down payment.

This is another simple concept that steve can't understand.

What premium would you pay, LICcomm, to live in New York rather than Long Island City?

Steve, Printer --

Actually, arbitrage between owning and renting is trivial. Investor thinks renting is more profitable -- buys a condo and rents it out. Investor thinks selling has higher expected return -- sells a currently rented condo. The issue is not transaction costs, but the fact that investors are very slow to change their models of where future profit is going to come from. Despite the StuyTown example, apparently a large number of investors still expect bubble prices to return.

BJW --

You've misunderstood me. The point of the equilibrium model is to make clear that we are NOT at equilibrium and have not been for close to a decade. The bubble made demand rise far faster than supply could adjust. But now, supply is catching up just as bubble demand is starting to slow. So prices are going to drop.

My issue with your analysis is that your focus on the premiums that buyers "should" be willing to pay makes no sense unless you think that buyers NEED to pay a premium to own instead of rent. At equilibrium, that wouldn't be true--at equilibrium buyers who are willing to pay a premium will happily discover that they can buy without one. So your concern seems to assume that prices will never drop to equilibrium. I'm trying to understand the model behind that assumption.

"What it is steve?"

None of the above.

FG - what?

LICCdope - you're outdoing yourself this time.

For the 'non-know-it-alls' who read these threads. It still seems wayyy less expensive to rent my 2 bedroom, 2 bathroom in Murray Hill. Why would I pay twice my rental fee to own an apartment of the same size?

Any help is greatly appreciated. And please dumb it down for us laymen. I'm not in finance, I'm not in real estate.

Thanks.

financeguy, I don't think supply is ratcheting up as you say - look at urbandigs' inventory chart (which I believe is updated to reflect his more accurate methodology). We're at 8,000 active, which is well below where we were 18 months ago (9,500, when the market was pretty horrible). So I'm not convinced drastic price drops are imminent. That's not the same as saying I think current prices make sense. For most apartments I've seen, the prices don't.

As for the premium to own - I think it makes sense for there to be one. Again, I don't think buying and renting are perfect substitutes, so it makes sense to pay more for one. And as has been said on this thread numerous times, I'm far from alone in this. Now you shouldn't pay 50% more, as has been done, but there is a more logical (lower) percentage there for most of us.

steve, still being evasive... I won't hold my breath.

JP78, paying twice what you rent makes no sense. No argument from me on that. Without knowing more, I'd say keep on renting that place.

Remember Adultfacebook me

Good one Alan.

"I won't hold my breath"

No - please do!

so FG, now you are saying that you are speaking of the owners of individual condo's in buildings that easily allow renting. What percentage of Manhattan housing units would you say fall into that? Remember, your beloved RS places severe restrictions on the ability of an owner to oust his tenant, so those are all out. Entire rental buildings would have to convert over to condo's with the attendant costs and risks, so those are out. So now we are down to the above. And of those, not every owner would sell vs. keeping it as a rental - they may have tax/estate reasons for not doing so, or other reasons why they place a greater premium on holding an income producing property vs. the lump sum from selling and investing in another asset. So now we are down to the subset of owners of individual or a handful of condo units that are purely arbing rent/buy. How many units do you think comprise that subset?

steve, quick with the barbs, but can't answer a simple question. Your credibility concerning any of this stuff just went kablooie,

bjw, i think we all know that steve's credibility went kablooie a very long time ago. still, it is sometimes entertaining to see the knots he will contort himself into.

"None of the above."

So what is the answer steve? Give me a number and back it up. It is so simple it's painful.

"Your credibility concerning any of this stuff just went kablooie,"

What credibility? That was gone long, long, long ago.

printer, JuiceMan, my mistake.

BJW:
1. UD tracks inventory, not supply. Supply -- the total number of units -- changes very slowly as builders and converters and renovators and arbitrageurs create, renovate, destroy and legally convert units. Inventory is important short term but tells you next to nothing about medium term.

2. It makes sense for some buyers to pay a premium to own if they need to. It never makes sense to pay a price that you don't need to pay. Even if you'd be happy to pay $100,000 for an ipod if that were the only choice, you aren't going to do it if they are available at $150.

So the question is, why isn't the free market providing ownership units at the same cost as rental units?

The answer cannot be "they aren't the same" -- they cost the same to produce and it is easy enough to move some from one to the other. The answer cannot be "because buyers are willing to pay a premium." If that were the only factor, buyers would outbid renters and the market would simply convert all rentals to owner occupancy (as it does in Scarsdale, where the government subsidies to homeownership dominate all other factors).

The obvious answer is "because we were in a bubble, and in a bubble, the right to sell to speculators is worth a huge amount of money, so people are willing to overpay for that right in the hope of selling to someone willing to overpay even more." That answer, however, implies that prices are going to drop at least until investors (NOT buyers) are indifferent between holding to rent and selling to owner-occupants, and buyers do NOT need to pay a premium even if they'd be happy to do so. Since the RE market is NOT efficient, the drop may be long and slow, but unless there is another factor here that we haven't identified, it is inevitable.

This doesn't mean that you shouldn't pay a premium today. If you are determined to own today, you have no choice but to pay a premium. It just means that you should assume that the premium, like the inevitable wear and tear on your apartment and the cost of idiosyncratic renovations, is consumption. It's gone and highly unlikely to come back when you sell. And the longer you hold, the less likely it is to be recoverable. Of course, you could luck out, just as Tea Party economics could also raise the incomes of the US middle class and it could turn out that there are weapons of mass destruction in Iraq. It's just not something to count on.

Juicy, I told you my answer already - half of it is the same of yours. You said the opportunity cost on $1,000,000. I said the opportunity cost on $1,000,000 LESS the stream of market rent you would have otherwise paid for an equivalent place to live. The second half is what you failed to include.

So what's your problem? It is so simple it's painful.

bjw, you are asking hypothetical questions and expecting specific answers to them. It can't be done. It's like asking someone what they're going to wear on October 23, 2012 - who knows? It will depend on a lot of factors.

The principle remains true, though: approximately what the market rent is, or less. There's no downside on the "less" side, though the upside would be very constrained.

Printer: Pricing is set at the margin -- doesn't need a lot of condos or new construction or landlords who do find a way to switch (Stuytown?) to affect pricing. And I'm not suggesting that prices are going to move fast. I have no model to predict short term price movements.

financeguy,

How are you tracking supply? And shouldn't you be looking at population changes? Or better yet, vacancy rates? This is very nice in theory but very impractical given the data out there. Hence why most people look at inventory. And I don't see inventory sky-rocketing. If you see prices dropping, you must mean in the very long-term, because inventory should be helpful in predicting that kind of shift.

"they cost the same to produce and it is easy enough to move some from one to the other"

I'm not sure this is true. If so, you'd be able to point to a time when the market was in equilibrium and see 50% renters and 50% owners. I don't know for sure, but find that doubtful in a city that's known for having a lot more renters. There's clearly barrier to entry (having a significant down payment, and good enough financials/credit to get a loan), which is, I think, one of the greatest factor in keeping the number of owners down. But I think you see these "goods" as perfect substitutes whereas I don't, and that's why we likely won't agree on this.

"I said the opportunity cost on $1,000,000 LESS the stream of market rent you would have otherwise paid for an equivalent place to live."

Based on what you are telling me, the cost for me to own that place for one month is:

The opportunity cost of the $1M for a month (I'll use a 5% rate for simplicity sake) = ($1,000,000 * .05) / 12 = $4,166

LESS

The stream of market rent you would have otherwise paid for an equivalent place to live (lets call that $4,000) = $4,000

$4,166 - $4,000 = $166

So according to steve, it cost me $166 to own that apartment for the month.

Better show us your math steve, because you ain't making sense. What about the interest I paid for that month?

steve, it's not that hard a question. You've got an apartment that costs $4000 per month in carrying costs to own and $3999 per month to rent. Which do you choose? And if you choose to buy, how low does the rent have to go before you change your mind?

Don't forget some 99% (guessing) of new contruction apartment units over the last 5-10 years built are/were condos. So 15-20 years ago where manhattan had 75/25 coops to condos, it would be harder to dump onto the rental market then.
As Miller/Sams quarterliess consistently show around an even 50/50 in condo/coops sales, I'd guess inventory is the same ratio today, 50/50? That's a lot more bi-inventory that will give more momentum to either single market (meaning a heavy drop in rental bring down sales quicker than in the past and vice versa)

THats why I strongly feel a remaining low rental market has to drag down the sales market.

BJW
It's the fairest of questions. Obviously interest rates have an affect on that assesment even with all the offsetting affects there are in the computations.
For me, more than 220/240 times the monthly rent Id rather rent.

BJW -- Why would renter/owners ever be 50:50? And what about cooperators, who are rent from a landlord that they partly own?

At equilibrium, prices need to be similar so that investors will be indifferent about which they hold or create. But the ratio of renters and buyers depends on consumer preferences.

If all consumers are willing to pay more to own than to rent, then eventually all units will be sold, none rented. If all consumers want the flexibility of renting or the government switches to enthusiastically subsidizing renters, then maybe the reverse would happen. In real life, people disagree.

financeguy, again, because there are barriers to entry, not all units will be sold, even in a world where everyone prefers owning. But you're right, there are preferences to account for, and some people unquestionably prefer renting, especially when it's cheaper. What I'm trying to tease out (unscientifically, but hey) is roughly what percent of the population would go one way or the other, assuming no barriers to entry and equal monthly costs - which is the very simple scenario I've been trying (very unsuccessfully) to get Steve to answer to: how much of a dollar difference would it take for you to switch your preference? My contention is that most people would choose owning. How much more they'd be willing to pay is a personal preference, but I think it's s question most people could answer with a modicum of thought. Doesn't seem Steve can generate that much. Kablooie.

FLMAO
BJW, it's like asking a (steve)dude ,"hey, you could have anyone on the planet be your sex slave for the rest of your life, all you have to do is have sex with one guy only once, who would that guy be?"
(for all The Wire fans) And dude is just too terrified the entire exercise is to just call him gay once he names someone.

"like asking someone what they're going to wear on October 23, 2012" Simple, a pair of pants, a shirt, and a pair of shoes.

"You've got an apartment that costs $4000 per month in carrying costs to own and $3999 per month to rent. Which do you choose?"

It would still depend, bjw: what do I think that future rents will be, property taxes, maintenance, property prices, etc., as well as how long I planned to stay there.

If I anticipate property prices will continue to fall, then I might choose to rent, instead. If I'm short cash or have a lot of cash, that could affect my decision, as well.

BUT - if I could purchase the apartment I currently live in and have it cost me about the $3,600 it costs me to rent it using 80/20 30-year financing, I would buy it. Because I think I'm paying a very fair price that I can live with.

However, the actual cost to buy would be twice that.

Juicy - if you look at rent as a capitalized expense, then yes, you are overpaying by $166 a month. I don't think your 5% is a proper interest rate, but that's what you picked.

So if the actual rent you should have paid was $3,000 for that $1,000,000 apartment, you would be overpaying by $1,166 a month.

And herein lies your (and LICCdope's) misconception: "What about the interest I paid for that month?"

You didn't pay any "interest" for that month. You are talking about an unlevered transaction. As soon as you add leverage, your opportunity cost and breakeven point are increased proportionately, because the opportunity cost is based on the VAR (value-at-risk), which is the full amount that you owe - at risk - and not your down payment.

Somewhere in this thread I provided a link to an explanation of how to calculate opportunity cost on levered transaction, poo-pooed by LICCdope, of course.

In other words, your risk is indeed higher if you lever the transaction.

"It would still depend, bjw: what do I think that future rents will be, property taxes, maintenance, property prices, etc., as well as how long I planned to stay there."

F'n hell, this is amazing. Only Steve could ask me to tell him what he thinks. Assume all those costs stay flat.

truthskr, you tying this to the Wire has made all this (despite feeling like I've banged my head against a brick wall for hours due to Steve's inability to answer simple questions) worth it. Really funny.

"Only Steve could ask me to tell him what he thinks."

Did I do that?

I told you - I would buy the apartment I currently live in for what I currently pay for it. I have enough information on it to say that. I do not have enough information on any other transaction.

I would NOT have paid $4,600 a month for the apartment I was living in in Chelsea - the rent was too high, but it's what it was at the time. So you see, I've answered you.

"Did I do that?"

Yes - you typed these words: "what do I think that future rents will be, property taxes, maintenance, property prices, etc"

And yet you still can't answer my question - this is just getting hilarious:

"You've got an apartment that costs $4000 per month in carrying costs to own and $3999 per month to rent. Which do you choose? And if you choose to buy, how low does the rent have to go before you change your mind?"

Would you buy your current apartment if the monthly ownership cost was $3601?

And your continued claim that to own your equivalent apartment would cost $7200 a month is totally ridiculous.

kablooie steve, that does fit.

"You didn't pay any "interest" for that month. You are talking about an unlevered transaction."

steve, read the example AGAIN. I levered the entire thing. What is my total cost for owning this place for a month?

Say I buy a place for $1,000,000 and finance it 100%. Assume my payment is $6,000 / mo with $5,000 being interest and $1,000 being principal. Now say I make my first $6,000 payment:

1) how much do I now owe on my mortgage?

Now say I sell the place immediately (on exactly the 30th day) for $1,000,000.

2) how much do I give the bank in order to pay off my mortgage?
3) how much am I left with?
4) Net of transaction costs how much did it cost me to own that place for the month?

Holy hell, is this guy for real?

"what do I think that future rents will be, property taxes, maintenance, property prices, etc"

Since when am I you?

"this is just getting hilarious"

It's actually annoying - I don't know why I bother to answer you, even.

I can't answer a hypothetical question with a specific answer, without details, which you refuse to provide. I've answered you one case in which I would buy an apartment for the price of the rent, and another in which I wouldn't. I have details on those. I don't have details on what you want me to look at.

"Would you buy your current apartment if the monthly ownership cost was $3601?"

Yes.

Not even close to the size of my apartment, directly across the street:

http://streeteasy.com/nyc/sale/554698-condo-310-west-52nd-street-clinton-new-york

$9,300 per month, EXCLUDING the real estate taxes that will soon enough kick in.

juicy, are you for real??

steve was referring to his inquiry which youve not answered which changed your braindead little propostion such that you had bought your hypothetical apt for all cash--your apt which seems to have no monthly charges and fails to consider numerous other variables--

all cash means no leverage
where there is equity, whether via down payment or accumulation, there is opportunity cost to be considered--where there is no equity there is none to consider--and the differnce between monthly layout for comp rental vs your apt should be considered--wtf dont YOU get?

and LICC, where are the goods on your apt in LIC? limit the deets to those i provided on my situation--or is all you have for this site your garbage LIC shillery and your obsession with steve?

prove otherwise

Sorry, JM, I thought we were doing my example, not yours.

1) On your mortgage you owe $2,158,381.89, less $6,000 = $2,152,381.89, over the next 30 years.

2) To pay off the bank you'd normally call the bank to find out, but let's say $999,000, since you paid of $1,000 in principal.

3) You're left with -$6,000; that is, $6,000 less than what you started with.

4) If we assume the alternate investment would make 10% per year, versus the 6% you're paying on your mortgage, then the opportunity cost of not investing that $1,000,000 in another asset is $8,333.33 ($1 million @ 10% per year for 1 month) - $5,000.00 (your cost of funds @ 6% ) = $3,333.33.

Then, if the market rent for that unit is actually $4,000.00, then the entire cost to you would be $4,000.00 + $5,333.33 = $9,333.33.

That is, based on those premises, what you should have paid for the apartment as an expense ($4,000.00) + the opportunity cost of not investing that money elsewhere ($5,333.33).

Ooops - forgot something

Then, if the market rent for that unit is actually $4,000.00, then the entire cost to you would be $4,000.00 + $2,000 + $3,333.33 = $9,333.33.

That is, based on those premises, what you should have paid for the apartment as an expense ($4,000.00) + the amount paid in excess + the opportunity cost of not investing that money elsewhere ($5,333.33).

How much do you think it costs you, Juicy? I come up with $9,333.33, of which $5,333.33 is pure overpayment.

way way way fking toooooooooooooooooo complicated.............

price now =$1000 psf
price in 1 year $500psf

adultfacebookme.... m'okay...

steve, even taking your numbers at face value, i think you are doing much double counting:

scenario 1: paid bank 6000, proceeds from sale after mtge paydown 1000, net out of pocket 5000
scenario 2: paid landlord 4000, proceeds from investment less loan fees: $3,333.33, net out of pocket: 666.66

so that gets to a net out pocket difference between the two scenarios of 4333.33

under your scenario, he somehow pays for both the apartment he has purchased, and the one he should have rented, and the 1k of principal paydown just vanished into thin air.

"steve was referring to his inquiry which youve not answered which changed your braindead little propostion such that you had bought your hypothetical apt for all cash--your apt which seems to have no monthly charges and fails to consider numerous other variables--"

Read above where I answered that question you little hampster. Then, answer the questions I posed to you and see if you can handle it. Moron.