Challenge for the bears - bring it on!!

exactly Maklo. the super-cycle-blowoff of the US began in the 70s -- as you point out. the break, however, was clearly the run-up in the middle part of the last decade. by cleary, i mean the statistical test will be able to reject the null hypothesis that the bubble years data was generated by statistically similar structural forces, i.e., there was nothing linear connecting the data that came before it., nor should there be anything linear about the data that comes after it.

help77: thanks. I am not clear on what your conclusion is. To reject all the data and instead break the dataset up into smaller ones that are more linear? I see problems with that approach as well.

I would not say "nothing" connects the data series. As I mentioned in another post, I do think there is a long-term underlying trend of real income growth driven by productivity, which supports higher real housing costs, which supports higher home prices. Other long-term drivers can be layered on top of this, such as the secular decline in interest rates and the bifurcated effect on prices vs. rents. And although some may disagree, I also think quality of life is a factor - trends like the spiking of the crime rate in NY in the early 1990s and its subsequent dramatic fall to 2000.

There is an interesting interplay between these factors. I like to start with income growth because even though it is cyclical, there is literally hundreds of years of history to support this and frankly I am an optimistic and believe, warts and all, the US is an awesome economic force. So I take it as almost axiomatic that real income and output will plod along at a steady rate. This force was trumped in the 1990s and 2000s by other factors like the secular decline in real interest rates driving up prices. These were more important drivers during that period than income growth, perhaps because the rate of change was simply faster. And it combined with human psychology drivers and other cognitive biases to create the bubble. And now we are back down from the bubble, but maybe there is still room to fall.

However, I stick to plodding income growth at the base of my mental model because I consider it to be the easiest, and most long-term driver at play that I can predict. I find it much harder to project interest rates, crime rate and the interplay between all of those factors.

And I try to be conservative. I do not factor in real asset price growth, just inflation. And I try to buy with some margin of safety. While I think 300_Mercer's example is fairly priced or maybe slightly expensive, I would not have bought it myself. I bought in 2009 at a lower price/rent ratio and in a neighborhood that has interesting long-term dynamics and is suitable for my particular life situation.

>national, nay worldwide

I was wrong, w67thstreet is a horse. A horse that went to business school and was a TA.

>Stop cluttering SE, with your fecal matter.

Leave that for when w67thstreet takes a bath with his son.

Now we are making some progress.

Standard theory is that improvements in productivity make costs drop. And in competitive markets, prices follow costs.

You disagree -- In your view, NY RE increases in price as productivity increases.

Indeed, you think this is so clearly correct that it leads you to reject Shiller's interpretation of his own data. This explains why you find my discussions of costs so wrongheaded. On this view, low costs and excess developer profits (higher income) should lead to higher prices.

Can you explain the theory that is driving your rejection of Shiller's data? Is it related to Lloyd George's once quite popular proof that the only people who benefit from economic growth are the landlords?

Shiller reports that his numbers show that constant-quality house prices track inflation, although the index will be slightly higher due to the difficulty of backing-out quality improvements.

You disagree, because you think that higher productivity leads to higher RE prices. So you make ad hoc adjustments to his numbers and conclude that that they show RE prices rising 2-3% over inflation. You call this normal, so presumably you agree with Lloyd George that the only people who benefit from economic growth are landlords--the rest of us just get pay more to live in the same place.

But standard theory is that higher productivity leads to lower production costs which leads to lower prices. Why do you think standard theory doesn't apply to NY RE?

Economic progress made the cost of clothing go down. Why does it make the cost of building houses go up?

ugh, I meant to delete the last 4 paragraphs.

"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."

I guess therein lies out disagreement. Economically, higher prices for the same goods is called inflation. In your model of the world, constant-quality rents rise with inflation (they are 30% of GDP after all) while constant-quality homes rise 2.3% faster. The poor homebuyers of the world earn a real 2x what their grandparents earned, yet the same fraction of their earnings goes towards that small circa-1960s house. What a horrible world, where more "real" money doesn't buy one any more of the highest-cost "real" good.

Fortunately, the data doesn't support your thesis. Here is real GDP since 1871 in the US:

http://visualizingeconomics.com/2011/03/08/long-term-real-growth-in-us-gdp-per-capita-1871-2009

Note the 12x growth between 1871 and 2000.

Here are US constant-quality real home prices since 1890 put together by Shiller:

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

Note the relatively flat range over the entire period 1890-2000. Note the unprecedented 2x runup after 2000.

So while you may not be using 2% real increases in prices in your assumption of returns, you are including it in your justification of valuation. But that's fine, we can disagree on whether prices increase at or above inflation.

FG -

Let's start from the end and work our way up. On clothing vs. house-building, I would posit that the entrance of China and other former communist bloc countries plus India more or less added a billion or two additional people into the labor pool, substantially driving down the cost of low-skilled labor. Labor content is the majority of clothing cost and it is also a big chunk of construction cost. Of course the difference is that you can outsource one (clothing) and not the other (Manhattan construction).

I would be curious to delve into your cost theory more though. I think one key component is the rate of productivity increase in the Manhattan construction sector. My gut tells me it is quite low e.g. <0.5% per annum over the last thirty years. Do you have this data?

While I can get comfortable with the idea that there is unaccounted for (hard-to-measure) spending going on that contributes to better-quality places, I have not seen any study concluding that this is the ONLY factor. So I do reject the idea that it is simply a matter of cost. Economics has never been a hard science (ask Charlie Munger about his views on this) and so "standard" economic theories have a tough time reconciling with the actually behaviour of economic development.

Finally, while I do believe in real asset appreciation linked to income/GDP, I am actually not factoring any real asset appreciation into my buy vs rent thinking. What I am sure of is the lack of any credible theory which supports negative correlation between income/GDP and asset prices - which is, with your base assumption of falling real asset prices, effectively baked into your logic.

my conclusion is that your use of a trendline to extrapolate when including the bubble years is statically flawed. put another way, one never would have been able to extrapolate the buybble years using the data that came before it given the predictors in your analysis.

Nada - thanks. Yes, you have brought this up before and I have thought much about this.

I would question whether it makes sense to compare the largely agrarian US of the late 1800s/early 20th century, or even the mfg-oriented blue collar economy through the 1970s to the post-Industrial Manhattan economy of the 1970s and beyond.

Perhaps studies of other urban regions in other countries provides a better comparable. For example a quick Google search for Englund and Ioannides comes up with their paper supporting the correlation between GDP and real estate prices in various OECD countries around the world.

But overall, the literature is not conclusive on the positive correlation between GDP and real estate prices, and moreover, the causal relationship between the two. It does not appear to be a 1 to 1 relationship but there is correlation. What is pretty conclusive is that real estate prices do NOT tend to go up when GDP goes down, or vice versa. So I think assuming nominal declines over a long-ass period of time is pretty extreme.

My gut tells me it is somewhere somewhere in the middle. It’s not a flat trendline nor is the slope equivalent to GDP. But again let me note that I am assuming no real growth in prices in my mental models.

help77: thanks for clarifying. I tend to agree with you. Maybe the bubble years skew the data somewhat. But I don't think you can just throw them out wholesale. Maybe throw out the peak of the bubble years and the lowest points of the bust years? If you do that, I am not sure there will be a material change to the trend line though ... something to look into I suppose.

I am also not trying to predict the next bubble (or bust). Too hard. I'm just trying to figure out whether prices are fair, too high or too low and by how much.

FG -

I am really trying to reconcile the logic of your marginal construction cost theory. So I have been thinking more about it.

Let me approach it by inverting the question. If construction cost is the _only_ thing that matters in determining real estate prices, why are there such big price differentials between different neighborhoods in Manhattan? Why is a high-end luxury condo in the Financial District so much cheaper than in prime Soho? Same appliances, same fixtures, same Equinox gym downstairs. Are the construction costs that much more expensive two miles north or can it possibly be something else?

Taking this further, why are prices in Manhattan so much more expensive than prices in Queens? Are construction costs that different? Why are real estate prices in New York City so much more expensive than Kansas? Does it all come down to marginal construction costs? I doubt it.

Instead, I think there is another big factor at play here that you completely ignore. I break down real estate into two main components. Land and improvements.

Land is pretty self-explanatory. It encompasses the physical land, but most of the value is in the location. You do not need to spend money to improve land value. If a Whole Foods opens up next door to you, you do not have to spend a single dollar to see your property value increase.

Improvements includes the building and the interior improvements. The building itself is almost like land in that once you build it, it’s useful life is exceedingly long - at least in Manhattan. My building is going on over 100 years – now I am sure those construction works from the early 1900s cost a lot less than they do today, but since I do not need to reconstruct the building, I benefit to the extent the replacement value goes up.

The interior improvements do need to get rebuilt or maintained, and that should be captured in your depreciation budget calculations, or your common charges. Note major capital improvements to buildings are often captured in common charges, as they are financed up front and then paid over a long period of time through finance expenses.

Now where do your construction costs matter? Certainly in the building and improvements areas. But since local labor is such a high component of construction costs, and particularly with the labor union situation in New York City, I do not see huge productivity improvements here - again would love to see some local data. There are times when construction cost inflation exceeds regular inflation. But you are hedged – you do not need to rebuild the entire building. So at least this part of the real estate value is at least keeping up with replacement value, and correspondingly, inflation.

But for the land piece, do construction costs matter? If crime goes down in your neighborhood, do you need to spend any money to see the value of your land go up? If income in the city is going up because desirable jobs are flowing in, do you need to spend any money to see the value of your land go up? I don't see how the cost of construction matters at all for the land portion of real estate value.

So how much of real estate value is tied up in land vs improvements? As a proxy, I would ask whatnew ground-up construction goes for these days? Not really my area of expertise, but a quick Google Search seems to indicate that 50% of the total sale price as a proxy for new developments. That means the rest of the value is tied up in the land. So roughly speaking, you have half of your asset value tied up in land, and the other half tied up improvements. The improvement piece is driven by replacement costs (newbuild construction) and the land doesn’t need additional spend to increase in value.

So this would suggest that real estate prices are driven half by factors that affect the value of land, and half by construction costs.

And what affects the value and desirability of land in a relatively constrained supply environment like Manhattan? Factors like income, crime rate, schools, presence of a Whole Foods …

WHOLE FOODS!
F
L
M
A
O
Zzzzzzz....

When 1/4 FOODS won't do, Go all in FOODS!

When 1/8 won't satisfy... WHOLE FooDS IZ THEREZ for you... double clean the alfafa... some fecal matter = organic...

SALE ON CREAM CHEESE @ where else ? WHOLE foodS!

We got NEWSSTANDS!

We got a BLOOMINGDALES!

What up???!!!!! Pop off partner, we got Dunkin Donuts with attitude... tell it for realz Habib....

We got Pottery Barn!

We got Old Navy... yep, $10 skinny jeans... pop off fkers... you lame ass midwesterner

happy 4th west67th!

Come on hfs. Bring out dumbshitersburg

Looks like w67thstreet just went nuts and there's columbiacounty right on cue to protect him.

Ask and ye shall receive.

Don't mind crazies columbia. Gotta go out for a cruise sometime... I'll email ya later this summer when the sailboat new rigging gets sorted out.

Facts you might have not known about Columbia County:

Roy Brown serves as the Chairman of the Columbia County Board of Supervisors.

Ready about?

i went sailing yesterday! it was glorious. happy 4th, uncle cc and hb!

that's funny Columbia.. .ready about it is :)

Where did yo sail, cuntersburg?

my father in law has a boat with sails. i know nothing more about boat-y things. he keeps it in maryland.

Be more precise cburg.

Coming about is pretty good also... heck anything on a sailboat is pretty funny. My mechanic and I were installing new winshields, the conversation was like "did you find the hole?". r u in yet? too much slop..... and of course. "no good, it's too long for the sexnut."

Joy of joys, thank GOD I don't own NYC RE in this shitty market, with the $$$$ I'm draining on the Transpac potential. But then again, I took my own "tax" break from YOU Taxpayers, I got it for $.15 on the dollar from BofA's sub in Miami. THANK YOU GEITNER and fellow taxpayer!!!!

Did you know that Holly Tanner serves at the Clerk of Columbia County?

I'm happy a good time huntersburg. I made my LL wet in his pants the other day.. .OH, he's going into foreclosure.... FLMAOZzzzzz

Columbia, you lucky SOB, NYC RE is tanking and you took your bubble marbles and ran home to Columbia just in the nick of time.... .YOU THE MAN!

most certainly will not be more precise. your bunch have proven to be a most unpleasant group of real life stalkers. no thanks. trust me, it was wonderful. it always wonderful. how could it not be wonderful?

Your bunch?

Real life stalkers?

Cburg?

Stuyvesant is a town within Columbia County.

no, dummy, your little posse does that. it's most unbecoming.

Check this boat out CC.

http://www.yachtworld.com/boats/2007/Cranchi-50-THE-ONLY-USED-HARDTOP-W-800%27s-%21-From-The-Used-Cranchi-Experts-%24%24-REDUCED-HARDTOP-HARDTOP-2154090/Marina-Del-Rey/CA/United-States

I hear the magic number is $450K, less than that it's a "short sale" situation... after $350K, its' a repo.... meh, I'd rather work with the bank, "Owners" get way way way too emotional about shit. Like little kids whinning... can't stand it, unless it's your own :)

Is cuntersburg in Jim boner county or rucille county?

That's a $900K swing in 4 yrs.... and he used it ALL of 175 hours, the diesels aren't even broken in yet... .CHERRY.

but didn't he also take his tanking equities marbles because he thought they would only tank more and ran home to cc?

Gigmasters can help you put together a petting zoo within Columbia County.

http://www.gigmasters.com/Search/Petting-Zoo-Columbia-County-NY.html

Ask for the primate special for a real treat involving ape w67thstreet and his monkey children.

Pic #7.

From Columbia County, NY, you can sail across the Hudson River to Greene County.

lucillebluth, what real life stalking do they do?

a stay at home____mom? what your wife desperately wishes she could be?

The next full Board Meeting of the Columbia County Supervisors will be held on July 13 at 7:30 at 401 State Street.

Mostly my wife just desperately wishes she could be my wife.

well, you're out of excuses alan, go forth and marry!

Out of excuses? Are you suggesting I'm too old to continue being a playboy bachelor? Wrong.

if you stay single too long everyone will you're secretely straight!

Fucille, can you just tell us your regular handle on SE? If u type really softly, only I'll be able to read it.

"I bought in 2009 at a lower price/rent ratio and in a neighborhood that has interesting long-term dynamics and is suitable for my particular life situation."

"Btw, I agree on stocks being cheap in 2009.... I went all-in myself."

OK, I'm confused. You both bought an apt and went "all-in" on stocks in 2009? What does that mean?

I think that means he was all in cash and then bought a boat really cheap.

http://streeteasy.com/nyc/sale/501257-townhouse-58-west-91-street-upper-west-side-new-

$593 psf..... 91st and CPW... let the confusion begin! flmaoz

That's just an asking price, w67th. The bidding war will put it in the $600s for sure.

Maklo:

If you are inclined to think that NYC building is all local hand labor with no technology or productivity increases, I suggest reading your kid Mike Mulligan And His Steam Shovel. And while you are at it, check where steel is manufactured. It isn't done on site.

Or just check the construction productivity statistics; they are pretty average.

[By the way, you might want to do a reality check on your stories about how the economy works generally. Productivity usually increases faster in unionized sectors, since unions give managers more incentive to invest in technology instead of squeezing employees. Also, virtually all of the labor cost in your clothing is US design, transport, marketing and retail, and consultants and managers and finance professionals.]

As for land, you have a stocks and flows problem in your analysis. Land is more valuable close to the center of the city, and the gap reflects our underinvestment in the public sector and embarrassingly primitive transit systems.

But that's already in land prices. For renters as well as buyers. It isn't a reason to expect sale prices to go up faster than rents in the future.

w67thstreet
about 1 hour ago
ignore this person
report abuse Fucille, can you just tell us your regular handle on SE? If u type really softly, only I'll be able to read it.

i have been the lucilles and before that i was alex09. before that i just read the board but never participated because i thought you were all so much smarter than me. HAHAHAHAHAHA!! why don't you just say who YOU think i am and let everyone laugh at you for being crazy.

must agree, in my RE experience the first 440 days is just a warm up... the real bidding begins after year 2.

fianancedude, just give it up. Maklo's all in and is now looking to justify his purchase... I'm going to Greece this winter to pick up a villa for the price of a studio on 6th and Ave D, who else is coming w/?

AND FYI, there is a frenzy of mega yacht listings from all over Greece and Italy this summer... the tax man cometh I hear..... hahahahahahahaaaaaa

alex, STFU and fk your husband... or is he DONE with you?

i already did it twice. you think he wants to do it again?

"If you are inclined to think that NYC building is all local hand labor with no technology or productivity increases, I suggest reading your kid Mike Mulligan And His Steam Shovel. And while you are at it, check where steel is manufactured. It isn't done on site.

Or just check the construction productivity statistics; they are pretty average."

So what is it for NYC or in the local area? It's central to your construction costs theory, so I would assume you have that number somewhere. My guess is somewhere in the middle of 0% and the US broad economy average of around 2%.

"By the way, you might want to do a reality check on your stories about how the economy works generally. "

Then answer your own question then. Why has the cost of clothing stayed low while construction costs have generally increased? I pointed out the decrease in the cost of the labor component from newly available sources. Do you have a better explanation?

"As for land, you have a stocks and flows problem in your analysis. Land is more valuable close to the center of the city, and the gap reflects our underinvestment in the public sector and embarrassingly primitive transit systems."

I see, well at least you admit it isn't just about construction costs anymore. So it's about physical proximity to the center for you now? Where is the center of Manhattan by the way? Actually doesn't matter. Pls answer this - why does a luxury condo in Chinatown cost less than Soho? Both are pretty much equidistant from whatever "center point" you choose.

"But that's already in land prices. For renters as well as buyers. It isn't a reason to expect sale prices to go up faster than rents in the future."

And where exactly did I make this assumption?

"OK, I'm confused. You both bought an apt and went "all-in" on stocks in 2009? What does that mean?"

Means I put several orders of magnitude more into equities than the apartment.

Time for alcohol.

"Means I put several orders of magnitude more into equities than the apartment."

Holy shit, you're a billionaire! Either that, or you really like to underlive your means, or you must have meant "several times".

So when you did this, were you doing so on expectations of 5% after-tax or something more? What are your expectations from the stock market long-term from here on out?

>gap reflects our underinvestment in the public sector and embarrassingly primitive transit systems.

financeguy and the other NYC haters always amuse me.

What is wrong with our transportation system? Our subway system is the 4th busiest in the world and the #1 that offers 2 hour service. Just think about Manhattan. Every day we have NYC Subway, NYC Bus, NJ Transit, PATH, Amtrak, LIRR, Metro North, bringing commuters into Manhattan. Primitive? According to what?

Looks like someone is showing up inonada and he's a LITTLE bit frustrated.

Our last know-it-all, somewhereelse, has at least calmed down in the past 18 months. And he was at least unquestionably smart, and knows NYC. What will it take to humble inonada?

i just wonder how inonada can feel good aboutposting here literally all holiday weekend.

oh come on....

you rationalize taking the second avenue bus. that is far more difficult to understand.

We always knew that w67thstreet was talented. But we didn't know he was also a contributor to the NY Post. Look for yourself:

http://www.nypost.com/p/news/international/monkey_shoots_himself_XJduonBjHkp4QNoW873MSL

It was interesting to go through this thread six years later and see how everything turned out. A few observations related to some topics that were discussed in this long-ass thread:

1) S&P 500 has hit 2,500. Up around 87% from June 2011. It's been a nice run. An IRR of around 10% (and add say 2% for dividends) not factoring in capital gains taxes.
2) StreetEasy (Downtown) Index is up 40%. Lot of these gains in 2012-2014. This translates into around 17% for purchases with an original 75% LTV.
3) Inflation rates have stayed low. I was actually able re-finance my mortgage (pulling all the original equity out) while lowering my interest rate as low as 2.5%.
4) They are opening a Whole Foods in the Financial District!

You would have done fine by renting and putting your downpayment into the stock market, but I think I am financially better off having purchased my apartment, having lived here the last eight plus years, having pulled out all of my original equity (and more) in a mortgage re-finance and expecting to continue to live here for many more years with my family.

Using 300's original example ($2M purchase at 75% mortgage) with a 40% appreciation I am calculating a 17% annualized IRR on top of getting to live in the place (which should be a higher than the dividend rate on S&P 500 stocks). And this is before factoring in the return benefits of being able to do a cash-out re-fi.

Mallon, Nice. My apartment is up more than 40 percent looking at the comps and have refinanced at 2.45 5/1 arm. We have really enjoyed living here and customizing it which would not be possible with a rental. Current rent will be appx $5 per month as a minimum. I made further investments in NYC real estate and sold one on a 90% gain on a price basis. Counting levereage 300 precent gain. I am sure there are people who made good money in the stock market as well. Both NYC real estate and stocks have been good investments. For me, if you do not have a home to live in, buying a home takes priority over stock investments.

Sorry Maklo.