Slim pickings

Can you admit that if we took your first set of numbers, you know where you said it was break-even over 2011, and replaced the made-up return of 3% from the asset mix of your own choice with the actual 16%, you're in the hole to the tune of $50K?

Forward looking is what matters. You are completely avoiding the second example I gave. 2011/01 SE downtown 1.92 vs latest 1.94. Up using the averages, if you were to use my example.

>you're in the hole to the tune of $50K?

reminds me of another time I served on a jury. Was an injury case so I figured it would probably be over quickly and why not be agreeable vs. being sent back to the waiting room for the next case.
So they don't tell you until the end of the trial what the plaintiff is seeking. And, for the injury ... $70K she was asking. I thought about it - 8 of us (6 person jury + 2 alternates) plus a judge, the whole court system, etc. wasted 3 days for $70K?

All this discussion for $50K?

and apparently so do the 12 foot ceilings. give it up---your argument makes no sense.

Nada, pretty tired of your using unproven example or your rent (privacy issue obviously) when I gave a example which applies to many people and listings and used last 10 year returns for stocks and 2% for real estate which is much below realized (compounded 4% as per you).

do you really believe that real estate returns over the last ten years are a reasonable basis for projecting forward? really?

>do you really believe that real estate returns over the last ten years are a reasonable basis for projecting forward? really?

That's your argument? No numbers, no proof. No nothing other than a miserable personality. Yes, we get it, you are miserable and would be happier if other people were equally miserable.

technologic,
Since you have the luxury of subleting (assume it at least covers your monthly nut) you can be patient. I just don't think time will be kind to price. I don't need a crystal ball...interest rates will rise (you heard it here first)in the future. Lending standards will remain high. Inflation will be part of your future. It's hard to imagine the driving force that will raise re values above their current levels. By raise I mean increasing above the inflation rate. We can talk about inventories all we want, they are low because you thought process is shared by many buyers...hence the low inventory numbers. If you thought you could get your #, you would list today. You don't have the confidence so you think...maybe next Tuesday. My advice is to unlock that money ASAP.

hburg, no one can guarantee future returns. Since we were assuming a 10 year historical return for stocks, I assumed a much less appreciation than in the last 10 years. Either you use zero for both or historical or forward looking.

Are there any statistics/surveys on who is actually selling? I would imagine it's mostly people in financial stress, relocating due to job/kids-school-family/retirement, or upgrading. That almost covers everything, except selling to take profit or they just want to put the equity in an alternative investment. At current prices and interest rates, I think people in these latter categories won't be selling because they are more "comfortable" with RE and probably "afraid" of other forms of investments like stocks or even mutual funds. Simply put, they won't know what to do with the money if they cashed out. Since they favor RE, they are naturally optimistic about the price of RE going back up, so they stay put. If they hold on long enough, the nominal price will likely be higher eventually. Don't even try talking to them about theoretically alternative investments that they will never actually put their money in.

With the huge foreclosure pipeline in the surrounding area and the high unemployment rate that appears to be rising, I am not putting any more money in RE in the near future.

not sure if i'd agree with that logic of not selling RE.. Cash is always a better investment than a depreciating asset. And, it is a hell of a lot more liquid..

What is the cash used for?

Brooks2, the idea of selling and putting the cash in the banks earning less than 1% is unimaginable to most. You would have to be a *very* pessimistic about RE to do that, in which case, probably already sold last year or earlier. The people I'm talking about are not likely to want out of RE forever, which means considering the transaction cost and natural optimism about RE, it makes sense for them to wait.

You'll have to use the cash for rent, right?

yes, I am very pessimistic about RE in Manhattan.

Not only are the pickings slim but the crap that is available for 1.5-2M is BS. These new developments SUCK!.........NO closets; TINY master bedrooms; kitchen-living room combos; and SF exagerations beyond the usual

"Nada, pretty tired of your using unproven example or your rent (privacy issue obviously) when I gave a example which applies to many people and listings and used last 10 year returns for stocks and 2% for real estate which is much below realized (compounded 4% as per you)."

Mercer, all I want to talk about is your own example. You know, the first one where you compared the cost of buying over the last year vs. the cost of renting and came to the conclusion that it was a wash. All using your own set of assumptions, not mine. The only thing I did is point out that your return of 3% over the past year on your own choice of assets was actually 16%, a $50K discrepancy. We're talking about a factual point on the past year, nothing more, nothing less.

Now why can't you just admit it? And if you cannot, what gives you the right to ask w67th to call himself a complete idiot if prices go up by year-end?

Jakedavid, agreed. That's our range, too - actually, 2mm is too high but I always look up to that number just for kicks. Except there are no kicks. It's depressing, what that buys you. We let go of a good one on the UWS thinking something would come up in the Village, but I don't see it happening. You should see the dump (postwar, 1200 sf, total gut needed) that we just looked at for 1.695. I think that because there's been so little, people are getting awfully bold with their pricing.

I am the banker who previously commented on this thread about how NYC RE would tread water for two years. A few more insights from my perspective.

1) The increase in a banker's base salary does not even come close to bridging the gap to pre-recession levels.

Again, in 2007 if you got an $800K cash bonus plus $175K base.

Today you are getting a $50K cash bonus, with $200K restricted (vests over three years; you lose it if you are fired or leave, which I'd estimate accounts for 75% of bankers) on top of a $200K base.

The huge problem here is that the bonus is not cash. My firm capped the cash payout at 20% of the total bonus. Other firms capped it at $100K. Either way that means bankers who are used to getting big ass bonuses got tops $100K cash this year. And you're not going to buy a $MMMMMMM condo with $100K cash.

And you know what? Last year the day after bonuses got deposited into our bank accounts (last year was a terrible year, this year was worse), about 100 people quit that very day to go to other firms. This year three people left - there are no jobs and that means pay will be down again next year.

2) Demand for real estate remains very strong in Manhattan, but the money is just not there. Incomes are down. Employment is down. Lending is down. Where is the money going to come from? That's a huge problem.

3) Regulation will limit Wall Street growth going forward and the era of the big ass bonus is officially over. Banks simply cannot leverage up like in the past and this means sharply lower employment levels in addition to lower profitability. There is no way around this.

Unlike prior years, this year everybody knows that bonuses will never return. The buy side could fare better (hedge funds) because they are more directly tied to the overall performance of the stock market, bond market, etc and they are (for the most part) unregulated.

So what does all this mean for Manhattan RE? Well, basically the whole thing starts to slow down. Demand remains high, but cash is not there. So sellers will either a) wait, or b) sell at a discount. The strong rental market will cushion any huge declines. As will the fact that the majority of current owners are living within their means, at least compared to other cities. (so they can afford to wait)

Bottom line don't expect things to tank, but fundamentals continue to erode.

I am looking for multi.family in harlem, brooklyn, jersey city and I see nada that makes sense.

Tomnevers. Not buying it. Like a shark that needs to eat 1/2 of its body weight every week, the nyc re was born and sustained by the perception you can always get good dollars when the bankers get paid and the riff raff who tried to overpay during the non bonus season in order to be not priced out of manhattan.

The whole entire feeding frenzy is off when you think the top of the food chain, men in gray as it were, are dying. Sorry nyc will crash. My still employed banker friends have come to accept the inevitability of 2007-08 as high water marks that will never be obtained in their lifetimes. It's so over. Put a kebab stick in it. The meat is done.

Ah yes, Tomnevers vs. w67th. The "slow bleed" vs. "the crash".

I've been putting forth the "slow bleed" argument for a while now. It is the preferred way out of the mess. Govt slows the train crash. Losses remain with participants, not backstopped by tax dollars. Lemmings who buy the others' white elephants should know better. Years will go by with no acknowledgement of the slow bleed. See mercer's inability to correct his own set of numbers to reflect the reality of this past year. Banker bonuses are a nice backstory, but whatever -- this bleed has been going on for 5 years now.

That said, I hear the proponents of "the crash" argument. All it takes is a trigger or two. Banker bonuses? Not enough IMO -- just strenghens the bleed. Rising interest rates? Maybe, but it'd need to be quick. You gotta love the "I can make the numbers work with 3% 5-year IO ARMs" lemmings. God bless their little ZIRP-blind hearts that have kept the whole shithouse from going up in flames. What a shock it will be when they all of a sudden find themselves facing a *gasp* 5% interest rate. Enough of a shock for a crash -- nah, what's another $20K per million amongst friends. Will the shock come? Maybe, maybe not.

Case-in-point from technologic:

"I'm a downtown owner who ponders selling pretty often. To be perfectly honest I would love to sell now because I'd like the cash for something else -- but I am not going to put it on the market until prices come up. I am sure there are plenty on this board who will laugh and say that will never happen in our lifetime, but I'm not quite so pessimistic. In the meantime, I will sublet."

Bleed, baby, bleed.

"We would love to sell now because we are azz tired of living in 650 sq ft with a growing child, but I don't want to sell at a loss."

Bleed & suffer.

"Except there are no kicks. It's depressing, what that buys you."

A couple of friends -- ex-NYers so they know what is up -- were visiting us a few weeks ago. They started telling us about how they had been to the newly-purchased apt of some friend with some high price tag and were like "That's it???" They were underwhelmed by the size of the rooms, the views, etc. "We thought it'd be a lot more -- like this place of yours with the size & views -- but nope!"

Meh -- my annual rent is like 4-5% of what they spent, my apt is a good chunk larger, my layout is more cohesive, and my views are vastly superior. What's there to be depressed about? Oh yeah, that's right. I'm not trying to piss against the wind by getting myself worked into a tizzy trying to buy in a slow-bleed market.

Err, correction: more like 5-6%.

I think Tomnevers nailed the outlook.

inonada: Agreed - with annual rent at 5-6% of comparable purchase price (i.e. a purchase multiple close to 20X), renting should be a no-brainer for most people, even with rates low, stocks high and cash plentiful. Yet for many, it isn't a no-brainer at all. A lot of smart people - including many who currently rent - still want to own. That's the most interesting aspect of this market. The explanations are as diverse as the buyers themselves. They aren't lemmings; lemmings are so 2007. (BTW, the whole lemming thing is a myth - even for lemmings.)

One factor in the pre-war sector is that the product is less fungible than new-construction condos. The math is similar, but it's harder to find the same apartment available for sale or rent. And as slim as the pickings are for purchase, they may be even worse in the rental market.

Tomnevers,

Yes. I totally agree. I have been preaching that same logic here on SE for about 9 mos. Most here don't get it. A few do...
There are brokers on this site thats either refuse to accept the economic change happening in country and the effect it will have on the financial capital of the world or don't understand it.
You will always have RE brokers telling you RE in going up while the acropolis is burning..

One added element to Tomnevers' excellent analysis is that most who bought in the last six or seven years don't have the equity buildup to relever into larger apartments. Things are probably going to be flat at best for a while and, when things start looking up it'll take a while for enthusiasm to return. Conclusion: waiting is cheap right now, which is bad news for sellers looking to get "aspirational" prices.

Mercer, you've quite correctly emphasized the main point about any capital asset bubble: future capital gains or losses will determine whether you make or lose money on your investment.

So, your elaborate rent/buy analysis boils down to this:

You assume that prices will remain steady or rise -- that is, that the bubble will continue.

But that's the conclusion you need to support, not an assumption on which to blithely base your bubble-bashing.

Bubbles happen because buyers can justify paying any price if they can convince themselves that someone else will pay more later. On this model, the more you pay, the more you make, so everyone should buy exactly the most that the banks or coop boards will allow them to. But incomes and banks need not stop the price rises: owner-wealth rises as prices rise, so rising prices create more ability to pay and allow prices to rise even more in the wondrous perpetual motion machine that RENY calls "happy days."

Why not pay $1m for a tuna-fish can if someone will take it off your hands later for $1.1m? $1000 psf, or $10,000 psf, is **always** going to be cheaper than renting if when you are done using it, you can sell for more than you paid. Why not Dow 50,000 or $1m psf?

Ordinary market economics predicts that bubbles end because high prices induce more production. If there are profits to be made building, renovating, converting to owner-occupied, or upgrading neighborhood reputations, eventually someone is likely to decide to make them. Increased supply will eventually meet even bubble-inflated demand and end the price increases you assume. Without continuing price increases, buyers will stop assuming price increases when deciding how much they are willing or able to pay, which reduces demand. Increased supply and reduced demand usually lead to lower prices.

Real estate bubbles usually end with a long period of very low volume and stable nominal prices slowly eroding by inflation as existing holders attempt to avoid nominal losses and buyers slowly adjust their expectations (and therefore their willingness to pay). Nevada didn't follow the usual story because holders were too leveraged to hold on.

NYC seems to be following the standard script precisely. Do you have anything (other than your naked assumption) to suggest that it isn't?

Mercer, another question regarding your analysis. You assume a 3% return on your downpayment is appropriate because you imagine that is what you would make if you were invested elsewhere.

Why do you think this is a relevant factor?

If the question you are trying to answer is whether it is cheaper to rent or buy, the answer to that is, as you point out, nearly always, "it depends on whether you paid a fair price when you bought and can expect to sell for a fair price when you sell."

So you need to determine what price OTHER people might be willing to pay now and later. Especially later. That has nothing at all to do with YOUR alternative investments. It must be based on what they'd be willing to pay for the asset you are trying to value.

So the question is not how much you'd make if you were invested in T-bills or whatever. The question is what marginal investors would have to be convinced they could make on their downpayment in order to induce them to invest in your apartment, which is not a T-bill.

Guessing what other people want on their investments is tough, and guessing what they'll want at an indefinite time in the future is tougher still. (Although I do think it is safe to assume that most NYC landlords would quickly sell to owner-occupants if they anticipated that their returns (before paying themselves) would average 3% going forward.)

However, we do know this. Equity investments are always riskier than a secured loan on the same property. This is especially true when the lender is a bank that gets its own money from a Federal government handing out infinite money for free with almost free insurance against any losses they might suffer. So equity investors should always demand more than a lender, unless one of them is making a mistake. And even more so today.

Lenders will not make a long term fixed rate loan on your apartment for 3%. So by assuming a 3% return on equity you are contending that the banks have made a mistake -- presumably, you believe that they think that your apartment investment is riskier than it actually is.

Why do you think that your apartment is such a safe investment that you think that the marginal investor would be delighted to take the risk inherent in an undiversified, labor-intensive, depreciating asset for 3%?

When you contend that prices will rise in the future, is that because you think that the future marginal investor will accept even less than 3%? Or do you have some other model in mind?

"...you think that the marginal investor would be delighted to take the risk inherent in an undiversified, labor-intensive, depreciating asset..."

You forgot to add "illiquid", non transportable, with VERY high transaction costs, and in the case of co-ops, not easily transferable.

"Agreed - with annual rent at 5-6% of comparable purchase price (i.e. a purchase multiple close to 20X), renting should be a no-brainer for most people, even with rates low, stocks high and cash plentiful."

West81st, my place is worth about double the place they were talking about, and I pay 5-6% of their purchase price. I.e., I'm paying a rent that is 3% of the price of my apt. I don't get people who are depressed by the RE market, there is plenty of cheap stuff out there. For rent. I don't get people whose income is in the top 1% who whine about how hard they have it, who think taxes should not be raised on them but only the "real" rich people. These people are lemmings.

There are plenty of people who bought, pre-2007 or post-, who understood the financial suboptimality of their choice. Many here on SE, many I know in real life. They didn't care, fine. But then you have a class of post-2007 buyers like spinny, front_porch, mercer, etc. who tout the financial acumen of their decision to buy in 2009+. Pleazzze, they pissed away one of the biggest investment opportunities of their lives. And the "investment" babble continues on an undertone to many a purchase. You'd be blind not to see it.

"A lot of smart people - including many who currently rent - still want to own. That's the most interesting aspect of this market."

I agree. Seeing that stupidity is exactly what gave me the confidence to sink every last penny I had, and at times a couple I didn't, into stocks during the 2008 crash and onwards. It removed the doubts of "maybe the market knows something I don't" with "maybe the market is sometimes just plain stupid" despite all the smart people. I still faced risks, including that the markets could get even more stupid, but I stopped doubting my opinion on its stupidity.

>West81st, my place is worth about double the place they were talking about, and I pay 5-6% of their purchase price. I.e., I'm paying a rent that is 3% of the price of my apt. I don't get people who are depressed by the RE market, there is plenty of cheap stuff out there. For rent. I don't get people whose income is in the top 1% who whine about how hard they have it, who think taxes should not be raised on them but only the "real" rich people. These people are lemmings.

Wow, have you seen someone for this problem?
And what does the first part of the paragraph have to do with the second part of the paragraph?

inonada: If the multiple is really 30-40x, then renting should be a no-brainer for everyone. I'm sure there are market sectors where those figures apply, and where the decision to buy is economically inexplicable.

In my little corner of the world, however, there's a pretty big difference between the apartment that sells for $2MM and the one that rents for $5-6K/month. The multiple here, I think, is in the 15-20 range. That's still high, considering the transaction costs, downside risk and macroeconomic context; but it's not completely insane.

nada, what makes you think I sold all my stocks to buy?

West81st, I think there are plenty of opportunities out there for 20-25x at $2M. I don't personally know anyone paying 15x. My 33x is the extreme of a nutty range. It reflects one edge in a vastly mispriced market. When people take 15x examples that no one actually interested in renting long-term takes and uses that and a bunch of skewed assumptions to conclude break-even, you've got problems.

if you had put down 100% of your apts values that you sold in 2007 and bought Stocks in 2008 you wouldn't be working today... that's how I KNOW.

Inonada... I think we have a difference in opinion as to what represents a crash. To me if you buy a $2MM unit and hold it for 5-years (more like a norm manhattan hold period) and sold for $2MM, you'd be down 8% on transaction costs.... 12-15% on "real" dollars and another 5%-10% adjustment for living in a far dumpier place than renting....

Effectively your 20% downpayment has been pissed away and you are taking a 100% loss on a chunk of change which in normal times would take you several years to accumulate.... but in bubble years bankers made in one bonus season.... so that's what I am talking about... the men in gray can't backfill and as that "knowledge" spreads... ppl like mercer will stop negotiating against themselves.

In every RE transaction I've come across in 2001-2009, it's been this "phantom" banker that drove a deal higher.... and although I agree with you that for the most part we are in a 5 yr slow bleed period, this is the period in which all the all "bad habits" of the Bubble years needed to be "unlearned." Nothing like a hard smack across your financial face to eduMcCate the lemmings. Hi w81 and Ali.

FP, I didn't say you sold all your stocks. Maybe you rode them down and up, I dunno. But you did not drop your exposure to RE and sink it in stocks, despite being at a natural transition to do so. Instead, you not only kept your exposure, but then you added a bunch to it.

Now that all is fine, people make choices, some work out, some don't. However, you have been on here touting your acumen in catching the bottom of the 2009 market, how you did so despite the naysayers. Except the market is up just 4% from the absolute bottom of 2009 according to the SE index. Maybe enough to cover the negative carry, if that.

Now tell me, do you think that your decision to double down was profitable relative to investing your money elsewhere? Do you think anyone has missed anything by not buying in 2009?

I think the ... flaw may be too strong a word, but ... problem with this decision argument is that it assumes that everyone is facing the same decision curves in the same micromarkets, and has the same expertise.

I didn't, in fact, "double down." I merely moved my real estate holdings around.

I had sold my Long Island beach house in the fall of '08. It not being a Hamptons house, that was pretty much a great time to sell.

Would I have made a killing if I had taken those proceeds and put them in the stock market? If I had been you, yes, because I would have known what stocks to buy. But I admit, I'm not a fabulous stockpicker. With my luck, I would have gone into the market in 2008 and bought Research in Motion. (says the girl who holds TWX).

So I instead left my then-current stock investments where they were (indeed, rode them down and back up), bought a few extra shares of JNJ, and took my cash and put it where I had more asymmetric information available to me.

*I* think that worked. I think I'm up more than 4% in my micro-market. I bought at $625/sf., and I don't think I could get the same light and gracious layout on a safe street in a 24-hour doorman building for $650 a s.f. these days. I certainly couldn't rent this apartment, or anything close to it, as cheaply as $1500/month.

Now of course in my view my co-op purchase money wasn't investment money at all, it was consumption money...so I don't wake up every morning and do those calculations. But if I try to put myself in your shoes and think like you do, I think I did okay.

Different strokes, different folks, different decision curves ...

ali

1) taking the worst trade and saying, see I did better than that trade;
2) if you sold your beach house in 07' you be up more;
3) $650.. .we are not talking about these days.. we are looking into the future.

And finally, if all else fails... rant and scream... it's consumption! NOT AN INVESTMENT...

When I eat out with my kids ... I don't calculate my per calorie cost to feed my family..... but theres you be at $650psf.... Fking hilarious. Hypocrite much?

asymmetric information => that's fking illegal. Unless it's in RE.. then It's all good.

w67, if I'd had your decision curves, I'm sure I would have married a doctor as you did.

Yes I fked my way to wealth instead of housesitting. Flmaozzzz....

New show on The Learning Channel - Ape vs Harvard.
I expect a great season.

FP:

1) No one is asking you to be a stock picker. If you think your stock-picking sucks, buy the index. You went into contract when, Apr 1 2009? SPY is up 83%.

2) You sold the one place in 2008. You were moving and had cash in 2009. Your "decision curve" at that point, whatever the heck that is, obviously included selling the other place as well & renting. You chose to go from 1 RE holding to 2 RE holdings. In 2009. Your state of RE holdings in 2008, or 1978 for that matter, had no bearing on your "decision curve".

3) Your perceived information asymmetry existed in rents as well. It still exists today. You could find just as good a magic deal today, only with more money in the bank.

4) Your touting was based naysayer missing the 2009 "opportunity", not information asymmetry.

In other words, sounds like a lot of rationalization to not admit buying NYC RE was just about the worst asset to have invested in 2009.

"Inonada... I think we have a difference in opinion as to what represents a crash. To me if you buy a $2MM unit and hold it for 5-years (more like a norm manhattan hold period) and sold for $2MM, you'd be down 8% on transaction costs.... 12-15% on "real" dollars and another 5%-10% adjustment for living in a far dumpier place than renting...."

I think we're on the same page, then. That's what I call a "slow bleed". I call the 20% drop of 2009 a "crash".

What I love about the slow bleed is the absolute insistence by bubble heads of its non-existence. "I would have only returned 3% in stocks/bonds/munis". No, if you actually look you'd see you'd be up 16% since you bought last year on your own choice of portfolio. "I'm the girl who holds TWX". Great that's what you actually held a little bit of -- up 89% since Apr 1 2009 when you went into contract. "Added a few shares of JNJ." Wonderful, up 36%. The two things you actually mention that you held were up an average of 63% since you committed your money to a second piece of RE holding. But why talk about those, you are sure you would have bought RIMM even though you held none and bypassed in favor of JNJ.

inonada, I get that what irritates you the most is probably how 'she has been on here touting her acumen in catching the bottom of the 2009 market, how she did so despite the naysayers.' I don't like it when at times she seems to be giving investment advice here either. However, RE is her thing and is naturally optimistic about it. At least give her credit for investing her money in what she is selling, unlike Goldman who did the opposite and betted against their clients. People who favors RE as investments simply won't put in the same level of capital into stocks / index funds. Invest in what you know isn't a bad idea, even if it means you won't net the most in the end. If she waits long enough, and she will, nominally she will come out ahead. She might even come out ahead in real terms. Could she have done better if she invested in stocks/index funds, sure, but the point is she won't. If she someone gave her another million in cash, maybe she'll put a little more in stocks/funds, but most likely she'll just wait for another opportunity and put it in RE.

I sold real estate on December 18 and used all of the money to buy Bank of America shares. I'm up double in 3 months. I'm the King of the World!

Inonada, sorry to disappoint you, but im not now nor will i ever be a slow-bleed "case in point." I bought my apartment for all cash, have no mortgage, can sublet and, in the worst case scenario, can afford to have my apartment sit vacant. I don't have to sell - I only want to - and I won't be doing so until I get the price I want. So please do point elsewhere for examples of slow bleed.

oh jesus....you really don't get it. you are the prime example of slow bleed. so, great you can hold on forever. and as long as you don't sell, you can remain convinced that you've made a great deal financially.

so...you have have enough money to not care? great. how does that change the underlying market dynamics?

Is the purchase of a home "consumption" and "NOT AN INVESTMENT"?

fwiw, I'm in the slow bleed camp.

>columbiacounty
about 1 hour ago
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>oh jesus....you really don't get it. you are the prime example of slow bleed.

No no no. That's apt23. But thankfully, she saw the gynecologist and everything's ok. Unfortunately, the same can't be said for her husband.

Columbiacounty doesn't understand how the "market" is made up of individual decisions.

Columbiacounty wants the Unicorn to say what price is "right".

Sunday, check out this thread from 2 years ago when I gave the hat-tip to FP for putting her money where her mouth is:

http://streeteasy.com/nyc/talk/discussion/19820-its-still-a-terrible-time-to-buy
"Well, at least she put her money where her mouth is, gotta respect that. Most bottom-callers didn't actually buy anything during what they viewed as an anomolous drop. When I see a market that is highly undervalued, I scrape together what I can to put in that market. The NYC bulls and most brokers seemed to have not. I might not agree with her on outlook, but she's certainly not duplicitous."

The problem is she cannot admit things didn't pan out so far as she had hoped.

Or else look at Mercer. He models return on 35% of downpayment at 3%, so 1% of purchase price. And appreciation at 2% of purchase price (though sometimes higher).

One year in since he "placed his bet", the return on downpayment per his asset mix is 5.6% of purchase price. The appreciation is -1%. So a 4.6% discrepancy on one side to against expectation, and 3% on the other side. Things worked out at -7.6% on purchase price vs. expectations this year. That's -22% on the 35% downpayment. But can he come out and admit it, saying "maybe next year"? Nope.

I love RE. You can NEVER lose.

Maybe she's happy in her apartment

Clearly duration means nothing to inododo.

Good man inonada. Sorry for doubting your fairness.

FP cannot admit something she disagrees with. If she say she would've bought RIMM, and that her micro-market is up, you two will just have to agreed to disagree.

The term micro-market bugs me for some reason.

To the extent we can attach numbers to the "bounce", the UWS market seems to have recouped about half of the ground it lost from peak to trough. The SE UWS Condo index fell from 2.20K (3/2008 closings) to 1.72K (7/2009 closings). The latest reading is 1.96K - exactly halfway between the high and the low. The 13.95% rise pales in comparison to the performance of stocks over the same period (especially when transaction costs are factored in), but I think reasonable people can disagree about whether equities are an ideal benchmark.

We seem to be riffing on an argument that w67 and I (among others) have waged off and on since 2010, exemplified by the "Ones that got away: Best buys from the crash" thread. Some people bought nice apartments in 2009, for lower prices than those properties would have fetched in 2010 (let alone 2007). Was buying those apartments an optimal use of capital? No. Is even the modest increase in values since 2009 sustainable? Unlikely. But that doesn't mean those 2009 buyers are wrong to be happy. A lot of them figure - with some justification - that if they hadn't bought, they would have sat with their down payments in a money market account, making nothing.

Of course, the money market account might still turn out to have been a better option than a coop. We're not there yet.

81, why don't you get it after all this time? Are you just an optimistic, naive personality?

This argument between you and 67, it's not about economics, finance, the market, or relative values of housing vs. the stock market. Maybe if you are talking with inonada, it's about all of that.

But with w67, read every 3 or 4 of his posts. What's it about? It's about your mother or aunt who bought in the 70s - an opportunity his family didn't have, it's about the rich people from 5th avenue who supposedly dind't acknowledge him as a child, it's about people who have assets and pay capital gains taxes at a lower rate than income tax rates that he supposedly has to pay, it's about Ali who went to Harvard vs. how he got in to college, it's about the family he had to sue who lived in an apartment he bought and then sold, it's about the people on Wall Street who didn't accept him, and it goes on...

"A lot of them figure - with some justification - that if they hadn't bought, they would have sat with their down payments in a money market account, making nothing."

Hi all, I'm an investment guru. Back in Jan 2000 when all the naysayers were saying that the stock market was in a bubble, who told you to go all-in? Moi. And look where you'd stand today if you ignored the naysayers -- up 20%. All with capital gains, better than money market accounts. Boy, I feel justified!

"The term micro-market bugs me for some reason."

It's simply another way of saying "I would have surely bought RIMM".

"Inonada, sorry to disappoint you, but im not now nor will i ever be a slow-bleed "case in point." I bought my apartment for all cash, have no mortgage, can sublet and, in the worst case scenario, can afford to have my apartment sit vacant. I don't have to sell - I only want to - and I won't be doing so until I get the price I want. So please do point elsewhere for examples of slow bleed."

I love it. You absolutely cannot lose in RE.

You bought a 1BR in spring 2007. 5 years ago to the day, let's say. You paid cash, say $800K. The SE index has you down to $680K. You've got $60K transaction costs to face. That's a $180K hole. Because you've paid only maintenance rather than rent, you've saved $20K a year in expenses to net it to just an $80K hole. Awesome.

Meanwhile, SPY would have had you up $100K during the 5 years, epic crash included. Stocks not your thing? How about low-risk, boring govt bonds? TLT would have had you up $400K. Would in no way wanted your money tied in long-term bonds and would have considered nothing other than 5-year bonds with a govt-guaranteed 5-year yield of 4.5%? Putting aside the issue of having your money "stuck" currently and making fair comparisons, that'd have put you up $200K. Pure & true overnight savings account at ING Direct the only girl for you, let's ignore your 5+ year fling with that illiquid floozy RE that has you stuck? Up $100K.

No matter how you slice it, at least a $180K hole. But no slow bleed here, no sir. I'll sell this turkey when I'm good & ready, when I can declare a gain in my own head. Carry on, nothing to see here.

>inonada
about 1 hour ago
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>No matter how you slice it, at least a $180K hole. But no slow bleed here, no sir. I'll sell this turkey when I'm good & ready, when I can declare a gain in my own head. Carry on, nothing to see here.

or
http://streeteasy.com/nyc/talk/discussion/3410-real-estate-is-a-bad-investment

stevejhx
about 3 years ago
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>No matter how you slice it, renting is ALWAYS financially more beneficial over time than owning.

Let's make some financial assumptions that are borne out by decades of empirical evidence:

1) Real property prices and rents increase at the rate of income, or 0.7% per year adjusted for inflation.

2) The S&P 500 increases at a real rate of 8.0% per annum.

These being true, it is ALWAYS better to rent property than to buy, if you invest the down payment in the S&P 500. Watch:

Say you make $100,000. This implies that you can spend up to $2,333.33 per month in total housing expenses (28%).

An 80/20, 30-year fixed $375,000 mortgage at 6% gives you monthly mortgage payments of $2,248.31.

Assume that taxes and common charges amount to a VERY CONSERVATIVE 10% of total mortgage payments, or $224.83 per month.

A $375,000 mortgage implies a purchase price of $468,750, and a down payment of $93,750.

If rented an apartment for the amount of the mortgage payment, you will have paid $903,455.33 in rent over 30 years if it increases 0.7% per year.

If you invest the down payment in the S&P 500 for 30 years, $943,374.08 at the end of 30 years, for a total net profit of
$39,918.75. To that, however, add your yearly maintenance and tax payments $2,697.96, increasing 0.7% per year and accruing 8.0% per year over 30 years, and you will have earned an additional $330,084.36, making your total profit $370,003.11.

Now do the same thing for your house. If your $468,750 home appreciates at a real annual rate of 0.7%, at the end of 30 years you will have a home worth $577,863.68, for a profit of $109,113.68. Add to that the original loan of $375,000 - the rest of the equity you will have built - and you get a gross profit of $484,113.68. But you would have paid $434,393.21 in interest, so your real profit is $49,720.47. In addition, you will have spent $90,343.15 in tax and maintenance, making your GRAND TOTAL PROFIT a whopping NEGATIVE $40,622.68.

That's right! You rent for the amount of your mortgage, all values go up linearly in line with historic data over time, and you will wind up with a total profit of $370,003.11. Whereas if you buy a home you will wind up with a loss of $40,622.68.

This of course excludes special assessments and all the transaction costs associated with owning real estate: brokers' fees, conveyance tax, etc. It also ignores the tax effect on dividends. But dividends and capital gains tax rates are currently the same (and can't be predicted in the future). The only further benefit from owning is the $250,000/$500,000 tax exemption. But it is doubtful that $410,625.79, which is the absolute value of the difference between the owner's loss and the renter's gain.

Guys, it's indisputable: renting is FAR better in the long-term than buying. All the figures and assumptions I used are real and verifiable. Do your own calculations: rent for the price of your mortgage payment, invest the down payment and maintenance and property taxes in the S&P 500 at the real rate of increase of 8.0%, increase your property value, rent, taxes and maintenance payments at the real rate of 0.7%, deduct the mortgage interest paid, and you will see IT IS ALWAYS MORE BENEFICIAL TO RENT.

Do your own calcs, or criticize the model. I'm waiting....

Thanks Sunday for understanding. It's true, if I had more money, I would probably buy another property.

However, I do think of one's primary home as consumption, not investing. I consistently said that before the crash, to both my customers -- some of whom I talked out of buying b/c prices were not right for them -- and to my readers.

By Nada's reasoning, I should regret every dollar I've given to Ralph Lauren, since every outfit could have been making me 83% in the stock market instead.

**

Also @Nada, I don't understand your point #2. I didn't go from one real estate holding to 2 real estate holdings, I went from 2 real estate holdings to 2 real estate holdings. I said in my message that I didn't "double down."

It's tough to argue with you, though, b/c you sometimes don't listen.

For another example, I pointed out I couldn't possibly find an equivalent apartment to this to rent for $1500 a month. If there are such magic rental deals out there ... please ...show me that one!

**

Finally, I don't get "things haven't panned out as I hoped?" -- I like the property I live in; as West 81st has pointed out, it's worth more now than when I bought it two years ago.

I don't look at the bottom of my coffee cup and wish I'd bought an index fund instead. Where's my dashed hope?

ali r.
DG Neary Realty

>By Nada's reasoning, I should regret every dollar I've given to Ralph Lauren, since every outfit could have been making me 83% in the stock market instead.

You could have rented one outfit and swapped it out with a new one each time you needed.

nada, last post.

1. You completely ignored the following post to continue to dishonestly push your argument:
"2011/01 SE downtown 1.92 vs latest 1.94. " And we bought in an area of downtown where the prices are up even more but I can not prove it. However you can get a good feel - just look at sales in the village in any of the conversions or ask any one who is trying to buy a 2-3b/r apartment in prime village (this is more proof that you can provide for your special rental deal).

2. I did not sell any of my other investments for downpayment. I just reduced the huge amount of cash I like to keep in my portfolio as I have enough exposure to stocks already partly due to large unvested stock and natural leverage to the upside in the market by working in the industry. In fact, I would like to pay down my mortgage to a lower amount to use significant excess cash I generate every year - my stock market exposure naturally grows. If I were not to buy an apartment, the downpayment would stay in cash/cash-like investments. One of the biggest reasons many people including myself save is to buy an apartment. This is why you can not use the same returns assumptions for every one.

Ali. If I make my wife come twice tonite. I get an extra $1k.

How's your housesitting gig? Oh you are out and about and your husband has Xbox of sofa duties.

@ nada point. You had 2x re. Sold one. Now you are 1x re and cash. Then you bgt new re with asymmetric info. Now 2x re.

Harvard math. Ok.
1 plus 1 = 2

2 minus 1 = 1.

I am in the slow bleed camp but a crash can never be ruled out since there is a global gaggle of black swans on the horizon. What I would like to know is where the buyers are going to come from to keep the current market afloat.

American unemployment is still high, the financial underpinnings of NY RE has just been restructured with the veritable end of the financial industry supporting the RE market, and incomes in most industries have taken a beating. So demographically, young families will not be making the dollars that supported the prices of the bubble years. And as for the older demos -- the interest even the wealthiest families exist on is non existent and even the alternative interest vehicles like REITS and MLPS will have to be sold when interest rates start to rise. When you consider that some of the most esteemed prognosticators like Ray Dalio and Jeremy Grantham - among dozens-- predict a long slow, flatlined slog for the American economy, how can that not affect prices in RE? Add to that pressure on the stock market from weak earnings and slow growth -- where will the money come from to buy all the million dollar cramped piss pots in Manhattan.

So that leaves foreigners. Europeans might continue to jump in the NYC RE pool for a while because the Euro is still high. But that won't last and when it turns down, even the German economy will feel the heat. The predicted long term recession in Europe should put pressure on the sales to European investors. And though there have been many Asians buying, that is the smart money getting out of China before either the hard or soft landing. So there will be fewer Asian buyers. (Anyone old enough to remember when it was predicted that the Japanese will keep RE prices high forever) The Brazilians and other South Americans are buying up Miami because there is much better value in luxury property ( and much shorter plane rides)

So who is left?

nada: could you give me some input on the following:

When buying a home (coop/condo), should one analyze the purchase as if it were an investment & only buy if mntnc/cc are less than market rents?

But, even if mntnc/cc are less than market rents, one sinks a chunk of cash (or mtg liability) into the purchase price and that cash does not generate income because the home is not an income producing asset. So, how can one compare a home purchase, which does not generate income, to the purchase of an income producing asset, like stocks?

Or, is it a question as to how one uses one's money: sink a chunk of cash into a non-income producing home or use the cash to buy income producing assets?

FP, what w67th said regarding point #2 is what I meant. If you're happy with the 2% returns on risk equity you've had in your investment property since 2009 despite vastly superior returns in every other asset (stocks, bonds, munis, etc.), OK. But I think your pride is keeping you from learning to make better investment decisions.

Mercer:

1) Replace your own -1% assumption with a +1% assumption. Still in the hole?
2) Replace returns from a stock/bond/muni mix @ 14% with one with just bond/muni @ 17%. Is the hole bigger?

You seem to be fond of 2% returns on risk equity as well. Good luck.

dwell:

My model of stocks is the following, I'll spare you the math behind it:

1) Take the last 10-ish years of earnings & smooth it while accounting for growth. For S&P 500, it's around 70.
2) Divide by price to get current earnings yield. It's about 5%.
3) Add 2% for inflationary growth, 2% for productivity growth, to get to 9% expected long-term yield.
4) Ask yourself whether it compares favorably relative to long-term risk-free rates at 3.5%.
5) Decide that a 5.5% spread is decent for the risk. Not great, not poor, just decent. Some exposure is warranted.

If you did the same exercise at the bottom in 2009, the spread was 11%+. That is great, once-in-a-generation great. Most of 2009 was around an 8-9% spread, which is still great.

Thanks nada. I hardly understood a word of it. Can you suggest a good book to help me w/ this stuff?

My model for NY RE is similar:

1) Assume rental yield of 4% on cash purchase.
2) Minus 2% for maintenance & cc & upkeep.
3) Minus 1% for transaction costs amortized over 10 years.
4) Net out to an earnings yield of 1% on cash.
5) Add in 2% for inflationary growth of earnings yield to get to 3% effective.
6) Compare to 3.5% risk-free long-term bonds.
7) A -0.5% spread for taking risk. Say "WTF"?
8) Don't touch that turd with a 10 foot stick.

Replace the 4% rental yield with whatever might be appropriate for you. I'm at 3%, maybe you're at 5%. Even at 5%, the resulting +0.5% spread is still a WTF number. You don't need as high a number as stocks, but 2-3% would be "decent" IMO.

The point being that a home, paid for in cash, produces an income (line 5). The question is whether the income is enough to offset the cost of capital (3.5% risk-free bonds) and risk (another 2-3% is "decent" IMO). Does my 5.5-6.5% requirement of line 5 income pass muster? Well, when Wells Fargo wants 4.75% on a 30-year loan after you've put up cash/credit to take the first 30+% hit on the home, I think so.

"Thanks nada. I hardly understood a word of it. Can you suggest a good book to help me w/ this stuff?"

Crap, I don't know. I don't really read books, just piece it all together from tidbits of info I gather. I think the Graham & Dodd books should be helpful. (Security Analysis and/or Intelligent Investor?) This stuff is useless in giving you anything but the most marginal edge on the 1-month or 1-year horizon, but very helpful for 10-year-plus horizons IMO.

inonada, if the purchase is a primary resident, there are a few very significant items that are missing from your list.
i. Tax deduction for RE tax (assuming no AMT).
ii. No tax on up to 500K? gains.
iii. Rental yield need to be adjusted for primary residents to reflect the premium one is willing to pay to live at a place they own vs. a rental. That premium is very subjective. For me personally, it's about a 25%. For a tiny minority of people, it could even be a negative number, but the average owner is probably willing to pay a premium that is somewhere near 25%.

Sunday:

1) AMT runs from $300K to $1M in income. Even if you're outside that range, it matters little in the "WTF" analysis. If taxes run at say 0.75%, the adjust the yields by 0.25%. A rounding error in the scale of the WTF.

2) The flip side of that is no capital loss credit for a loss either. When you are holding a risky asset that yields zero w.r.t. risk-free, a loss is a real possibility. Irrespective, in a normal, properly-priced market with 2% inflation, home value appreciates by 22% over 10 years. Transaction costs take out 10%, so you're looking at a 12% gain. Suppose this is all tax-free. It saves you 3% over the decade. That works out to 0.3% in the scale of the WTF.

3) History has decades where the premium was the other way around. It sounds like the baloney justification of the herd, honestly. The cyclically-adjusted earnings yield of the S&P 500 was 2.5-3% at the peak of the bubble in 2000 against bond yields of 6-7%. At the trough of the panic in 2009, it was 10% against bond yields of 3%. BelIeve me, the herd had stories on premia in opposite directions as well both times. In any case, a 25% premium would adjust things by 1%. Still WTF.

Ino: could you please create a WTF app so the math-challenged bloggers among can just plug in some numbers. Or, can you please hire yourself out as a consultant to die hard SE fans of Ino. You could single-handedly create a downturn in the market with this analysis.

I doubt it, apt23. Plenty of people a lot wiser and more eloquent than me have been talking about it for a long time. There's a degree of willful ignorance that is well beyond math & reason. You'd think a highly-educated adult would have the sense to distinguish between a 2009 stock market investment with growth-adjusted yield that is 10+% beyond a risk-free asset, vs. a NY RE investment with an effective yield that is at 0% spread relative to same risk-free asset. But nope. No interest in even acknowledging the poor outcome of an investment decision, much less the actual soundness of the decision. Very interesting stuff, IMO.

inonada, I intentionally didn't comment specifically on the percentages you were using in your list because I see the list as a guideline and people will plug in slightly different numbers. i. + ii. (0.25%+0.3%) already get you to positive territory at "7) [0.05%] spread for taking risk.". If others adjust rental yields based on specific deals they find, a smaller transaction cost depending of the type of home purchased and broker %(or no broker), and appreciation in price based on the deal they got and timing of purchase (which effects ii.)

"7) A xxx% spread for taking risk." can also be rewritten by an RE optimist as "7) A xxx% spread for reaping the potential upside benefits."

>>"History has decades where the premium was the other way around."
I think you are referring to the premium from the investment perspective. While was a history where it's cheaper to buy vs. rent, it is fairly constant for the preference to live at a place one owns vs. rent. That preference translates to a premium. That premium just make it that much sweeter at a time when it was cheaper to buy vs. rent. In other words, if the result at line 7) was a positive 5% instead of -0.5%, I would consider it to be more like 6% with my preference to live at a place I own included in the calc.

on the point of willful ignorance inonada. I think Ali, as a broker, is using the 6% commission as an "income" offset against any LT RE holds losses. The following are some of her other justifications that she is not willing to share on the board, (ala w81's admission his mom bought her C9 for $28k ($4MM bubble profit));

1) Being a RE broker is how she earns her living;
2) wrote a book on the matter;
3) there is an asymmetry to the amount of "income" she derives from running with the RE bubble vs. "work/effort." And she KNOWs it.

So to pooo hooo RE now would be to admit she is a harvard degreed failure..... a shoe saleswoman with a blackberry.

Sunday: If the preference for ownership of one's primary residence is so strong, why do we need a mortgage interest deduction? Or, to put it another way, do you think the preference for ownership would survive the repeal of that deduction?

West81st: "...do you think the preference for ownership would survive the repeal of that deduction?"

Yes. Maybe housing prices will be a bit lower to compensate. The gov will likely not take away the deduction all at once, just a little at a time if at all. Also consider that many low income home owners get very little or no interest tax benefits if the standard deduction is higher than itemizing.

I personally don't think there should be a mortgage interest deduction. I prefer all basic necessities (food, housing, healthcare) to be as low as possible for the greater good.

Ino: My reasoning is not as sophisticated as your math but I draw the same conclusion. I am just not willing to buy someone else's obvious loss against historical bubble charts. Premium price for market fizzle? No thanks.

hey W67: I jumped into sprint today. looked at the spreads saying 50% chance of bankruptcy and put on the chicken position -- I bought the Jan 14 $1.50 puts. As much as I am betting with you, I have always thought that guy from Bernstein who downgraded the stock yesterday is a tool. It has always been a pretty safe bet to bet against the tools -- in the RE market and the stock market. I'm in.

:) Flmaozz. Ino.

I got busy yesterday but was about to pull the trigger on a shorting the jan $4 calls and longing the June $2 puts. If the stk moves sideways I earn the call put spread premium for 4 months. If my calls get 'called' im up 80% in a 160k $2.4/share position. By June sprint I'm hoping to bk scenario starts to unwind. Id take this position over nyc re anytime. Oh I did.

>Ino: My reasoning is not as sophisticated as your math but I draw the same conclusion. I am just not willing to buy someone else's obvious loss against historical bubble charts. Premium price for market fizzle? No thanks. <

ditto

Sunday -- Preferences for ownership over renting don't create large or stable price premiums for ownership in commercial transactions for apt buildings, offices, airplanes, companies, etc.

Or cars, where leasing and owning are almost always very close in price.

Actually, basic intro economics teaches that it is quite rare for preferences to drive prices above cost of production in functioning markets, unless the producer has a monopoly (first mover, patents, copyright, etc) that stops competitors from entering. RE moves slower than many other markets, but it's competitive enough that prices are highly unlikely to stay above cost of production indefinitely.

When the bubble deflates, most people will still prefer owning to destabilized renting (most middle class families need more stability than Inonada and that means that short term leases leave them open to exploitation by landlords who can raise the rent knowing they'll have trouble moving). They just won't have to pay extra for this preference.

Sunday: "it is fairly constant for the preference to live at a place one owns vs. rent"

In our country, sure.

"That preference translates to a premium"

That's where you and I differ in opinion. Translating the preference into a willingness to pay a premium is a byproduct of people justifying bubble pricing. I'd bet if you put together a historical value of my line 7, you'd see a century of pre-bubble data indicating that the average spread was 2-3%. I don't think the historical non-financial preference to own was any different.

financeguy: "Actually, basic intro economics teaches that it is quite rare for preferences to drive prices above cost of production in functioning markets..."

I did not say that the preference to own one's primary resident have the level of impact you assume I am implying. It does contribute to the equation and I noted above how much it contributes to my equation personally.

Additionally, as you indirectly pointed out in the last paragraph of your post, the preference for owning one's primary resident is not quite the same as owning one's car. Getting a new car every couple of years has no impact on family stability.

inonada, people are willing to pay a premium for various things for some very stupid reasons. It is what it is. You can't pretend the impact isn't there just because you disagree with it. Humans are the most logical and illogical beings all wrapped up in one body.

Sunday: "...already get you to positive territory"

Well that is the fundamental investment mistake repeatedly made. An asset bubble squeezes the risk spread to 0% & slightly negative, and the ones gladly holding the bag point to the risk-free base ("my cost of capital is 3%") as justification / safety. Except risk spreads pretty much never go significantly negative (which would be required for upside beyond the risk-free base), and they eventually revert, wiping out the risk-free base long-term & causing significant capital losses shorter-term.

I'm guessing your "RE optimists" were "stock market optimists" back in Jan 1, 2000. If the S&P had maintained its risk spread of 0%, it'd be at 3000 right now, and returns would have matched the risk-free base. Except it didn't, and we're sitting at a risk spread of 5.5%. Of course, by now they've forgotten that their long-ago expressed idea of safety has been fulfilled -- an investment held would make money (it'd be up 20% right now). They puked out the asset class and swore off stocks in favor of a "truly" safe asset class -- RE. "By golly, stocks are just too risky, who knows about bonds/munis, and my money would otherwise be earning 0% in the bank! I'm happy with 3% returns on risky, long-term, illiquid, levered investments!"

So now this is a Sprint investing message board. And of course, what 67 does, apt23 has to do too. I guess that's what happens when your husband is emasculated by your shrewness, you look for the nearest excessively hairy guy who wears a nice watch and knows how to bench press. So sexy. FLMAOZ.

"inonada, people are willing to pay a premium for various things for some very stupid reasons. It is what it is. You can't pretend the impact isn't there just because you disagree with it."

We are looking at a risk spread that has historically been +2.5%, say, and is now -0.5%. I think you are saying that for you personally, the ownership premium is worth 1% in the scale of this spread (25% of a 4% vs. 5% rental yield). Is that right?

What do you think the ownership premium was on average across the market pre-bubble? Did it shift, or has it remained the same?

inonada, why haven't you accepted such irrational mindset even though you are profiting from it both through stocks and RE by renting. Do you not see yourself continuing to be ahead of the crowd going forward?