Challenge for the bears - bring it on!!

Maklo, I think I see where you're coming from. Compared to 2005 when you thought it was too high to buy, we currently have the same prices and the same rents but with higher maintenance. Maybe we're currently at a cyclically lower place on rents, so let's say that offsets maintenance. The big thing that has changed for you are lower interest rates, which I think are now 5% rather than 6-6.5% for 30-year jumbos.

You think that predicting forward rates is too much of a mess, so looking at interest paid is a good enough proxy. The 2005-2011 interest rate change amounted to an effective 20% reduction in cost relative to 2005, and that put things into balance for you. If interest rates drop from 5% to 2.5% from here on out, then a doubling of real prices would be in order. If it dropped to 1%, then real prices should go up by 5x and things would stay balanced.

On your question of my expectations for the next decade, my $300K nominal drop was "bringing it on". My best guess is flattish prices. Rents up 25%. S&P at 2500 while yielding 2%. Long-term rates that are 1.25% or so higher.

"For Nada, the rental listings at the places I mentioned at $7-8 per sq feet per month. I am just using $6 including all the negotiations and discounts. $6 for high-end rental is low looking at the listings."

300_mercer, I think I see where you're coming from. You believe that your only alternative to finding a well-priced apt and renovating for $1300 a sq ft all-in is to rent an equivalent at $6-8. You think that the only alternative to putting money in a home is cash. You justify what you want to do by limiting the opportunities out there.

I guess I see a different world. I see better uses of money for the next 20 years than 3.25% after-tax. At comparable risk, I see 7-8% after-tax returns from a 20-year buy-and-hold in S&P, never mind other opportunities. For spending $8 a sq ft on rent, I see places that cost $3000-$4000 a sq ft.

Nada's correct, and I think the largest pressure will be how high and fast interest rates do or don't climb in the next 5 years.
Interest rates certainly have a greater chance of rising than lowering.
I dont know how much more or longer they can tinker with that.
AN awful scenario and not out of the question would be say in 2 years a mortgage is 10%, that extra monthly expense (nearly double) will greatly influence and would likely knock down prices 20% at least.
Second largest pressure is unemployment. If we have round 2 rents will fall again.
But if unemployment holds and gets better, even slowly, I think rent will maintain.

"Rents can go up due to a lack of supply" True but this is circular too. You have many new developments that rented waiting for the market to rebound.
Construction is less but hasnt halted. Rental inventory will continue to be available. Keep in mind the for the last 20 years most if not all brand new inventory are condos, not coops.
Inventory ratios 20 years ago were probably 80/20 coops to condos. Now it is likely 50/50. Next 10 years will likely see 75/25 condos to coops.
This means an increasing an expanding field of inventory with looser rental options.

The Dow has "pierced" 12,400. What does that mean for Tealeaf Analysis? http://streeteasy.com/nyc/talk/discussion/12135-stock-market-looking-ill?last_page=true

If we are now on best guesses, Inonada is more pessimistic than I am on prices. But isn't reasoning more interesting than guesses? Here's mine:

I have faith (no evidence!) that eventually the politicians will move past "liquidate, liquidate, liquidate." That should lead to an economic recovery and perhaps even allow us to start catching up with our competitors in the basic prerequisites for economic success.

In a recovering economy where homeowners are going to want to move on with their lives, more are going to want to sell even if it means taking a nominal loss. So I think it's more likely -- despite the history to the contrary -- that at some point prices will drop to meet rents, reducing the pain significantly for would-be buyers, making the economics of developing better, and improving QOL in NYC generally.

Of course, when you ask for best guesses or act based on them, you should be asking also "how likely is this?" and "what are the alternatives" and "what would make the prediction change"?

For example, I'd think differently if a Republican Senate/White House becomes more likely. The current Republican positions would mean larger deficits, reduced Federal spending on everything, higher medical costs, and attempts to keep the dollar high that are likely to succeed short term but create instability long term.

That would likely send the economy into a tailspin, but might not be bad for Wall St bonuses. In the rest of the country, it'd probably mean more foreclosures and RE prices dropping below trend. In NYC, however, I suspect that the stronger effect would be to make underwater sellers decide to hold on (and more will be able to do so), so probably make Inonada's scenario more likely.

Etc.

As far as using Related (buildings like Caledonia) as examples, they are furthest from the norm.

As I posted 2 years ago;
"I saw an apartment at the Caledonia. Related has a smart formula. Lower floors are rentals with lower ceilings, higher floors are sales and are trickled out to the market.
THe agent was nice and had a "we are somewhat bulletproof" to the market air about him.
Their own little RE Hedge Fund."

Bottom line is Related for the most part can maintain it's own little bubble and be it's own island.

Mercer --

Any competent developer should be able to make reasonable profit on $4 psf rents if they can build or renovate for less than $650 psf or so, assuming they can get 5% financing on 50% and want a 10% gross return on equity without including possible capital gains. If they are willing to take a lower return on equity -- Maklo is willing to go negative on equity before possible capital gains -- they could spend more.

Of course, if they can rent for $5 they won't rent for $4. And if they can sell for $1000 psf, most will decide to sell rather than rent, unless they can run rental buildings very cheaply or they are willing to accept far lower ROE (which, however, makes building new condos even more attractive).

But for the longer term the point is that if they can develop for $650 psf, they'll keep building/converting until they add enough new "luxury" units to drive sales prices down to $650 or rents down to $4 or whatever number is the least their equity investors will accept.

Nada, yeah I think that is about right. I don't think it's a direct equation b/w interest rates and housing prices (e.g. 5-2.5% = double prices), but it is certainly and important factor to take into consideration.

I also understand the "bringing it on" concept. I just note that flattish prices at 2% inflation is a 22% drop in real prices. My view is more optimistic, but neither will I completely rule out that scenario.

I also have a long-term view that NYC will thrive relative to the rest of the country. It's part of my "great city" thesis supported by research done by guys like Geoffrey West (http://chartercities.org/blog/160/geoffrey-west-on-scaling-phenomena-in-cities) on the super-linear effects of per capita GDP in larger and larger cities. Buyers will benefit from real rising housing costs as they are hedged, renters do not as this is passed on to them. It is not something I would use as an "expected scenario" and hence I have assumed flat real prices, but it would support an upside case. If I were "bringing it on" I would probably assume some real price appreciation.

Also, the bubble made land prices very expensive, so $650 psf renovation or new construction isn't happening in much of Manhattan.

In a bubble, the value of a parking lot is the expected value of the land fully developed less the developers' cost & profit. If the market anticipates liberalized zoning, it could be even higher than that. So the cost of developing becomes a function of the expectation of bubble prices--developers bid up the price of land based on what they think the Maklos of the world will pay, while Maklo pays based on what he thinks the next Maklo will pay. Landowners need to decide whether to sell now or hold out for more tomorrow, and holding out will often look better so long as they expect ever rising bubble prices.

But as tenement and parking lot owners stop expecting bubble profits, they face a simpler choice: continue working for a living, or sell for more than a parking lot/tenement generates.

Thus, absent a bubble, the prices of parking lots or tenements have a strong tendency to drop to the value of the net income they generate AS BUILT. If land prices go that low, builder economics change radically.

>Also, the bubble made land prices very expensive

Understatement - multiunit buildings had asking prices that treated air rights as if they were already built.
Rent control units as if the tenants already died.

Here is part of the problem for people paying current prices and hoping to sell for similar real prices in the distant future:

A parking lot might be worth $500 psf to a parking lot operator as a parking lot in Manhattan -- say $80k / spot. If you can rent it for $500/mo, that'd be about 7.5% gross return, before paying taxes and attendants and maintenance.

If you can build a 50 story building on half the lot, that means the building would have $20 psf of parking lot cost in it. Even if you have to pay the parking operator double to get it move on, it's still only $40 psf.

How much does construction cost? $350 psf plus another $100psf in marketing costs? That doesn't quite get to W67's $500 psf.

Anything above that at is excess bubble profit for someone that is likely to disappear over time.

Technology sometimes offer solutions
http://manhattan.ny1.com/content/ny1_living/real_estate/141283/automated-parking-garage-is-an-unparalleled-parking-solution

When the market turns up, the surprise will be by how much it does rise. It's important to realize the market is driven by sentiment. It doesn't take much for people to stop crying, "Market is going to crash Sell Sell Sell" to change to "Well.. actually I think the market will do OK".. to which everyone winds up agreeing with...

http://www.youtube.com/watch?v=mzJmTCYmo9g

financeguy:

The first thing I find interesting is the suggested universal relationship between parking rates and land value. The psf prices of undeveloped land is apparently 1-2 times the monthly expense for a parking spot. (or do you mean 2-4 times?)

Then:
"How much does construction cost? $350 psf plus another $100psf in marketing costs? That doesn't quite get to W67's $500 psf. Anything above that at is excess bubble profit for someone that is likely to disappear over time"

It is interesting that 100$ psf is budgeted for marketing. So, for the hypothetical 50 story building, $50 million, assuming 10,000 sft per floor. Probably a large share of this would be salaries / profits for the marketing firm. Yet, NO profit for the developer? I don't think you can say that any profit for the developer ("Anything above that") is "bubble profit". I believe the micro-economic theory you cited earlier does not say that in equilibrium the developer cannot make any profit, but rather that the profit would be comparable to one achieved by some other economic activity for which similar means and efforts would need to be expended.

Also, I really don't have any numbers for construction costs of a 50 story building. I suppose your number of $350 psft includes everything (planning, permits, etc). It seems quite low to me then, given that according to inonada a standard reno has to be budgeted at $250 psft (every ten years).

Tell me why I am off on my Carnegie Hill assessment again? Look at recent sales in 10 East 85th. Seems the 2/2s in there get between $1.1-$1.25mm. Its not a shithole...and its on a park block...albeit one with a bunch of cross park traffic.

"Here is part of the problem for people paying current prices and hoping to sell for similar real prices in the distant future"

FG, I am again scratching my head to understand this logic. My takeaway is that your conclusion is that assuming constant _real_ prices is foolhardy because we are in a "bubble". But whether we are in "bubble" pricing or not is the exact question we are trying to answer. It is not axiomatic; you are trying to prove the question by starting with the answer.

Maklo. Unlike your model, the standard fundamental model does not assume its conclusion. Markets tend to drive prices down to marginal costs. That's the model "standing on one foot." It comes with a century or two of commentary.

The key benefit of the standard model is it gives you an idea of what non-bubble/non-panic prices might be. That makes it easier to think about what prices will be in the future, when we have no idea whether we will be emerging from or entering into a bubble or panic.

Right now, the standard model suggests to me that prices still reflect the bubble because prices are far above any fundamental costs I can identify. That conclusion follows from my guesses about costs, not some assumption about the bubble.

As prices get closer to fundamental costs, I expect to see bulls with better information correcting my cost guesses, which are pretty rough. For example, eventually prices will drop or rents will rise to the point where someone will show that it is no longer possible for a condo owner to make more money by selling to an owner-occupant than by renting for the expected life of the unit. That will mean one of the most flexible sources of new supply is gone.

Meanwhile, however, bulls continue to rely not on data but on models that say it is ok to ignore fundamentals because others will too, or on theological views that God or the Realtors Association has promised that RE prices will always rise, or anti-capitalist claims that it is immoral or pessimistic or anti-American to think that markets work in NYC.

And the continued strength of that bubble thinking is the second strongest possible evidence of a continued bubble.

Polisson: I have no confidence in my specific numbers. If you have better ones, I'd be happy to see them.

financeguy:

I do not as I stated above. But contrary to you I do not claim to have a "fundamentals" based sqft price for Manhattan highrise real estate that is obtained by "deriving" a simple (land value per sqft = 2 * montly parking rate) relationship between parking rates and land prices, guessing construction and marketing costs, and calling ANY developer returns "excess bubble profit".

Truth be told, I don't think using parking lots are the right base to use. Really how many of manhattan's new developments in the last 5 years came from single floor parking lots. 20%?
Half of Ny parking lots are inside buildings anyway.

A more proper base may be 4/5 story buildings to be torn down. if someone wanted to crunch those numbers.

"Unlike your model, the standard fundamental model does not assume its conclusion."

Huh? You are _also_ making an assumption on prices. Just because your assumption on capital gain is ZERO doesn't mean you are NOT making an assumption. You are effectively assumign they are flat in nominal terms. That means they are down, significantly, in real terms, if you believe in the concept of inflation.

If you take the capital gain/loss out of the equation, you are ignoring a large difference in the economics for buyers vs. renters. Buyers benefit or lose from capital gains and losses. Renters neither benefit NOR lose from capital gains and losses. If you are ignoring this in your thinking, then your theories are incomplete.

Like I've said before, the flaw in your logic is mixing real and nominal. Fixed, long-term debt is nominal. My 30-year fixed mortage rate is 5.125%. In real terms that is more around 3.375%. Debt is nominal. Real estate is ... errr ... real.

truth: in the bubble, the gap between the lowest price at which it makes sense for an existing use to be upgraded, and the highest price a developer might pay, gets huge. That makes negotiations difficult and hard to predict. So the least-profitable current uses aren't necessarily the first to be developed.

Maklo -- "You are effectively assumign they are flat in nominal terms." This is just not in anything I've written.

The standard model predicts that over time, prices on average will reflect marginal replacement costs. It follows that at an unknown time in the future, prices are equally likely to be above or below that average number. Whether that results in capital gains or losses, real or nominal, depends on (1) future costs relative to current costs, (2) whether you pay more or less than current costs and (3) the luck of whether you sell into a panic or a bubble or not.

My assumption -- the real one that you might want to question -- is that we can't predict bubbles and panics 20 years in advance. In 20 years, we are no more likely to be in a bubble than a panic, so the best estimate of your price then is projected marginal replacement cost. (I used your estimates for those costs, since I'm not very good at making predictions, especially about the future.)

Today, on the other hand, prices seem to be well above marginal replacement costs.

Buying above marginal cost and selling at marginal cost necessarily generates a (real) capital loss unless you make strong predictions about future costs that you've said you aren't making.

I don't disagree but there is simply not enough manhattan "undeveloped land" in any time period bubble or not.
The majority "undeveloped land" (obviously not including parks,train yards, or public property in general) are 2/3/4 story buildings....in manhattan, with a much higher replacement value than a street level parking lot.

And most gas stations are gone. I am impressed with Mobil on west 14th street. Still don't see how that station is profitable. Even at 4.99 a gallon for super, about .70 cents more than long island, it's just not enough of a premium to my naive gas station biz eyes.

Thing is we are 50% of the time in some bubble, life happens inbetween and during.
You just need to avoid being in the worst position at each pop.

Have a great weekend all.

Here is one prediction about the future, however: If your asset increases in value at 2% due to inflation, you will have a nominal capital gain. Try some simple arithmetic to decide whether you'll have a real gain.

Now, think about this. If you buy this asset using borrowed money, which makes both gains and losses bigger, are you going to be better off or worse off?

What if the interest rate on your loan is higher than the 2% inflation rate - does that help?

Now add a loss every year, because the asset's expenses are bigger than its income. Does that make allow you to make up your losses on volume?

Truth -- I agree. There are many other ways to increase supply as well: build on empty lots, build on landfill, replace buildings that don't fill the zoning envelope, convince affluent people to move to new neighborhoods, convert existing rentals/warehouses/commercial property to owner-occupied, upgrade or update "estate condition" units, upzone to allow higher density, expand mass transit to increase accessibility.

We've seen them all and we are likely to see more of each until prices drop (or costs increase) to the point where the cheapest way to increase supply is no longer profitable.

That's why people who think really long term, like Schiller, nearly always end up concluding that even in the most popular metro areas, prices usually reflect, basically, actual costs of construction.

NYC will always be more expensive so long as people are willing to pay a premium to live in the city: it's more expensive to build high in dense areas than flat in less dense areas. (If people aren't willing to pay a premium to live here, there will be no building. See 1935-1970).

But the size of the premium, over time, is likely to reflect little more than the difference in costs. When it gets higher, as now, investors respond by increasing supply more, and eventually they add enough supply to bring prices down to the cost of adding new supply.

And yes, financial considerations are not all. You might well decide to take a nearly inevitable loss to get exactly the cookie-cutter UES one-bedroom that you can't rent. By the time this bubble corrects fully, we'll all be on to some other stage of life. Happy Independence Day

FG - Does your "standard fundamental model" use the real or nominal cost of debt?

FG. Let's make this really simple. Let's present 300_Mercer's example in real terms. That means the 5% fixed mortgage rate is really 3% in real terms. That means 5% after-tax return on equity is now 3%, but let's bump it up to 4% (6% nominal, ~9% pre-tax) if you think that is more conservative.

Interest $48,000 (3% of $1,600,000)
Return on Downpayment $16,000 (4% of $400,000)
Common Charges $24,000 ($2k per mo)
Tax Deduction ($14,400) (30% of Interest)
Amortized Tx Costs $14,000 (7% roundtrip costs)
Maintenance Capex $13,500 ($150 psf every 20 years on 1,800 sf)
Total $101,100

This compares to rental equivalent at $96,000 per year. Not really a big difference. But wait, in real terms, the interest portion actually goes down 2% every year to account for inflation. At Year 10, for example, it is down from $48,000 per year to around $40,000 in real terms.

Note there is no discussion of capital gains/losses here

So let's call it a wash. Looks about equal. Is this indicative of your "bubble"?

"Like I've said before, the flaw in your logic is mixing real and nominal."

You wanna talk in real terms, let me explain your bubble to you real simple.

You have a $2M risky asset. By your own calculations, it costs $53K a year in real terms to hold it: $24K in maintenance charges, $14K in transaction costs, and $15K in depreciation. Rent benefit is $96K in real terms. So for $2M, you yield $43K in real terms. Works out to a 2.15% real yield for a risky asset. A risk-free asset of duration similar to that over which this asset will yield, 30-year TIPS, yield a real 1.77%. So a 0.38% premium for a highly illiquid risky asset. I.e., pretty much zero: in fact there were times this year where 30-year TIPS yielded more than 2.15%.

So what premium do you demand over TIPS Nada for unleveraged real estate.

Btw, if you are using the 30yr rate, you should really amortize transaction costs over 30 yrs instead of 10 to be apples to apples.

Oh and you are ignoring the tax subsidy.

Amortize? You know, I wish my monthly expenses were all amortization of costs I might pay some day in the future. I could sit on 100% of my cash today, or spend it, while some accountant is amortizing 'just to be accurate'.

"if you are using the 30yr rate, you should really amortize transaction costs over 30 yrs instead of 10 to be apples to apples."

I know that was for inonada, but I can't help but jump in here. By the same logic, does that mean if the average owner sells in 10 years, they should get a 10yr loan/rate? I don't understand how that's apples to apples.

Sunday, ok let me put it this way. Why not use the 10yr TIPS rate, which is 50 bps lower? That more than doubles the spread. Then add in the very real tangible benefit that is the mortgage interest deduction.

You know, a mortgage amortizes principle by requiring you to PAY in cash.

Transaction costs - you pay them when you tranzact. At 5 years, or at 10 years, or at 30 years. The key word being AT, not OVER.

Look alanhart/midtownervirgineast, I misspelled transact.

inonada: "You have a $2M risky asset."

The reality is, most people who are buying do not truly see it as a risky asset, regardless of comments that suggest they believe the price could drop in the short term.

Buy vs. rent analysis is a fun exercise but ultimately does not effect the final decision. Most people will want to buy the moment they think they can afford to.

maklo1421: "That more than doubles the spread."

You can say that about changing any of the input. That's why I think it's a fun exercise, but ultimately not useful in making the final decision.

"So what premium do you demand over TIPS Nada for unleveraged real estate."

I can assure you it's more than zero. Something like 2% would be appropriate IMO.

Let's look at 1998 for comparison, which is after a good rise from the bottom of the last cycle by all measures but the bubble. The OP's apt would have sold for $880K according to the SE index. Amortized transaction costs would be $6K according to your 7% metric. Depreciation would be $11K (backing CPI), and maintenance would be $17K. Using ratios of average rents from Miller Samuel, $82K rent. So a net of $48K on $880K, which works out to a 5.5% yield.

In 1998, 30-year yields were 5.5-6.0%, and I'd guess TIPS would have been 2.5-3.0%. So NYC RE was yielding 2.5-3.0% over TIPS.

"Btw, if you are using the 30yr rate, you should really amortize transaction costs over 30 yrs instead of 10 to be apples to apples."

I don't think so. The 10 years for amortizing transaction costs are there because that's the average duration of ownership. Pricing of an asset does not depend on how long a particular individual owns, whether it be 2 years or 30 years. It's the cost the average participant in the market will bear. Even if you stay for 30 years, others in the market need to price according to 10, including those who buy at the same time as you and those who eventually buy from you.

The point of using a 30-year rate is that is your asset is yielding over much longer period than 10 years, and the price you pay for today and sell at in 10 years is based on not just 10 years of yield, but something much longer.

Suppose you believe the stock market will yield the equivalent of 9% fixed and you're planning on holding it for 1 day. Is the appropriate benchmark for the risk-free rate in determining the premium of that 9% the 0% overnight rate? Nope.

"Oh and you are ignoring the tax subsidy."

Ah yes, the tax subsidy. The same one that was there in 1998 when yields were 2.5-3.0% higher than TIPS. More so, in fact, because the full mortgage would have been deductible, and because AMT would have less likely been an issue.

You know, back in 2000 when 30-years were yielding 6%, one could put together an argument for how the S&P 500 was yielding the equivalent of a fixed 6%. However because of tax treatment, held for long periods the 30-year would only yield 3-3.5% after-tax while the S&P would yield 5%. So there is your 1.5-2% premium!

Yet somehow today we find ourselves with S&P at fixed-equivalent yields 5% higher than 30-year yields w/o tax effects.

"Most people will want to buy the moment they think they can afford to."

And that's why they're ending up stuck paying more for an inferior home. While I get the idea of "yeah, I know it's more expensive but that's what I want", I get the sense that over the past decade most have been engaging in bad financial rationalization.

"Let's look at 1998 for comparison, which is after a good rise from the bottom of the last cycle by all measures but the bubble."

Ahh yes, 1998, a good 4.9% inflation-adjusted rise from the low in 1996. A year in the 24th percentile of real pricing since Case-Shiller started in 1987. At least it's more representative than 1996.

How about more of a middle-percentile year, like 1989 or 2003? Let's use 2003 because the historical TIPS yield is actually available on the Treasury website - the 10yr, the highest they have, is 1.92%.

>You know, back in 2000 when 30-years were yielding 6%, one could put together an argument for how the S&P 500 was yielding the equivalent of a fixed 6%.

If you bought the S&P in 2000, and bought a home in 2000, and sold both today. Which would have worked out better?

"The point of using a 30-year rate is that is your asset is yielding over much longer period than 10 years, and the price you pay for today and sell at in 10 years is based on not just 10 years of yield, but something much longer."

I do not necessarily agree. If "the longer the better", logic would make the case to extend the yield curve past 30 years and use an extrapolated 50 or 100-year yield. Many if not most people are happy using the 10-year treasury benchmark, if only b/c there its history is not interrupted. IIRC, you yourself were perfectly happy to use the 10-year as a benchmark earlier in this thread.

"You know, back in 2000 when 30-years were yielding 6%, one could put together an argument for how the S&P 500 was yielding the equivalent of a fixed 6%."

I suppose one could have put together that argument, but it would have been pretty easy to knock down in 2000.

Maklo, Miller Samuel has 1998 avg price per sq fr at 30% higher than their early-90's trough. The SE index has Jan 1998 at 20% higher than the lowest point from 1995, probably 25% higher over the average of 1998. Your reference points are silly. You do realize that 1989 was the PEAK of the last RE cycle. And that half the years in the data set you have are durin the greatest housing bubble of all time, which NYC tracked very closely?

"I do not necessarily agree. If "the longer the better", logic would make the case to extend the yield curve past 30 years and use an extrapolated 50 or 100-year yield. Many if not most people are happy using the 10-year treasury benchmark, if only b/c there its history is not interrupted. IIRC, you yourself were perfectly happy to use the 10-year as a benchmark earlier in this thread."

The yield coming in year 100 does not matter much once you consider discounting it. The 10-year benchmark is a benchmark for the lender: they on average are loaning you money for 10 years. The asset, however, does not have a yield duration of 10 years.

If I'm buying a stock for 1 day, what benchmark should I use?

"I suppose one could have put together that argument, but it would have been pretty easy to knock down in 2000."

Yet here you are making similar arguments today.

"Maklo, Miller Samuel has 1998 avg price per sq fr at 30% higher than their early-90's trough. The SE index has Jan 1998 at 20% higher than the lowest point from 1995, probably 25% higher over the average of 1998. Your reference points are silly. You do realize that 1989 was the PEAK of the last RE cycle. And that half the years in the data set you have are durin the greatest housing bubble of all time, which NYC tracked very closely?"

Ignore inflation at your own peril. 1996 was the bottom based on Case-Shiller.

"Yet here you are making similar arguments today."

Nah, I think a more appropriate analogy is you making arguments against buying stocks in 2002 and 2009. I'm saying real estate is fairly priced, and I am even willing to say that it's slightly expensive. It certainly ain't cheap. In times like today you can find interesting opportunities. Sure you can also lose money. But it's a hell of a lot different environment than in 2007 when 95% of purchases probably end up losing money.

Now you are entitled to your viewpoint, but you are also calling people idiots for even considering purchasing. In today's markets, you can find suitable opportunities - maybe you have to look harder than say 1998, but it is not unreasonable that a good chunk (maybe still not the majority) of people buying today will ultimately get an appropriate return, whether that's through consuming it, selling it down the line or a combination of the two. Dissuading people to even consider buying by calling them idiots is potentially doing them a big disservice.

"You do realize that 1989 was the PEAK of the last RE cycle."

1987 was the peak, if you adjust for inflation. By the end of 1989, real prices were already down 12%.

Manhattan's peaks tend to be delayed. You'll notice that Case Shiller had the NY area peak in mid-2006 while SE & Miller Samuel show Manhattan strength well through late 2007 / early 2008.

Not sure why you keep referring to an inferior data source generally. You don't think Manhattan prices are down 25% from the peak as Case Shiller has for the NY area, do you?

I'm not sure why you think I'm calling people idiots or trying to dissuade them from anything. I'm just presenting a set of facts and my interpretation of those facts.

Maybe their subconscious are calling themselves idiots after reviewing your 'facts and interpretation of those facts.'

"Nah, I think a more appropriate analogy is you making arguments against buying stocks in 2002 and 2009. I'm saying real estate is fairly priced, and I am even willing to say that it's slightly expensive."

I find that funny given the amount of stocks I bought in 2009. Trust me, I was making no such arguments. When the market was bouncing around 700-900 with cyclically smoothed earnings at 60-70 and fixed yield equivalents at 11-14% assuming 4% earnings growth from inflation & productivity, I was scratching my head and buying. So while some were licking their chops at 2005 NYC RE prices, which mind you were 2.5x their prices from a decade earlier when inflation would have had it at 1.3x, I was busy elsewhere.

I did not think stocks were fairly priced or a bit expensive in 2009: I thought they were underpriced. I think they are fairly priced today. But Manhattan RE still seems overpriced to me, not on an absolute basis, but given what it yields.

Sunday: Maybe their subconscious are calling themselves idiots after reviewing your 'facts and interpretation of those facts.'

LOL. What people do I the privacy of their own minds is not my fault.

Correction: "...do in the privacy..."

"But it's a hell of a lot different environment than in 2007 when 95% of purchases probably end up losing money."

I don't know. A 2007 purchaser was looking at 15% higher prices and 15% higher rents. Rents were below their CPI trajectory going back into the mid-90's, so maybe they saw the same sort of below-cycle rents that might seem to be here today. Interest rates clearly inferior. So the difference between the 2007 buyer's position and a 2011's was maybe 20-25% of price. Not a world of difference IMO. Certainly better, but not exactly stocks circa 2000 vs stocks circa 2009. Now that was a "hell of a lot different environment".

Besides, I'm pretty sure most 2007 purchasers will apply some calculus that doesn't have them losing money.

Re: peak, for my building it was early 2008. That's on a $-per-share basis, with this year's sales down about 45% from there. When you look at the whole pattern, though, it's a different story: http://bit.ly/l2DOKZ

Maklo:

What your restatement of Mercer's numbers shows is that an investor holding this unit to rent out would lose money every month, in real or nominal terms. Investors don't usually invest for negative returns, so few long term investors will buy at this price, and most investors that already own will be inclined to sell at this price.

(There are exceptions to this generalization. We still have bubble investors who are willing to overpay on the expectation that they'll sell to someone who is willing to overpay even more. And investors that expect higher rent inflation than the consensus 2% might be willing to pay more than a price based on the consensus of 2%; of course, to make your numbers work, they need to anticipate much higher inflation than the consensus and dissenters from the consensus are a minority by definition.)

Accordingly, over the next few years, if your numbers are right, investors will tend to move rental units into the owner-occupied market. (Current prices are also higher than the costs of redevelopment plus the expected profits from parking lots, tenements, most older offices, obsolete apartments and so on. So, investors will also tend to create new units by developing as well.)

It follows, as a conclusion not an assumption, that supply is likely to increase and therefore that prices are likely to drop.

Of course, the increase in supply is going to be slow. Building takes time, and until investors holding underdeveloped property give up on bubble expectations, they will be unwilling to sell at prices reflecting current uses.

So if demand is strong because there are many people like you who are willing to pay prices above cost (or as Sunday says, willing to pay whatever they can), it may take a while for supply to catch up with demand. This means that people who've decided to buy or sell regardless of the economics and are just trying to decide whether to do it now or in six months should consult tea leaves and UrbanDig's "sentiment" measures, not fundamental value theory.

>Sunday: Maybe their subconscious are calling themselves idiots after reviewing your 'facts and interpretation of those facts.'
LOL. What people do I the privacy of their own minds is not my fault.

I think what Sunday is really trying to say is that you are acting like a know it all and no one likes to be around a know it all.

hi hb!

>What your restatement of Mercer's numbers shows is that an investor holding this unit to rent out would lose money every month, in real or nominal terms. Investors don't usually invest for negative returns, so few long term investors will buy at this price, and most investors that already own will be inclined to sell at this price.

Makes sense. Because in the past 3 or so years, there have been no rental buildings built in Manhattan. Related hasn't built any. Silverstein hasn't built any. Glenwood hasn't built any. Extell hasn't built any. And why haven't these firms built any? Because they are sophisticated and don't want to lose money. That's why there's no MIMA or Silver Towers or Emerald Green or Ashley. Neither is there an Columbus Square, or Ohm, or a Geary, or any of that, because surely whoever would build those properties isn't stupid, right?

NWT, fascinating chart. I would guess part of that explosive growth is from improved interiors. Do you think that's accurate?

What is up with those 2008 peaks? Superior apts for the share count?

HB: Yes, it does seem pretty clear that many developers concluded that it would be profitable to build even if rents dropped, so expensive rental supply is increasing. Assuming costs haven't changed much, supply is likely to continue to increase, too.

And that three years ago, not every investor was as sanguine as Maklo. Some investors were unwilling to take the risk that the bubble might deflate fast enough so that by the time they hit market, condos might be selling for less than rentals or even less than development costs.

As it turns out, they were wrong. Or perhaps not exactly -- if more of them had made the other decision, prices would dropped faster and they'd have wrong anyway. It's the inverse of the bubble problem. Bubbles happen because if enough buyers pay based on expectations of future demand, they create the increased demand they expect. Developers have the opposite problem: if enough of them make the same prediction about supply, their actions falsify it.

The small one at ~750 is completely out of whack. It was a sponsor sale, unique layout for the building, nice landlord-y reno until you looked close, and made no sense to anybody.

One of the >700 big ones is a combo where they bought the pieces from the sponsor in 2004 at 240 and 400. I think about a fifth of the runup went to combo costs.

The other big >700 one was bought already combined, but unrenovated, for 220 in 1999. Seller bought one piece at 100 in 1991/1992, but the other piece was for cash and I missed the sale.

All those between 200 and 500 are a mix of renovated/unrenovated/sponsor-renovated.

The cluster around 100 are unrenovated sponsor sales at conversion.

Re: developers and their optimism/anxiety, the Laureate is an interesting example.

The original partners bought the land just before Lehmann at peak. A year later, after the design work, etc., they were getting worried and went looking for more partners.

The partners they found, the Stahls, conveniently equipped with their own bank and construction company, apparently wanted a bigger stake, so the original partners pretty much sold out except for "a piece of the up-side" when an up-side wasn't at all assured. It turns out that everybody won.

Thanks for the great commentary as always, NWT.

"Manhattan's peaks tend to be delayed. You'll notice that Case Shiller had the NY area peak in mid-2006 while SE & Miller Samuel show Manhattan strength well through late 2007 / early 2008.

Not sure why you keep referring to an inferior data source generally. You don't think Manhattan prices are down 25% from the peak as Case Shiller has for the NY area, do you?"

Case-Shiller goes further back than StreetEasy, covering two cycles. StreetEasy covers one cycle, and you can argue we're not at the bottom yet.

But fine, let's use StreetEasy's Manhattan index and adjusting for inflation (using 2000 as the baseline year), 1996 was still the bottom (it was lower than 1995 at least). The median comes out to 1,254, and 1998 was 889. So I just don't think it's such a representative year. Which was my point.

"I'm not sure why you think I'm calling people idiots or trying to dissuade them from anything. I'm just presenting a set of facts and my interpretation of those facts."

Fine, I may be misplacing you with some others with the same directional position. SE doesn't make it easy to follow threads.

"I don't know. A 2007 purchaser was looking at 15% higher prices and 15% higher rents. Rents were below their CPI trajectory going back into the mid-90's, so maybe they saw the same sort of below-cycle rents that might seem to be here today. Interest rates clearly inferior. So the difference between the 2007 buyer's position and a 2011's was maybe 20-25% of price. Not a world of difference IMO. Certainly better, but not exactly stocks circa 2000 vs stocks circa 2009. Now that was a "hell of a lot different environment"."

Avg. S&P 500 in 2009 was around 941. Avg. in 2000 was 1,420. About a 33% difference. So 20-25% difference is "not a world of difference IMO" but 33% is? Pretty close IMO. I think it is a little disingenuous to think otherwise.

Btw, I agree on stocks being cheap in 2009. I made my parents take a mortgage on their paid-off house in Feb 2009 and put it all into equities. I went all-in myself. It's been a very good decision so far.

"What your restatement of Mercer's numbers shows is that an investor holding this unit to rent out would lose money every month, in real or nominal terms."

Wrong. What it shows is that over the 10 year period, it is roughly the same.

@NWT, ?everybody won?, really?

I lost like 10 friends from Lehman, most moved out west of to Asia, and one started a Piggly Wiggly in Georgia... yeah, everybody won. DO YOU EVER FKING THINK RE IS EVER A BAD DECISION? You and a bunch of PERMA-NYC-RE-SUCKLING BULLZ masturbate to floorplans you could NEVER EVER dream to own... but you'll take your fking 6% wherever it may come.

GOODz luckz.... tard.
Hey Maklo/MERcer=======>>>>>>>>> STFU and BUY the other 12K Manhattan units for sale would ya?! I HEAR RENTS ARE GOING UP 50%/yr for the NEXT 30yrs and INTEREST CAN ONLY GO DOWN. FLMAOzzzzzz....

tiny bubbles... tiny bubbles.....

"Avg. S&P 500 in 2009 was around 941. Avg. in 2000 was 1,420. About a 33% difference. So 20-25% difference is "not a world of difference IMO" but 33% is? Pretty close IMO. I think it is a little disingenuous to think otherwise."

I think you'll find that the earnings in 2009 were 1.5x to 2x those in 2000 by any historical metric. The cumulative effects of inflation, productivity growth, and share repurchases. On the basis of relative to earnings, there was a 2-3x improvement in fundamentals. In addition, there was an even more dramatic drop in 30-year rates from 6.x% to 3.x%. If you believe my estimates of a fixed-equivalent yield of 6.x% for stocks in 2000 and 12.x in the best parts of 2009, the premium over treasuries widened from 0% to 9%.

For NYC RE, we're talking about a move from a 2% yield in 2007 to a 2% yield in 2011, with the only benefit coming from a 1% change interest rates.

LOL w67th

"I think you'll find that the earnings in 2009 were 1.5x to 2x those in 2000 by any historical metric."

Sorry Nada what am I missing here.

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/spearn.htm

2000 S&P EPS $56
2009 S&P EPS $60

No wonder your'e so fking retarded. You went to Stern, wha? wha? couldn't get into an ivy?

why not help67?

maklo, stTu. You are DONE. Don't "jusitfy" your purchase. The ppl that I know that have bought in the last 3 yrs have all been like "yeah, I know its' a bubble, but I CAN take the hit."

YOU, you? Your'e more like the WTF do you mean YOU ARE PREGNANT?!!!!?!?!?!!?!??! dudette.... chill... the baby comes in 9months, get your manbra on.

>wha? wha? couldn't get into an ivy?

Sounds like it was spoken from someone who didn't go to Harvard or Wharton, but rather Tuck or Columbia or Johnson. Those are SO much better than NYU's Stern. Columbia is SO much better than NYU. Oh, and you were a TA too, so that adds extra to your credentials. FLMAOZ.

>Like a bunch of fking nazis justifying the death camps with graphs and charts.

Weren't you the jackass who said that the mother who killed all of her kids and then committed suicide wasn't responsible? Weren't you the one who blamed the real estate industry? Of course, she had no responsibility for her own flesh and blood. Blame someone else. w67thstreet is a victim.

Oh that's right, Warren Buffett went to Columbia Business School. W67thstreet's hero.

But was Warren Buffett a TA?

"I went to Columbia. Yup, no, yeah right. No, I didn't want to go to Boston or Philadelphia. I wanted to stay in New York, my friends are here, I could keep my apartment. Plus it makes it easier with the summer internship. Philadelphia is kid of ghetto. Boston, who wants to deal with those assholes plus its 4 hours drive. Columbia's just as good. At least it isn't NYU. Yeah, their area is cooler but Columbia is Ivy. Kind of Ivy, right? Like the law school, that has a top ranking, right? Warren Buffett went here too. And some other guy I can't remember. Jonas Salk the Polio guy? No, that was City College. Well you know what I mean. Hey, I just got a used Porsche."

"Sorry Nada what am I missing here.

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/spearn.htm

2000 S&P EPS $56
2009 S&P EPS $60"

You're kidding? You're comparing the tippy-top of the most bubblishest business cycle we have known as a country to the bottom of the worst recession since the Great Depression. Stare at the data some more and figure out for yourself what the cyclical swings tend to be. Hint: 2011 is estimated around $100.

Very nice inonada, but you mentioned 2000 and today, so my simple question was, if you bought a place in NYC in 2000 and sold today, or you rented a place in 2000 and bought the S&P500 in 2000 instead, under which scenario would you be better off.

You picked the years. You picked the comparison.

So the questi0on to you is, which real world scenario would have been better.

No need to talk about EPS or rates. Neither gets deposited into the bank.

Which scenario left you better off? Its binary, one or the other.

"You're kidding? You're comparing the tippy-top of the most bubblishest business cycle we have known as a country to the bottom of the worst recession since the Great Depression. Stare at the data some more and figure out for yourself what the cyclical swings tend to be. Hint: 2011 is estimated around $100."

Fine, so you are using 2-year forward projection for the S&P. I can live with that. But why are you using current rental rates instead of 2-year forward rates for yield?

Remember I am not arguing 2000 was not a bubble nor was 2009 was a great time to buy equities. I am merely responding to your flippant comment "yet here you are making similar arguments today" where you are attempting to draw a comparison between real estate in 2011 and stocks in 2000. We are now 4 years and counting after peak pricing. I just don't see how you can reasonable draw an analogy to stocks in 2000.

I'm making the case that prices are a lot closer to fair value than your assessment that prices are still 30% overpriced. Here you are using years like 1996 and 1998 as if they are representative of where NYC should be priced, yet those are in the bottom percentiles of pricing whichever data set you use. So you believe in the boom and bust cycle but you choose to pick data from the bust cycle as your vision for what an average future looks like.

So yeah, you are just "set of facts and interpretation of those facts" but if that data or logic is skewed, it's not surprising the conclusions that follow.

"Fine, so you are using 2-year forward projection for the S&P. I can live with that. But why are you using current rental rates instead of 2-year forward rates for yield?"

I'm not using a 2-year forward projection, just stating on a cyclically adjusted basis S&P earnings circa 2000 was $40 and circa 2009 was $70.

Top-to-bottom between 2007 and today, there has been a 20% drop in rents in real terms. Maybe you want to argue that this is cyclical and that 5% of this cyclical drop has recovered. Fine, then rents should be 5% higher inflation-adjusted on average. That adds $400 a month, or $5K a year, to the numbers. That's a 0.25% increment to the carry. So a real yield of 2.4% instead of 2.15%.

If we do the same adjustment to 2007, we get a real yield of 1.9%. So yes, it is now better, but not by much IMO. Perhaps an analogy to stocks circa 2001 would have been better.

"Here you are using years like 1996 and 1998 as if they are representative of where NYC should be priced, yet those are in the bottom percentiles of pricing whichever data set you use."

I don't know if you are aware, but we just went through the greatest housing bubble of all time. So big, that it put all the others to shame. When you have a decade of data with such a bubble followed by explicit govt policies to attempt to slow the deflation of the bubble to a slow hiss, and your data is only 15 or 20 years long, your medians are going to have a problem.

Now both SE and Miller Samuel put 1998 at a 20% or so real increase from the bottom. Most of the time, that would be considered a healthy recovery. Maybe we see another 20% of exhuberance to the top for a 1.4x span trough-to-peak in real terms. This bubble of ours did a 2.5x span. Take a look at this national graph, you'll note that a 20% bump off a bottom would most of the time be considered a recovery of prices:

http://www.ritholtz.com/blog/2008/12/classic-case-shiller-hosuing-price-chart-updated

So you think 2011 is a "fair" year in terms of NYC valuation and take issue with my references to 1998. What past year would you say also had "fair" valuation?

"Hint: 2011 is estimated around $100."

"I'm not using a 2-year forward projection, just stating on a cyclically adjusted basis S&P earnings circa 2000 was $40 and circa 2009 was $70."

You were the one that mentioned 2011 earnings so I had just assumed. I am not familiar with your "cyclically adjusted basis" - what are you referring to? Clearly if you are trying to make a fair comparison, it's important to understand the basis for comparison.

"So you think 2011 is a "fair" year in terms of NYC valuation and take issue with my references to 1998. What past year would you say also had "fair" valuation?"

I guess it depends on how long your historical perspective is. Real estate is one of those things that has a very, very long cycle. StreetEasy's index (back to 1995) is definitely too short. Going back to Case-Shiller NY data (1987) is probably too short too and in either case does not quite have two full cycles worth of data. I go back to around 1975, which includes three full bubbles and also broadly coincides with NYC's (and the US) transition from a manufacturing-oriented to today's services-oriented economy. I am not sure if going further back adds much more color ...

The data I used is constructed out of StreetEasy data going back to 1995, then indexed using Case-Shiller NY data back to 1987 and then indexed using Case-Shiller US data going back to 1975. It's the best that I could find. All inflation adjusted. And linear regression analysis would show that 2011 prices are at the trendline. Other years around the trendline include 2001-2003, 1990 and the mid 1980s. It would show that the mid-1990s bottoms were 30% below trendline and at the peak of the bubble it was around 30% above trendline.

Now of course, the trendline ain't a perfect correlation by any stretch of the imagination (R-squares are in the .5 range for the statisticians out there). So I am willing to accept that maybe it's high in one or the other direction. My gut would say high, so that is why I have been very consistent with my view that it is between fairly priced to (maybe) slightly overvalued.

Maklo needs a bigger plaster dildo built into his bedroom wall. Maybe a doubler?

You do know maklo, Inonada is taking you to the sheds, right? He is schooling your silly non ivy league stern school of business MBA to task. There's a reason you bought a bubble nyc re minus 15%, cause your financial thinking is seriously flawed. The data set and conclusions you are using leads smart ppl to rent yet therez you iz buying geitner/rebny lemming juice by the gallon.

Seriously, stfu and paint your walls or something. You are done. Just chk back once every 3 yrs. Get a big dog to beat up, small ones can't take the kicking you'll give it when ppl earning 1/2 your income live better financial lifestyles than you. And seeing your strivy nyu stern MBA, I gotta think you care alot about how others live. ;) later dude.

"You were the one that mentioned 2011 earnings so I had just assumed. I am not familiar with your "cyclically adjusted basis" - what are you referring to? Clearly if you are trying to make a fair comparison, it's important to understand the basis for comparison."

Fit some exponentially growing curve to the data with 10 or so years. Sorta like CAPE10 where you take the average of the past 10 years of earnings, but include something to account for generally increasing earnings to get an as-of number. Or some other variant that you like.

w67: jerk jerk jerk jerk jerk

nada "faster, bitch faster!"

67: make sure you clean your hands when you are done pleasuring nada before you touch your kids, ok?

"The data I used is constructed out of StreetEasy data going back to 1995, then indexed using Case-Shiller NY data back to 1987 and then indexed using Case-Shiller US data going back to 1975."

Interesting idea, I'll have to give it a try at some point.

" It would show that the mid-1990s bottoms were 30% below trendline and at the peak of the bubble it was around 30% above trendline."

I'm working off memory here, but I thought 1996 (which i think you say was the inflation-adjusted bottom) to 2007-2008 had a 2.3x inflation-adjusted swing. I'd think that be more consistent with 40% below/above baseline, not 30%.

I'm also not following how 2001-2003 could be trendline at the same time as 2011. Wasn't 2001 on the SE index something like 1100, putting it 30% below the current 1850 on a real basis?

Maybe what's going on with your data is that the bubble has introduced a trendline which has home prices increasing at inflation plus another 2-3% annually. I don't know if that's your intention.

note to Makla: do a google search for "Chow breakpoint test"...then let's talk about regression results. Regards

"do a google search for "Chow breakpoint test"...then let's talk about regression results."

Sure. There is a balance you need to strike. Too short a data series and you may not have enough context. Too long and you may be talking about completely unrelated sets of data.

At some point you have to relate data to real life. The "structural break" I see is the transition from a manufacturing-oriented to a services-oriented economy in the 1970s. How would you look at this differently, I am curious.

"Maybe what's going on with your data is that the bubble has introduced a trendline which has home prices increasing at inflation plus another 2-3% annually. I don't know if that's your intention."

Is your trendline flat? If so, I think the difference is what we had talked about before about the increase in real prices as incomes/GDP rise. The 1975-2011 trendline increases in real terms at 2.3%, which happens to be equal to the rise in US GDP growth during the same period.

IIRC, we had not finished talking about that. You said that, hey looking at data since the mid-90s, real prices have risen much faster than rents. I said that data was skewed b/c of the starting point, and also the difference between asset prices and equivalent housing costs (driven largely by the decrease in real interest rate during that period). I contend that prices ultimately follow GDP over the very long term, and that then supports the positive sloping trendline, where the slope is roughly equal to real GDP growth.

So one conclusion I drew out of all this was, perhaps Manhattan prices in the mid 1990s were as extreme below trend as the prices in 2007 were extreme above trend. We keep talking about how big the bubble is, but perhaps one should consider that the bust in 1990s was extreme the other way?

I am happy to email you the datasets I am using if you provide me with an address.