Rent $4750 = Housing price equivalent?

No more than $700k.

$1-1.25mm (no more than 3 times your last average 3 year income). $1800 seems too high of a maintenance. Your monthlies will only be slightly higher but you are building equity. Also, you would need to spend that much to get a slight upgrade to your current place.

stevejhx,

Your price of 700K is about 12-12.5x of price to rent ratio. For references, Pittsburg, at the bottom of the list in this article, is 11.7x. The next one up is Detroit 12.1x:

http://www.nytimes.com/interactive/2010/04/20/business/20100420-rent-ratios-table.html

As for other references in comparing affordability of housing in other metropolitan cities of developed countries:

http://www.demographia.com/dhi.pdf

The above reports indicates that 20 of the US markets are actually affordable, including Indianapolis, Atlanta, Cleveland, Detroit, Las Vegas, St. Louis, Dallas, Phoenix, which are all at the bottom of the NYTimes list. Not surprising, given their price-to-rent ratios are all below 15x. Even Columbus (16.9x), Houston (16.2x), Memphis (20.2x) are deemed affordable in this report. In fact, at first glance, these 2 reports actually reached pretty close conclusions, except for the NYC region - NYTimes broke the MSA down to New York and North-Central NJ and Demographia has NY-NJ-PA.

I guess for stevejhx, RE is a total no go at all.

300_mercer,

Monthlies of $1800 are quoted for a 1050 sq ft full-service building. Is this high?

mynycse, that's because the reporters/analysts on these are still in bubble-mentality mode, and are only judging the affordability of those cities relative to one another, and not relative to the long-term "normal". Memphis is clearly not a smart buy at that ratio (unless "affordable" means easy to overspend on housing while losing your investment) ... give it time and it probably will become affordable. Same for NY, but give it more time. There's no "new economy", "new normal", "new math" or "new morality".

That is normal these days unfortunately. I would think that the place you mention, if in good rental condition is $1.15mm. High end finishes, $1.25-$1.3 if in prime location.

there are quite a few of us who remember when it was cheaper to buy, here and elsewhere. it's rarely at equilibrium, it's usually moving. and right now the direction of that future movement is highly uncertain.

so your affordability ratios today may mean nothing tomorrow.

>There's no "new economy", "new normal", "new math" or "new morality".

Maybe we'll revert to the mean?

One thing a renter must factor is future increase in rent, not being kicked out every few years and geneally higher quality of properties for sale vs rentals. That does not mean you buy more than what you can comfortably afford after accounting for potential job loss etc.

300 mercer, moving is not the end of the world. really. it might just beat committing huge amounts of money buying an illiquid asset. or not. it's far more complicated than just spewing the common fear theme of you are hostage to your landlord. yes, no and maybe.

300mercer, all opinions are welcomed here as long as they are pro-renting

* without using the help of a broker to find the rental

myce, check what they're actually reporting - it may not be the price to rent ratio, but rather owners equivalent rent ratio. Similar, but very difficult.

Moving is very painful for many painful especially if you want your apartment somewhat decorated. Also, furniture damage having to figure out where every thing would go and unpacking. Major stress. That said I agree prices in manhattan may have a few more percent to come down - some properties 10-20%.

Sorry for the extra painful. Freudian slip.

300_mercer, do you own or rent? and i'm not asking to be snarky. somebody started a thread here recently asking renters how often they moved. the vast majority who responded, it was every year or two. pita, i agree, but plenty do so here. maybe landlords might do better if they tried to retain tenants? i don't know.

i actually calculated the risk of improving my apartment (i got very lucky because of the PCV RS decision, but my calculations weren't based on that) and i decided to commit some money to improvements to the apartment. i think owning can be lovely, i've done so almost all of my adult life. but you really can have aubergine walls even if you don't own.

300 mercer, i hadn't noticed, but very funny.

I rent but looking to buy - full disclosure.

just curious, not opining as to which is better for you, you clearly are looking with a critical eye. good luck!

Yeah zero emotion all factual. Also, we want high-end finishes and personalized decor. In my opinion, current prices will not go down further. The biggest risk with buying is increasing real estate taxes. Rents have a lot of room to go up.

Did I just call the bottom for Mahtattan real estate at 2005 price level? Do not shoot me!!!

i disagree generally with your conclusions, i think the city rents, given the large numbers of new units coming on line and the demographics going forward, may not be nearly as strong as you think. for example, it has recently been revealed that stuy town has essentially warehoused 570 units. in most years only 12000 apartments sign new leases total in manhattan. gehry's going on-line shortly, columbus square has only released half its units. 209 new rental units just up at the Beaver. eventi, etc., etc.

i think the vacancy rate is actually quite large, but the major landlords are trying to obscure it.

sorry, your post just got me going on something i've been spending a lot of time thinking about. if there is a major influx of young people without children nyc should be fine. but otherwise, i'm not so sure. many schools are at the tipping point. families may not be able to, or want to, stay.

I think 200x monthly rent or 16.67x annual rent is a good rule of thumb given today's interest rates, mynycse, so $950K. I can go through the details if you care.

http://online.wsj.com/article/SB10001424052748704680604576110062827617504.html?mod=googlenews_wsj

Rents going up.

yes, they say so all the time. and that's national. color me skeptical that landlords in chicago can actually get higher rents. or in NYC in two years.

don't look at this year, we're still being goosed by both prior stimulus efforts (although it's just about to run out), extended unemployment benefits which are also about to run out.

Regarding the price, does it matter whether it's a coop or condo? E.g. 950K means coop and 1.15M means condo?

For those who are interested in the 2 reports:

NYTime uses "A simple way to do the comparison is to look at something called the rent ratio: the purchase price of a house divided by the annual cost of renting a similar one. The number 20 provides a useful rule of thumb." Of course this depends on how they define "similar", since a 3-bedroom rental in Manhattan (1000 sq ft) could actually be smaller than a 2 bedroom in a coop/condo (1200 sq ft).

Demographia uses "Medium house price divided by gross annual median household income", thus taking interest rate out of the equation.

Totally different measures, but they both come up with similar results. Out of 37 overlapping cities, only 9 cities are "out of sync", namely L.A., Boston, Miami, Charlotte, Denver, Milwaukee, Raleigh, Memphis and NY metro.

According to Demographia, it is not surprising that most of the bigger cities, e.g. Boston, Seattle, Toronto, L.A., NYC, London, SF, Melborne, Vancouver, Sydney, and Hong Kong all have ratios above 5.0x. I wish they could have included Paris, Geneva, Amsterdam, Dubai, Tokyo, Seoul, Moscow, etc., in the report. But I would be very surprise if any of the above cities will have a ratio of 3.0x.

According to NYTimes, it is also interesting to see Northern-Central NJ has a price to rent ratio of 23.4x, whereas for NY, the ratio is 15.6x.

"Regarding the price, does it matter whether it's a coop or condo? E.g. 950K means coop and 1.15M means condo?"

I guess the question you are asking is unclear. If you are asking "What-sized purchase should I be making so that my after-tax costs are similar to paying $4750 in monthly rent while getting a return on the 20% down payment commessurate with the risk on it?", then my answer is $950K. If you're asking about the price of a place in today's market that is equivalent to what you can rent for $4750, I'd put it at $1.15M to $1.4M depending on your specific sub-market and your personal competence in finding well-priced rentals.

"The number 20 provides a useful rule of thumb."

Yeah, we've discussed this shill article before, when it was posted by Juicy. Only Leonhardt claims "20" - everyone else in the world says 15.

http://www.nytimes.com/2010/04/21/business/economy/21leonhardt.html

Nonetheless, opening paragraph: "In much of the country, for much of the last decade, renting a home has usually been a better financial move than buying one."

Same holds here.

To be at $5K per month, after 35% tax benefit and 20% down payment with 5.5% 30 yr fixed, your mortgage should be $840K. That is considering the $1800 per month maintenance that is 40% tax deductable. The total is $1.05M.

The 5.5% interest rate is due to having a non-conforming mortgage, so don't just on me that you can get a conforming one at 4 7/8.

inonada,

Since the price differential between a coop and a condo is quite high (maybe 20%), therefore when you put 950K, does it mean condo or coop pricing? If it is condo pricing, then I can go for a 760K coop for something similar. If it is coop pricing, then I can go for 1.14M as a condo.

Assuming I can get these prices at the open market now... Just assuming. Of course the differential exists for a reason, e.g. sublet policies, board approval etc., but the gap is actually huge, and hence my question.

Hahaha, sorry, I am using my sister's account since she is the subscriber. It's mynycse.

sara_se, part of the differential -- a good part, I think -- between coop and condo pricing has to do with the way they measure condos.

That is, allocating all common areas proportionately to the individual units, and including those numbers in the stated square footage. Of course, buyers couldn't care less about the area of common elements, so it's completely bogus, a carryover from commercial real estate where a landlord might split up a floor between tenants or might not.

There's a gap, yes, but it's not as huge as you might think. Part of it is sleight of hand.

mynycse, I guess you are asking whether you should compare $4750 in rent to buying a coop vs buying a condo? It depends on the rental, I'd argue, but closer to the condo price.

As a coop owner, you lose two things compared to a condo. Let's call the first an inconvenience factor: any time you want to do anything (buy, sell, rent, etc.), you have to put up with a more invasive and rejection-prone process. Let's call the second a financial inflexibility factor: if you need to move, you are at the whims of the board approval, there are limitations on renting should the need / desire arise, people avoid renting in coops because of the adde vurden, etc. As a renter, you are more condo-like in these respects. Unless of course you are renting in a coop, in which case you get hit with the first (and usually get an appropriate discount).

So as a base, I'd argue that you should compare to condos. Now, if coops are 20% cheaper and you deem that as over-compensation for the above two issues because it should only be 10%, then you have an argument for coops. I.e., a $950K condo is equivalent to $4750 rent, or a $850K coop because you deem should be at only a 10% discount to a condo (which is the equivalent of a $1050K condo in quality, but 20% discounted by the market).

"sara_se, part of the differential -- a good part, I think -- between coop and condo pricing has to do with the way they measure condos."

I disagree. What inonada said explains the price differential, convienance and flexibility

Only steve can value Mahattan lower than Detriot

>Only steve can value Mahattan lower than Detriot

A better comparison is Wayne, NJ, right inonanda?

I think 300 mercer is spot on. 1.1 to 1.2. if you find it for 700k just drop me a line: i'm interested. coops should never be touched.

inonada,

I actually have a different opinion. I think the price should reflect coop pricing. My logic is when I rent at $4750, I am paying for the location, the space and amenities, not for the right to sublet. Therefore I believe the right to sublet is an add-on, a premium. With respect to the invasive coop process, this is definitely a discount to pricing, since I do not have to endure the same process when I rent. However, because coops comprise of 75% of NYC housing stock, the invasive process is almost the norm if you want to buy. Therefore, the chance to avoid the invasive process is a premium.

This distinction, when quoting the "right" price, is actually important - Irregardless of whether it's a sleight of hand or other reasons, the differential does exist and it's not a small gap. Just how big is anyone's guess.

Regarding NYC vs Detroit, and whether 15x price to rent makes sense... Here is another website:

http://www.numbeo.com/property-investment/rankings.jsp

You can search for major cities in the world and see their respective ratios (e.g. price to rent, housing price to income, etc).

Irregardless of whether it's 15x or 11x, NYC itself trades at a premium to, say, Atlanta or Tampa in all reports. The infrastructure is just different - If you compare NYC with Tampa, you are comparing apples to oranges. I still believe it's better to compare NYC with other major large cities in the world, e.g. Tokyo, London, Zurich, Moscow, Beijing, Paris, Sydney, Dubai, Hong Kong, Seoul, etc.

very interesting link. i agree with you. Manhattan (not NYC)can only be compared to "world class cities" as u mentioned.the rest of NYC and the rest of the US doesn't (except LA).
Coops are a weird thing. I doubt you could get international financing for a coop which is an indirect claim of RE ownership (a derivative). not a problem for a condo.

"My logic is when I rent at $4750, I am paying for the location, the space and amenities, not for the right to sublet."

That's an interesting take. Actually, when you rent, you do have the right to sublet.

In any case, I'm coming at it from an "options" point of view. Suppose you bought a place with a 4.5% 30-year loan, and you put enough down where it is cash-flow positive. A few years pass, and interest rates hit 7.5%, causing prices to drop 25% from where you bought. As long as you're living in the apt, there is no difference. However, suppose you need to move (relocation, increase/decrease in income leading to desire for greater/lesser housing, marriage/family additions, etc.). If you are in a coop, your only choice is to sell for a 25% loss. If you're in a condo, you can just continue with the cash-flow positive setup you always had by renting for the remainder of the 30 years. In effect, if you have a 4.5% loan when the market rate is 7.5%, you're sitting on money. With a coop, you're forced to forgo this money based on your choice of residence.

I'd argue that renting is more condo-like because it does not force you to make investment choices whose timing is based on your personal residence.

> With a coop, you're forced to forgo this money based on your choice of residence.

True, with the understanding that presumably you are selling and then buying elsewhere at the theoretical 25% lower price.

> I still believe it's better to compare NYC with other major large cities in the world, e.g. Tokyo, London, Zurich, Moscow, Beijing, Paris, Sydney, Dubai, Hong Kong, Seoul, etc.

You are well intentioned with your preferred comparisons, but how much do you reallly know about Moscow, Sydney, DUBAI, Hong Kong and Seoul to say that Manhattan is a good comparison?

Fact of the matter is that Manhattan real estate is actuallly less risky than the smaller U.S. cities, and deserves a premium as a result.

"Only steve can value Mahattan lower than Detriot"

Did I do that? I don't remember. Tell me, Juicy: did I do it on an absolute basis, as a ratio, or did I apply The Mysterious Juice Factor, which is the number multiplied by any answer I get in order to get the answer that I want?

so does that make 15 a conservative ratio for manhattan?

regarding inanoda remarks
1) u assume because rates went up that prices went down. true most of the time except in high rising inflation times. It happened for 10years in the 70s, my feeling is it will happen again in the next 10 years. (I know most of the bloggers will say the opposite:they're wrong. I only trust data).
2) the option: in mortgage finance, the "gift" is the imbedded option, calculated at 1.5%,(regardless of rate: that is 1.5 wether rates are5% or 10%).no time to expand here, but the option is enormously valuable as protection of future rate changes. (assumables can even be traded).

1) That's what you and half the population think, trust me it's not some fringe notion amongst the masses. We currently have short-term interest rates that run 2% below inflation. It's entirely plausible for them to go up without inflation because right now the real interest rate of -2% is at historic lows. Something like +1-2% is probably more normal. You wanna play inflation because you think you know something, lots of investment products out there that will sell it to you at 2-2.5%.

2) The price of the option has to do with pre-payment risk and interest rate volatility, it is not fixed at 1.5% forever. In any case, my point is that you lose one of your embedded options with a coop: namely, the right to carry the loan out to its full 30-year term regardless of your residence choice. Even if you pay cash but don't believe in rational markets, you lose the ability to wait on selling until markets become rational again per your estimation.

you don't play the inflation game with short rates: with long rates. that's the whole point. investment products will make you pay taxes on (virtual gains). defeating liabilities with negative rates is tax free. that's the whole point.

In a bubble, condos should sell for more than coops because they are better vehicles for bubble speculation, which is what is driving prices. Coops usually have rules that inhibit flipping. In a loose-credit driven bubble, this effect will be even larger, since banks are more likely to lend on overvalued condos than coop boards are to allow speculation in coops.

In more ordinary times, in a market with lots of coops and lots of condos, the prices should be about the same: some people will prefer the freedom to impose on their neighbors or will value the option to rent and will choose condos; others will prefer collective decisions to reduce impositions from their neighbors or want to avoid renter neighbors and will choose coops; and enough people will be willing to switch from one to the other to keep prices relatively similar.

Moreover, nothing in the coop form requires intrusiveness and nothing in the condo form requires tolerance. So if enough people prefer one system to the other so that price differentials get large, owners in the lower priced form are likely to pressure for rule changes to shift towards the more highly valued one. Coops are legally free to allow subleasing, and condos in the rest of the US often restrict it.

The current price differential, to the extent it is not an artifact of different methods of measuring, is likely to disappear as the bubble deflates. The process may be slow: condo owners using their option to rent may lead condos to adjust even slower than coops.

inonada,

Yes, a renter has the right to sublet. However, a renter usually has a lease of 2 years and he/she can only sublet till the end of the lease and the sublessee has to move out. In many cases, my understanding is coops can be leased to non-owners for 2 years too.

And yes, I understand your point of view on interest rate increase. There are 2 things in my mind:

a. Whether an increase in interest rate (of course, depending on how much and for how long) will cause a dip in housing prices remains debatable. Now we are in a period of decreasing interest rate but housing prices are declining as well. That's why I also look at "housing price to income" ratio (i.e. no interest rates are involved). Even though this ratio for NYC is not exactly "affordable", as demonstrated in Demographia's data, it's not totally out of whack when comparing to other international cities. On the other hand, as huntersburg pointed out, which cities constitute a good comparison to NYC? That's up to debate too. Irregardless of the subjective nature in selecting comps, there are certainly a few international cities which are very much like NYC. I threw a list of cities just to cast a broader net in accommodating different criteria. Of course, there is always a risk all international cities are in a huge bubble, that's the inherent shortfall in using comps.

b. US interest rate has been decreasing since the 1980's, and hence people say housing run-ups are due to decreases in interest rate -
http://economix.blogs.nytimes.com/2010/09/07/mortgage-rates-and-home-prices/

However, if you look at things outside the US, two examples:

a. Hong Kong - Due to the currency peg to the USD, Hong Kong's interest rate follows the US's very closely. Look at Chart 8:
http://www.hkdf.org/newsarticles.asp?show=newsarticles&newsarticle=126

Hong Kong's home prices had a huge run-up in the early 90's. US and Hong Kong's home prices, both were under similar interest rate environment, behaved very differently.

(To be continued)

b. Japan - Interest rate has been falling since the early 1990's (the second chart): http://www.contrahour.com/contrahour/smart_analysts/

What about home prices? Take a look at: http://4.bp.blogspot.com/_mJmwQtPmusk/SusSzwxTm0I/AAAAAAAAENs/aqA69nY96pQ/s1600-h/japan-house-prices--nov08.gif

I am NOT saying interest rate does not influence home prices, but there are definitely other strong factors that need to be considered before reaching a conclusion.

huntersburg,

I do not believe Manhattan is actually "less risky", however, my take is, when a city paid a lot of money and efforts to build infrastructures, there is a premium associated with it. Just like when you buy an apartment that needs gut reno vs. xxx-minted apartment.

Plus, I agree with financeguy: "Coops are legally free to allow subleasing, and condos in the rest of the US often restrict it." After all, coop boards comprise of shareholders, which are just buyers. I think that the current price differential is likely to narrow (rather than disappear) as the bubble deflates. I hope Streeteasy will have something that tracks closing price of condos vs coops in each room category, since they have this database anyway.

OK, last one. Regarding mortgage finance: I am not a fixed income person, but I can't help wondering, why in this world will lenders, on the cusp of pending inflation (hyper or not), are willing to lend at such low rates for 30 years? My gut feeling is the US government is subsidizing big time on this. My understanding is there is no other country (other than the US) which has 30-year fixed rate being offered as a mortgage option. Most of them are floating rates, quote as PRIME + or - x%.

Getting a fixed rate for 30 years now sounds like a no-brainer, especially when everyone thinks (hyper- or not) inflation (or an increasing interest rate environment) is coming.