Caveat Emptor: Manhattan Still Way Overpriced!

No, Steve, I claimed you no longer CAN go to bathhouses. And not because of Koch. That's why you're so bitter. But, carry on with your Hitler like speeches about the tanking RE market...will probably keep you from shooting people from towers.

Hey ostriches (that better?):

"Wall Street Firms Cut 34,000 Jobs, Most Since 2001 Dot-Com Bust

"March 24 (Bloomberg) -- Wall Street banks hit by mortgage losses and writedowns have cut more than 34,000 jobs in the past nine months, the most since the dot-com boom fizzled in 2001. Citigroup Inc., Lehman Brothers Holdings Inc. and Morgan Stanley are among the firms that have disclosed headcount reductions so far. After the Internet bubble burst, 39,800 jobs were eliminated during the same period; the number climbed to 90,000 in the next two years, according to the Securities Industry and Financial Markets Association."

And that's "so far." It doesn't count Bear Stearns and all the other layoffs predicted. I'm telling you, it's going to be bad. I'm showing you the predictions, but no one comes back with anything but, "I think, I feel, I believe."

Hard numbers guys....

So let me understand this Stevejhx you bought a house in long Island 6 years ago and continued to rent in Greenwich Village as of 6 years ago. I guess that was much smarter to do than buying a place in Greenwich Village 6 years ago and renting in Long Island.
I also find it interesting that you refer to people who disagree with you as a she as if the female is an inferior gender.

so stevejhx - if its going to be that bad, what are your predictions for:

a) commodities
b) additional fed stimulus
c) length of the recession

You know, Dick Bove has had his fair share of awful calls, but his last one where he stated, THE FINANCIAL CRISIS IS OVER, THE ECONOMIC CRISIS IS NOT, I thought was pretty dead on. While I dont think we are out of the woods with financials, and there could be more shoes to drop in other debt classes that were securitized and more writedowns, its clear the fed is willing and able to do anything to prevent chaos. Unfortunately this means REGULATION! We are about to enter a period where IB's will have plenty of regulations placed upon them, removing capapbilities of making $$$ that they got used to in past 4-5 years.

First wall street will cry for fed action, then they will cry that they cant make the money they used to because of regulation (the latter being 1-3 years from now). The game is over.

In my opinion, Bove is kind of right. The credit crisis is getting tons of stimulus to ease it, now comes the economic data that results from the 6-8 month storm that has been over us.

Steve,

I wish you would do a weekly web-cast (like Oprah/Tolle but without either). We, your fans, crave direct access.

eah, never did go to a bathhouse, sorry. Love the Hitler thing, though.

Spunk, if you're a guy - you're not so identified in your screen name - then say so & I shall call you such.

No, though: I bought in GV, sold in GV, bought 2 places in South Beach, sold 2 places in South Beach, returned to NY, wanted to buy with the proceeds but found everything waaaaay overpriced, so I bought a place on the beach b/c the price bubble hadn't reached there yet - when 1-br apartments were going for $85k in GV they were going for $85k on the beach, but 1-br's rose to $775k in GV & didn't go up on the beach at all.

I put the rest of the proceeds in the stock market.

11201962, I don't know what Oprah / Tolle is/are. Sorry.

Urbandigs, FINALLY! A sensible post! Thank you!

Commodities - depends on BRIC, not here. They're still growing apace. Gold is overbought. What does anybody need gold for? Oil is a dollar-price phenomenon.

Additional Fed stimulus - I don't know, will depend on incoming data. :) It seems like they'll push the liquidity button rather than the interest-rate button, however, to stop inflation. I do think that in the medium-term rates will rise, and quickly, because:

as I've said, I don't see a slowdown in the economy. My mother says FL is dismal, my friends say SoCal is dismal, but there are plenty of places where housing didn't skyrocket that maybe feel the pinch of oil prices, but if they're in manufacturing or cereals, I don't see their pain.

I think we've hit bottom on the Down, and that the financial crisis is not over yet but is ending. Over the next quarter or two banks will write down their CDO's to zero, which will be great in the future when housing finally stops tanking and there's a market for the securities again, and they can re-mark them to market. Sort of like how oil companies make money when oil prices go up even if they don't sell any oil: they revalue their inventories to market levels.

You're right about re-regulation: no more 100x leverage. (100x? Really?) Off-balance sheet will come on, mark-to-myth will be done away with, which will lead to cuts at investment banks, which will become subject to regulation again. Citibank is going to reel, go from the largest US bank to third after BofA and JPMorgan. I think that the worst thing that will happen to NYC's economy: it's a bloated beast that must be tamed, and the only way is for it to do what the old BofA did in the 80's, when I worked there: slim down and start all over again. As one of the articles I posted today says, it's easy to make lots of loans. The hard part is when they don't get paid back.

There was a good editorial in the NY Times this weekend about "moral hazard," and the editorial board rightly said that the way to avoid "moral hazard" is to stop it before it starts. And the way to do that is through proper regulation. Otherwise, because of the interrelatedness of the world financial markets, one failure like BSC could bring down the whole system.

Oh, I also think there will be an investigation into the real-estate brokerages' involvement in the housing boom: banks, mortgage brokers and appraisers are already being investigated. How can real-estate agents avoid it?

Look for a change from the commission-based system to a fee-based system, as happened in the financial-services and insurance industry. Commission-based means no buyer is ever properly represented, because it's in his agent's interest to get the highest commission possible, rather than the lowest price possible. Look for buyer's to hire their own agents, sellers to hire their own agents, and for it to work like every other industry where buyers and sellers are represented by their own agents.

good, urbandigs will be perfectly positioned!!

I do like your blog, btw, urbandigs. Let's face it, we may not all agree with each other on where things will wind up, but if you can make a case based on numbers, it becomes persuasive.

Right-wing Republican though he may be, I still enjoy Larry Kudlow. I'm no supply-sider (though it has its merits, demand is king) & don't agree with most of what he says even though I should because I'm rich, at least he supports it with a real theory and real data, which can be informative. Kudlow 101 is actually very instructive because it brings you back to the fundamentals.

I'm sorry, but when you see headlines about tens of thousands of bankers losing their jobs, the evisceration of Citigroup, the deleveraging of the financial markets, but focus instead on whether this or that overpriced condominium has marble or granite countertops, you lose my respect.

Kudlow is all about free markets and biased optimism except when markets need a jolt. To him, no matter what is going on, its always a great time to buy. Thing is, investors probably will lose money if they listen to him and I view Kudlow for the debates, NOT for investment advice. I would equate my way of thinking much more closely to Santelli.

"but focus instead on whether this or that overpriced condominium has marble or granite countertops, you lose my respect."

who talks about marble or granite countertops? Certainly not me on my blog.

Sorry about the confusion on countertops - that was mh23 and spiderman or somebody on the prior page, post like 97 or something, discussing whether a condominium was worth $6 million if it didn't come with a gym and high-end features.

Not you!

Yes, Santelli is far better than Kudlow in terms of trading, Leisman (sp?) the best in terms of economics. Fast Money is also good even though I'm not a trader: I learn a lot by analyzing how they think.

I don't follow Kudlow's investment advice either - or Cramer's, who was recommending Google at $800 or whatever it was and no longer isn't - but I enjoy his focus on the fundamentals, and his policy debates. As soon as he switches to politics, I switch to MSNBC.

steve, just because you post something does not make it true. but i’d like to set the record straight in case others read your comments and put any faith in them (doubtful I know):

first off, historical price appreciation rates:
s&p shiller index started in 1987. average historical appreciation for all metropolitan areas approx 5.3%
office of federal housing enterprise oversight (OFHEO). started tracking in 1975. historical appreciation rate 5.8%

add in the fact that neither include the impact of tax advantaged capital gains (you can find plenty of research on this) and my estimate of 6.5% was pretty right close.

the 0% rate you quote from the article is based on the assumption that demand factors dont change. a pretty silly assumption (read the article it actually points this fact out).

as far as you touting price/rent ratio, let me restate what i said. it is flawed because it ignores financing costs (mortgage rates) and tax implications. let me make it more clear:

“The key mistake committed by the conventional measures of overheating in
housing markets is that they erroneously treat the purchase price of a house as if it
were the same as the annual cost of owning….A correct calculation of the financial return associated with an owner-occupied property compares the value of living in that property for a year—the “imputed rent,”. This comparison should take into account differences in risk, tax benefits from owner-occupancy, property taxes, maintenance expenses and any anticipated capital gains from owning the home” (Charles Himmelberg, Christopher Mayer and
Todd Sinai)

in case you don’t know who they are:

“Charles Himmelberg is Senior Economist, Federal Reserve Bank of New York, New York,
New York. Christopher Mayer is Paul Milstein Professor, Finance and Economics, Columbia
Business School, Columbia University, New York, New York. Todd Sinai is Associate Professor
of Real Estate, Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania.
Mayer is also Research Associate, and is a Sinai Faculty Research Fellow, National
Bureau of Economic Research, Cambridge, Massachusetts.”

So your statement “every economist in the world tells you that those two figures, over time, are closely correlated. It's just plain BS” looks a bit silly. I just showed you 3 very prominent researchers who disagree with you.

I’m sure you will change the subject and throw out some more rubbish that is off point, but that is fine. The only reason I’m writing this is that hopefully you will begin to think for yourself, instead of just surfing the web and pulling up stats that suit you. I initially thought you wanted to discuss the matter, but looks like you just want to rant, so go on.

US Home Sales Increse in February along with Price Drops -- Looks like the national housing market is in the process of bottoming out. Good news for the economy!

http://www.cnbc.com/id/23777672

Will, as long as prices drop, you're right.

mschlee, that 6.5% figure is a NOMINAL figure, not adjusted for inflation, and it is an average rate, not a compounded rate. The figure that I published was the "real" - a.k.a. inflation-adjusted - figure that went back to 1900, and it was compounded.

To see what that means, go to:

http://www.fdic.gov/bank/analytical/fyi/2005/021005fyi.html

If an average house price declines 30% in value in 3 years, that's not a 10% compounded annual decline. It's a 9% annual compounded decline. A 10% annual compounded decline would yield a 33% nominal decline over 3 years.

That difference is HUGE over 38 years.

You then have to take inflation into account.

Moreover, the OFHEO figure is for properties with CONFORMING mortgages only, and only properties that have been financed, and only for some cities does it go back as far as 1975. Most of the data are from 1990 and beyond.

Case Schiller is only for single-family homes and so is not very useful to Manhattan, though the ratios it measures are applicable everywhere, even if the raw figures aren't.

Nonetheless, inflation was rampant in the 70's, if you remember. $1 in 1975 is worth $4.01 today. If you use your compounded rate of 6.5%, $1 in 1975 would be worth $7.99. Therefore - even if your 6.5% rate were compounded (which it's not) - almost half of that gain is in inflation. But that is an average rate, not a compounded rate.

I NEVER ignored "financing costs (mortgage rates) and tax implications." Ever. In fact, I fully agree with what the Fed governors you're talking about say, and I always have. Imputed rent was an accurate measurement of inflation - which is what it's used for, BTW - until exotic mortgages were sold starting in 2000, which skewed the historical norm, and caused a divergence between rent and imputed rent.

Moreover, if you read your post, it says, "A correct calculation of the FINANCIAL RETURN." I'm not talking FINANCIAL RETURN, am I? Never have, never will.

And every time you calculate the mortgage tax deduction benefit you will see that it is offset by the opportunity cost of investing the down payment elsewhere.

My whole point is that things came out of whack starting in 2000, with all the fancy ARMS's - 65% of jumbo mortgages, BTW - and no-down payment loans, no documentation loans, etc. The Fed is cracking down on that, banks won't lend like that anymore, which is why all the loose liquidity is being sucked out of the market.

So please, if you're going to use data, use data that are pertinent. Know the difference between nominal and real rates of return; and compounded and average returns. And the difference between a return on investment - what the Fed governors are talking about - and an expense, which is what I'm talking about.

If you recall, inflation was very low during the period we're discussing, meaning that the REAL price increases were far larger than ever in recorded history.

mschlee: just to make it even clearer, a $1 investment with an AVERAGE yield of 6.5% over 38 years will be worth $31.95 at the end of 38 years.

That same investment with a COMPOUNDED annual yield of 6.5% over 38 years will be worth $79.90 at the end of 38 years.

See the difference?

Steve, $1 compounded for 38 years at 6.5% would be worth just under $11 at the end of the period, not $79.90.

actually i dont understand - how are you calculating those vaules? how do you get 31.95 or 79.90 out of a 6.5% rate? cagr is end/beg^(1/t)-1 that is what i'm using. in your example 79.9/1^(1/38)-1 = 12.21%. 31.95/1^(1/38)= 9.5% i have no idea how you are getting these numbers.

regarding nominal vs real. the risk free "nominal" rate is negative right now so not much opportunity cost to offset real tax savings. 2y treasuries trade at 1.50%, and 2y headline inflation expectations are ~2.75% so a negative yield of about 1.25%. so even a 0% return looks pretty good by comparison.

and as far as what the researchers are saying, again i knew you'd change the subject. the point i was making is that price/rent is a flewed measure. you said i was full of bs and every econimist will support that measure. i gave you 3 who said it is flawed and the rational why.

My head is spinning, I'm doing this fast.

1975 - 2008 is 34 years full years. I assume that the compounding occurs once at the end of the year, and at the end of every other year. Therefore, the correct figure for compounding is to take $1 and multiply it 1.06 thirty-four times (giving the figure at the beginning of the 35th year).

That comes to $7.99.

However, I did make a mistake in the average calculation. If you take $1 and multiply it by 1.065 x 34, you get $36.21, not what I wrote. I mistakenly typed in 30 years, not 34 years.

Not that it matters much.

and that is, "multiply it by 1.065 thirty-four times"

HEEEEEEEELP! I am so confused! This is what I get for doing this when I'm supposed to be meeting a deadline.

CORRECT FIGURES;

Compounded: $7.99 = ($1 multiplied by 1.065 34 times)
Average: $3.21. = ((.065*34)+1

My mind is elsewhere.

You are right, east_cider.

so am i correct on the other 2 points as well?

mschlee, I made a mistake with the calculation due to a spinning head. I have recalculated it.

I did not change the subject on the economists. They are discussing "imputed rent," which first, is a rate of return, not the expense of the actual rent. Here is its definition:

Imputed rent is the economic theory of imputation applied to real estate. In owner-occupancy, the landlord-tenant relationship is short-circuited. Consider two people, A and B, each of whom owns property. If A lives in B's property, and B lives in A's, two financial transactions take place - each pays rent to the other. But if A and B are both owner occupiers, no money changes hands, even though the same economic relationships exists; there are still two owners and two occupiers, but the transactions between them no longer go through the market. The amount that would have changed hands had the owner and occupier been different persons is called the imputed rent.

It's a way of calculating the economic value of owner-occupiers living in their own homes.

Imputed rent is used in calculating rent inflation for owner-occupied properties. In effect, a hypothetical rental value is assigned to the transaction they have with themselves. Changes in it are reflected in the inflation rate.

Up until 2000, there was a direct correlation between imputed rents and market rents, based on the standard 30-year fixed, 20% down payment mortgage. With the advent of excess leverage - now being sopped up by the market - that correlation was lost because mortgage interest rates were artificially low and leverage was increased at times from 4x (20% down - you put down $20, the bank puts down $80, for 4x leverage) to 9x (10% down - you put down $10, the bank puts down $90) to infinite leverage (you put down $0, the bank puts up $10). Since under proposed regulations these exotic products will not be available to most people, the correlation will return to its norm.

The Fed knows this, and that's why they're not worried about inflation right now. Housing costs are 40% of the CPI; the CPI does not use the asset value changes of housing stock as an inflationary measure. Rather, they use imputed rent and market rent, which are no longer properly correlated. Rents have been going up recently because people have been priced out of the housing market. Falling home prices and decreased liquidity will cause market rents to go down because more people will be able to buy, causing DEFLATION, not inflation.

mschlee, last post for a while, but you are wrong on all 3 points.

First, I've given you the correct difference between compound and average rates. It's huge over time.

Second, I explained what "imputed rent" - which is what the economists are talking about - is, and what it is used for.

Third, your "risk free "nominal" rate is negative right now" is not the actual opportunity cost, because housing is not risk-free. Normally, the long-term compounded rate of return in the stock market is used, which is some 8% nominal over time.

You must always do your calculations with a 30-year fixed, 20% down mortgage, because that is the historical parameter where rents and owners' carrying costs (not imputed rent) are the same nominally, and the tax benefit is erased by the gains from investing in another asset class.

Thus, just to make it easy, if you have a $80,000 mortgage and pay 7% interest, you pay $7000 in interest. If you have a GROSS (not marginal) tax rate of 25% - 25% of ALL wages are paid in tax, not the top marginal rate - you will save $1,750 in tax (25% of $7,000). If you had put down $20,000 down and invested it in the stock market with a historical yield of 7%, you will earn $1,400 in income. That income is compounded, whereas your interest deduction tax benefit decreases as the loan amortizes, so if you do the calculation, the figures generally wipe each other out over the life of the loan.

Everyone's particular circumstances are different, but in general, on a macro level, that is what happens.

There I go putting down the wrong figures again. 7% interest on an $80,000 loan is $5,600 in interest, so with a gross tax rate of 25% the tax savings would be $1,400 (25% of 7% of $80,000). The figure for the stock market is correct.

Thus in this example the two figures are the same. There are other possibilities.

They need to give you more space here so you can edit what you do properly! To make it easy I changed it to a $100,000 house, then forgot to change my figures from the $100,000 mortgage that I was originally writing.

Not my day.

Marginal tax rates are the relevant ones for determining tax savings, provided that your deduction isn't big enough to move you into a lower tax bracket (in which case, the calculation requires that you compute some of your savings in each of the brackets). Since marginal tax rates apply to the last dollar you earn, they also apply to the last dollar of taxable income that you can remove. For the purposes of these discussions, we're probably talking about 44-46% (33-35% federal and 11% NYS + NYC).

Steve, I’m wasting my time with this to make a point that maybe you will learn from. You call people names and say they are liars because they disagree with you. You accuse me of making things up without reason. Do what you like, but just be aware of who you are and why people react to you as they do.

To the point

1. you used price to rent ratio to value a property listing and say it was way overpriced. I noted that the ratio is flawed because it ignores mortgage rates and tax implications. For which you replied ” every economist in the world tells you that those two figures, over time, are closely correlated. It's just plain BS.” So I posted the research that says exactly what I said – it is a flawed measure. You can disagree, but to say it is BS is 100% wrong.

2. you also say that “she makes up a property, makes up a price, claims it has increased to another price at a rate of 7.5% per year” I actually said 6.5 and calculated it (correctly) from the 2 best sources available, shiller and ofheo. If you want to use real rates fine, I’m using nominal. As long as I use all nominal rates my analysis is fine. And I obviously know the dif btw nominal and real – I quoted you the TIPS spread in the thread.

by the way, regarding opportunity cost - without getting into dcf discussions, it is the value you could otherwise earn on your investment. what is the risk adjusted return of the s&p? the risk free rate. remember we are not discounting cash flows, we are talking about what you could otherwise earn on the money.

jordyn, everyone's case is individual, and it's far more complicated than we can get into here. The reason you don't use marginal rates, however, is that that favors mortgage interest over every other type of deduction, like, for instance, short-term capital losses. To treat all deductions the same, you need to not favor mortgage interest over all the other. Otherwise,you are saying that short-term capital losses only get you, say, a 15% tax deduction, whereas mortgage interest gives you a 33% deduction.

mschlee, one last time: I did NOT ignore mortgage rates and tax implications. Read what I said about excess leverage and artificially low interest rates. Imputed and market rents are identical, by definition. (On which I misspoke before when I said "there was a direct correlation between imputed rents and market rents." What I meant to say that there was a direct correlation between imputed rents and owners carrying costs.)

However, owners' carrying costs were made artificially low because of excess leverage and artificially low interest rates. Therefore, from 2000 there evolved a disconnected between them and imputed rents: it cost more to carry a home than you could rent it out, using not only a standard mortgage, but even some of the exotic products. That is an anomaly. The excess leverage and interest rates that caused it are being removed from the market. That parity will return.

On point 2, I gave you a real property. Give me the same real property that sold in Manhattan on the dates you used in your example and we'll calculate it.

You DID NOT calculate the 6.5% properly. You compounded it rather than using it for what it is, an average rate. The difference is HUGE. Then you compared your 6.5% compounded rate to what I quoted, which was a 0% REAL rate of growth. Then the figure you used is only for properties with conforming mortgages - which does not include most of the Manhattan market - and it only goes back to 1975.

There is no way change the fact that real prices cannot go up more than real incomes for any long period of time. There is no way to change that.

Use the FDIC's definition of a housing bubble: more than a 30% nominal change in prices over 3 consecutive years. Well guess what? In the last 3 years real estate in Manhattan has increased by 100%.

Unsustainable.

mschlee, long-term Sharpe ratio for all US stocks is about 0.4. Now what do you want to do with it?

why i do this i dont know:

I said price/rent is a flawed measure because it ignores mortgage rates and tax. you said i was full of BS. am i right or wrong.

since you dont like ofheo, lets use something specific to manhattan. median 2 bedroom, downtown manhattan price per data on miller samuel. 1989 $189.5k in 2000 $335k. cagr is approx 5.3%. lets not get into which time period i chose and data coverage. the issue is you said i calculcated wrong. i didn't

Steve, you just got killed by mschlee. At least admit defeat every once in a while.

stevejhx did you ever think that in order to maximize your your personnel and financial goals that you should try to spend more time on these threads.

Short term capital losses cause a reduction of gross income, they're not a deduction.

As long as your total deductions (mortgage interest plus everything else) don't move you into a lower tax bracket, it's irrelevant what order you consider the deductions in--they'll all reduce your taxes at your marginal tax rate. In the event that your deductions cause you to move between tax brackets, how you choose to think about the order to apply them is purely philosophical. It would be perfectly reasonable to figured out a blended rate for all of your deductions and use that for thinking about the effect of your mortgage on your tax liability. In any event, the relevant tax rate will be much higher than your overall tax rate--it's interesting to note that some of your income is taxed in the 10% bracket, but not relevant for calculating the effect of deductions.

what does the sharpe ratio have anything to do with what we are talking about? it's a relative mesurement i.e, to compare 2 investments. please doont just throw random facts out. if you think you can earn 8% in this market, god help you.

i agree with you jordyn. not sure what steve is talking about.

The Sharpe Ratio is a formula used to measure risk/return. The ratio describes the amount of extra return received for the extra volatility of a more risky asset.

You're absolutely right: you asked for the risk-adjusted return on the S&P. Risk compared to what?

Why do you keep on picking 2000? I'm talking about TODAY'S prices.

And Miller Samuel is not an accurate measurement because it doesn't factor in the change in mixture of units. Accurate measurements follow the same apartment over time, not means or medians, which is what Case-Schiller / OFHEO do. You need to follow the same apartment over time, as I did.

And "I said price/rent is a flawed measure because it ignores mortgage rates and tax." No it doesn't. The long-term equilibrium is between out-of-pocket expenses for purchasing and rent. That is because the price of property changes to equate the rent when you take mortgage interest and tax into effect.

This is because rents correlate to income, and - except since 2000 - housing prices correlate to rents, not the other way around. So if taxes and interest rates change, housing prices change with them so that the carrying cost of the property will equal the market rent on the same unit. That by definition factors in interest rates and tax deductions.

That is why the Fed uses imputed rent as a measure of inflation, NOT owner's carrying costs or property values or anything else. The economic theory is that the return on investment of a real property - known as the IMPUTED RENT, for the 10th time - is absolutely identical over time to the cost of renting that same place.

Think of it like a proprietary lease: your "dividend" on your shares is the right to live in the unit. Your "dividend" - which is the return on investment - of buying a property is the right to live there. The economic value of the right to live in a unit is the market rent that you would otherwise pay to rent the exact same place. Therefore, why would you pay more to own a home than you would to rent it, if your dividend is simply what you would have to pay in rent? That would be like paying, say, $1,100 to get $1,000 back.

You really need to understand the concept of imputed rent and the several ways of calculating rent-to-own ratios before going any further.

duecescracked, how did I get killed? On what point?

See spunkster, you're nasty again!

jordyn, except for Social Security, 401(k), and the like - which we're not discussing - reductions in gross income and deductions have the exact same effect on taxes: they reduce how much tax you pay. It doesn't matter which side of the form they're on.

At most you can take everything that reduces your overall tax burden and weight it by how much income you receive. If you take the weighted average of ANYTHING that reduces your taxable income, then that will also work. That is, weight each deduction / reduction evenly across your income curve.

You're making what is a macro example into an individual analysis of every single person's taxes. Add AMT just for good measure!

Just to make one more thing clear about the housing bubble, here's what happened.

It all started in California, where property was very expensive and unaffordable to many people. Countrywide and a number of other lenders came out with these neat exotic mortgages that artificially lowered the cost of borrowing from the typical rate received, which was the standard 30-year fixed mortgage.

The first person who used one of these loans may have gotten a deal because the cost of borrowing had gone down but the price of the asset purchased hadn't yet. The more people who took out these loans, however, the more demand there was, and the more housing prices went up to compensate for the increased demand. At first these products caused carrying costs to be lower than market rents, but every successive person taking out one of these loans got less and less of a "deal" because prices were rising.

But incomes weren't rising that fast, so market rents stayed the same and in some cases actually started to fall because fewer people wanted to rent. That means the IMPUTED RENT for a purchased unit was falling - leading to nominal DEFLATION - at the very time the underlying asset price was rising because of cheap credit, which would under normal circumstances imply INFLATION.

The housing market was in such a bubble that rents started to rise - causing nominal INFLATION -beyond incomes because housing cost too much.

Bang! The rates reset. Now carrying costs were no longer lower than market rent, so rather than rents go up - which they can't because they're tied to incomes - the prices of the properties fell. And they will continue to fall until owners' carrying costs are equivalent to imputed rents, which is the long-term equilibrium.

The rates didn't even have to reset. Eventually housing prices would have stabilized until rents approached them as a function of income, which would have caused home-price stagnation or perhaps a slow deflation. But when they reset, it burst the bubble.

Housing bubble 101.

are these postings for sharing information or a debate?

i've tried very hard to not use ad homnin comments, but my god you really are delusional. You are so focused on trying to show how smart you are you completely miss the point.

I’m very well aware of what imputed rents are. Please stop trying to explain them and pretend that your explanation supports your statement. I’m not talking about the cpi measures etc. This is your quote

“The historic price-to-rent ratio is 11 to 12. That means multiply your annual rent by 12, and you will get what property prices should be. A $5,000 rental should cost you $720,000 to buy” all of your spouting does not change the fact that this does not take into consideration mortgage rates or tax advantages. It’s flawed. I said it, the research I showed you said it. Not much more for me to say.

You are trying to change the topic by talking about imputed rental measurements. Fact is, by saying that my argument is bs, you are 100% wrong.

You said that I “DID NOT calculate the 6.5% properly. You compounded it rather than using it for what it is, an average rate. The difference is HUGE”

So I gave you the underlying numbers they were right. I calculated correctly. But rather than admit you are wrong, again you tried to change the argument to which time frame I picked and which data set to use

Lastly, the risk adjusted rate for the s&p is the risk free rate by definition. It is the rate to use for opportunity cost. It has nothing to do with sharpe ratio. risk adjusted means removing the risk. elementary CAPM.

And, ladies and germs, that is why comparing market-rate rentals to the carrying cost of real estate using the standard 30-year fixed mortgage, is so important. Your dividend on your property is the "imputed rent": what you could get for renting out a place. Under normal market circumstances housing values change with market rents, and take into account tax benefits and other related charges, including opportunity costs, to equal them. In the Wonderful World of Adam Smith, the global market will set prices so that they are in equilibrium over time. All the benefits of owning are equal to all the benefits of renting over time, because the only thing you gain in return for owning is the right not to rent. That includes future asset appreciation - which can never exceed income appreciation over time - tax benefits, opportunity costs, and everything.

Under normal conditions there will always be a slight divergence between the renting and owners' carrying costs because of normal market and policy events. That has always been the case. Now, however, the disparity between the two of them is massive, which is why there is no chance that things will do anything but fall.

If it were the other way around like it was in 1993, I'd be the first to tell you.

sorry jmcbyr8, you are correct. i thought it would be helpful to say "be carful when you look at analysis as it can be easily bias to make it show what you want it to". the old "how to lie with statistics" but steve jumped all over me calling me names so i fought back.

i should not have and will not in the future.

apologies

jmcbyr8, share whatever you like.

mschlee, once and for all, imputed rent MUST include all those things, otherwise you would be overpaying / underpaying market rent, and market rent would not be equal to imputed rent, which by definition it must.

Suppose you rent out your apartment for $1,000. That's what that apartment is worth on the rental market. It's the imputed rent. That rental figure would have to include your:

1) Depreciation
2) Mortgage interest tax deduction
3) Lawyers fees
4) Property taxes
5) Mortgage amortization
6) Conveyance taxes
7) Real estate agent's fees.

etc.

Let's suppose I live an identical apartment next to yours and I pay rent to the developer, which will be market rent. That will have to include the developer's:

1) Depreciation
2) Mortgage interest tax deduction
3) Lawyers fees
4) Property taxes
5) Mortgage amortization
6) Conveyance taxes
7) Real estate agent's fees.

etc.

Or doesn't it?

It's just a matter of who takes the deduction - it's all included in the rent. If I own a place and live there, I get all the debits and credits. All of them. If I rent, the owner gets all the debits and credits. All of them. That has to be factored into the rent that I pay, otherwise I would buy.

The way people USED to make money renting their own apartments is that they took out 30-year fixed mortgages. Their payments remained constant. As incomes rose over time, rents rose, and they began to make profit.

Now, though, if you buy an apartment and I can rent an identical one for half as much, then you can't rent yours out without losing money. Vast amounts of money. Calculate all the deductions you want, you'll lose money. But you need to calculate both the debits and the credits, the income and the expenses, and all of them. If you do, and it costs you more to buy than to rent, why would you want to? And if it costs more to rent than to buy, why would you want to?

are these postings for sharing information or a debate?

Yes stevjhx is having a debate with him and himself. Of the 140 postings on this board he wrote 100 of them. It's quite fascinating to observe an obsessive, addictive behavior with a touch of Asperger's thrown in the mix.

I'm getting seriously concerned that Steve's head is going to implode in very short order if he does not slow down the pace and intensity of his postings. It really reminds me of a junkie having to get his crack fix every couple hours. Steve has posted so many messages with so much tangential information in them that we are getting to the point where its impossible to follow the discussion anymore.

Hey Spunk, you're counting my posts and I have Asperger's?

Sorry you don't understand the content.

mschlee, once and for all: "The risk adjusted rate for the s&p is the risk free rate by definition."

Who said it wasn't?

The risk-free rate is assumed, not calculated, by taking a benchmark. If your benchmark is long-term Treasuries, then your risk premium is the return over Treasuries. But that is no more sufficient as a long-term indicator than an average or medium. Thus Sharpe ratio. Specifically, the Sharpe ratio is used to characterize how well the return of an asset compensates the investor for the risk taken.

I don't know what this has to do with what we're talking about, which is economics, not finance. I am an economist by training, not a mutual fund manager or a day trader. And as I said, the return on investment on housing is its imputed rent. It includes everything by definition.

You make a post, then you argue with your own post. You posted:

"A correct calculation of the financial return associated with an owner-occupied property compares the value of living in that property for a year—the “imputed rent,”. This comparison should take into account differences in risk, tax benefits from owner-occupancy, property taxes, maintenance expenses and any anticipated capital gains from owning the home."

That's exactly what I said. In other words, you said:

“The historic price-to-rent ratio is 11 to 12. That means multiply your annual rent by 12, and you will get what property prices should be. A $5,000 rental should cost you $720,000 to buy” all of your spouting does not change the fact that this does not take into consideration mortgage rates or tax advantages. It’s flawed. I said it, the research I showed you said it. Not much more for me to say."

It's an indirect relationship, but an equality. If the historic price-to-rent ratio is 11 or 12, then that assumes the market rent price as part of the equation. By definition, the market rent price is the imputed rent. Therefore, since market rent is the imputed rent, as you post, it MUST include "differences in risk, tax benefits from owner-occupancy, property taxes, maintenance expenses and any anticipated capital gains from owning the home."

That's what I've been saying. If market rent = imputed rent, and imputed rent includes differences in risk, tax benefits from owner-occupancy, property taxes, maintenance expenses and any anticipated capital gains from owning the home as your own post said it does, then market rent must include it, as well.

The only difference is one of accounting: who takes the deduction, the renter or the owner.

Or is that not a tautology?

steve - a couple of thoughts I wanted to get your take on, the main things that come to mind that i could see as altering the outcomes you foresee -

first, i hear you when you talk about the basic supply/demand forces, and new construction, and question whether there's a sufficient pool of buyers for the expanded luxury segment. i think (was it imom?) someone also pointed out the difference between the uber-rich and the working wealthy, which i think is definitely relevant. and ditto with your point about how existing owners who got into the market at cheaper prices may be forgetting that values going forward depend on affordability NOW, not in the past.

but my question for you, then, is how do you call the inflection point? the factors you point out definitely are examples of possible downward triggers for the market, but (for example) an erosion of wall street employment isn't the same as a crash ... so that's one factor i can't get my hands around. there's a big difference (in terms of the market being able to absorb new supply from people selling under duress) between, say, a big bank cutting employment by 25% in a single quarter vs. gradually over two years. same NET effect in terms of numbers, on a 2-year lookback basis, but very different effect on RE pricing trends.

second, i point out that wall st employment is not a single, uniform employment market. to oversimplify, there's stock employment and bond/fixed-income/mortgage/loan/etc. employment. the dot-com crash mostly kicked people in the stock business out of work, and they languished while the low interest rates made the debt market employment soar, with a boom that ended only last year. there will be areas of wall st that will likely be relatively unscathed by the current unwind, and some of those people have the chance to come in and take up some of the slack.

for simplicity of argument, as to why there's a mixed outlook, people sometimes look at a single statistic in isolation, like employment. my gut instinct on the manhattan market is bearish for the moment, but I think that the overall relatively high employment figures for example (below 5%) suggest that the baseline we're starting from is a fairly robust economy, that may be in the process of slowing to a lackluster one. if unemployment peaks at, say, 6% in this cycle, that's not nearly the same pain as if it went from 7% to 8%, for example.

so I would theorize that some of the tension between bullish and bearish scenarios is that for a real, historic meltdown to occur, one has to believe the local economy goes over a cliff, altogether. but the impact is much more mild if instead there's just a rocky, bumpy, dusty slide to the precipice, a few RE market sectors tumble over the edge, but most of the market still stays upright.

another way of putting it, regarding market psychology, is there has to be a real “fear contagion” that takes hold and then spreads ... like it has in the mortgage-backed securities market, basically paralyzing that market. i don't know that i can see the same happening with real estate here. and when i say fear contagion, it has to be pneumonia, not just a really bad cold.

- - - - As an example of what I'm talking about, parse the perspective given by this recruiter: http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/vmxkgxzk9BUk.asf

duecescracked, you're right, my head's about to explode. But to anybody interested, it's important, because it shows why free-market rental prices are so important in this.

Just one further clarification then I'm gone till tomorrow.

mschlee, the reason why what I'm saying is by definition true is the price-to-rent ratio is the relationship between the market rental price and the purchase price of the same property. Since the market rent IS the imputed rent, and the imputed rent includes all the variables you posted, what changes to make the equation is the price of the asset. It works just like the return on bonds: the actual interest rate is calculated by taking the nominal interest rate plus the discount.

If market rents are fixed in the short-term (which they are) and all the variables you post are also fixed in the short-term (which they are) then the only thing that can possible change to make the equation true is the price of the house. Just like the only thing that can make a bond yield a certain amount over its par value is its discount.

That is why it is a 1:1 out-of-pocket ratio over time. That's why there is a historical price-to-rent ratio. Because the market rent is the imputed rent, the market rent takes into account everything you say, so nominally, they will be the same. It's a zero-sum game: tax benefits are wiped out by opportunity costs in the long-term. Interest rates determine the face value. The way you do it takes the tax benefit twice: once in the imputed rent, then you deduct it again from your income taxes.

Steve, deductions and reductions in gross income have similar but not identical effects. It's almost always more beneficial to reduce AGI than add deductions, because a number of tax benefits (*including itemized deductions*) phase out as AGI increases.

It sounds like you're proposing something along the lines of what I did in my last message, but as I've said over and over again unless your deductions actually cause you to move between brackets the weighted average of everything at the exact same rate will still end up being your marginal tax rate, so in most cases it's going to be the only one that matters. With very rare exceptions, the worst case scenario is that you'd mostly use the tax rate below your marginal rate instead (so maybe 33% federal instead of 35%; NYC + NYS will stay constant at 11% for essentially everyone relevant to this conversation because the top bracket starts so low).

stevejhx, there is one major point you are missing..you say that all real estate is overpriced, but what is really true is that *average* real estate is overpriced. this means nothing when looking at individual apartments.

I went to contract a couple months ago on a 1br in new construction in the east village. elevator, top floor, large terrace, first rate finishings, close to a subway. a great apartment in (what I believe) is a great area. you can't compare that to some shoddy old walk-up, or even new construction in murray hill. and while I paid at / slightly above average prices for manhattan, I paid well below the astronomical psf of some of the very high-end new buildings.

And one other note - this may change, but I have a hard time finding an apartment I want to rent. I currently spend $5k/month for a 2br in a very mediocre building in a convenient but not-neighborhoody part of noho. In the areas I looked at (east village, LES, west village, nolita), there are not any good rental buildings (and no, not interested in avalon christy/bowery that gives 2 br for $6500/month, no terrace, and feel like I live in a hotel). maybe some nice new condos go rental (and some have), but not at attractive prices.

I plan to stay several years but am confident I could find a buyer above my price no problem. So sure, you may be right about the market in general, but I am very comfortable with my purchase...and I am sure many others are too.

OK, this was interesting, but I think I've maxed out on econ theory for now.

If we can get back to hard data, is there any data re how much of Manhattan RE was financed via ARMs? I doubt many were of the subprime variety (at least south of 96th st), but wonder how many were of the prime or alt a variety, and whether int rate re-sets/inability to refi into a fixed will factor into any mkt slowdown?

anotherguy, since I'm never going to finish my work by the deadline, I'll answer what I think your question is.

Honestly, all the factors you indicate are symptoms, not causes. All this stuff - Bear Stearns, Citigroup, etc. - are symptoms of what has gone wrong in the market, and how the market is correcting itself.

Because Wall Street is reeling, I think the fall will be sudden and sharp. NYC is 3 years behind the asset deflation curve. Not for long. What you see happening is indicative of it.

The symptoms result from the problem: an overvalued asset class, which is what happens in these cycles: dot.com's, Tequila effect, tulips, it doesn't matter: some price gets out of line with the underlying income needed to support it. In dot.com, for instance, it was the P/E ratios of companies with no E.

In this case, the underlying relationship is home prices to market rents, since the long-term return on housing is by definition the market rental rate, and market rents are tied to incomes. If you read the whole thread you will see how people who bought just 3 years ago can rent their properties out at a handsome profit; people who try that today will lose their shirts. The inflection point is precisely the moment when it costs exactly the same to buy 1 square foot of property as it does to rent it at current nominal market prices. That happened in 1998 in NYC, as I demonstrated earlier. Prior to that prices fell until it was cheaper to buy in Manhattan than it was to rent, and then they started to rise. 10 years later it became much more expensive to buy than to rent.

At first rents will rise because property prices are too high to afford. Then, as property prices fall, rents will fall until where they're equal to income, then will start to rise again. Housing prices will continue to fall until, nominally, carrying costs are the same as rental costs.

What's important in this discussion is that it's a macro relationship over the long-term. Buying a property accrues greater up-front benefits because the tax deduction is initially higher. Renting accrues benefits later, as a "down payment" would accrue compounded yields. So it's the average of the entire market - all free-market real-estate in Manhattan - some of which was bought today, some of which was bought 20 years ago, that matters, that must be in equilibrium. The indicator now that something is wrong is that current market prices are waaaay above the average equilibrium for the market, represented by market-rate rentals.

Therefore, if it were me I wouldn't wait until the inflection point necessarily because of the short-term benefits of home ownership. But I sure would keep my eye on the price to rent ratio on similar properties, and wait until they converge a lot more than they currently are. You should be able to rent a place out nominally break-even, and that's when I'd stick my toe in.

jordyn, I can't disagree with you: as I said, it's very complicated for each individual, which is why I have an army of CPA's to was through it. Tax benefits do nothing but disturb the market. But basically, I agree with you. I just wanted to keep it a little simple for a thread.

evillager, you're right: I'm talking overall, not for any specific unit. If you want the goldmine of rentals, go to nybits.com.

Kiss, I couldn't find any specific information on ARMs in Manhattan, except that New York Mortgage says that 65% of its jumbos are ARM's, probably prime I would guess, but I was offered a liar's loan by BofA years ago. (Didn't take it.)

Now I am off till tomorrow!

Just got back from a short vacation, did I miss anything? Hmmmm, let me see. stevejhx, is still spinning an uncontrollable yarn, has shown (repeatedly) that he takes extreme liberties with his “facts”, lashes out whenever he is proven wrong (mschlee & mh23, gold star for you), and loves to change the subject or focus on insignificant dribble when he gets uncomfortable. Yup, things are pretty much the same.

For the record steve-o, you accepted an apology of mine when none was offered. I found that a bit strange. I am also enjoying your constant references to my “westernized world” comment. You know very well that comment was a broad generalization to make a point, but somehow you are fascinated with it. Seems to me it was your way to deflect attention (which is a common strategy of yours) from the fact that you were speaking WAY out of school, and I called you on it. Did I make you nervous steve-o? Were you a bit embarrassed? Based on your responses to mschlee, mh23, it sure seems that is your preferred reaction when stumbling.

I said it a week ago and I’ll say it again. Stevejhx is an entertaining story teller. He may have a few valid points under all that noise, but from my standpoint, his lack of credibility on the small things keeps me from entertaining the rest of his econ-fiction.

stevejhx-if we were to take into account market conditions and an amount that a willing buyer and seller agree upon wouldn't that result in purchase and sale. or am i missing something here?

And we're also a bit disturbed with Will for quoting Ronald Reagan . . .

Thx Steve.

I should amplify my query above: what mortgage data is there for Manhattan, not just re ARMs, but also for IO, NIV, zero down or other non-conventional mortgage products that are at high risk of default?

Urbandigs? Anyone else?

kiss - i can't find anything definitive either. however i'm not sure arm resets will really be an issue. average margin runs about 2.5% over 1 year constant maturity treasury (CMT). currently CMT is around 2.05% so if i had a loan and my rate reset right now, i'd be paying about 4.5% for the next year. some people probably got in lower rates than that but probably not by much, hard to verify as most are non-conforming so data tough to find.

also, i noted this previously, 2 yr TIPS are trading at negative yields. what that means is the market expects the fed to be very accomadating over the next few years i.e., mortgage index rates will lower than inflation

the above analysis holds pretty close for libor currently around 2.80% with an inverted yield curve

Oh, JuiceMan, how I've missed you and your speaking out of your arse.

Research "imputed rent," then get back to me. It is IMPOSSIBLE for nominal rents to exceed nominal owners' carrying costs over time. That is more than an economic principle: it is a definition.

I can't deal with you anymore. You are an amateur "investor." Play in the Big Leagues. With people who know the long-term meaning of "imputed rent." With people who know the value of "fundamentals," and don't make emotional investment decisions. JUST LOOK IT UP. If you don't understand it, you're out of your league (which you are!) and are going to get burned.

And JuiceMan, as always, your comments ("Westernized World") are based on what you want, not on what actually exists.

jmcbyr8, if you are happy long-term, and want to hold a property more than 10 years, I wouldn't worry. If you're a short-term player, that's a problem. Buyers make mistakes, sellers make mistakes, but that is short term. Long-term - 10 years - don't worry.

poorishlady: can Ronald Reagan be quoted, and still make sense?

I have 2 rules in life: I will never take a plane that lands at Ronald Reagan Airport, or George H.W. Bush Airport. The former, I'll take a train, the latter, I'll land in New Orleans and walk the difference.

Kiss, I have no answer beyond mschlee's.

mschlee: beyond everything else you got wrong, there is no such thing as a "TIPS spread." There's a TED spread, and a "crack spread," and lots of other spreads, & I'm sure "missionary" has something to do with that, but no "TIPS spread."

ARM's may or may not be an issue, which is why the Sharpe Ratio is so important: what premium do you get for your risk?

Because we don't know what interest rates will be upon reset, the risk is infinite.

Guys, this is the smartest thread ever posted here. Ignore the imputed rent = market rent equilibrium (which is a definition) at your own risk. It is ALWAYS true over the long-term. Right now, owners' carrying costs being twice imputed rent, means there's a problem. A BIG problem. Ignore it at your risk, it's a definition, because it's ALWAYS true.

Night!

Stevejhx wins again!!!!! His smarts are connected to his polyglot abilities, surely. (Steve, do you actually type all this or do you use voice recognition?)
Yeah ---- Will owes us an explanation about quoting Reagan. Or an apology.

it is yield not spread. i was thinking about margin spread and mistyped

sorry take that back. i did type yield so my original post was correct.

kiss - in case i was unclear i was talking about: mortgage resets are based on short term rates, so
what the fed does is very important to ARM holders. TIPS are treasury inflation protected securities. they pay real not nominal rates. if inflation goes up, they pay more, down they pay less.

they are a ver good indiator of where people agree rates will go because it is what people who put their money where there mouth is are all agreeing on - probably the best measurement out there. by trading with negative yeild, investors are saying they believe the fed will keep rates low for the next few years.

that is why i dont think ARM resets will be an issue.

And JuiceMan (moron - did I say that?!), why is the 30-year fixed mortgage so important? B/C residential property is depreciated over 27.5 years - approximately a 30-year mortgage - at a fixed - FIXED - rate. Therefore, that economic equation approximates the accounting amortization (mortgage) / depreciation (asset value minus non-depreciable land) ratio.

That's right: 27.5 year depreciation of improvements and 2.5 year non-depreciable land values. That's the average ratio that a 30-year fixed-rate (since depreciation is straight-line) mortgage will give you.

This stuff - if, JuiceMan, Spunkster, and all the rest, understood what it meant - makes a lot of sense.

If you don't get it, get out of real estate today. Because it all makes a neat-o whole.

poorishlady, I type. I'm from Queens, voice-recognition software doesn't get the accent.

No, mschlee, you typed "TIPS Spread": nothing that exists. That post - as all of them - was wrong.

Mschlee, "mortgage resets are based on short term rate" is not necessarily true. It depends on each individual mortgage. Your mortgage could reset on the LIBOR 10-year rate. HARDLY short-term.

READ THE DETAILS.

Mschlee, you are - sorry - ignorant about more than you don't know. TIPS are backward-looking:

"The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater. TIPS pay interest twice a year, at a fixed rate. The rate is applied to the adjusted principal; so, like the principal, interest payments rise with inflation and fall with deflation."

You only know inflation in the PAST, not the future. Every time you post, you make a bigger fool of yourself, yet you keep on posting. To tell market expectations of future inflation you need the forward Tbill rate minus the forward TIPS yield.

Is that okay by you?

You've really got to stop posting, sweetheart, before you're in the JuiceMan and Spunkster category.

poorishlady, if you are really interested in the topic of price/rent values and why they are flawed, here is the study that i sited gsb.columbia.edu/faculty/cmayer/Papers/Assessing_High_House_Prices.pdf

i dont agree with their conclusions, but i it lays out in detail why price to rent measurements are flawed

I'm going to bed, but you guys have GOT to learn the basics. Econ 101, Finance 101, Accounting 101. That's about as complicated as it gets.

I got criticized yesterday for saying a**holes. On one level, people were right. On another, all of this stuff is so BASIC, it gets embarrassing to respond.

steve please ignore my posts.

kiss - if you want to know more details about my comments let me know

stevejx, didn't you have to go to work? I would hate to see you get fired and not be able to pay your rent in NYC

mschlee, there is no such link: gsb.columbia.edu/faculty/cmayer/Papers/Assessing_High_House_Prices.pdf

There is no flaw, as you cite, and as soon as you give me a proper link I'll tell you why. IT IS A MACROECONOMIC DEFINITION.

I've read that paper. Here is their conclusion:

"Recent price growth is supported by basic economic factors such as low real long-term interest rates, high income growth and housing price levels that had fallen to unusually low levels during the mid-1990s. The growth in price-to-rent ratios—especially in cities where this ratio was already high—can be explained by the fact that house prices are more sensitive to real long-term interest rates when interest rates are already low and even more sensitive in cities where house price growth is typically high. During the late 1980s, our metrics indicate that house prices in many cities were, in fact, overvalued (for example, Boston, Los Angeles, New York and San Francisco), and prices in these cities subsequently fell. Thus, we do not find that housing prices are always close to equilibrium levels. Still, in 2004, prices looked reasonable. Only a few cities, such as Miami, Fort Lauderdale, Portland (Oregon) and, to a degree, San Diego, had valuation ratios approaching those of the 1980s."

THAT IS VERBATIM WHAT I HAVE SAID. If only we could underline the year 2004. What did I say was the equilibrium, where prices would fall back to? 2004!

You REALLY need to go back to school.

To make it clear, that paper is at:

http://www2.gsb.columbia.edu/faculty/cmayer/research.html

and you have to click:

Assessing High House Prices: Bubbles, Fundamentals, and Misperceptions

I CAN'T BELIEVE YOU PEOPLE!

Read that synthesis, reread this thread. IT IS EXACTLY WHAT I HAVE SAID!

Like, mschlee, imputed rent.

You are so dumb.

mschlee, how can I ignore your posts, and why would I want to? They're HILARIOUS!

csn, I had a class tonight. I can't get "fired." I own my own business & make several hundred k a year at it. I'm not worried.

mschlee, why are you afraid of me? Because I prove that what you say is bcrap? B/c it is? From imputed rents to average vs. compound interest rates, to this "paper" you cite, that says exactly what my thread says?

PLEASE!

Stevejhx, hello again - mschlee, nice to meet you.
I don't really see the point of your previous argument (either of you) re: rent/buy. Nominal increases are not 6.5% but they are not 0% either. Anyhow, the point is that unless you are living in Idaho, renting an aprtment there and commuting to NY - then it almost always makes sense to own because you are not dumping money into rent. That is an easy way to get 0% return on your money. Unless, of course, the housing market experiences a "huge" correction; but Steve, you know where I stand on that.

good night.

i agree that 6.5% is high. i used it as an example in a previous post to prove a point. it is somewhat irrelevant. sorry to mislead

Guys, I repeat: owners' carrying costs being twice imputed rent, means there's a problem. A BIG problem. Ignore it at your risk, it's a definition, because it's ALWAYS true.

LEARN ABOUT IMPUTED RENT.

Lobo - "it almost always makes sense to own because you are not dumping money into rent" - read the definitions again. Imputed rent = market rent, which includes EVERYTHING in the long- (not short-) term: return on capital, tax effects, whatever. Put your down payment into stocks, and over 30 years you will make more than in real-estate. Guaranteed.

It makes no difference over time whether you buy or rent. Residential real-estate over the long-term makes a 0% real rate of return. Commercial real-estate is different. Stocks, being tied to earnings, yield more: 7% to 8% nominal - 4% - 5% real - per annum.

ALL income-producing assets over the long-term make the same rate of return. By definition. Because as soon as one is out of equilibrium, people pile into / out of it until it becomes true.

Paul Samuelson. Look him up.

mschlee, 6.5% is not only outrageous, you compounded the outrage by taking an average yield and compounding it. A 6.5% annual return over 20 years will give you (.065*20)+1 = $1.40 for every $1 you invest. Compounded (once annually, at the end of the year) will give you $3.31. Quite a difference: $1.40 vs. $3.31.

Have you ever heard of the "miracle of compound interest"?

OK, I've really got to go to bed before I start using ALL CAPS too. So this really is my last post.

a) IMPUTED RENT is a THEORY based on a THEORY: “imputation”, not a definition; and therefore, definitely not ALWAYS true. Factor prices are a value of their outputs - blah blah - I think by "learn" you mean agree. And I certainly don't agree that a theory is always true.

b) Adam Smith, had he still been alive, may have argued that the "labor theory of value" would be better applied to the housing market; and in that case, as you claimed earlier, since housing prices have historically increased at "0%" then the market value would be fair. Anyhow, I am not trying to say that I actually believe that 18th century economics are better applied than modern day economics - but I am well aware of what imputed rent is. Thank you though. So, just to set the record straight, no, I am not a Marxist.

c) I don't believe that everyone in NY is a slumlord; therefore, if I were to create my own theory based on imputation it would be that demand for housing (ownership) is correlated to income, not rent. Imputed rent is a calculation that should be used at the individual level (in my mind), to compute personal finances (i.e. should I buy this individual apartment as an investment), not to draw complex economic conclusions about the state of the overall housing market. And before you go there, yes, I do realize that you are not the only person that uses imputed rent to determine fair value for housing prices. Personally, I believe that the home/property itself is the final product and that demand for the apartment is driven by those who are buying it. That would be applying imputation in its purest form.

Anyhow, I am glad to see that you are finally factoring inflation into some of your earlier posts because as I said in your previous thread "death knell", I believe that we will experience a significant inflation in the coming years which will balance the housing market – raising overall prices and therefore, income. Prices may fall a bit 5%, 10% or maaaaybe 15%; because yes, it does take a while for inflation to hit income.

But thanks for the lesson on imputation.

Anyhow, I do enjoy your posts because you are clearly smart. But it is hard for me to always agree with you because I get the impression that you like to hear yourself talk. Not that I have an issue with that, but I also like to argue, so it will naturally drive me to respond occasionally. Unfortunately my life prohibits me from posting as often, so bear with me.

Good night, Steve.

P.S. unless you are independently wealthy, which most people in this country are not, then your advice to rent and put your money in the stock market instead of buying is probably not the best.

Build equity in your home (over 30 years - so the trends even out) instead of pissing away rent and retire with a place to live. Your home is not an investment - that is where you and I differ.

Yes, invest in your 401K, put money in the stock market - I'm not saying that you should not have investments, but buy a home as a place to live. Unless, of course, you are Tishman Spyer.

really going to bed now.

Now, now steve-o, aka Mr. Cranky pants. No need to get angry and start calling names. I'm not sharing anything new here, everyone knows that you take liberties with "facts" and are quite good at slinging bullsh*t. Does it make you nervous when I point that out? I don’t mean to be negative, just consider this well, a bit of a public service ok?

Why do you feel it is necessary to continuously tell everyone what you make a year? Would you like us to be impressed? Does it make you feel better? Do you think we care? Other than urbandigs, you are the only person on this board without anonymity. It seems to make sense for him. Why do you feel it is a good, safe strategy to post your income, comedy show dates, occupation, etc? What if one of your clients links your uncontrollable spew on this board to you? Does that make a lot of sense? I once interviewed someone and Googled his name before he arrived. He was linked to a Dungeons and Dragon’s blog with some fairly alarming posts (he was a “leader” troll or something looking to wipe out the universe). Could that happen to you?

It’s not all bad steve-o. I am highly impressed with you in some regards. Your ability to take a stance and regardless of any sound logic, creative arguments, reputable publications, or educated opinions and remain unflappable, is quite amazing. No matter how bad your argument gets, you continue to fight the fight. Oh, and you type really fast. That is quite impressive as well.

Yippee!!! We're all smoking the peace pipe!!
I don't care --- I'm going to go ahead and sign the contract for the very moderately priced coop that I'll move into. I'm having trouble selling my current coop, so I'll just let my college-age son and a pal of his live there and pay modest rent. I'll own and be able to carry two very modest NYC abodes -- modest, but not without charm and amenities.
I have to live somewhere, and so does my college-age son who doesn't yet have an income that can allow him to live in Manhattan without parents' help.
I'm not as wealthy as Steve and Spitzer. (For a brief moment I thought Steve WAS Spitzer --- his posts started when Spitzer lost his job. But then I realized that the connection between Spitzer and Steve is that they're both so rich that they are in a position where they CAN happily rent as opposed to buy. --- If you call Spitzer living in Daddy's building "renting.")
Please folks, keep the big picture in mind: Alan Greenspan is to blame for a lot of the current mess.
Support Obama!!!!

Thanks Poorishlady. I won't apologize for quoting Ronald Reagan, but I do regret it if my quote appeared to be a support of his policies or politics. And I do apologize to you if I offended you in any way.

Congratulations on your home purchase!

If you put aside all of Steve's technical, or macro arguments (which in my mind are not particularly helpful with respect to the economic transaction of purchasing a home in Manhattan), he is basically arguing that prices will go down to 2004 levels, which is about 80-100% lower than they are today, and that during the time it takes for that price decline to occur, one should rent.
Well, Steve has already dismissed my arguments regarding the intangibles of home ownership, he has dismissed my argument that the wealthy buy and never own, he has dismissed my argument that buying a home is not buying "shelter", and therefor amenities, quality of finishes, location etc. are relevant considerations; I am sure that as soon as he awakes and runs to the keyboad he will dismiss Lobo's argument that perhaps salaries/inflation will catch up to prices rather than prices dropping to salaries (and that is assuming that one accepts Steve's rent/own ratio for Manhattan).
I think that if one is buying to live in and use and hold for 5 or ten years, and you find something you like and afford, it does not make sense to spend five years in rent and lose that money for a down payment or equity. You can't rent your way to wealth, unless of course you are like Steve who is able to time every market perfectly.
Here is an interesting anecdote that Steve will surely dismiss. My mother in law, who lives in suburban Pennsylvania, is in Manhattan, today, looking to buy a one bedroom as a pied a tiere, and to live in half of the year when her husband retires. They already own in Florida. She is looking for a 1 bedroom in the 6-800k price range. Her only concern is getting a place that she loves in the location that she loves for something in her price range. She loves Manhattan because of the theater, the museums, the restaurants, the nightlife, etc. Now, how many people are doing that in say suburban Mo., or Cinn., or Stockton? That is why Manhattan's housing market is different. There are multiple streams of demand that help to drive up the price. THE PRICE OF MANHATTAN REAL ESTATE IS NOT DETERMINED EXCLUSIVELY BY SALARIES EARNED BY PEOPLE WHO LIVE HERE.
Again, I am not arguing that Wall Street Lay offs will not have an impact in certain segments of the market. However, I know for a fact that foreigners, people in other industries, people from other parts of the country, all are part of the stream of demand for Manhattan real estate.
Finally, you mention the "uber rich". I would argue that the 4 mil and up properties may be more vulnerable then some of the less expensive units due to less potential buyers. However, I don't think that end will suffer because that are many wealthy people on this planet that want to own in Manhattan, despite what you think.
I personally don't care what the market does because I own real estate to use and it is not a significant part of my financial portfolio. I am not a developer and I am not a flipper, I am an owner and a user. However, I feel compelled to respond to your posts because I feel like you are trying to scare people, and that you derive pleasure from people losing their money and I don't like that.

lobo, good morning! Imputed rent is a theory, but don't do the Creationist thing and confuse the different meanings of "theory." One meaning of theory is "conjecture." Another is "a set of principles on which an activity is based." Scientific theory starts as the former, and if proved empirically winds up the latter. All of chemistry is a "theory"; all of science is a "theory"; Relativity is a "theory," yet it is repeatedly borne out by the facts. Economics is a theory; finance is a theory. We live by theories: sets of principles used to describe behavior.

Imputed rent = market rent is not a "theory": it's the definition of imputed rent. The theory of imputed rent was posted above. The fact - yes, fact JuiceMan! - is that over time, all data show that market rents and owners' carrying costs are the same, which bears out the theory. Show me somewhere that says that isn't true over time, there are always oscillations, but the oscillation is around the mean.

Lobo, you got this partially right: "if I were to create my own theory based on imputation it would be that demand for housing (ownership) is correlated to income, not rent."

Income determines the price level for housing, not the absolute demand for it. There is demand because it's something we need. Incomes determine how much we can afford of it, not whether we need it or not. Income does not determine the demand for potatoes and rice, either, but incomes and the prices of potatoes and rice determine how much of each we consume.

"I believe that the home/property itself is the final product and that demand for the apartment is driven by those who are buying it. That would be applying imputation in its purest form."

What? The first part makes absolutely no sense. I think you're saying that the product drives the demand, which is really silly. The second part says exactly the opposite, and it does make sense - that demand is driven by those "buying it" is the definition of demand. The definition of demand is not "applying imputation." You don't apply a theory; theories are explanatory of behaviors.

My comment on inflation was in response to an absurdity posted by mshlee. I'm not discussing it, except to say that when housing prices fall market rents will fall, which will cause deflation in the housing market.

And I never said that housing was not a good investment: I'm saying, "At what price should you buy it?" You seem to think it's a good idea to buy housing at any price. I say - and all long-term economic studies say - that when it costs the same or less to buy as to rent is when it's a good time to buy. Certainly when it costs twice as much to buy than to rent, that's "pissing your money away," as yo call it.

It shouldn't be viewed as an "investment" as in a stock or bond, because it does not derive income. Investments derive income. As the definition of imputed rent says, your return on housing is the right to live there.

Juicy: "No matter how bad your argument gets...." Did you notice yesterday that median housing prices fell to 2004 levels in the country? That's what I said was going to happen here. Or maybe lower, depending on how much Wall Street does cut back (and I think it will be a lot). If you can tell me what your "theory" is, what you base your opinion that housing prices will increase forever (or whatever your theory is) I'll be glad to entertain it, read your evidence just like I did mshlee's. But as of now all I know is that you think up, up and away!

I don't care if people know who I am or how much I make (which does vary from year to year). You know who Tiger Woods is, too, and how much he makes and where he lives. So what? I perform in clubs all over the city using my real name, I've been on TV using my real name, I have websites all over the place with my real name. Who cares? What you don't know is my phone number, because it's not listed.

poorishlady, Eliot Spitzer rents in Manhattan.

Yeah, but he rents in a building owned by his daddy!!!!!!! You're a renter, Steve --- does your daddy own the building you rent in?
I'm not rich enough to rent. I'm a Manhattanite of modest means, and thus I'm forced to own a coop. It's not perfect, but it's home!!!!

Will --- I'm glad you have disavowed your brief Reagan mistake!!!! Thank you! You're a wonderful liberal, libertarian, progressive!
Yes, I'll be drinking champagne later this week after signing for my new coop. A home first, to keep me and my pooch off a park bench. And secondarily an investment, of sorts . . . .
Steve, come on --- we're smoking the peace pipe!!! Juice is smoking it!!! Enjoy some with us!!! It's good stuff . . . .

stevejhx, you missed my point entirely...I don't need a list of rental buildings, I already am in contract

my point is that in the areas that I want to live in (east village, west villages, LES or nolita), there are virtually no good rental buildings to live in. and the ones that are barely acceptable are overpriced (as I said, look at avalon bowery place or the ludlow). or, just as bad, many of the rental buildings are high rises that have all the comfy feel of living in a hotel.

neighborhood, block, building...these things matter a lot, in terms of both your investment, and quality of life. just because it might make more sense to rent vs. buy in murray hill or some other bland neighborhood, or if looking at walk-ups with radiators that wake you up with banging in the middle of the night, doesn't mean anything for my rent vs. buy decision.

Calling all Bulls! Calling all Bulls:

http://www.nytimes.com/2008/03/25/nyregion/25mta.html?ref=nyregion

Read it. It's what I've been saying. The market has come to a standstill.

M.T.A. Delays Improvements, Citing Drop in Real Estate Sales Taxes

The shortfall was chiefly caused by a sharp drop in taxes from real estate transactions, transportation authority officials said. They held out hope that if finances improve by the summer, they could go ahead with the improvements.

Gary J. Dellaverson, the authority’s chief financial officer, used words like “gloomy” and “frightening” to describe the decline in what has been a key source of the authority’s prosperity in recent years.

Real estate tax revenues in February and March were below budget forecasts, which had already been trimmed back substantially from previous years.

“We took these tax projections down quite dramatically from last year, and they are quite dramatically underperforming,” Mr. Dellaverson said.

The real estate boom had helped fuel large budget surpluses at the authority, but Mr. Dellaverson said the two-month decline was a “cautionary flag.”

The authority has taken in $306 million in mortgage and transfer taxes so far this year, $21 million below its forecast. The shortfall would be even larger except for a strong January, which came in above projections. Real estate tax revenue received in March totaled $79 million, $31.5 million below the forecast and almost exactly half what the authority received in the same month last year.

The tax revenue generally reflects transactions that took place in the previous month, so the March revenue is based on mortgages that closed in February.

mh23, herein lies the fault of your argument:

"If you put aside all of Steve's technical, or macro arguments (which in my mind are not particularly helpful with respect to the economic transaction of purchasing a home in Manhattan)...."

In other words, you think Manhattan is "special," that the capital of capitalism is not subject to the very market forces that capitalism extols. You think everyone who bought in your building at $721 psf can afford it at $2,000 psf. And you support what you think with quaint anecdotes about your mother-in-law, Ralph Lauren's daughter, and marble countertops.

That's fine. That's your opinion and you have a right to it. And so did everybody who bought UUNet at the peak of the dot.com bubble, or a McMansion in San Diego three years ago.

I say be careful. Nothing is "special," everything always returns to the historic norm. Read the article about MTA tax revenues: it gives you a clear picture of what's been happening in the market over the past few months.

something to feed on that few are discussing. If housing spread to wall street causing all the damage in the secondary mortg markets and to banks + IB's balance sheets, and ultimately causes the recession, HOW WILL THE RECESSION EFFECT HOUSING?

Everyone is talking about a recovery already because of yesterdays sales #'s, but what do you think will happen when the recession hits, which we are probably in now, but officially hits and the headlines in mass media take charge on RECESSION ARTICLES and jobs are lost.

Omigod. Steve is right. There's a 2 br 2 ba available in Spitzer's fancy-schmancy 5th Ave building owned by his father. And it's only $12K a month rent! That could be very, very tempting for nervous, well-heeled would-be condo buyers -----
See this:

http://cityroom.blogs.nytimes.com/2008/03/11/the-elite-rental-where-the-spitzers-live-pets-allowed/

Steve. We shall see. One point where we may agree is that, should quality of life in Manhattan deteriorate so that it is dangerous to go to the theater, etc. and people want to leave Manhattan, that will be bad.
Digs, if that happens, your East Harlem property will sit for another three years (if you have not sold it), only but the top 20% of brokers will have a job, and you in all likelihood will be out of work. If your blog generates enough advertising to support you and your constant gloom and doom, you will be fine.

Poorishlady, I posted that listing, and there are lots more like them, some publicly listed, some not.

No smart millionaire pours money out with the bathwater, to mix a metaphor. There is no innate benefit to owning property.

urbandigs, that housing report from yesterday - which confirms in the rest of the country what I've been saying about Manhattan: back to 2004 - I believe is just the start.

To answer your question about a recession - and I don't feel one - I think you need to review what happened in NYC in 1987. Wall Street bonuses in the past were predicated on earnings that were marked-to-myth, and are disappearing. Hedge funds may wipe up some excess of the brokers / traders being fired by the banks, but without their 100x leverage - which is also going away - there won't be that many opportunities for the time being.

If anybody posting here has ever lived through a bank retrenchment, or a housing bust, please raise your hand. I worked for the old BofA during the dark days of the mid-1980's. Though I wasn't laid off, I know what massive layoffs are. I saw property in NYC decline 25% in nominal terms in NYC from 1987-1998, at the time Citicorp almost went under. It's happened before. Anybody who thinks we're immune, as the MTA and the city what's happening to property conveyance taxes, mansions taxes, and mortgage recording taxes.

still waiting for steve to respond...

also, to say manhattan isn't special is ridiculous. why do we pay so much (whether owning or renting) to live here? I live downtown and commute to the suburbs for work. why? because manhattan is great. I love the restaurants, the bars, the cafes, the shops, the people. While not super-wealthy, I make a very good living, and for how hard I work, I am going to live where I want to live.

if you had an apartment or house in hoboken, long island, westchester, wherever, that I could live in for free instead, I would turn you down. if you think I am an exception, go check out grand central between 6-7am and look at all the young professionals reverse-commuting to their hedge funds in greenwich. do you think they live in the city because it's cheaper?

What would you have me say, evillager? Your words were:

"neighborhood, block, building...these things matter a lot, in terms of both your investment, and quality of life. just because it might make more sense to rent vs. buy in murray hill or some other bland neighborhood, or if looking at walk-ups with radiators that wake you up with banging in the middle of the night, doesn't mean anything for my rent vs. buy decision."

Of course that's true. But it's not an absolute truth. It's a relative truth. You might like the East Village. Know what? I like Eliot Spitzer's building. But I can't afford $12,000 a month rent until I get my own comedy special on HBO.

There are always emotions involved in decisions: I have a Lexus, my uncle has a Cadillac. We can afford them, we have our taste. But you can't buy what you can't afford, and that's my point.

If you can afford a $2,000,000 property that costs twice as much to buy as to rent and that's what you want to do, how you allocate your capital is your business. Economic theory, however, says that on the whole, more people will decide to rent because of the extreme price differential, and that theory is borne out by one hundred years of statistics.

This is actually getting to be fun:

http://www.bloomberg.com/apps/news?pid=20601087&sid=a4kZQNXUFpW4&refer=home

"S&P/Case-Shiller Home Price Index Falls Record 10.7% March 25 (Bloomberg) -- Home prices in 20 U.S. metropolitan areas fell in January by the most on record, a sign the housing recession is deepening, a private survey showed today. The S&P/Case-Shiller home-price index dropped 10.7 percent from January 2007, after a 9 percent decrease in December. The gauge has fallen for 13 consecutive months."

That's why banks are cutting back, guys. That's why the MTA reports tax revenue down so much. The MTA data are on closings, which indicate activity going back 6-9 months because of the lag from offer to close (especially in new construction). That's WAY before the Bear Stearns collapse and all that's going on now.

Put the pieces of the puzzle together. Apply the numbers to the theory (not the other way around, please!) and see what they say. Things are reverting to the norm, here and everywhere. Here especially, however, because we're behind the deflationary curve.

If somebody doesn't agree, come up with an empirically-tested economic theory why, and show how all this information correlates to that theory.

I completely refuse your claim that properties cost 2x as much to buy vs. rent. My total monthly charges after tax will be about $5500 per month for my apartment...I could rent this place out for $5K easily, and could probably even break even on it. But what will rents be in 5 years, when I upgrade to a 3br and might want to hang on to this place? I guarantee that I will be making a nice profit.

Look steve, I don't think everything you say is wrong. Sure, prices got ahead of themselves, and will probably soften, especially for your nondescript, interchangable 1 or 2BR with no outdoor space in murray hill (or substitute: chelsea, hell's kitchen, UES east of 2nd ave, turtle bay). But if you are waiting for a bargain on a great building in the west village, tribeca, soho, 5th ave, or CPW, it ain't gonna happen.

Steve,

I agree with your price/rent analysis. I would like to buy a place but am in no rush as I, like you, see storm clouds on the horizon for Manhattan real estate. But I also think there is more to it than that.

I rent a 4BR 3BA apartment on the upper east side for $40 per sf. per year. A 3BR 3BA apartment of similar s.f. and located 5 blocks away just sold for $1600 per square foot. Monthly maintenance is more than 60% of the amount I pay in rent. The price of the apartment would pay for 45 years worth of renting not including the additional charge of monthly maintenance on the purchased apartment. This is an over simplification of course and says nothing about inflation or price appreciation. But maintinence and taxes also go up for owners, appliances wear out etc. Nevertheless, one must agree that this is out of balance.

But the price/rent ratio has been out of balance for a long time. And there is no reason to think that it cannot stay out of balance for a very long time. Or to think that it cannot get even more out of balance in the future. In fact, as many hedge funds have found out markets can stay irrational for a lot longer than some can stay solvent.

The point is most buyers do not buy homes for purely financial reasons. On the contrary, it is emotional factors and fuzzy feelings about schools, safety, convenience, commute, aesthetics, prestige, ego that all weigh in on the home buying decision . No where is this more true than in New York City and in the surrounding metro area. No where are people more willing to spend money for convenience. And there is virtually no where else where people have the income to pay for that convenience. I accept that the rent/buy relationship is out of balance. And I have no doubt that it can remain so for a very long time.

Housing is not purely a financial decision about shelter. One thing for sure is that you Steve are very emotional and passionate about your housing views. Believe me there are plenty of others who are just as passionate about living in the "right" building in the "right" neighborhood. Aditionally, there are others who will spend whatever it takes to live near a good school which will provide what they think is the best education and opportunity they can provide for their kids. Those people are living their lives. They are not spending every waking moment on a blog. They are not paying attention to the 28% of income rule.

Why do people buy fancy cars like a Lexus? Isn't a car just transportation? Just like housing is just shelter? Isn't buying a car a purely financial decision too? Why is over paying for transportation any different than over paying for housing? Why do people buy the Lexus over the Volkswagon? or the Kia? Why do people in Manahttan need a car when they can take public transportation? Could it be that buying a car is more than a financial decision? Could it be emotional factors like aesthetics, prestige, ego ?

Steve,

I raised my hand already as having lived through the late 80s-mid 90s RE mkt. Wasn't pretty at all. Based on that experience, however, I am still inclined to believe the downturn will be gradual, not precipitous, and that any "deals" would have to be opportunistic based on a particular seller's circumstances (e.g., job loss; relocation).

Speaking of potential circumstances:

http://dealbook.blogs.nytimes.com/2008/03/25/wall-street-may-hand-out-20000-more-pink-slips-report-says/index.html?hp

Stevejhx I too am waiting for prices to go down so I can buy another investment property. There's a sweet 1 bedroom in the West Village I have my eyes on. It's a condo and the owner is asking 1.3 mil for it. Although other comps show that they sold for about the same price this year. I offered 430,000. I used a 7 to one rent ratio. Wish me luck.
BTW I hope all potential sellers out there read Stevejhx messages and lower your prices. I am also looking to buy a few apts on the cheap so I can flip em in a couple of years from now and make a nice tidy profit.

Steve, I wouldn't read too much into that MTA data. My reading is:

- They're 6.4% below projections for the year, which doesn't seem to justify words like "standstill", and
- For March, they're more like 30% below projections (although the month isn't over yet, strange that they're releasing numbers as if they're fully baked), but exactly at last year's levels.

What the second number tells me is that whoever is in charge of planning the MTA's budget is an idiot. Who plans a budget with an assumption of a 40% YOY increase in revenue, especially since it's been apparent for a while that the real estate market is slowing down.

KISS, without BSC that blog says:

"The city’s Independent Budget Office, in its report, estimated that Wall Street’s profits for 2007 will sink by more than 80 percent to the lowest level since 1994. Profits for 2007 are expected to total just $3.2 billion, down from $20.9 billion in 2006, the report said."

Yikes. I can't argue how long the correction will take, except that it will happen.

evillager, I don't care that you "completely refuse your claim that properties cost 2x as much to buy vs. rent." It does not in all cases; it does in most cases. Read this thread entirely, go back to my other posts elsewhere. Compare the prices of equivalent apartments in different buildings. You'll see it's true.

Don't count the tax benefit twice: the tax benefit is already included in the market rental, and offset by the opportunity cost of not putting your down payment in another asset. You need to compare nominal market rents and nominal carrying costs. Those are what are always equal over time.

"If you are waiting for a bargain on a great building in the west village, tribeca, soho, 5th ave, or CPW, it ain't gonna happen."

Wanna bet? Isn't that where all these laid-off bankers live?

Jake: "But the price/rent ratio has been out of balance for a long time. And there is no reason to think that it cannot stay out of balance for a very long time."

It's been out of balance for 4 years or so, and there is every reason to think that it can't stay out of balance for a very long time: it never has, and it never will, because incomes are insufficient to support these price levels.

Plus, look at the layoff numbers.