SteveF *High Fives*

Yeah, well I guess we really can't complain.

Folks who do the math reap the benefits. For every person who makes a dumb decision in markets, there is someone like you on the other side to take advantage. I've been renting for a sfraction of someone else's carrying costs. The stocks I bought when the world was ending, someone sold them to me... probably at a huge loss.

So, while we sit in amazement that folks like this (and Steve) exist, we should also be thankful they do...

So, I guess, well, there is Steve's high five!

You might also have bought the stocks from columbiacounty.

high five steve/ericho... high five
H5
H5
H5
H5

High five to bjw
High five to riversider
high five to urbandig
H5 to w81
H5 to ali
H5 to the rest of the lemmings

How are you not the greatest lemming w67thstreet?

BJW, walk me through how you are paying less to own than to rent. Scale the numbers to a $1M place if you don't want to give exact info. I'm interested in seeing how the numbers add up for you.

nada, we don't even need to get into specific numbers to discuss this really. In my monthly nut, I'm factoring my mortgage payment, maintenance fees, insurance, taxes (unabated, even though I'm paying far less at the moment), and a 6% broker commission for a future sale, amortized monthly over 10 years. What else would you have me include?

Holy crap not this again. BJ, you should be familiar with the drill by now. Take your DP at Madoff plus 20 points and recaluclate.

Oh right, that. I would have owned that tiki bar by now. Shucks.

Look, I just want to understand how things add up for you when you say you're paying less to own than rent. If you don't break it down, then I cannot understand it. It's your perogative not to answer, but I think it gets to the meat of the discussion.

That's fair nada, but why do you need the specific numbers (which I'm obviously not totally comfortable posting on the internet)? I would think knowing my "methodology" should be enough to answer your questions, unless you doubt my ability to add and subtract? Besides, to me, the "meat of the discussion" we're having seems to be philosophical views on home ownership and risk tolerance.

why do people always toot about the 10% (riight) expected equities return at year 1 of a mortgage vs rent, yet don't see the extra cash on hand at year 16 of a 15 yr mtge or at year 1 if doing cash deal??

it's the equivalent of someone who loves swallowing c*m saying sucking c*ck isn't worth it bc it's demeaning or you might catch pubes between your teeth..

where's the fun in drinking (and enjoying) my cup of c*m if i can't jerk and suck it to my own liking?

What I'm feeling is that the way you've come to your conclusion ("pay less to own than rent") is by vastly underpricing the capital you've put up, in essense underpricing risk. Knowing the limited amount I know about your situation, that's the only way I can make it add up. I was hoping to get more light shed on that, but I understand if you don't want to give specifics.

nada, well then I'm genuinely curious as to how you would correctly price the capital I put up. I think we can discuss this without getting into my specifics.

"What I'm feeling is that the way you've come to your conclusion ("pay less to own than rent") is by vastly underpricing the capital you've put up, in essense underpricing risk. "

That mistake almost seems to be the rule with buyers making that calculation.... either ignoring it, or saying "I can only get 1% in a CD" (being oblivious to the fact that a 5x ot 10x leverage real estate investment has a risk factor several times that of stocks).

swe, please stop following me around - you're obsessed! Seriously though, I've never ignored the capital and do understand the leverage involved in a real estate purchase. While I'd like to avoid yet another buy vs rent thread, I am (again) genuinely interested in hearing how you would allocate on a monthly basis. And I hope you can come up with something a tad better than w67th's "if you can't make 10% in your sleep, you should off yourself" before disappearing from the conversation altogether. Very useful stuff.

bj--you are an idiot--why do you need someone else to tell you what you might have done with the money that sits as equity in your cheaper to own than rent fantasy?? there are plenty of instruments with risk comparable to real estate which, if leveraged 2:1 as your real estate is, will throw your calculations far out the window--and wtf are you blathering about with how one would allocate on a monthly basis?? your money sits as equity in your real estate or not

W, please, the adults are trying to have a conversation here. Go insult the other kids in the sandbox if that's what you're in the mood for.

BJW, it depends on how much you've put down. At 20% down, I'd want to see an expected return in the neighborhood of 15% a year on the down payment. I think 5% annual swings in RE are quite expected these days, which works out to 25% of the downpayment. At that level of risk, I'd want an expected rate of return that is 5-7% beyond risk-free, which currently runs at 5%. I'd also want to be compensated for illiquidity a few percent.

Now I can see reasonable arguments to the effect that 15% is too high, perhaps something as low 10% is sufficient. Perhaps. However once you start going down to 5% or 0% or -5%, you've got a case of massive underpricing of risk IMO. As far as I can tell, my place is sitting at an implied cost-of-capital of -5% for the top 20% of equity and represents one extreme. Now your place may be at an implied cost-of-capital of +5% representing the other extreme. However, the whole dialogue is in the wrong ballpark: we should be talking about a range spanning 10% to 20%, not -5% to +5%.

That is underpricing of capital / risk. If you've put up $200K on a $1M home and are OK with seeing your gains be $300K after all is said-and-done w.r.t. renting after 20 years, you've underpriced your capital. You should be looking for a million or three.

And before you say "Well, I'm not looking at my home as an investment", let me remind you that your parents didn't either. Yet somehow they were compensated for their downpayment well beyond risk-free.

nada, your numbers make sense to me from an investment perspective (ie: buying with the sole purpose of renting the place out and turning a better risk-adjusted profit than you would elsewhere). I know my parents were well compensated for the real estate purchases, but it's an unexpected windfall that should never be budgeted for. Those things happen, but don't fall into the trap of expecting them to drop by on the regular. Obviously, that warped people's views and expectations around real estate, but I don't think that's right. Isn't adjusted annual appreciation on real estate ~1%? 15% has happened and might again, but timing that is a major crap shoot and not worth it in my view. In the end, aren't we agreeing on the same basic principle? Investing in real estate here is not going to make you rich.

But this begs the question: do you see yourself ever buying a home here? Because it sounds like that's something you may never be fully comfortable with.

Why in tarnation would Mr. Nada buy a home in Williamsburgh? How would he even get there?

Oh, I get it ... you mean AFTER the new ferry service opens the area to settlement?

alan, nada's too high class for Williamsburg, I suspect. The liquor is slightly cheaper however, and that beats the pants off waiting for the A train.

"In the end, aren't we agreeing on the same basic principle?"

Not even close.

"Investing in real estate here is not going to make you rich."

If you don't expect to earn an attractive risk-adjusted return on your money, then that's not really "investing", is it.

bjw: you're halfway arguing for the economics of owning (without putting forth any numbers) and halfway pointing to the unquantifiable benefits of owning. It's kinda hard to follow.

"If you don't expect to earn an attractive risk-adjusted return on your money, then that's not really "investing", is it."

seg, no it isn't, but read the whole thread - I don't consider owner-occupied real estate to be an investment in the first place. To me (and I'm open to differing opinions and schools of thought on this, for sure), owning your home should not be compared to the returns you could get with equities, etc. unless you're explicitly buying with the purpose of renting the place out. It's a completely different ballgame.

hard to follow??

bj is quite the prolific blatherer--i check in for a chuckle now and then

W, get off your high horse. That's no place for a troll anyway. Back under the bridge with you!

I hear you. What I'm saying is, it's difficult for a person to say, on the one hand: "My cost of owning is less than renting." And on the other hand say: "I recognize that my real estate purchase is not meant to be as attractive as risk/return on equities etc." There is some contradiction here.

Of course the words I used are not quite the same as yours, just trying to illustrate the point.

Anyway, for the purposes of your own rent/buy calculation, the return on your down payment is whatever you decide it should be, right? And the point people are making is people use too low a cost for the risk.

So the real cost of owning depends on implicit returns on alternatives with the same risk. You can't really separate the 2 concepts.

"return on your down payment" should be "cost of capital on your down payment"...

seg, thanks. I guess I have a hard time seeing "paying less to own than rent" and "relatively unattractive risk/return" as mutually exclusive terms. Do you mind explaining further? The former is a function of the price you paid, your monthly nut, and the strength of the rental market. The latter is a function of opportunity cost on your dp. Obviously there are some ties there, but maybe I'm missing a stronger connection there.

On a somewhat separate note, I tend to think some project far healthier returns on equities than they really should, but there are apparently some real ace investors on this board.

To me, that's how you're underpricing cost-of-capital / risk. Regardless of what your parents may or may not have been thinking, that's what they were getting. Let's go back to 1995, the earliest date we have the SE index. It was at 700, today we're at 1870. That means a $1M condo today was trading for $375K with $500 in monthlies. Rent was probably $2500 a month. Mortgage rates were around 7.5%, so net of taxes you'd get to 5%.

The rent works out to 8% of price, take out 1.6% for monthlies, take out 1% for amortization of transation costs, take out 0.4% for insurance/maintenance, and you're left with a net yield of 5% on a cash purchase, plus inflationary increases that were running at a 3% expectation. So you effectively had an 8% fixed yield on cash. Now if you finance 80% of it at 5%, that eats up 4% of it. However, you are left with a 4% return on the entire purchase divided over your 20% downpayment, and you end up at a 20% expected return on your downpayment.

Now this 20% expected return doesn't really compound over the lifetime of the purchase as the leverage is dropping over time (besides paying down the mortgage, your leverage is decreasing simply from appreciation), but it starts out that high. It came with a bunch of risk, sure, but still nice & big beyond the mortgage rate of 7.5% to compensate.

"The former is a function of the price you paid, your monthly nut, and the strength of the rental market. The latter is a function of opportunity cost on your dp."

Let me ask some questions to figure out the angle from which to explain the point of view of me & others to you. Person X is going to pay cash for a property. Person Y is going to pay with an 80% loan. Should one pay a different price than the other? Their monthly nuts are most definitely different. Is one "paying less to own" than the other?

"On a somewhat separate note, I tend to think some project far healthier returns on equities than they really should."

What kind of returns do you project for equities?

nada, those returns are hardly typical of real estate investment. As I've said, to expect that is setting yourself up for trouble.

"Person X is going to pay cash for a property. Person Y is going to pay with an 80% loan. Should one pay a different price than the other? Their monthly nuts are most definitely different. Is one "paying less to own" than the other?"

True, but in my experience, you set up the monthly nut comparison assuming 80% financing. Obviously an all-cash purchase throws that comparison out of whack.

"What kind of returns do you project for equities?"
Good question. I don't project 10%+ as some have. 5% seems far more reasonable, but I am by no means an expert on these things. I pretty much exclusively buy ETFs at this point.

this is just blather--what kind of returns are predicted for real estate?

rent v buy need not consider projected returns--if RE significantly outpeforms stocks it will, of course, prove to be cheaper to have owned than to have rented and vice versa

it's easy however to see that as of now, of recent, were one to have been invested in any number of instruments, or even a typical "balanced portfolio" with similar leverage to that applied to owning realestate; it have been cheaper to rent

now you can cherrypick instruments, like a short metals etf. but, in general to say one is lucky to be able to own more cheaply than to rent, without any consideration that one's equity might have been invested in comparably risky, comparably leveraged instruments is quite simply the thought product of an idiot----as in bj

"alan, nada's too high class for Williamsburg, I suspect. The liquor is slightly cheaper however, and that beats the pants off waiting for the A train."

I used to live in an area akin to Williamsburg with all the cool kids not too long ago, but now I've become high-class and boring. I'll probably become cool again at some point. I did consider Williamsburg, but the inventory just didn't match what I was looking for.

"But this begs the question: do you see yourself ever buying a home here?"

If prices become attractive, sure: put me back in 1995, I would've probaby bought. I've got the money to buy whatever it is that I'd want at today's prices, but unfortunately also the sense not to piss it away ;).

bjw:

The difference here is what is meant by "pay less" to own vs. rent. In an all cash puchase, the buyer will indeed "pay less" than renting but the return's going to be almost certainly less than 5% at today's prices. Then apply leverage and a lot of purchases are negative returns on DP or just slightly positive. In the case then techinically the buyer might be paying less than renting, but it's not what most astute people would consider paying less given the risk. I think this concept's been hashed out enough by now and I don't have much more to add.

Congrats to you if you did a bit better than this, as it sounds you might have.

FWIW- I justified my purchase in a similar way as you, but for some other reasons as well. It's difficult to do purely on numbers, even if the expected return is positive over a long period. Anyway hope you are enjoying the place.

"Good question. I don't project 10%+ as some have. 5% seems far more reasonable, but I am by no means an expert on these things. I pretty much exclusively buy ETFs at this point."

If you're really projecting 5% a year long-term, you probably shouldn't be in equities. Risk-free treasuries will give those types of returns without the risk. You can get 30-year fixed at 4.7% or 30-year TIPS that'll give you inflation + 2.16%. Exposing yourself to equity risk for such little excess expected return is not a good idea. Of course, your expectations may be off here...

"nada, those returns are hardly typical of real estate investment. As I've said, to expect that is setting yourself up for trouble."

Those returns are hardly typical of RE investment ... this past decade. Go to the decade prior, and they were the norm. In some hard-hit markets, they are becoming the norm again.

IMO, if you don't expect those types of returns, you are setting yourself up for trouble. I'm not talking about high expected returns on a 20% downpayment from ever-increasing prices. I'm talking about high expected returns from inflationary increases in rents.

why can't people just say, "hey, i want to buy. i don't care if it makes sense financially. i want what i want."

the effort to have it both ways seems so silly.

i buy expensive cars because i can and i want to. there is no economic justification. nothing wrong with wanting to own an apartment. just stop trying to pretend that it makes sense financially. or blather on about how its not an investment, its a place to live but....of course it still makes sense financially.

bottoms, if calling me names every chance you get helps you get through whatever troubles you seem to be having, I'm all for it, but maybe lighten up a bit? Take some of spinny's advice for a change. Trolling an anonymous message board is a wonderful pastime and all, but don't say I'm not lookin' out for ya.

As for your one salient point amidst the otherwise unintelligible gibberish you posted, there's no rule that obliges you to invest your down payment in equally risky assets. As spin explained, most people simply don't do that.

"That is underpricing of capital / risk. If you've put up $200K on a $1M home and are OK with seeing your gains be $300K after all is said-and-done w.r.t. renting after 20 years, you've underpriced your capital. You should be looking for a million or three."

Well put...

Btw, we haven't heard from ericho and Steve in a while here. I'm used to Steve running and crying after he gets slam dunked on, but nothing from ericho?

"If prices become attractive, sure: put me back in 1995, I would've probaby bought. I've got the money to buy whatever it is that I'd want at today's prices"

nada, fill me in on the details. What exactly has to happen for you to consider prices attractive?

"Of course, your expectations may be off here..."

Yes, I was being a bit overzealous (underzealous?) given what I've seen posted around here (stevejhx's infamous average of 2% returns per day!). Still, what do you consider a reasonable expectation? I also think there needs to be a distinction between your "average" investor and someone like yourself.

"Go to the decade prior, and they were the norm."

I was under impression that annualized real estate returns averaged out to ~1%. This has been posted plenty of times on here (which doesn't mean it's right of course), but I had kind of taken it for granted at this point.

"I'm talking about high expected returns from inflationary increases in rents."

Sorry, are you saying that over the long-run rents increase faster than sales prices?

>why can't people just say, "hey, i want to buy. i don't care if it makes sense financially. i want what i want."
the effort to have it both ways seems so silly.
i buy expensive cars because i can and i want to. there is no economic justification. nothing wrong with wanting to own an apartment. just stop trying to pretend that it makes sense financially. or blather on about how its not an investment, its a place to live but....of course it still makes sense financially.

can a politician please stand up and lead us in song?

seg, thanks, I do love my place. I bristle a bit at the vocal few around here who seem intent on lecturing me that I made a horrible decision, that I'm an "idiot," yearn to revel in schadenfreude, etc, ad nauseum. I genuinely like inonada and really appreciate his willingness to discuss real estate without ever veering anywhere near wbottom territory, but obviously there are a couple folks who troll about as well. Anyway, my point is definitely not that I made the "investment" of the century. Far from it. But I'm happy and proud I bought something I could easily afford and negotiated a pretty good deal for myself in the process. Seems to really bug some people I guess.

cc, doesn't really have to be so black and white, sorry. You can buy and still aim to negotiate a good price. If I viewed renting and owning as perfect substitutes and wanted to purely maximize my net worth, then no, I would not have bought. Is that what you want to hear?

i don't have any particular desire to hear anything. actually, no.

honesty is always appreciated.

> why can't people just say, "hey, i want to buy. i don't care if it makes sense financially. i want
> what i want."
> the effort to have it both ways seems so silly.
...
> just stop trying to pretend that it makes sense financially.

Agreed, that kind of rationalization can get dangerous.

If you really, really want it, call it what it is... consumption. But don't let a lack of understanding of the word "investment" cover it up. If you want to consume, understand that you are paying for it, and get the real price.

The problem is, it was this kind of stupid "investment advice" from so many all over this town and country - and on this message board - that was not only painfully wrong, but it hurt a lot of people who are now suffering.

>i don't have any particular desire to hear anything. actually, no.
>honesty is always appreciated.

Can a politician lead us in a lengthy song?

cc, sorry, didn't mean anything by it - it can just feel like a lecture hall in here sometimes. I'm sure I'm guilty as well.

"If you really, really want it, call it what it is... consumption. But don't let a lack of understanding of the word "investment" cover it up. If you want to consume, understand that you are paying for it, and get the real price."

swe, yes, that's what I've said all along. I still think this doesn't preclude a potential buyer from looking for the best deal and actively negotiating for it.

listen to yourself.

substitute "porsche" for "apartment" and think how silly it sounds.

nothing wrong with a porsche. just trying to justify it as great transportation because you got a great deal sounds dopey.

An apartment is a porsche?

cc, I have a great apartment and got a great deal. That sounds silly?

With the turbo engine?

no.

the part about how its a great financial decision sounds silly.

it doesn't have to be a great financial decision for you to enjoy it.

columbiacounty, when was the last time you were able to use your penis?

cc, I might be wrong, but I have never said it's a "great financial decision." I simply said I pay less than I would to rent the place.

Once again, columbiacounty is proven to be a liar.

Back to aboutready, you talk about your experience. What is your experience? What do you do for a living? What is your education? Do you have a large family you manage? Anything outstanding?

if you really like the place and it really costs less than it would to rent, isn't it a great financial decision?

columbiacounty, shouldn't you address your lying before moving on to a new topic?

"if you really like the place and it really costs less than it would to rent, isn't it a great financial decision?"

No, not necessarily. As others have said here, if I park my down payment in undervalued equities and make a killing there..

bjw, columbiacounty, aboutready, and w67thstreet HATE you. But you feel the need to convert them to your point of view. How many years has it been? Of course, you are a wonderful person and maybe it will work because you ignore me, you think?

I just saw a google ad: Rich Dad, Poor Dad is back in town for another round. Remixed. Remade. Remodeled. Maybe someone will get condestinkingly rich if they just know the secret of ownership: shhh.

Some days the google thinks I'm a woman, some days the google thinks I'm losing my hair, and some days the google thinks I'm desperate for something.

hburg, come on. I doubt (and hope) they feel that strongly about me, especially since all they know about me is what I post on here. I actually really like ar and of course we don't agree on everything (a generic phrase that actually applies to everyone, but you know...), but our conversations have been totally fine.

Hope is a great strategy bjw.

I'm now waiting for aboutready to say she likes you too, just that she thinks you made a bad decision. And something like "good on you" or some other passive aggressive non-standard phrase that masks her disdain as a compliment.

By the way, what happened to w67thstreet? Did the service elevator get stuck overnight with him in it?

bj--the volume of comletely vacuous heartfelt garbage you produce over your lousy real estate purchase is awesome

since youve so laughably described yourself to be a data freak, why dont you share your numbers? what's so personal about that? no address, nothing traceable

or as nada requested, why not at least express your numbers based on an assumed price?

otherwise just keep blathering on as you do

Wtushy!

bottoms, the amount of time you spend vociferously denouncing me is awesome. I really seem to push your buttons hard - lighten up; take a walk outside; consider that your anonymous trolling is maybe taking away from whatever it is you otherwise enjoy (unless this is it?).

As for my numbers, they are hardly necessary, especially when you've obviously already made up your mind. The same exact points can be made by discussing exactly how to do a rent-buy analysis, which has been done to death around here.

Starting to fight back a little. Good for you.

taxes per yr 4800
common per yr 4800
mtg payment 2271
interest per yr 21900
loan @ 5.50% 400000
purchase price 500000
rent 2300
downpayment 100000
(1st, security, broker) 6900
principal paydown per mth 450

500k Studio bought w20% down vs rented for 2,300

The $450 is principal paydown(loan balance decreasing).
The $735 is tax benefits(28% bracket).
The $388 is not used down payment money earning safe 5%.
The $88 is tax on renter-invested-downpayment gains
The net monthly cost is 1,886 for owning vs 2,000 for renting.

Footnote: the principal paydown accelerates every year and
your rent increase long term.

Buy Rent
3,071 2,300 buy - mtg/tax/cc
- (388) renter downpayment earning 5%
(735) - owner income tax benefits
(450) - loan balance/principal paydown
- 88 tax on renter's capital gains

1,886 2,000 Mthly Net cost Buying vs Renting

Ascribing a "safe" equivalent return to a 5x leveraged investment on one property is a HUGE flaw in the analysis here.

BTW, show us the listing for this apartment where you have this choice.

BTW, Steve, where is my high 5? I made a ton because of folks like you...

"nada, fill me in on the details. What exactly has to happen for you to consider prices attractive?"

At today's interest rates, it'd take price-to-rent in the range of 15. The 1995 example I had laid out is representative, except back then interest rates were a bit higher and price-to-rent was a bit lower. In my market, it'd take a 30-50% drop in prices to get there. Or a 50-100% increase in rents. I'm not holding my breath on either.

"Yes, I was being a bit overzealous (underzealous?) given what I've seen posted around here (stevejhx's infamous average of 2% returns per day!). Still, what do you consider a reasonable expectation? I also think there needs to be a distinction between your "average" investor and someone like yourself."

If you go to Shiller's site, he's got 140-year history of US stock index prices. Total returns have averaged 6.5% above inflation over this period. Long-term inflation expectations, according to 30-year treasuries minus 30-year TIPS minus an allocation of 0.5% for inflation risk premium in the former, is running around 2%. So you get to 8.5% by this metric.

Another approach is to look at earnings yield & expected growth rate. Averaging the past 10 years of earnings, inflating, and adjusting for growth, we are at an earnings yield of around 5% right now. I think one can expect around 2% growth on this number from inflation, and another 1-2% from real earnings growth. This gets you to a number like 8.5%.

Now will the average investor achieve these sorts of numbers? Dollar-weighted, this is a tautology. Does the average person achieve this: I think studies show otherwise. I am guessing you can beat this number a little by avoiding what I'll call obviously stupid times (I consider 1999-2001 the only such time in recent memory), maybe by 0.5-1.5%. By the same token, the average person is probably attracted to obviously stupid times I would imagine. Now, does this mean you should count on a lower return if you are an average person? I don't know. That same person who is attracted to obviously stupid times in the stock market is probably also attracted to them in other asset classes like RE.

FWIW, I think NYC RE has been in "obviously stupid times" territory for several years now. I'm not saying this to insult anyone, just calling it the way I see it. A typical consequence of an "obviously stupid time" is that a decade later, your risky asset that should have returned 2.5x on your capital has instead returned a 25% loss. Not the end of the world, but a pretty crappy outcome for high-risk capital.

"I was under impression that annualized real estate returns averaged out to ~1%. This has been posted plenty of times on here (which doesn't mean it's right of course), but I had kind of taken it for granted at this point.... Sorry, are you saying that over the long-run rents increase faster than sales prices?"

I think the data shows that RE has returned inflation, maybe plus ~1%. That ~1% is dubious: it involved using a history that included the recent unprecedented 2x runup in inflation-adjusted prices. If you use 2011 prices rather than 2007 prices, you'll see that RE returns just inflation over long periods of time.

This does not, however, mean that returns on your downpayment are limited to inflation. Take my 1995 example. Rent works out to 8% of the price, you take out 2% for monthlies/insurance/maintenance, another 1% for amortized transaction costs, and another 4% for financing 80% at an effective tax rate of 5%. This nets you 1% of the purchase price. Additionally, a year passes and the value of the home goes up by inflation, which I assumed at 3%. So you're up 4% on a downpayment that was 20% of the home value. There's your 20% return, all done without assuming any changes beyond inflation.

Now you may ask why someone should pay 3% more for the same home? Well, in the first year a person was able to net $1000 on a $100K home. Since all the rents/costs go up by 3% (inflation) for a new buyer in the second year, they're going to net $1030 on it. If someone was willing to put down 20% and buy a $100K to net $1000 plus 3% inflationary increases, then that same person should be willing to put down 20% and buy a $103K to net $1030 plus 3% inflationary increases.

Too long to bother reading.

"FWIW, I think NYC RE has been in "obviously stupid times" territory for several years now...an "obviously stupid time"

Stupid + obvious can go together without much trouble during an inflating bubble. Harder to make that case when the market's already taken a major leg down (~30%?) and we're about 2.5 years past the peak. What's your take on the inventory situation, inonada? If market prices are very, very wrong then sellers should be very, very happy to sell. Yet the inventory explosion remains, stubbornly, just around the corner as it has been for awhile. Market may be stupid, but it ain't obvious.

Market is only down 15% according to SE's index, which is the only one that is reliable IMO. Maybe down 20% inflation-adjusted. On an inflation-adjusted basis, 1995 prices were half what they are today. Do you think 1995 was stupidly low by 2x and prices are about right now? Or that RE outpaces inflation?

On "very, very wrong market prices", I was never one to believe in rational markets. I see no reason why a market cannot stay irrational well after the peak.

dang, another hole in equilibrium theory. financeguy, time for a ten page tome.

"At today's interest rates, it'd take price-to-rent in the range of 15. The 1995 example I had laid out is representative, except back then interest rates were a bit higher and price-to-rent was a bit lower. In my market, it'd take a 30-50% drop in prices to get there. Or a 50-100% increase in rents. I'm not holding my breath on either."

Makes sense. FWIW, I bought at just over 16.

"FWIW, I think NYC RE has been in "obviously stupid times" territory for several years now. I'm not saying this to insult anyone, just calling it the way I see it. A typical consequence of an "obviously stupid time" is that a decade later, your risky asset that should have returned 2.5x on your capital has instead returned a 25% loss. Not the end of the world, but a pretty crappy outcome for high-risk capital."

nada, I think you know that I agree: the vast majority of properties have traded at insane prices for several years now.

"On "very, very wrong market prices", I was never one to believe in rational markets. I see no reason why a market cannot stay irrational well after the peak."

Thank you. Over the long run, we'll see some regression to the mean (and quite possibly, an irrational overshoot as well - which I think is what some here are banking on), but it should be clear by now that markets don't move according to formula.

"Do you think 1995 was stupidly low by 2x and prices are about right now?"

Since you asked, from a purely financial framework on an inflation-adjusted basis I think 1995 prices were too low and now, even after the correction, prices remain somehwat too high. I am not smart enough to say whether quantitative equilibrium is closer to 1995 or to 2011, and I doubt whether anyone is.

But I don't see either era as indicative of a stupid or irrational real estate market. I see 2007-2008 as an obviously stupid market when flippers and way-too-easy credit were setting the marginal sale to a large degree. Today the market is pretty efficient as far as I can tell.

So if I am agreement that prices are probably still too high then why is the market not irrational?

From the perspective of a potential seller, may be sitting on an apartment than he thinks (but doesn't know for sure) he can sell for more than it's inherently worth. He may also have a family or other reasons to stay that aren't entirely quantifiable. So the decision of course is to sell, move and rent with the expectation (not the certainty) that he can redeploy the funds in some other investment and build more cash in his brokerage account in the long-term. So he's betting on two things: that the financial expectation turns out to be correct, and that the new living situation is not materially worse.

IMO, people in this situation are reluctant to make BOTH of those bets. Call that inertia or financially irrational, but I don't see the decision to stay put as irrational in the broader sense. Let's face it, there is no guarantee buying stocks at S&P 1,300 will MATERIALLY beat RE over next 10-15 years. Perhaps it's more likely than not, but by how much do stocks need to outperform to make that bet wortwhile given the change in circumstances that is entailed. This IMO is a big reason inventories of larger-size apartments are staying flattish and we're not seeing the surge of owners lining up to sell that your finacial model would predict.

Then for a potential buyer, it's the "not holding breath" concept you cited above. For some people's situations, there is a windown of time to buy, and it's effectively buy soon or it will never make sense to do it. Some will accept an implied return of 2% + inflation and prefer this to renting with the expectation (not the certainty) that after 10-15 years they'll wind up with more $ in their brokerage account.

Is what I'm describing the perfectly-optimal finanial decision? Probably not. But it is a way of looking at the world that I don't believe is so stupid and irrational. Just calling it as I see it as well...

>dang, another hole in equilibrium theory. financeguy, time for a ten page tome.

What's the acronym? FLMAYO? FLAMEZ?

One quick addendum to this:

It depends a lot on submarket. nada, you have pretty consistently said that your sub-market is at 25x rents (or more). I haven't been through all the comps you've posted -- I'll take your word for it.

But I think a lot of coop markets these days are more like 18-20x. Some even less.

It goes without saying, but if 25x qualifies as obviously stupid, then 18x may not be attractive but it's at least a lot less stupid.

"Call that inertia or financially irrational, but I don't see the decision to stay put as irrational in the broader sense."

I would actually call it loss aversion. Maybe irrational from a pure economic viewpoint, but well demonstrated IRL.

http://en.wikipedia.org/wiki/Loss_aversion

"It depends a lot on submarket. nada, you have pretty consistently said that your sub-market is at 25x rents (or more)."

Yikes - for the curious among us, can we get an example of something still trading at more than 25x?

"Makes sense. FWIW, I bought at just over 16."

I think when you bought, it'd have taken a number like 13 for me because of higher interest rates (around 1.5% higher than now). Underlying interest rates are notoriously hard to predict, but I'm willing to bet that 0.5% to 1.0% of this support will erode as the govt removes its artificial housing-specific support over the next several years regardless of what happens to interest rates at large.

nada, fair enough, though I did refi at these lower rates.

seg, I hear what you are saying on rationality. I am using the word strictly in the classical economist sense, meaning rational people should not be willing to take risk-free returns on risky assets. I distinguish this from "efficiency", meaning that you cannot predict markets despite irrationality.

Even in the top of the stock bubble in 2000, you could demonstrate that the market would achieve at least risk-free returns over the long run. I'm willing to bet that by 2030, you will find that holding stocks 2000 to 2030 will have returned about the same as a zero-coupon 30-year treasury. If you want to say accepting risk-free returns on a downpayment as rational, then I think you should be willing to accept risk-free returns on a stock market investment as rational as well.

Still, I get what you are saying on people's view of "rational" vs. economist's view of "rational".

"Yikes - for the curious among us, can we get an example of something still trading at more than 25x?"

Oh geez, don't make me flog out my favorite again. This bad boy rented for $15.5K, and market price is probably something like $7M (a couple were on the market with no takers for close to $9M):

http://streeteasy.com/nyc/rental/672298-condo-25-columbus-circle-lincoln-square-new-york

Works out to something like 37.5x. I've picked the most egregious example here, but something like 30x is quite run-of-the-mill at that price point. Drop the rent by a factor of 2, and 25x becomes the norm.

Sorry nada, that is indeed nuts. I don't tread in those waters, but as far as I can tell, things can get pretty wacky pretty fast when you get that high-end. Is this the range you're usually looking at? I have to assume you're a finance guy (not THE financeguy, fortunately)?

hey a number from our self-professed "data-freak", bj

having said she wont provide any numbers to illuminate for us details of her purchase, she now provides that she bought at the incredible rent/buy of 16X...atta girl, bj...nice purchase...we'll just take it on faith that you alone, in all you real estate investment glory, were able to effect this incredible rent/buy

it's possible...could be an ugly land lease....could be a coop with a hidously oversized underlying mortgage...but it certainly isnt reasonable product that any of us mere ordinary mortals could ever have purchased

of course bj, you could prove me wrong with some details, or examples of similar product from the time at which you bought--se/acris have plenty of data you could sort from, if such a thing existed, oh freaky one

Bottoms, I couldn't give two sh!ts if you believe me or not. You've proven to be nothing more than a trollish a-hole around here, so what's the point? You enjoy having all these run-ins, which just get to be tedious after awhile. I do enjoy that you seem to consider calling someone a "she" as a thinly-veiled "insult" and yet go apoplectic about supposed homophobia when people poke fun at your handle choice. I'll sit back and enjoy my condo (oh yeah, there's your answer) while you concoct another long-winded, vitriolic diatribe. Cheers!

i hear you bj...now how bout some deets on your 16X miracle??

hahahahaha

Bottoms, what's funny is that you consider 16 to be a "miracle." I got a good price, but there was no divine intervention involved, sorry. Not that this table is the bible, but it certainly sheds a little light on how little you actually know.

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

No comment on my details, bjw. I'm happy to tell you personally, just don't care to post it here.

Wbottom, I think 16x might involve a small amount of a rose-colored view from bjw, but not a whole lot. I think I have a good idea what his market is, and 16-20x is a plausible range.

help me on the math.

if 15X is the multiple where price settles, then each additional 1X is approximately 7% too much?

i.e. 18X would imply a potential loss of ~21% not counting transaction costs?

nada, totally understand. Could I email you offline? Obviously, I really value your insight, but no worries if you haven't got the time or inclination.

As for the 16, I don't know how rose-colored the view would be to you, but I've taken a slight discount from rental comps to determine the ratio. A fellow owner in my building recently rented his place on the first floor for more than I'm estimating, though he does have a small private outdoor space attached, which certainly adds value. I'll also mention that when I was negotiating, the developer was already in the black and more inclined to get a deal done at that point. That certainly helped my cause some.

It would imply a 16.6% difference. I think that is well within error bounds of determining a magic "rational" price. Once you start getting beyond 20x, that's when my "obviously stupid price" meter starts ringing. If you're buying at 18x, I'd be more worried about the "rational" price shifting from 15x to 12x from interest rates rising by 2%.