New American Dream is renting to get rich

"The reason is simple. While a home is the main repository of wealth for many Americans, it comes with numerous hefty expenses. The carrying costs - what's needed to hold and maintain the asset - range from property taxes and home insurance to emergency repairs and renovations. In a rental situation, the landlord covers those costs, leaving the occupant free to invest revenue in other areas."

Is this guy too simple-mined to realize that the landlord passes those costs down to the renters?

And yet again, another pro-renter falls back into the not-seeing-the-forest-for-the-trees phenomenon; you need to pay for a place to live, whether it's through a rental check to a landlord or a mortgage check ultimately to yourself. But in the end, after 15 or 30 years, the owner now OWNS the property outright. The renter is still paying top-scale market rent -- FOREVER.

>Is this guy too simple-mined to realize that the landlord passes those costs down to the renters?

You mean the adjunct professor, not of finance, but of personal finance?

The man whose analysis means that 100% of the time, landlords are getting the short end of the stick, and that all landlords are stupid in institutional finance?

Look at those who retired comfortably, more of them have owned than rented. The article would have been more correct if it said buying is no panacea and that over-buying is worse than having bought at all. Over time rents are likely to include realized profit paid to the owner and renters do not receive any of the subsidies buyers do(e.g. writing off mortgage interest and taxes). As long as the system is lop-sided one needs to consider prudent purchases of real estate.

> Is this guy too simple-mined to realize that the landlord passes those costs down to the renters?

The more you insult, the more wrong you seem to be. But, no...

Landlords will try and pass it down in theory.... but they often can't.

Ultimately, particularly in Manhattan, landlords rent for what they can get. If their costs go up, or down, they push for market rates (and if they overshoot, they don't get to rent it out at all).

Pretending that because your taxes or maintenance go up, the tenant pays... that's just wrong. Rents went down until DEMAND went up.

Costs had little to do with it (other than the long term effect of changing supply).

"And yet again, another pro-renter falls back into the not-seeing-the-forest-for-the-trees phenomenon; you need to pay for a place to live, whether it's through a rental check to a landlord or a mortgage check ultimately to yourself. But in the end, after 15 or 30 years, the owner now OWNS the property outright. The renter is still paying top-scale market rent -- FOREVER."

Yet another bitter buyer misses out on that thing called... MATH.

OK, you own it forever. Great. But would you pay 3x its value to own it? 5x its value? 10x?

The apparently blind, old wives tale eating, always buy crowd seems to completely miss the fact that screaming "equity" doesn't make up for overpaying for that equity.

It is a fundamental math mistake... one that, incredible, even in NYC, gets repeated what seems daily.

>Landlords will try and pass it down in theory.... but they often can't.

And often they can. Landlords are in business to make money. And they do.

Timing is critical

And often they can. Landlords are in business to make money. And they do.

all of them? how many? how much? what is ROE?

what is their ROE?

>all of them?

Yes Brooks, I was talking about every single one of them throughout the history of the world, forever. Thank you.

>what is their ROE?

Go take a look at some of the residential REITs if you want some statistics.

glad we cleared that up.

Yes, crystal clear.

"Yet another bitter buyer misses out on that thing called... MATH."

Here's some MATH for you:

$2,100 - owner's mortgage/maintenance on one-bedroom in Uptown Manhattan/Bronx, after $36K down payment.

$2,500 - renter's rent on similar apartment in Brooklyn Heights

$985 - Owner's effective monthly payment after mortgage tax deduction is factored in.

$2,500 - Renter's effective monthly payment.

--- 29 Years Later ---

$1385 - Owner's effective monthly payment after mortgage tax deduction is factored in, and allowing for regular maintenance increases

$12,000 - Renter's effective monthly payment, allowing for annual rent increases

--- 12 Months Later --

$900 - Owner's total monthly payment, now paying only maintenance

$12,360 - Renter's effective monthly payment, expected to only go higher forever and ever, amen.

are you comparing two neighborhoods that take 1 hour by subway?

I'm comparing two identical apartments in two different neighborhoods in New York City.

How can they be identical? Not even in contiguous counties.

An old metric for expected ROE was the 6% that Mitchell-Lama developers got. Then they had the potential upside of opting-out after 20 years, and either jacking up the rents to market or selling.

Some big publicly-held REIT bought several big rentals here last year, but we don't know whether they're intending to flip or to hold long-term. Ditto with TIAA-CREF buying the Corner on W72nd last year.

Most of the big landlords are privately held, and bought their property decades ago, so no telling what their ROE is. Probably pretty good, or they'd have converted in the 1980s or since.

Didn't the investors that bot the Mitchell-Lama properties lose their shirts, loans defaulted on?

NYCMatt reports that his $2100 maintenance is $985 after the tax subsidy. If that's right, he is the Cadillac driving welfare queen Ronald Reagan could never find. How can anyone get the government to pay 53% of their housing costs?

I don't know what program NYCMatt is using (I suspect he just doesn't know how a tax deduction works and is overstating his tax subsidy by a factor of 2 or 3). But if such a welfare program exists, it should be abolished immediately. What public service is NYCMatt (or other coop leaseholders) performing that entitles him/them to such a gift at the expense of the rest of us?

>NYCMatt reports that his $2100 maintenance is $985 after the tax subsidy. If that's right, he is the Cadillac driving welfare queen Ronald Reagan could never find. How can anyone get the government to pay 53% of their housing costs?

Isnt that "tax subsidy" a deduction against the taxes Matt pays for going to work every day?

Someone else can try to figure out under what scenario NYCMatt's prediction -- that rents will increase wildly faster than inflation while maintenance costs are subsidized to sharply trail it -- might come true.

On its face, it seems like he must be predicting a vast social movement of people who refuse to buy regardless of price, but elect politicians who insist on banning rentals and subsidizing purchases.

Otherwise, ordinary market forces would be far more likely to do what they usually do, which is to keep rents from rising much above costs except in relatively short terms (because if they do, investors have an incentive to respond by creating more supply).

Matt bought in 2006, so his mortgage is mostly interest, and 50% or more of his maintenance is probably RE taxes and underlying-mortgage interest. So more than 50% of his nut is deductible, but no way the net cost is less than half. But then Matt's finances are a mystery to me.

Brooks2, I can't think of any belly-up Mitchell-Lama sales offhand, but it's always possible to be over-optimistic in your projections and over-pay. E.g., Stuyvesant Town, Riverton Houses, those speculators in the Bronx, etc.

My bad. You are right. I was thinking of the Sty town investors that lost their shirts.

financeguy:
So, what if it turns out that you're right, that in the longer term rents will rise with costs. And what if at the margins -- even factoring in tax deductions and record-low mortgage rates -- the strict $-math still marginally favors renting instead of buying. My question for you is the $ the ONLY metric that you would look at.

I'm sure you've read your Benthem and John Stuart Mill. You seem to be making the assumption that there is a perfect correlation between $'s and Utility. This is not an argument for the "emotional value" of owning as opposed to renting. It's what I just stated-- does $ always = Utility?

Let's use a simple example. Let's say someone's refrigerator breaks. You see it as though the renter wins because the landlord pays to fix it. What say you to the fact that perhaps the pre-incident, and (gasp) even post-break, the owner achieves *utility* -- even if he comes out of pocket -- for the luxury of choosing whatever refrigerator he wants, rather than appealing to his landlord to install a new one over some (often excruciating) period of time.

What say you?

> I'm comparing two identical apartments in two different neighborhoods in New York Cit

LOL... Good thing you aren't concerned with accuracy in your math equation.

"Someone else can try to figure out under what scenario NYCMatt's prediction -- that rents will increase wildly faster than inflation while maintenance costs are subsidized to sharply trail it -- might come true."

I read his first two assumptions and saw how fabricated those were, and just stopped reading.

Not that the article is a mathematical proof, but it is much more believable.

On top of that, I just watched what happened the last few years in Manhattan, where renters made out like bandits...

^^^ Anybody want to weigh in here? Financeguy, somewhereelse? Is Inonada around? It seems a very debatable point, but maybe not an interesting one to the bears.

financeguy
about 2 hours ago
Otherwise, ordinary market forces would be far more likely to do what they usually do, which is to keep rents from rising much above costs except in relatively short terms (because if they do, investors have an incentive to respond by creating more supply).

Yes, those costs include costs of capital. Banks are getting their interest and their principal returned. Investors are getting risk-based returns on equity.

>On top of that, I just watched what happened the last few years in Manhattan, where renters made out like bandits...

Renters have not made out like bandits. Renters are paying high rents in NYC, regardless of the comparison to costs of ownership of equivalent apartments.

>^^^ Anybody want to weigh in here? Financeguy, somewhereelse? Is Inonada around?

How about huntersburg?

You are citing an example of the emotional benefits of choosing a specialized refrigerator in the context of the long-term macroeconomy. Isn't that a bit silly?

didn't they?

Maybe silly, yes. Emotional: no. The refrigerator was but one example.

You know what I find a bit silly, Huntersburg? It's that financeguy thrives on using all this flowery prose to ramble on about David Lloyd George, and Reagan welfare queens, and standard market economics, and all his other highfalutin ideas. But then, when someone cites two actual political economists -- Jeremy Bentham and John Stuart Mill -- what do we get...crickets. He was posting here just an hour or two ago. Maybe he's having dinner. Still strikes me as a bit silly.

Maybe he's having dinner. Doesn't seem that silly that he could be having dinner.

How fucking crazy are you?

Crazy like a hen.

Friends kept telling me to buy something forever and forever and I kept saying it didn't make financial sense. Well, I finally took the plunge (well b4 the bubble) and I'm glad I did. Timing and common sense are very important..of course, sometimes even that can work against you.

Seg-- I can't imagine why you think I equate utility with money, or why you think that I think renters "win" when they get the benefit of their leases.

If you want to spend money to change your refrigerator, be my guest. No law says you have to own real estate, or even be a coop leaseholder, to buy a refrigerator, and if you have enough money to comfortably rent, let alone buy, in Manhattan, a new fridge is hardly a budget buster. If you want guidance from political economics on refrigerator purchases, I suspect that you'd find Veblen more illuminating than Bentham or Mill, but I don't find the issue interesting enough to pursue very far.

However, if you get an "emotional" kick out of the (misleading) legal label "owner", you might want to consider talking to a psychotherapist. That's pretty perverse. Maybe a lawyer, too. It'd be quite sad to set as a major life goal achieving a status label based on misunderstanding the applicable law.

By the way, it's Henry George, not David Lloyd George, who writes about landlords sucking up all the capital in the economy.

And, no, I do not see any reason to expect that renting will be "marginally" cheaper than buying at bubble prices. History and theory suggest that when you buy a capital good at double both cost of production and expected returns, in the long run you are likely to lose half your investment. Markets are rarely efficient and never at equilibrium, but they do exert major pressures to bring prices into line with costs. And when virtually the same product costs twice as much under one label as another, usually someone can make a lot of money doing things -- like developing condos or coops -- that bring the prices closer together.

I don't quite understand the logic between picking two very different neighborhoods, unless it's to make buying look smarter than it is.
Anyway, if you are planning to stay in the same apartment for 30+ years, it probably makes sense to buy, even at these inflated bubblicious prices. For everyone else, the regular people who stay 5-7 years before moving up, down or sideways, it doesn't make financial sense, but it might make emotional sense if you have the disposable income.

Now we're talking -- thanks for the response financeguy. The point I make is there are certain intangibles on both the sides of renting or owning. But what I categorically reject is that just because something is unquantifiable, that necessarily makes it "emotional". What is so emotional about wanting to evaluate something that is not quantifiable. Here are some intangibles that are not emotional -- as you will see these have benefits to either side:

- Avoiding the hassles of moving and/or renegotiating leases
- Avoiding the hassles of taking on homeowner's insurance
- Avoiding the hassles of dealing with landlords
- Avoiding the hassles of dealing with co-op/condo boards

Why not have a good-spirited debate without calling for lawyers and psychotherapists? I'm really not sure why you went there. Anyway, my personal opinion is with the stock market as high as it is now, the expected return on a down payment is lower these days, and mortgage rates are at record lows. It's pretty damn close. As in, take a preference. Call me crazy (which you seem to have already done).

And OK, before you call me out, homeowner's insurance obviously is quantifiable. So my mistake and strike that one from the record (along with renter's insurance, and -- to some degree -- moving more frequently)...

Is your point that there are marginal differences between renting, owning real estate and owning coop shares, and that different people may have different preferences at the margin?

What is there to have a debate about?

>Why not have a good-spirited debate without calling for lawyers and psychotherapists? I'm really not sure why you went there.

he hit a nerve?

The main point to debate is your economic framework that is based largely (entirely?) on the decisions real estate investors would make in deciding to sell or convert or build. Let's take these one at a time:

1. Current condo owners: why is there not more inventory on the market?

2. Converters: Why are we not seeing more fast-paced conversions? Why are most existing conversion projects doing reasonably well? (I am happy to get into examples here if you like -- happy to get into examples if you like)?

3. New construction: Where? What about my point on utility? One can't just build wherever one chooses.

This is the debate. Your framework is logical but I'm struggling to see where it's holding up right now. My hypothesis is there is more than simply a dollars-and-cents equation that governs decision making. Too many variables to work so neatly.

get the papers .. the papers

Brooks2: nice one.

I'm not sure where you see a problem in "my" framework, which is just conventional economic analysis of the sort taught in Econ 101.

In the short run, costs of building are largely irrelevant to determining price. Supply doesn't change much in the short run, so small changes in demand matter more. Moreover, most developers don't have a good handle on their costs, let alone expected returns, and in any event, buildings coming on line now were mostly planned at the depths of the credit crunch, when funding was hard to find, so changes in supply are only loosely related to costs or demand.

On the other side of the equation, plenty of retail buyers (including at least two in this thread) have no clue how to calculate how much they are paying, let alone whether they are making a sensible financial decision. Indeed, we still have people claiming that buying now will prove profitable if you hold for ten years, as if they had some kind of a dispensation from the Heavens promising another bubble and capitalist markets be damned.

Moreover, anyone attempting to make a rational investment decision must incorporate assumptions about other people's behavior, and since their behavior is likely to be influenced by similar calculations, not to mention whatever nonsense they've picked up on the internet, prediction is basically impossible.

So short-term supply and demand are both likely to be largely the result of optimism/pessimism, gut feelings and spirit of the age: predictions about the predictions others are likely to make. Markets may stumble around in the general direction of the equilibrium charts we draw in econ class, in which supply meets demand when price equals cost, or finance class, where expected returns vary only because of expected risk, but there is no reason to expect efficiency or accuracy any more than there is to expect current prices to be at equilibrium. Systems in motion reach and stay at equilibrium only when they are dead.

We don't see more of the things you are looking for because 1. many current condo owners still expect bubble prices to return/continue or prefer to take their losses slowly, 2. Conversion is slow and financing is still difficult to find, 3. Building is slow. If this weren't true, the bubble would have collapsed long ago.

Where is the debate? I'd love to learn something before I go to bed.

Seg, I didn't read the whole thread. But on the refrigerator issue, it was not theoretical for me. My fridge was not cooling properly last year. I send an email to the management company owner pays 10% or so, they schedule for the appliance repairman and reply the same day to verify the window works. It's a Sub-Zero from mid-2000's, why would I want it replaced? More importantly, how much is concierge service worth to me to have some guy take care of arranging my repairs, me not needing to worry about getting ripped off, etc.? It's not as if I'd go out and hire someone to do it for me given the sporadic nature of repairs, but my setup already includes such service.

One other thing. If you're renting out a high-end apt, you know your customers are going to demand quality finishes. So when something breaks or needs replacement, you do a quality job. If you have an apt that rents for 6 figures, say, and the 15-year-old top-of-the-line GE (or whatever was big back then) breaks, what are you going to replace it with? Maybe you can stuff the current tenant with a second-rate fridge, but where does that leave you in 2 years? Trying to rent a $10K apt with a $600 fridge? Good luck with that.

inonada, FG: thanks for the thoughts. Regarding the debate, on #3, I'm not sure how slow building actually is. There was lots of it in the mid/late 00's. There is not that much now. Why is that? It seems like the market is at work. Do you still believe we are still in a bubble -- it sounds like you do? If so, why -- do you have data to support the view?

Also on #3, there are supply constraints that will never be opened up. What if someone wants a pre-war apartment. They aren't making any more of it, despite a handful of recent projects trying to re-create it. So it seems like demand is more free to ebb and flow than supply. So the "conventional analysis" doesn't really work particularly well here. Your arguments are better suited to new construction.

FG: what is the practical application of your views (which I don't and can't dispute)? Renting, which is the clear economic winner in my niche market - inventory is sparse and hard to come by. Meaning that I am usually locked in somewhere else when there is supply. Buying, a little less hard to come by.

Seg, I think we are still in a bubble. I'm not so much in the supply vs. demand school of argument, more in the rent vs. buy school of argument. Manhattan prices can stay elevated for the rest of the decade, I really don't care. The question for me is how I can get the most home for my money. Take a look at KW's idea of a nice apt for $4.5M:

http://streeteasy.com/nyc/talk/discussion/29983-high-end-reno-example

I'd say that the all-in monthly cost of such a places, tax benefits and capital costs and transaction costs and appreciation at inflation, is around $22K. To me, that is a pedestrian apt for that kind of money when I could get something like this for $14K:

http://streeteasy.com/nyc/talk/discussion/29987-high-end-example-inonada-edition

I think it's pretty easy to make the case that the second apt has a higher price (were it for sale) than the first, probably by a significant margin. It's providing probably twice as much bang for the buck.

Now tell me, why should I sweat over the first apt when I can just have the second one?

Ah, the old "they aren't making any more of it" myth. It's wrong. First, they are making more of it. New pre-wars are made every year: Rentals are converted. "Estate-quality" apartments that no upper class family would live in are renovated. Chopped up apartments are recombined. Neighborhoods that weren't respectable enough are rebranded.

More to the point, substitutes don't have to be exact. There are plenty of people who are willing to move at the right price from Park Avenue to CPW, or from a classic pre-war to a new imitation, a downtown loft, a starchitect glass house, a renovated tenement, a Westchester mansion or a Harlem brownstone, or even a Trump tower. Park Avenue commands a premium, but the premium has shrunk, not grown, as the acceptable alternatives for the upper class have expanded.

In the short term, prices reflect fluctuations in demand and the optimism of providers.

But the long term is different. As long as some developers believe that demand is sufficient to keep prices above the cost of building, converting, renovating or rebranding for long enough for them to finish their projects, profit-seekers will expand supply. Increased supply, of course, reduces prices, all else being equal. If all else isn't equal, the process repeats. Over time, prices are under enormous pressure to drop to the cost of the cheapest of developing, building, converting or convincing people to move to newly fashionable neighborhoods. To believe that prices will stay above development costs indefinitely, you must believe that capitalism is a failed system.

That's why, long term, real estate prices basically track inflation. If they go up faster, developers develop more and, eventually, bring them back down.

(Of course, the picture is not symmetric. Developers can easily (if slowly) increase supply. It is harder to shrink it. If demand drops (because jobs disappear or fashions change) so much that prices are below replacement cost, prices can remain below costs indefinitely. See, e.g., Brooklyn c. 1950-80 -- lots that were cleared in 1929 sat vacant until 2006. This is one reason why it is usually cheaper to buy than rent -- over time, owners are taking a large downside risk with relatively less upside potential.)

The evidence that we still have bubble pricing is simple: prices are above the cost to build or renovate, and far above what a sensible investor would pay to hold-and-rent.

inonada - I hear you. that's a good example. The only thing I can say is location, location etc...

financeguy, let's look at actual examples in the market I pay attention to -- albeit generally higher-end than my price range. Here are the recent "making more of it" examples. Explain why these are sold out so fast, or are selling out so fast. to be clear, I have no dog in this hunt. I'm genuinely curious as to what you think.

http://streeteasy.com/nyc/building/845-west-end-avenue-new_york

http://streeteasy.com/nyc/building/535-west-end-avenue-new_york

http://streeteasy.com/nyc/building/the-laureate

Anyone who thinks these buildings are struggling is simply not looking at reality, or is not in the market.

My question is WHY are they doing so well, according to your conventional framework. It would appear your only argument is the buyers are behaving irrationally. Is there something more to it that I'm missing?

So profit-seeking developers will increase supply, unless they expect that prices are likely to drop before they can come to market.

At the same time, some part of the demand was created by the bubble itself -- people who expect to make money by consuming, consume more than people who don't -- and that demand is likely to dry up as people's expectations change.

Increased supply, decreased demand.

I would add that 845 certainly did struggle the outset, and has struggled more than the other two. 905 WEA is another conversion. Are there other conversions that I'm missing? 240 WEA? Please don't nitpick the small points. I'm talking conceptually.

To generate stable, let along rising, real prices from here, as far as I can tell, you need to assume one of the following:
A. Developers expect prices to drop (so don't develop), but retail buyers expect them to rise (so increased demand), and neither learns from the other or adjusts expectations based on actual price trends.
A'. NYC will generate so many new well-paid jobs (or be such a safe-haven for international flight capital) that demand will increase, but developers or their investors/lenders will fail to act on the profit potential so supply will not. (This seems to be the basic bull case on SE).
B. Costs suddenly rise to meet current prices -- e.g., zoning is tightened or construction workers organize for higher wages or bankers manage to push finance costs up, or the finance or development markets become far less efficient.
C. Henry George was right and capitalism is just a mechanism to forcibly transfer income from those who produce it to landlords, inevitably resulting in stasis or collapse as the landlords extract so much that producers defect or revolt.
D. The system is so stacked in favor of "owners" and the government's control of the economy is so complete that the political classes will do whatever is necessary to assure that NYC (unlike LA) real estate bubbles never pop.

A, A', C and D require believing that markets don't work and capitalism is a failure -- if you believe that it is hard to see why you'd want to invest in the world center of finance capitalism. B just requires believing that all the political trends of the last two decades are about to reverse; that's less challenging, but still an effort worthy of the Red Queen ("I always believe two impossible things before breakfast").

Seg -- why are buyers still willing to pay high prices? You know the answer.

For many of them, including virtually all the bulls on SE, it is a belief, supported by trend extrapolation, basic accounting errors and a deep religious faith that God has given them special privileges denied to ordinary mortals, that someone else will pay even more than they are paying, so that the high prices are really low prices. For some it is like playing the lottery: you know you are going to lose, but you can't figure out anything with better odds and maybe you'll get lucky. For some it is flight capital--losing half your money in NYC real estate could look quite attractive if the alternative is losing 90% of it in a local political or economic collapse. For a few of them it is consumption (see NYC10023 -- if you have the money and want the product, you might decide to overpay).

There is always someone willing to pay a higher price than marginal cost. That doesn't mean that prices stay there indefinitely.

NYC10023: Practical implications -- don't kid yourself. That's all. If you buy today, you are consuming, not investing. You are paying roughly double equilibrium price and, therefore, it is highly likely that prices will drop significantly over time. Probably slowly and largely by inflation.

And as Inonada points out, you are paying far more than you'd need to rent a more-or-less equivalent.

So what are you paying the extra for when you decide to buy a condo or coop shares?

Mainly to be able to say you "own". This seems to me to be a very expensive neurosis better dealt with by therapy.

Also for security of tenure that is hard to get in the non-stabilized rental markets. That seems to me worth quite a bit for many people, especially if you are tied to a particular neighborhood or have children who need stability or are obnoxious enough that landlords are likely to want to evict you. But right now the market is charging an extraordinary premium for this -- double the cost on a current basis and a high likelihood of losing half your capital in the future. For most people, it would be much cheaper to simply pay the landlord even outrageous rent increases until you are ready to move.

Maybe for particular tastes that can be hard to satisfy in the rental market. Of course, this is easy to exaggerate. Most condos are pretty cookie cutter and for most people, it'd be much cheaper to paint your rental when you leave or replace the landlord's appliances than to pay the bubble premium.

To save some money on taxes. Some people have a deep desire to screw the country by not paying their fair share of the costs of running the place. The tax subsidy for mortgage finance and the fact that imputed rental income is tax free to owner-occupants allow you to cut your contribution to the public fisc by owning instead of renting. It doesn't save you any money -- at current prices, the subsidy is more than capitalized into the price, so you are paying more that the full value of the subsidy to your seller and bank. But it does mean that you are giving away your money to the former owner of your unit instead of using it to pay for the public services you consume. That may give you the deep pleasure of knowing you've scammed your country -- and many of your fellow citizens will even cheer you on for doing it. And it means you will have done your part to make the country less equal and less productive, something that seems to appeal to many.

For a little bit of cognitive dissonance: to avoid having to accept that bubbles are possible and we are still suffering the consequences. This is particularly important for people who got rich due to the bubble and would prefer to imagine that their wealth comes from their own efforts or merit or the inherently just nature of a productive system.

Finally, you are paying for a lottery ticket that has overwhelming odds of costing you half the current price of your apartment in real terms, but could, if your timing is lucky, pay off in a way unavailable to most people who aren't managing directors at JP Morgan Chase. Envy of those who won in the past can make people quite happy to ignore the low odds of a repetition.

Have I missed anything?

Nope. I don't see you missing anything financeguru. You have an ability to not curse your head off to the most offensive re bulls on SE and I kowtow to you for that.

For manhattanites 'prepaid renters' who can't read nor understand the financial consequences of riding 'out' this massive RE bubble, I commend you on having the logic of a 6yo. 'how come Timmy gets lots of Legos and doesn't have to go to school.?'
W67, Timmy's parents were crack heads and burned Timmy with hot iron and broke his legs.
'I wish my parents were crack heads, I was burned with a hot iron and I have broken legs..... And arms. Then maybe I'd get the 'death star Lego!'

Finance:

If prices are so much higher than development costs, why are housing starts so depressed?

New housing permits in 2012 are 1/3 of what they were in 2004-2008. If prices are still so much higher than cost, why would that be the case? If prices are still so much higher across the board to buy than to rent, why are developers in Brooklyn converting for sale condos to rentals?

http://www.dailywealth.com/1980/The-Greatest-Opportunity-Ever-Is-Just-About-to-Pass-You-By

real estate does NOT provide rising real prices. just increased nominal prices. and that's enough.It's a leveraged inflation play (5 times at 20/80 LTV) multiplied by 2 (increase in nominal price AND decreased purchasing power of the debt at EXACTLY the rate of inflation) or 3 if you rent it out (also assumably inflation indexed plus depreciation "phantom cash flow").
It's quite simple really. take inflation, multiply by 10 or 15, that's the return on your down payment.
And quite unbeatable. Especially now as the article points out.
This month alone I bought a loft in the fashion district (my second in 2 years), a beach house in central america (where the market mirrors the US, foreclosure, 65%off, titled land) and 1/3 of a large commercial building in the Midwest.
Don't let this pass you by.

This is like AAPL shareholders from 2000 telling investors today to buy AAPL "because it never goes down".

If pre-2005 NYC RE holders really believe that NYC RE is going to perform as well as it has over the past 15 years, then they should be rushing out and buying themselves, not recommending buying to others which simply creates more competition.

Or maybe they aren't that sincere....

Fair enough. Practical implications are worth a lot more to some than others. I too, will never understand those who choose to buy the exact same product over renting.

Well NYC RE certainly went down and can go down again.

In order for your analogy to be accurate, AAPL would have to be some significant percentage below its all time high. It isn't.

Finance:

Any thoughts on why housing starts are down so much? You think it is because prices are still so much higher than developments costs? Or have housing starts declined because prices declined and are no longer much higher than development costs?

Real world example: Currently paying under 3K for a great 800+ square foot 1BR/1BA in a good, (if not hip or exciting neighborhood). A very similar apartment, (fewer closets, slightly more outdoor space, and slightly less indoor space), is currently listed at around $1M, with $1,500 maintenance. If we buy, our monthly cost, (before tax writeoffs), would be around $5,500, and we'd have to put around 200K down. As I've stated on other threads, our increase last Summer, (when the rental market was en fuego), was a less-than-faint-inducing $100. So is it a smart for us to take 200K out of investments that are doing nicely right now, and up our monthly outlay by 90+% while not gaining more space or relocating to a more desireable neighborhood? I don't see it.

FG: the depth and thoughtfulness of your analysis is impressive.

Where you lose me is when you start saying most people buy because of fanatical ego-driven religious beliefs or an irrational desire to screw the government at the expense of their own (and their families') well-being. I don't see much substance behind those theories of yours.

More importantly, would even the bears with the highest conviction (W67, Inonada) say that the cost to buy is DOUBLE the cost to rent today? That's not what the numbers say. Especially for midscale NYC housing. Inonada points to the very high end where price-to-rent ratios are further out of whack than for us mere mortals.

johchle: you raise a good point on housing starts, but I think the answer you will get is NYC prices have not collapsed like the rest of the country. So the nationwide housing starts numbers are not terribly relevant. On the other hand, housing starts here have certainly dropped off as well.

I was citing housing start numbers for "New York-Northern New Jersey-Long Island,*
NY-NJ-PA" not for the entire nation. The national numbers tell a similar story. Like most easily accessible data, NYC and Manhattan are not explicitly separated. I would be curious to see that data if anyone has it.

http://www.census.gov/construction/bps/msamonthly.html

I don't point out the housing start data to imply that we are on the verge of some bull market because of under supply. I just point it out to show that it is not obviously so much cheaper to build than to buy an existing home. If it were still so much cheaper to build, housing starts would not have fallen off a cliff. This is the starting point of financeguy's "guys it's simple supply and demand" argument.

Jhocle: makes sense. The data isn't a perfect proxy for NYC but it isn't meaningless either.

"Friends kept telling me to buy something forever and forever and I kept saying it didn't make financial sense. Well, I finally took the plunge (well b4 the bubble) and I'm glad I did."

The fallousy of bubble logic.... In 1999, anyone who ever said buy stock at any point in history before, right or wrong, looked pretty smart. In 2007, same for real estate. Because at the peak, every other time looks like a bargain.

So the folks who are always yelling "buy" don't get credit for making that call... especially when it was so wrong to say it in 2007.

"Timing and common sense are very important..of course, sometimes even that can work against you"

Sure they are. But the math says buying has not been smart in the bubble. Pre-bubble... well, I think the answer there depends on where we are in 5 years, 10 years.

jhocle:

-As far as I know, no developer can complete a building instantly. So starts depend on builders and bankers guesses about the market in two or three years. If starts are low today, that would suggest that builders or bankers are guessing that prices will be lower in two or three days. Why do you think they are wrong?

-Converting planned condos to rentals is more interesting. I think it has to do with the micro-economics of development. Rents are high enough to make building profitable. Sales prices remain far higher, but the sales process is slow.

So a developer has a choice between taking immediate profit now (selling to an investor that specializes in rentals) and moving on to the next project, or holding out for a potentially higher profit after a long (and expensive) sales period. Some developers may not be liquid enough to make it through the sales period. Others may see their core business as developing, not sales, and prefer to move on to the next project. Others may believe that the slow pace of sales reflects underlying weakness and worry that they won't actually be able to sell at their projected prices.

-- Nationally, number crunchers who seem to have their head on their shoulders, like Calculated Risk, think that prices have declined most of the way to the end of the bubble and are approaching cost of construction, and that natural growth is catching up with the overbuilding of the bubble years. NYC seems to be well behind the rest of the country.

Jhochle : "two or three years" NOT "two or three days". Too much ECMH wish fulfillment.

Leverage. Sometimes it gives and sometimes it takes away.

-Allah.

Seg: You misread. I didn't say anything about most people, let alone that they are fanatics. This is NYC. Most people DON'T buy.

Second, these beliefs are completely mainstream and conventional and widely held -- it's just that they are usually presented in a different tone of voice and without pointing out that they depend on magic. You'll find them all on every SE thread. Just look for "RE will go up 1% above inflation" or "20 x annual rent is normal" or "return on downpayment is the risk-free rate" or "my apartment will be worth more in 20 years even if I do no repairs" or "rent is flushed down the toilet, but interest is money you pay to yourself" or "demand is high so prices are going to go up forever" or "tenants are poor and deserve to be screwed" or "taxes are theft, but interest is payment for services" or "rent is punishment for bad people who deserve to be poor."

They are wrong, not fanatical. In the case of the anti-tax folks, they are also deeply immoral, in my view, since I think people should pay for what they use, and anti-patriotic, since they are advocating destroying the economic and cultural basis of the country, but they have one and a half of our major political parties on their side, so they are centrist, not fanatic.

-Well I don't think that developers showed much expertise in seeing the crash, so I don't think they would see an upturn before it happens either. Among my friends...the worst bubble purchase was by the son of a home builder in the Washington DC area. At the time I asked him if he thought things were getting a bit out of control, and it might be a bubble. He said "my dad thinks things are great." Well he just puked that place out at a 30% loss. Housing starts remained very strong through 2008, and then fell off a cliff in 2009. Given the lead time you cite, the 2007-2008 permits didn't show much foresight unless of course they were still able to turn a profit in a declining market. I personally doubt it, but wouldn't be shocked.

-If developers have a choice of a profit now, or a profit later...why aren't there more new developments. I don't think it is that lucrative, but I am not a developer. In 2008-2010 developers seemed to have the choice between a loss now, or a potential profit later (by renting for a year or two and delaying the sales process). My guess is that many developers had skewed incentives and chose to convert only to hold out for a potential gain since it wasn't their money on the line if things kept going down. The new Brooklyn condo that is converting to a rental building seemed to be selling briskly so their decision to change may have been made for a different reason.

Seg: re: "double." It's a guess, not a calculation. I don't know of any public data on construction costs in NYC, but developers often talk about $300 psf for units they expect to sell for $1000, which is too big a gap.

And condo owners describing the fortunes they expect to make renting usually indicate that rents will cover their out of pocket expenses, with the fortune coming from "capital appreciation". That's too little.

Parking lots sell for prices based on the future building rather than the current use. That's bubble pricing.

Rent stabilization guarantees landlords a reasonable return, yet small operators froth at the mouth at the profits they are losing because they aren't allowed to expropriate rent stabilized tenants. That's an indication that sales prices are too high.

Half would allow a buy-and-hold landlord to earn a reasonable return on investment even after paying for maintenance, at current rents and without making wild assumptions about the future that contradict ordinary economic theory.

Half would bring rent::price ratios to historic NYC and national levels by most measures.

Half would bring us back to prices when the bubble began, although bubbles almost always overshoot on the downside.

By the way, historically, downward price adjustments in RE are overwhelmingly by inflation -- nominal prices rarely drop significantly. Inflation is so low today that I expect more nominal adjustment, but it is still likely that we will see a long period of very slow declines or flat-ish prices until rents and construction costs catch up.

Does the $300 psf include land? Or is that building cost?

I think you're overplaying the tax point. What do you think of real estate taxes? In most cases RE taxes exceed any tax savings on interest deductions. RE taxes support the local economy.

In this sense, owner-occupants are hardly "anti-patriotic" or "destroying the economic and cultural basis of the country".

Sure, you're going to say I'm misreading or taking your words out of context again. But your language is so vituperative that it becomes impossible not to make logical extensions about how you view the landlords and owner-occupants who pay the local taxes.

jhocle -- You may well be right. It's hard to overestimate the skewed incentives and simple blindness in the real estate or finance industries. The professionals are likely to try every possible way of losing money before finding the profitable one. And while they have better information about current conditions than I do, they also have a long history of misreading the implications for the future of that information

That's one reason why I try to avoid paying much attention to "real time activity" or making short-term predictions.

> Landlords will try and pass it down in theory.... but they often can't.

this is overlooked so often, it's not even funny. another issue is that landlords HAVE room to absorve the costs. cost absorption means lower margins, not necessarily running a negative cash flow. remember that old time landlords own out right, without a mortgage. that leaves room for cost absorption.

so Matt, they don't become non-profit enterprises by not passing all costs down. in fact, great landlords absorve costs to lower vacancy rates. awful wannabe landlords, bought recently with high LTV. they HAVE to pass the cost or walk away from the property cause of not being able to carry a negative cash flow for long. these amateurs don't make the bulk of the rental supply though.

Seg:

As far as I know, landlords ordinarily plan to and usually are able to charge rent that is enough to cover their taxes and still allow them to make a reasonable return. As a result, everyone who lives somewhere pays RE taxes directly or indirectly; that is one of their main advantages. So I'm not sure why paying RE taxes directly instead of indirectly is a justification for the mortgage tax subsidy or the exclusion of imputed rental income.

The homeowners' income tax subsidies are basically redistributions of wealth from the lower middle class to the upper middle class, with a certain amount of leakage to the bankers and real estate developers to support economic activity that people wouldn't be willing to pay full price for. It is hard to see any justification for them at all.

Corporations are able to deduct interest expense from their income which lowers their tax liability. I don't see why the mortgage interest tax deduction is very different.

after all corporations are people, right?

you do realize that individuals were able to deduct all interest expense before reagan eliminated that tax loophole.

Reagan raised taxes? Shhhh we don't talk about that. We like to forget that.

A costs more than B (after the fancy maths)

sometimes you justify it, sometimes you don't.

that's all i got.

"inonada - I hear you. that's a good example. The only thing I can say is location, location etc..."

You did see the townhouse down the block that Brooks posted, right? It sold for $1000 ppsf prior to conversion from apts & renovation, now asking $1800 ppsf. Overpriced, sure, but it gives you a sense of that market in that location. And the rental was superior in every way imaginable: architecture, style, light, views, outdoor space, etc.

You know I can give examples with locations superior to both of these, doesn't much change the story.

inonada examples are very good examples of "deals" on the rental side.And they are excellent deals. But at the high end they are not reflections of landlord behavior.They are mostly accidental landlords or people trying to make a few dollars while there situation is in flux/wait out the market. (I do love the 33 fifth avenue loft. totally my type of space, but waaayyyyy over what I would spend for myself.
The numbers are far different at the bulk of the market: the low to mid end particularly in the "poor" boroughs.
It's all about value. NOT PRICE.it's ALL about purchasing power 1) of the asset 2) of the currency that buys the asset 3)of their respective relationship.
And that's it.
http://goldsilver.com/news/fofoa-yo-warren-b-you-are-so-og/

Re interest deduction:

The reason corporations, and indeed all businesses, are allowed to deduct interest is that the interest is considered an expense of creating the income. An income tax aims to tax net income, not gross receipts. This justification also explains why a landlord gets to deduct interest against the rental income.

But a personal mortgage does not generate any taxable income: Owner-occupants do not declare the (in-kind) income they receive as landlords by paying rent to themselves. So a mortgage on an owner-occupied unit is not an expense of producing income. It is double-dipping to allow owner-occupants to deduct the expenses of producing non-taxable income. (We enforce this principle elsewhere: if you borrow to buy tax-exempt bonds, you are not allowed to deduct the interest on your loans.)

Therefore, in a fair income tax system, there would be no deduction for mortgage interest for an owner-occupied home.

Even this would be a subsidy to owner-occupants, just a smaller one than today: In an imaginary ideal income tax system, owner-occupants ought to be paying tax on the net income from their rental investment property just like commercial landlords (and therefore tenants) do. But this is way too complicated to work in the real world -- no one would know how to calculate the imputed rent or understand why they should pay taxes on purely imaginary payments, enforcement would be impossible, and too many homeowners wouldn't have the cash to pay the tax.

If we were interested in a fairer system, we might instead allow tenants to deduct their rent (on the assumption that nearly all the time, markets allow landlords to recover the tax they pay from their tenants as part of rent). That has its own complications, but it would come closer to equalizing tenants and owner-occupants and in any event would eliminate the current upward redistribution from tenants to owner-occupants. Also, it would eliminate the current current subsidy for leverage that encourages the upper middle class to take out excessive mortgages. (It would still be a subsidy to the real estate business, detracting from more productive enterprises and keeping real estate prices higher than they should be, but I don't see any way to avoid that without having a government agency calculate the fair market rent on every owner-occupied unit in the country, which seems absurd.)

Unfortunately, making the wealthy -- or even just the less poor half of the country -- pay their fair share of the costs of running the country is not on the political table at the moment. Nor is reducing the subsidies to the finance and real estate industries.

"But at the high end they are not reflections of landlord behavior.They are mostly accidental landlords or people trying to make a few dollars while there situation is in flux/wait out the market."

That example I posted is the top 3.5 floors of a 9-story building bought in its entirety in 2003, apt renovated, and then rented. The entire building's apts are being rented. Owners have lived somewhere in Westchester.

Here's another fun one that just changed hands:

http://streeteasy.com/nyc/sale/640879-condo-257-west-17th-street-chelsea-new-york

Bought in 2007 for $4.575M for cash. Owner moved out in 2010 onto bigger & better things, couldn't sell. Tried becoming an accidental LL with an ask of $15K, no takers, meaning that no one took it at $13K.

Now buyer comes in at $3.8M, financing 70% with a 4% interest-only 10-year ARM. An owner-resident? Nein. It was put on the market for rent immediately at $17.5K.

FG: interestingly, the Ontario tax system allows one to take a property tax credit based on rent or property taxes paid. That equalizes things.

Here's a fun case study of the prior owner's cost to own that apt for 5 years:

1) Lost $775K nominally between purchase & sale.
2) Paid $330K in transaction costs (it would have been higher, but no mortgage).
3) Paid $200K in common charges and taxes, net of tax deduction.
4) Lost $200K to $1500K on investment opportunities of $4.575M. The former is for an investment in SPY after-tax, the latter for an investment in TLT after-tax.

So $1.5M at the low end, $2.8M at the high end.

I believe the owner only lived ~40 months in the apt, but even at 60 months, a horrendous monthly cost.

Finance guy

Can you Please explain to us what is in a fair income tax system? Yes that is rhetorical, although you do seem to know, so let me know if you have the time.

Is there Really any difference between a mortgage deduction and a corporation that buys an apt and rents it out to a tenant (maybe the owner of the corporation)? It is pretty naive to think that there is a real economic rational for all the tax breaks penalties and loopholes in our system.

The tax system is so far from fair it is a joke. Funny that this deduction gets people all worked up. This argument tends to be made by renters that want to buy but wish things were just a bit cheaper. So they argue that we should do away with this deduction that has been around for decades to be more "fair."

I seriously doubt that we are going to explore deflationary policies considering the fed's recent war on deflation.

ino, these are idiots, not landlords. they're not investors. they're high paid employees who want to play the game. but they are for a living.their knowledge is superficial. they're gonna lose their shirt as they should. that's how you learn.
As for the tax system: believing that taxes are for "services" is beyond naive. They are to pay the interest on currency created out of thin air (with a statutory 6% interest).IRS was created in 1913, at the same time as the federal reserve, NOT a coincidence.

they work for a living

JH:

I can get worked up about all sorts of inequities in the tax system, but most of them don't have anything to do with SE. Moreover, this particular tax subsidy goes to half the country, creating a particularly large group of self-righteous welfare recipients who like to present their wealth transfers as the inevitable result of their Galtian excellence and productivity.

A fair income tax system starts with an accurate definition of income and then taxes those who receive more, more, while trying to treat people in similar positions similarly. It tries to reject efforts to use it as a source of subsidies, if only because tax expenditures are less visible and more likely to be corrupted by lobbyists than are appropriations. It taxes unearned income at higher, not lower, rates than earned income. And it tries to minimize opportunities for the wealthy to game the system, although the inherent confusions of the concept of income make that difficult.

Wrf does deflationary policy have anything to do with a deflowering a tuliP bubble.

I don't know if the nyc re bullz understand, but financeguru just called yo mamas fking retards. And yo wife ugly like a bull dog.

By the way, renters aren't the only ones better off with lower RE prices -- we all are. Well, all of us except the most selfish of current landholders.

In 1960, average households spent 10% of their income on housing, leaving the rest for more interesting things. Today, it's three or four times that. The country is much richer than we were a half century ago; we should be spending less of our income on housing, not more.

High RE prices simply take from current wage earners -- the productive folk mainly responsible for making the city interesting -- and give to lucky members of the older generation. I understand the strong desire to organize society so as to take from the less well-off and give to the better-off, but this is a particularly perverse way to do achieve a basically evil goal.

Cut the price of NYC real estate by half and the number of young New Yorkers doing risky, interesting, creative, productive, entrepreneurial, artistic things will go up by 10x.