Caveat Emptor: Manhattan Still Way Overpriced!

"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 guess that is my point steve-o. You have no idea whether I agree with you or not. When I attempted to ask a legitimate question that challenged your theory, you exploded into this tirade about how wrong and stupid I was. Problem was, your tirade included some inaccurate and exaggerated information, which led me to believe you were more interested in being right than having a discussion. I personally learn better by challenging both sides of an argument and then forming my own opinion. Sort of like watching the same story on CNN and then Fox News. I rarely have an extremist stance, but on Manhattan real estate I am much more optimistic than you are.

I was intrigued (and continue to be) by your rent vs. buy spread analysis and think it makes a ton of sense. However, I would be careful to blanket that analysis across all Manhattan properties / neighborhoods. What may be true in Tribeca in one building may not be for a co-op in the UES. Further, I think mh23’s points about being careful about linking incomes to real estate prices should be investigated further. There is no accurate way to measure savings, and that’s where relying on incomes as a predictor of real estate falls short. Forget about the foreigners and out-of-towners for a second, there are many people in Manhattan (and on this board) that have used equity to trade up into larger places or that have amassed significant wealth that allows a larger than 20% down payment. These larger down payments skew the income analysis as well as your rent vs. buy theory.

urbandigs asked above what the impact of a recession would have to this amassing of wealth or build up of equity. A significant recession would certainly impact the savings rate and the slowing of Manhattan real estate would obviously slow the equity build up. This would impact the savings rate for Manhattanites, however, it is impossible to know how it would impact out-of-towners looking for the perfect pied-a-terre.

steve, since you're so smart, I'd like to know a few other things about you:
1) where do you live? you said you rent in the city, but own on long island - where for both?
2) how much did you pay for your house? how big is it?
3) how much is your rent?
4) how much do you have amassed in savings? and how old are you?

see, I don't think you are as smart or rich as you pretend to be. just some old shlub accountant who thinks he knows about real estate.

Spunk, it's a 12:1 ratio, so you're going to have to up the ante.

Jordyn, read the figures closely. Bloomberg said the same thing as the MTA. Check out the Miller Samuel 4Q2007 report vs. listings not in contract on streeteasy. 5,113 available listings at the end of 2007, 6,740 here today. That's a 20% increase in inventories just of listed units, excluding those not put on the market by developers. It absolutely confirms what the MTA said.

JuiceMan, I'm tired of fighting. I asked for a theory, got "All The Western World" from you. Just not true.

I'm not using "my" theories, JM: I'm using tried-and-true economic principles, not all of which agree with each other (which is already a known fact) but all of which indicate that things are crazily out of line.

You say, "I was intrigued (and continue to be) by your rent vs. buy spread analysis and think it makes a ton of sense. However, I would be careful to blanket that analysis across all Manhattan properties / neighborhoods. What may be true in Tribeca in one building may not be for a co-op in the UES."

By definition what you say can't be true. That is always the ratio over time and always has been. What may be different is the price and income levels, but the ratio remains the same.

Re savings, see the "wealth effect." People feel awfully poor right now; BSC, even at $10, has been wiped out. MLynch's profit forecast was cut by 45%. Lehman and Goldman have announced huge layoffs. We know what Citigroup is going through.

My memory from the carnage at BofA in the 80's is that when there's an environment like that, nobody makes a move till it's all over. Unfortunately, the Fat Lady is just beginning her aria, and it might be Wagner's Ring cycle.

Oh yeah, I have the same memories of Price Waterhouse in London in 1992, when their Nigel Lawson property bubble burst: nobody made a move, everybody was waiting for the ax to drop.

And drop it did.

That's what's happening on Wall Street right now.

evillager:

1) Chelsea, Fire Island
2) $340,000, 2-br 2-ba loft
3) $4,600
4) 7 figures
5) 48.

K?

Then - I don't care what you think of me, so I don't know why you would even write such nonsense.

evillager. Lets not get upset. Steve please do not respond with a 5 paragraph response to evillager. Does it really matter where STeve lives, what he does, etc. He's just a man with an opinion just like evryone else here. Lets stop the personal attacks and have a nice calm discussion about Real Estate. Isnt that what this message board is for? I feel like this blog is a script from the Jerry Springer show!

Thanks sharise, if you know who I am most of that is recorded information, and anyway I can be making it all up. Which shows how silly evillager is.

When you tell people things they don't want to hear, and they respond like babies, then you have to treat them like babies.

"I don't think you're so smart nanny-nanny-boo-boo!"

I'm also not a CPA.

"JuiceMan, I'm tired of fighting. I asked for a theory, got "All The Western World" from you. Just not true."

There you go again steve-o. Is that all you got? The western world comment? I must really make you nervous. In order to stay on subject, I have refrained from pointing out all of your tangential exaggerations. I at least I admit to a broad generalization, when are you going to fess up about your inaccuracies? There is nothing more revealing about a persons character than someone who doesn’t admit s/he is wrong.

"By definition what you say can't be true. That is always the ratio over time and always has been. What may be different is the price and income levels, but the ratio remains the same."

Yes steve-o, I realize this, thank you for making my point. Price levels are different across the city and in some cases across the street. You are blanketing your theory across all scenarios which is painfully inaccurate.

"Re savings, see the "wealth effect." People feel awfully poor right now; BSC, even at $10, has been wiped out. MLynch's profit forecast was cut by 45%. Lehman and Goldman have announced huge layoffs. We know what Citigroup is going through."

Not denying this either, but that wasn't the point. The point mh23 made was that you have to consider savings when discussing price levels not incomes alone. If you want to argue that savings are being impacted, fair enough, but it has to be considered. Mh23 is correct.

yes, it does matter. steve acts like he is such an expert, and that his opinions are law.

the people buying these "overpriced" properties that steve talks about are younger and wealthier than he is.

and yes, taste matters. chelsea - blech. awful neighborhood. you probably live near penn station.

you want to take multi-million dollar real estate advice from some over the hill guy who spends all his time on a message board with a $340K house? go ahead. losers.

JM, I said that mh23 was correct about wealth. I've always said that. My only problem with what he said is that as far as I know there are no accurate data that could support any firm conclusions. We don't know how many there are beyond the census data, we don't know whether they want to buy, we don't even know who they are. Therefore, I can't draw any conclusions on them.

No, you don't make me nervous at all. Except for the "Western World" comment I don't know what I said that you're referring to. Remind me.

Tell me my inaccuracies and I'll look at them again. I have in a number of instances corrected myself and been corrected. I have no problem with being wrong.

I have repeatedly said that what I am saying is macro - not specific to any one unit - and that it affects the economy as a whole. It would be illogical - and I forgot the specific name of the logical error - to apply an overall trend to a specific piece of data. What I have been saying is that - overall - this is what economic theory says will happen, and that we are, in fact, seeing the numbers start playing out the way they should.

Re your earlier post, I watch Kudlow all the time. Don't agree with his politics or most of his economics, but it's an interesting debate and I love Kudlow 101.

Oh, evillager! I'm not stating opinions. I'm stating economic theories.

No I don't live near Penn Station, though I can walk there if need be. As it happens, my grandmother grew up in Chelsea, and my great-grandmother lived here, as well. I have roots in Chelsea that go back to about 1920.

I LOVE THIS! "you want to take multi-million dollar real estate advice from some over the hill guy who spends all his time on a message board with a $340K house?"

First, that house is my second house, not my first house, and it's worth considerably more than $340k right now, though it's probably falling in value as we speak, like everything else.

Second, "The people buying these "overpriced" properties that steve talks about are younger and wealthier than he is" is really funny, because a) you don't know how old these people are, and b) I still have a job.

Steve, I summarized what the MTA said. Do you disagree that what I wrote is a correct summary of the numbers they provided? If so, how do you disagree?

Essentially, the MTA is saying that revenues are slightly lower than projections for the year, and significantly lower than they projected for March (which seem to depend on a 40% increase in YOY revenue), but exactly inline with revenue last year. This seems inconsistent with the notion that the market is at a "standstill".

I agree that there is going to be further pain in tax revenues, but at this point it seems to be more the result of declining volume than falling prices, although you'd expect eventually one will follow the other.

ok, I take it back. you live in one of those soul-less highrises on 6th ave in the 20s. great location! you can go to home depot any time you want.

face it, steve, you've done ok for yourself, but you're not a player. you're not going to impress anyone who is a real participant in the real estate market in this city.

Jordyn, this is the only thing I'm talking about:

"One of the most striking declines was in a tax on residential mortgages for properties that range from single-family homes to six-unit apartment houses. That tax delivered $11.9 million to the authority in March, the lowest one-month level since January 2002."

If you look at the graph, that figure has been going down for a long time.

I refer mostly, however, to what they mayor said about a month ago: there's been a precipitous decline in revenue for the city. The MTA tax revenue comes from areas outside the city as well, and the figure presented only shows the mortgage recording tax, which is not applicable to co-ops, the mansions tax, or the biggest revenue-producer of all, conveyance tax.

fair enough steve-o, let's move on. We can all meet at poorsihlady's house warming party, do some shrooms and listen to The Grateful Dead.

Steve sorry to inform you that the RE market in Fire Island as well as long Island is very poor. Depending on where your property is located it probably wouldn't even fetch 340k.

Not really, spunk. It'll probably fetch $550k b/c I bought so long ago and did some good renovations - central a/c, skylights, repaint (it was a mess from the 70's), and there was never a boom there. But you're right, lots of people out there are losing their jobs in here. It could wind up a mess.

evillager, you are funny!

"ok, I take it back. you live in one of those soul-less highrises on 6th ave in the 20s. great location! you can go to home depot any time you want. face it, steve, you've done ok for yourself, but you're not a player. you're not going to impress anyone who is a real participant in the real estate market in this city."

No, actually, I don't live in one of those high rises on 6th Avenue. Where I live isn't ideal, but then of course I don't own it so I can leave any time I want.

I'm not trying to "impress anybody," and I'm doing quite well for myself: top 1% in the US, top 5ish% in Manhattan. And that 5ish is going to go up, I think.

By "real participant," do you mean Joe Lewis, the billionaire who just lost one of his billions betting on Bear Stearns? Thankfully, I don't want to be a "real participant" like that.

JMan, no shrooms for me, but I do like my alcohol. ;)

unfortunately wishful thinking Stevejhx no way in todays market can you get what you paid for plus the cost of renovations for your two bedroom in Fire Island unless of course you lived in one or two exclusive areas there. Couple that with the commission from the sale and your probably lost money on your purchase.

Your also paying over 50K in rent a year that also sounds like a wise move as well.

and your 48 and spend at lease 6 hours per day on this thread per day. That also sounds like a good plan as well.

Why hasn't everyone figured out that no matter what Steve is always going to be able to explain why he is the exception? His property will defy gravity whilst the rest of us (presumably due to job loss) have to sell, only to have the property languish, then we panic sell at a loss and end up living with Mom and Dad. And our investments (while his are safely tucked awayin global funds) will all tank leaving us without a retirement. And we will never work because we do not have a unique combination of language skills or a thriving translation business.

This is getting ridiculous. But more because people keep engaging him. He has so overplayed his hand. Let us at least wait for him to start the discussion under a new made up screen name and identity...

Great, you guys - much as I agree that Steve is abrasive in his comments, at least his opinions are grounded in facts and figures - all I am hearing from the bulls camp are:

(a) Variants of "Manhattan is different and so laws of economics, gravity, etc do not apply here" theory
(b) personal attacks (didn't someone call someone Hitler here on this thread?? :-)
(c) Trying to attack Steve's credibility rather than his logic/points (e.g., Steve, your zip code is inferior to my zip code, so anything you say must be false)
(d) ridicule (e.g., "pay your rent ha ha" that is the only 'reasoning' tactic spunky has used on this board as far as i can recall)

I was \looking to buy this season, but am half considering renting for another year - unless some bulls come up with logical arguments that convince me (in abrasive language or otherwise) that I will not lose my shirt investing in property now.

I do buy the points around intangible benefits of buying - but the question really, is how much premium am I willing to pay for those intangible benefits - 10% more? 20% more? it seems at current rates, its closer to 60 - 70% more. Further, while there are intangible benefits of buying (its your place, so you can invest in it and make it nice), there are also intangible benefits of renting (if you get your dream job in san francisco, or decide to take a year off to go around the world, you dont have to worry about the interest rates or real estate cycle to sell or rent the place).

Thoughts?

Erik

"thriving translation business"-- for some reason that doesn't sound right.

Anyway i agree with you eah we should just leave him alone and let him argue with himself. That's free entertainment. He kind of reminds me of this dog (link below) when he responds to his own posts and gets angry in the process.

http://www.youtube.com/watch?v=XD4WnQ1pvMI&feature=related

Erik: even Steve and I agreed that eventually you roll the dice and see what happens. Whether you rent or own. I agree there are times when it is not the right decision. For example, when I was 25 co-op home ownership would have been a ridiculous decision since I worked in emerging markets. And I was nowhere near the maturity level of becoming a landlord so even buying a rentable condo did not make sense. So, I rented.

If your gut right now says wait, why bother yourself with property bulls/propery debates/numbers? When you decide the storm has passed revisit the conversation. I am losing the reasoning behind the tug of war between buyers and owners.

spunkster, you can only lose money if you're planning to sell it or planning to rent it for less than it costs to carry. I don't plan on doing either, though if there is a downturn maybe I'll pick up a place on the ocean for a song.

Just so people know, the property I bought was on the market for 2 years, and they lowered the original price from $490k and I bought it for $340k. It was a fire sale, & the prices had been decreasing since the dot.com boom. They started increasing the year I bought. The next person who bought a similar unit with no view and only one bathroom bought for $375k 2 months later.

I don't think my property is special, and I never said it wasn't going to lose value from its peak. I probably will, but if I don't sell it I don't lose anything, & I don't plan on selling it. In fact, I'm going to put in a new kitchen.

Spunkster, I'd rather pay $50k in rent than $100k in interest and be sitting on an asset that if I purchased today would lose money. As I said, guys, it all depends on when you bought. If you bought in 2000 in Manhattan you probably won't lose money, thought I believe the value will fall far from its current heights. If you bought last year, you're screwed.

eric_cartman, I believe you are absolutely, positively, 100% correct, especially the last paragraph that starts with, "I do buy the points...."

Everything you say I agree with. Every decision is personal. If you want to buy go ahead, but you need to know the downside risk potential, and every indicator I can find says that it's steep. This would be my rule of thumb: if you can buy today and rent it out for as much as you pay per month - nominal rates, excluding tax deductions, abatements, etc., since they're a wash over time - then you won't lose money. But if the differential between buying and renting is significant on a nominal basis, you might lose your shirt. See my earlier example about 99 Jane.

You know what? If I were to translate this paragraph:

"thriving translation business"-- for some reason that doesn't sound right. Anyway i agree with you eah we should just leave him alone and let him argue with himself. That's free entertainment. He kind of reminds me of this dog (link below) when he responds to his own posts and gets angry in the process."

I would earned $6.48. Comes out to be about $200 an hour, no expenses except a computer.

Spunkster, yet again you know not what you speak!

eah, the "the tug of war between buyers and owners" has just begun. I think the only variant this time is there's all this new construction available and coming online. Developers have more margin, and more incentive to lower prices, since it costs them money to keep units vacant. Some might be turned into rentals.

OK--this is a perfect time to move on to practical example and I am excited to provide a real life example. I did buy last year (not my first property, if that is relevant to people) and it was in an emerging area: Washington Heights. I paid $485 for ~1500. It is a gorgeous classic six. I renovated it and, all in, probably paid about $450/sq. ft. It is 100% to my taste but generic enough to be appealing to renters.

So, Steve, sased on your broad criteria...I am screwed since I bought last year. But let's go to the next step where you tell me exactly how I am screwed? Seriosly, describe how I made a major financial error? Now that we have an example, we can argue in real terms.

There is absolutely no way that Stevejhx can generate the volume of posting on this board at this frequency and also do some productive work at the same time. But it is a free country, so post away. Perhaps if it keeps up at this rate we can all gather together and stage an intervention. There has got to be meetings out there for this kind of thing. This site is busy become "steve-easy". The first step is admitting you have a problem.

stevejhx I don't care what you say you are not selling (even if you wanted to ) that property for a profit in todays market. It was a crappy purchase when you bought it several years ago and it's even more crappy today. I have a strong suspicion this property is not located in Solitaire nor Seaview since you didn't mention either one. Now you indicated it's not in Cherry grove so where oh where can your 2 bedroom little house be located?

That's Saltaire

Honestly, eah, as I've said before, it's hard to comment on individual cases, and I've never been to Washington Heights.

I don't know if you made a mistake. A lot depends on what you want to do with it. If you want to live in it for 10 years, I don't think you have a problem. If you plan to rent it out and can get in rent what you're paying for it and can continue to do so, then I don't think you have a problem. If you plan on flipping it you might have a problem.

It depends on the market in Washington Heights. It depends on your intentions. I have a friend in California who bought a house to flip, couldn't, now rents for less than he's paying, is completely underwater in his mortgage, and is teetering on bankruptcy. He has another place that he rents for more or less what it costs him, and is in contract to buy at Trump Something in Sunny Isles and will probably have to walk away and lose his deposit. In the meanwhile he rents a house because it's much cheaper than buying.

The woman who bought my last apartment in South Beach bought it to live in and flip in 2 years. She paid $1 million. 2.5 years later she couldn't sell it for $700,000.

I know people here - and mh24 claims to be one - who bought in 2004 at $721 psf and can make money, and I think he can. But as mh23 would readily admit, no one who buys today at $2,000 psf could rent it and make money in Tribeca.

What are the figures for Washington Heights? I don't know....

briguynyc, I'll make about $1k today, it's a little slow.

"It was a crappy purchase when you bought it several years ago and it's even more crappy today."

Okay, Spunkster, I agree with you, it was a crappy purchase. But at least I enjoy it.

Exactly. There is no broad measure by which you can determine if someone who went into contract last year is screwed. To make a statement like that is just ridiculous. People make up markets but you're constantly using static models and making broad generalizations based on catastophic circumstances.

Being screwed is getting hit by a cab who jumps a curb and leaves me paralyzed. Being screwed is not, on paper, one of my properties losing value. Unless I need to sell it to pay for somethign dramatic like cancer care for a family member.

eah, that's exactly what I've always said. I don't know why you're so upset about it. I said it about my property, I said it about your property, I said it about everybody's property. It depends on what you want to do with it.

My point - and read the thread again - is that if you're thinking about getting into the market right now, know the downside risk. All indicators are that prices will fall dramatically. If you want to live in it and like it, that's cool. If you want to flip it or want to sell in the short-term, you're probably in trouble. If you need to rent it out and can't cover your costs, ditto.

I believe that prices are going to fall, and fall dramatically in Manhattan as they have in the rest of the country. I don't believe we are immune to what is going on. I believe there is a bubble. Buy in a bubble at your own risk. I also knew people in Miami who bought at the height of the 1987 bubble, and didn't make enough on paper to break even for 10 years. That's the danger.

classic, briguynyc.
"There is absolutely no way that Stevejhx can generate the volume of posting on this board at this frequency and also do some productive work at the same time."

he's entitled to his opinion, but there seems to be a disconnect between his micro/macro analysis. the nyc market is so complex that his sweeping statements and figures should be taken with a grain of salt. Not everyone has the balls to pull the trigger in this market. RE is also a timing game for flippers and a winner's game for those holding property for 5+ years...and NOBODY on the this thread knows if we are the bottom; my $.02 prediction = the dust settles Q2 09.

I too recently bought with the intention to eventually rent out (and to eah's point, 100% to my taste, yet appealing enough for an eventual renter). It's in Carroll Gardens, Brooklyn. Some make sweeping judgments that ALL of Brooklyn is doomed, but I emphatically disagree. I conservatively took my chances on $650/sq ft than Manhattan's $1100 sq/ft with greater appreciation opportunity. My point being, there are deals to be had right now that might not be around in 18 months. Yes, speculative areas, perhaps in an oversupply area like Billyburg or up-n-comings spots that might get a smack-down (see Fort Greene, Prospect Heights, South Slope), but the brownstone areas are insulated. There are also desirable public schools and passionate community board members that prevent over-development that keep it a desirable neighborhood.

Just another "opinion" from a cautiously bullish non-wall-streeter.

curious007, there is no disconnect between my micro and macro analysis. I am making a judgment on market fundamentals based on tested economic theories, not picking a stock or saying what will or won't happen to any property. Call it chartology if you will, because that's what it is. Markets move in overall directions, real estate included. Just because the entire market is going up or down doesn't mean a particular stock - or property - is going up or down.

However, most assets are correlated with the market.

Long-term investors don't worry much about short-term market swings. I've said that. But long-term investors also don't jump in to a market when the fundamentals are wrong, if the market is overpriced. They wait on the sidelines for things to come back into equilibrium. Short-term investors in real estate are fools, because real estate is not a highly liquid asset, and prices normally (though not recently) rise and fall slowly.

That said, what I'm getting from this thread is that a lot of people seem very defensive and almost want their hands held, as if they want reassurance that their particular bets won't sour. Sorry, I can't make that prediction any more than I can predict that they will sour, though I would say that what goes up must come down, and the biggest fall the hardest. And it is extremely rare for one person's property to keep its value when all others are falling.

Steve, online forums will always have a certain disconnect since so much essential nuance is missing. I don't hear people being defensive; more a bit weary of your endless analysis. I'm really not the touchy-feely type but RE kind of is a touchy feeling topic since it is often based on emotion or driven by factors such as marriage or having children or feeling like you've reached a certain age. If you were considering buying something enormous, or if it were your first time buying, I could see your relentless number crunching and new threads but all this over a market you've already decided not to buy into actually indicates that you're defensive. I am not sure where the obsessive need to justify comes from but it's really quite odd.

Steve, your view of the real estate market really makes sense. I have always relied on the similar market logic of Charles D. Ellis in "Winning the Loser's Game."

Oh, eah, I'm just having a little light entertainment while translating boring articles of incorporation.

I like the debate, and I learn from it. I clarify my thoughts, emotions from facts, learn the psychology that's driving people in this market. That's probably my favorite part. I like seeing what people's motivations are, what facts they use, what they consider relevant. It helps me identify the right time to get in, which is usually about the time when everybody's giving up.

No obsessive need to justify, just debate the facts. As I said, I was trying to see if anybody could tell me what theory or data they were relying on to justify the prices in this market. No one came up with either, though mshlee tried (and failed miserably).

I remain convinced that the imputed rent = market rent equality remains unharmed because no one was able to come up with anything different. Therefore, if it costs more out of pocket to buy a place than it does to rent something equivalent, then the market is out of equilibrium.

The market is out of equilibrium, we are in for a huge correction. Not only can't incomes support the current imputed rent of buying property, incomes are falling because of Wall Street and rent will be falling along with them. Bubbles cannot last. This one is deflating.

And that, folks, concludes the usefulness of this thread. Until next time - unless you absolutely, positively have one more insult to hurl out Spunkster - this is me, signing off....

he's obsessing and number crunching because as he's admitted in the past, these prices are not "ideally" where he'd like to pull out his wallet. You don't need to hold my hand, I'll be ok Steve, but for someone that is pretty obsessive and relentless on here, trying to campaign "MANHATTAN STILL WAY OVERPRICED!," I find it hard to believe there's nothing in it for you other than mental masturbation.

"learn the psychology that's driving people in this market."

I mean all real estate has some kind of risk associated with it. Trying to time the market carries risk. But some will win and some will lose. That is how it works. It all depends on how long your time horizon is.

Why don't we just all catch up in like 6 months and see if the prices are actually down?

Of course, by then stevejhx will have posted over 2.5bn words to the streeteasy servers.

The Bears for the past 6 years have been wrong but these same bears now claim they have been right for the past two months. Time will tell.

I do find the price/rent ratio to be an interesting indicator although it certainly moves in long cycles that can make it feel like cyclical changes are actually permanent. In my mind this ratio is driven by 3 factors: 1) price and availability of credit, 2) "ownership premium" (i.e., benefits such as ability to renovate outweigh costs such as maintenance, inability to move easily), and 3) real estate appreciation/depreciation expectations.

As for #1, credit remains somewhat resonably priced but has become much less available. This argues for a lower price/rent ratio. As for #2, I find it hard to believe that the "ownership premium" really changes much over time therefore I consider this a non-issue. On #3, the extraordinarily high price/rent ratio suggests that very high appreciation expectations are already built into the market. In other words, NYC real estate sentiment is at historic highs and is therefore far more prone to a downward revision than an upward revision.

As far as I'm concerned there is no reason at all to believe the price/rent ratio should be above its historical average. History would tell us that an overshoot on the downside is in fact more likely.

"RE is also a timing game for flippers and a winner's game for those holding property for 5+ years...and NOBODY on the this thread knows if we are the bottom"--curious007

Probably the one of the most insight statements on this thread!

The problem with that statement is you could replace "RE" with just about any asset class...stocks for example. While most asset classes do appreciate over any given 5-year horizon that is not necessarily the case. In fact, historical analysis would suggest that returns are GREATLY enhanced if an investor periodically rebalances his/her portfolio into the asset class(es) with the lowest price/cash flow ratio. Right now, NYC real estate is probably the asset class with the single highest price/cash flow (i.e., price/rent) ratio. Anything can happen, but i can't think of a good argument that NYC real estate is the place to put new money. If I could short it, I would.

This is sounding more serious: Merrill layoffs:

http://www.housingwire.com/2008/03/25/merrill-rumored-to-be-planning-layoffs-facing-huge-writedown/

mbz, I'm temporarily coming out of retirement to congratulate you on a fine, fine post. Reasoned like a true investor: the p/e ratio of residential real estate, which over time averages 11 to 12, and e is the return on investment, in other words the imputed rent. A low p/e only makes sense for an asset that does not generate income or efficiencies.

No one knows the bottom of anything until after the bottom, though chartology helps. Or the top.

In fact, two of your three factors are part of the equation:

1) price and availability of credit
3) real estate appreciation/depreciation expectations.

Those are some of the factors in imputed rent calculations. By definition, market rent = imputed rent, and imputed rent includes all those things you state (and others: see above). Since in the short-term interest rates are fixed, tax rates are fixed, and market rents are fixed, the only thing left to change is the price of the house.

The fact is you can't rent a place without having 40x the rent in annual income. Income is a real constraint. All the loose credit of recent years didn't change incomes (for the most part), but through enormous leverage caused home prices to skyrocket because demand skyrocketed because subprimes and ARM's and 10% or 0% down increased leverage, lowered initial interest rates (sometimes even negatively amortizing them), transferring the interest-rate risk onto people unable to understand what risk they were actually getting themselves into. Unfortunately, those exotic instruments only worked for the first people who used them, however; everyone else saw home prices soar until their carrying costs once again equaled rents.

Then, the resets, and carrying costs far exceeded rents. POP!

Then, back to income. In NYC these exotic mortgage products did in fact affect incomes, because of the bonuses paid by Wall Street for buying and selling and packaging them. So here, it will be a double-POP! ARM's will reset - but that will probably happen second - and incomes will fall drastically as Wall Street loses firms, fires employees, redeploys its resources.

We're going through the income reduction phase right now, but since the resets haven't hit yet, there's plenty more pain down the line. Nothing worse than being an out-of-work banker with a $1 million mortgage that resets to a brand new rate.

mbz, this is pure genius: "NYC real estate is probably the asset class with the single highest price/cash flow (i.e., price/rent) ratio." I would add one word to the end: anywhere. And if you were to calculate it on a forward p/e ratio, it would be even worse.

anotherguy, we overlapped. Read what I said about incomes falling here before ARMS reset. This hasn't begun here yet.

Perhaps I closed this thread before its time.

Steve, why is this genius: NYC real estate is probably the asset class with the single highest price/cash flow (i.e., price/rent) ratio.

Perhaps if you actually worked in finance and didn't just translate our contracts you'd be less impressed. Or more likely, you just spun off a new screen identity and are slapping yourself on the back.

You know, I didn't read the Spunkster's post closely:

"NOBODY on the this thread knows if we are the bottom"--curious007 Probably the one of the most insight statements on this thread!"

If Spunkster thinks that's INSIGHTFUL, then he is in for a pleasant surprise. If you and curious007 didn't know that NOBODY ever knows the top or bottom of anything until after it happens, then you are perhaps the most uninformed investor who has ever lived. Don't you even watch Suze Orman? Did you take economics or finance in college? Did you go to college?

My man, if that is insightful, you are in for a big, big surprise.

eah, I did work in finance, remember? I worked for Price Waterhouse and Bank of America. I helped design and audited some of the most sophisticated trading platforms out there. I have worked with all the big players on this - I know a lot about it. Besides BofA, I worked with Barclays, UBS, Credit Suisse First Boston, Goldman, all of them.

The reason it's genius is because, besides me and urbandigs, mbz is the only one who makes sense, who understands how to look at investments, and he's the only one to view real estate as a price-earnings ratio. I said something similar with the return on investment, but mbz not only identified it as a p/e, but identified it as the most overpriced asset class around.

Do the math. Here's a reference for you from wikipedia:

Robert Shiller shows that over long periods, inflation adjusted U.S. home prices increased 0.4% per year from 1890–2004, and 0.7% per year from 1940–2004. Shiller also showed comparable results for housing prices on a single street in Amsterdam (the site of the fabled tulip mania, and where the housing supply is notably limited) over a 350 year period. Such meager returns are dwarfed by investments in the stock and bond markets. If historic trends hold, it is reasonable to expect home prices to only slightly beat inflation over the long term. Furthermore, one way to assess the quality of any investment is to compute its price-to-earnings (P/E) ratio, which for houses can be defined as the price of the house divided by the potential annual rental income, minus expenses including property taxes, maintenance, insurance, and condominium fees. For many locations, this computation yields a P/E ratio of about 30–40, which is considered by economists to be high for both the housing and the stock markets; historical price-to-rent ratios are 11–12.

Ignore this at your peril.

if anyone plans to disagree with steve, please dont. he is the smartest richest person on planet steve. i was reading some other threads and in doing so got a good glimpse at the physiology of mr. steve

since he likes quotes, here are a few of his own (i really can't even comment, he says it all himself):

"I don't think we're in a recession. I've been making $1.5k a day every day since the end of December. That doesn't indicate a recession to me."

"And if you speak English, Spanish, Portuguese, Italian, & know something about accounting, finance, & law, you 2 can have a job."

"I'll make about $1k today, it's a little slow"

"you'd have to make at least $350,000 a year. I beat that. "

"I sold my two places in Miami, the last one the day before Hurricane Wilma. I made a fortune"

"If you want a return-on-investment, I went from $1 to multimillions."

"I'm an economist by training, and a financial auditor by trade"

"I was a bank auditor with BofA and Price Waterhouse"

"I worked for Price Waterhouse and Bank of America"

"I lived in London, Madrid, New York, Singapore, Miami, San Francisco, all over the place"

all that money and intelectual power, and our poor old steve cant even multiply:

"That same ($1) investment with a COMPOUNDED annual yield of 6.5% over 38 years will be worth $79.90 at the end of 38 years."

oh really? try again

"My head is spinning,...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."

hmmm, how about you try that once more

"HEEEEEEEELP! I am so confused!...CORRECT FIGURES; Compounded: $7.99 = ($1 multiplied by 1.065 34 times)"

sorry, you still got it wrong, 1.065^34 is $8.51

but keep trying.

oh and steve before you write a dissertation on how intelectually inferior i am, dont wast your breath. i'm ok with who i am - are you?

I agree with everything I said.

In fact, if you tune into Kudlow & Company right now, instead of wasting your time quoting me out of context when I a) not only agree with what I said, but b) am readily able to correct myself and admit my mistakes, you would see that they're talking about housing.

You should learn to admit your mistakes rather than accusing me of thinking that your are intellectually inferior, which I never said and never intimated and never would. What I did say is that you don't know about housing or how it behaves historically, so you shouldn't be investing in it. If you buy a place and want to live there for 30 years, that's a good idea. But you don't know how to invest in it, and if you invest in something you don't understand, you'll get burned. You finally admitted that housing does not increase in value at a compounded rate of 6.5% per year. As I showed you, one study shows the real (after inflation) rate is 0%, Schiller says its 0.4% and proved that over 350 years.

Very far from what you said.

Just FYI, as I clearly explained. If you want the whole progression, I'll publish it, but I said what I was doing and that's what I did. Just FYI, your 8.51 is my 7.99 x 1.065 - you took it out a further year, which I said I didn't do.

Moreover, if you read that post you're actually arguing more in my favor while you criticize what you think is (and isn't) a math mistake. You took an average yield and compounded it, which was wrong. Now you've exacerbated your own mistake by making what should have been $3.21 and turned it into $8.51, instead of $7.99.

But in any case, your hatred of me seems to be overwhelming. You seem to be trying to take what I said entirely out of context to turn me into a monster (the person who by people on this website has been called a Hitler, and worse).

I think if you were really "okay with who you are," you would have never written such a post as that. It seems to hurt you to be wrong, and you seem to be trying to make me feel bad because I made a mistake, but I quickly corrected my mistake and admitted it. I'm cool with that.

If you want to play this trite game, will you please admit that you didn't know what imputed rent was, and you spent a whole day arguing with me and against the very post that you made?

You seem to be a new spunky, compulsively following everything I say. Show me anything that refutes what Schiller says about how housing prices increase over time. Show me anything that refutes that, or anything else that I've said.

I'm sorry you hate me. I'm trying to help you by convincing you not to invest in real estate right now, because it's apparent that you don't know what the downside risks are.

This thread has convinced me that there are a lot of amateurs out there who are going to get burned, and burned badly. Except for a few, no one seems to know what drives real-estate prices (incomes), no one seems to know what constrains them (market rents). I make reasoned arguments, and I get baby talk back because people are mad that I'm telling them something that they don't want to hear. I get attacked personally. This is all very indicative of a serious problem, but not with me.

I had an editing problem there, but mschlee, read my posts again and you will see clearly that I said that I compounded once, AT THE END OF THE YEAR. Therefore, there was no compounding in the first year - I assumed a starting point of 31 Dec. That's why my result was what it was, and that's why if you do it one more time - assuming a starting point of 1 Jan - you'll get your result.

Nice try, but read it again. Carefully. Before you try to make a fool of me and only wind up making a fool of yourself.

Thanks, and peace to you. Do yourself a favor, get out of real estate.

We can all calm down now and drink a bit of red wine.

it's not fun to look in the mirror sometimes is it?

Did you ever see that character on SNL who has outdone everyone on everything ever? I think Steve is related.

poorishlady, I'm there. Me and JuiceMan are having a party at your house, if you didn't read. Congrats on your purchase, but do make sure your co-op will let you son stay in the old one. The co-op I own, the Board is a b*tch. Biggest mistake I ever made was buying a co-op. That, and my last 3 or 4 boyfriends. :0

mschlee, you seem to think that what you wrote bothered it. It did not. In fact, I'm proud of what I've said, of what I've done: try to convince you to get out of real estate. You are making me sad, though. Why are you acting like a child?

briguynyc, no I haven't seen it. It wouldn't be true, anyway. But I do know something about investing, especially about investing in real estate. When you invest in something, you need to know the fundamentals that drive it. Very few people on this thread know. Had they been in Holland a few hundred years ago, they would have had a surfeit of tulips.

Again, guys: attack me all you want. It's indicative

and I meant, "bothered me."

Steve - what in your estimate is an acceptable P/E ratio for a Manhattan condo?

I've never seen someone who would benefit from a valium more than Stevejhx. Steve, please have just one. It will help SO much.

Hey, Steve. I am spending the summer in The Pines. Let me buy you a drink.

11201962, you're on.

baabamaal, that's a good question. 12 is the historic norm, and that was the ratio in 1998, when the cost to rent and buy were identical. Remember, 1998 was the inflection point, when the NYC housing depression started to recover from the downturn that had started in 1987. The amateurs on this thread think that won't happen again, because now we have marble countertops and the meat-packing district is walkable (and pricey). Remember Robert Schiller, who retraced housing values in Amsterdam back for 350 years: these equilibria don't change for a reason.

Nonetheless, baabamaal, I don't think I'd wait for that. Right now we're about at 25, which as a p/e ratio for an asset that earns no income is ridiculous. I'd say it depends on your horizon. More than 10 years, I'm going to bite the bullet at 15, because the way the accounting works, most of the benefits of owning accrue up front. Over the life of a 30-year mortgage - which as I said earlier mimics the 27.5 year depreciation of improvement on (undepreciable) land - you can withstand any short-term decrease in values if you bite at 15. Except in extremely unbalanced markets - like this one - it takes time for the benefits of renting to kick in.

I'm really sorry that people like the spunkster and mschlee feel the need to attack me personally, because what I'm saying is bad-tasting medicine. But if you don't understand the long-term fundamentals of an asset, don't invest in it. It's like, if you can't sing, don't do karaoke. If you can't dance, don't try dancing with the stars. If you don't speak a foreign language, don't offer to translate a document.

It seems so simple....

dmag2020, I'm not real a drug sort of guy. I do like alcohol a lot, though. :0

"That same ($1) investment with a COMPOUNDED annual yield of 6.5% over 38 years will be worth $79.90 at the end of 38 years."--stevejhx

Actually that was your most insightful and intelligent quote.

Actually, spunkster, since they don't teach you how to compound interest in high school, I understand your point of view.

The whole reason why I LUV U GUYS SO MUCH is because you have no idea what you're doing, but you're sure you're doing it right.

i love this. steve cant even say he's wrong when he has his own numbers right in front of him.

lets try one more time steve.

"$7.99 = ($1 multiplied by 1.065 34 times)"

sorry my man it does not. talk about beginning and ending annuities all you want. 1 multiplied by 1.065 34 times does not equal 7.99

if you wanted an end of year you should have said 33 times. but you did not.

as always, you try to introduce subterfuge to cover up your mistakes. your feeble attempt to talk about sharpe ratios, your total misunderstanding of bond markets. your comment about tips was quite amusing. you actually implied that bond yields have nothing to do with expected future interest rates.

you may know something about real estate, but if you are out of your depth on other topics, be man enough to admit it.

This thread is really getting off-topic - time to start a new one Steve.
do we really need 266 posts to agree that:

a) If you are looking to make an investment, don't buy RE in Manhattan or anywhere else in this country right now.

b) If you are looking for a "home", then find the right place and buy it.

everything will continue to be overpriced until incomes rise, prices drop or Hillary steps-in and "solves" the housing problem - sarcasm; in case no one picked up on that.

Steve, maybe you can start a thread called: "How in the hell can Hillary claim that she is going to "solve" the housing crisis!?"

Steve -

Ok, so by that reasoning and some simple math, lets see what is a good price for a condo.

Assumptions:

Midtown/Turtle Bay area One Bedroom doorman luxury condo (approx. 625 square feet) on a high floor with a view.
Condo Price: $Z
Maintenance: $500/month
RE Tax: $500/month
Other fees/Insurance: $200/month
Total Annual Costs (excl. mortgage): $14,400
Rental Income: $2750/month (this is a reasonable guess)
Total Annual Rental Income: $33,000

If we take a reasonable P/E of 15 as you mentioned, here's what Z computes to:

Z=15($33,000 - $14,400) = $280,000 (approx.)

That's less than $500 /square foot in mid-town.

Unless I have completely bungled the calculation - is this ever possible, no matter what Manhattan RE correction is forthcoming over the next few years??

Note: This is not meant to be a flame, just trying to understand Robert Shiller's P/E ratio reasoning you used in your post.

evillager, you said: "I went to contract a couple months ago on a 1br in new construction in the east village." and "I plan to stay several years but am confident I could find a buyer above my price no problem."

Not sure if you bought at 110 3rd Ave or in the A Building, but the first A Building flipper, when factoring in transaction costs and seller's broker, is within a hair's breadth of a loss after a $60k price chop.

urbandigs, you have been very quiet through all this. Interested in your opinion on these questions:

1) What is your take on the buy vs. rent spread?
2) Why do you think rents are as low as they are? In other words, are rents artificially depressed?
3) If the P/E ratio is truly out of whack, are massive price declines the only way things get back in balance? What other levers will be pulled besides price?
4) How's business?

Yes, lobo, this thread is getting off topic, I tried to end it but people just kept right on posting.

mschlee, yes you're right, it's 33 times for 34 years. I was not clear in the way I explained it, I wrote one thing (x34) and I said something else (compounded at the end of the year). To be absolutely clear I should have said that I compounded it 33 times over 34 years. My answer the correct answer if you don't compound the first year (which is assuming the purchase on 31 Dec) or take the figure at the beginning of the 34th year, not at the end. That is what I meant, but I was not consistent in saying it.

Is it clearer now? Compound it one more time and you get your figure, which would be to own it for all of 34 years, from January 1 of the first 1 through December 31 of the last. Mine effectively gives you the compound rate from July 1 of the first year through June 30 of the last.

When you make a mistake, you say that you "mistyped" (go back and read your words). When you think that I have made a mistake, you say, "i love this. steve cant even say he's wrong when he has his own numbers right in front of him."

So, since you're reviewing everything that I said, what about your:

1) nonexistent "TIPS spread"?
2) stating the TIPS rate indicates forward interest rates, when it doesn't?
3) saying that imputed rent doesn't include tax benefits and interest rates, when it does?
4) compounding the OFHEO 6.5% average rate instead of using it as an average?
5) forgetting that it's a nominal rate not a real rate?
6) using Miller Samuel's median price data to indicate price changes, when those data do not normalize for the change in housing mix, and so are not an accurate indicator of price changes?
7) using OFHEO data for Manhattan, when those data only include conforming loans, which are not prevalent in Manhattan?
8) stating that OFHEO data go back to 1970, when for the most part they go back only to 1990?
9) using the present Case-Schiller index for Manhattan, when that index only includes single-family homes?
10) quoting economists saying that in 2004 housing was not overpriced (which is what I said), and extrapolating that to 2008?
11) stating that 1998 was the peak of the housing cycle, when it was the trough?
12) constantly referring to price increases through 2000 or 2002 or 2002?
13) requesting the risk-free return on the S&P (500, I assume) without stating the benchmark index?
14) stating that risk adjusted rate is the rate used for opportunity cost, when it absolutely, positively 100% is NOT. Opportunity cost need not even be calculated monetarily.
15) stating that the Sharpe ratio was immaterial to risk-free return, when it's not? "Basic CAPM," as you called it.
16) stating that all mortgage resets are at a short-term rate, when that's not necessarily true.

Then you accuse me of saying things that I never said, talking about topics we're not talking about. You accuse me of "misunderstanding of bond markets. your comment about tips was quite amusing. you actually implied that bond yields have nothing to do with expected future interest rates."

No I didn't misunderstand the bond markets, my comment about TIPS was not amusing, and I never implied or said that bond yields have nothing to do with expected future interest rates. Never, ever did I ever make any sort of statement like that. What I said was, "To tell market expectations of future inflation you need the forward Tbill rate minus the forward TIPS yield." I actually looked it up before I wrote it, and copied it directly from the website. They're not even my words.

Nevertheless, I'm not and never have been talking about inflation. I merely said that your 6.5% compounded growth rate in housing prices was a) not compounded; and b) not adjusted for inflation. You're the one who engaged in subterfuge by introducing the subject, when I'm talking about housing prices. You're the one introducing "CAPM" and theories of finance when I'm talking about theories of economics. You introduced the S&P-whatever, not me. Then you go on and on about something I'm not talking about, trying to prove your superior intellect, and accuse me of calling you stupid. Uninformed about housing, yes, but not stupid.

I could go on and on and on an on, but won't (this time) because I already have. My failure to be clear on how I was doing the compounding - mea culpa, mea culpa! - does not alter the essence of my argument; rather, it enforces it by increasing the differential between compounded and average rates.

Reread the thread, stick to the topic.

You have a long list of 16 egregious mistakes to fess up on. You also owe me an apology for claiming that I am engaging in subterfuge when it's you who introduced TIPS "spreads" the S&P 500, future bond yields, etc. You further owe me an apology for saying, "you may know something about real estate, but if you are out of your depth on other topics, be man enough to admit it."

Sweetheart, that "man enough to admit it" is outright obnoxious. "Out of your depths on other topics" demonstrates that you're introducing subjects that are not germane to the issue. Moreover, read my past post: "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."

I'm waiting for apology.

Steve. I fully understand your argument(s). You have either dismissed, or simply not responded to many of mine, which is fine. Let me make a few observations.

1) I am not sure that the case shiller index is appropriate for Manhattan due to the fact that it essentially looks at single family dwellings. If I am wrong on that, please correct me.

2) When you view an apartment in Manhattan as a purely financial transaction, I think you are missing many of the nuances involved. If one were to buy a share of IBM in say 1980, the only differences that will have occurred with that share between then and now are its value, its dividend, its p/e ratio etc. Nothing will have changed accept for its financial components. However, if you bought an apartment in the West Village in say 1989 (shelter), there have been many fundamental changes and improvements in the area that have transformed some of the essence of your purchase. To the extent that Manhattan has made major improvements over the past 10 years, would that not warrant a premium for shelter in Manhattan. Unless you think that quality of neighborhood and quality of life has no bearing on the value of a home.

3) I understand your argument regarding renting vs. owning, and in some instances, renting is the only option if you need/want to live in Manhattan and you have no money for a down payment, are living here short term, can't afford to own in the hood you want to live in, are on the verge of life changes, etc. Owning brings with it its own set of considerations unique to owners that are not directly related to simply the market value of shelter. I have listed these reasons before and have no reason to do so again. You dismiss those reasons, but I think they are valid and contribute to some of the premium of ownership.

4) I agree that Wall Street lay offs have an impact on Manhattan's economy, including real estate. However, not everyone who owns or lives in Manhattan works on Wall Street. I believe that Wall Street layoffs may be more visible on the supply rather than the demand side. If you can't afford your home, you have to sell, and maybe sell fast. We will see how many fire sales there are, and if anyone steps in to buy the distressed PArk Avenue coops.

5) I fully agree with you that everything comes down to affordability. A gallon of milk costs 6.25 at my local deli. That is way above the national average, yet the deli is still in business. The same milk, and dinner, and clothes, and taxes (we do pay a hefty tax to live in Manhattan), garage fees, etc costs more here, and yet people still pay a premium to live in Manhattan. If we can agree on that, perhaps we can agree that there is also a premium factored into owning in Manhattan that pertains to its perceived value rather than as part (at least entirely) of an asset bubble.

As an aside, a friend of mine just rented a 600 square foot rental in the 60's on Lexington avenue (near the equinox). She is paying $4,200 a month. The building is almost full, and the broker said to her that the same apartment will probably rent for $4,600 after June. That is more then a qualified buyer would have to pay on a 1 mil mortgage (either 1 month libor or 5 year interest only) pre tax deduction. You can buy a lot of nice one bedroom condos for 1.3 and down; so it really comes down to the 200k down payment. Where is the big disconnect, between owning and renting, unless you think that building will rent for 2800 next year

baabamaal, sorry, but I had to dismiss of mshlee before getting to your question. She is very, very obnoxious.

It's very complicated in NYC because we don't know how the Wall Street mess is going to play out. Personally, I wouldn't do anything until we do know. If a lot of these fired employees are mopped up by other firms, then incomes won't fall that drastically. I have a feeling that with the tightening of credit they won't, but I don't know.

12 is the long-term rate, and we're headed that way because we always do. How quickly no one knows (hence what I say above). But if we look back to the 1987 real-estate crash, it took 10 years to straighten out, during which property prices fell 25% nominally, but inflation and wages also increased, so they met more or less halfway.

This isn't 1987, which if you were around a lot of marginal co-op conversions went bankrupt and were taken over by the city. There were effectively no condos, and very little new construction. For new construction, developers have the ability to a) slash prices so they'll still make a profit, just not as big a one; or b) turn the units to rentals; or c) go bankrupt.

My opinion is that we know where we're headed - toward equilibrium - but we're still in early days regarding how we'll get there, and how long it will take. Remembering the fear at BofA and Price Waterhouse in London when they were cutting back, I'd say almost no one on Wall Street feels safe about their jobs right now, and that's where all the income driving this market for the past few years comes from.

I wouldn't touch real estate in Manhattan right now any more than I'd touch real estate in New Orleans when there's a hurricane spinning furiously in the Gulf of Mexico.

JuiceMan, good questions, & I'd love to hear what urbandigs has to say. I say:

1) What is your take on the buy vs. rent spread?

Beware of markets that are far outside the long-term norm.

2) Why do you think rents are as low as they are? In other words, are rents artificially depressed?

I do not think rents are low now. In fact, they shot up enormously in a short-time, as housing became more and more expensive. When I returned from Florida in 2005, I rented a 1-bedroom in the Westminster for $3,400 a month, and when I moved just over to years ago the rent for my apartment was $4,600. But now rents are falling SHARPLY. I just checked on the Westminster's website: they have 2 1-br 1-ba's for $4,095.00.

I think that's highly indicative of where properties are going to go: rents are far more correlated than property prices because they're absolutely constrained by incomes; there is no leverage.

3) If the P/E ratio is truly out of whack, are massive price declines the only way things get back in balance? What other levers will be pulled besides price?

See above.

4) How's business?

Fantastic.

mh23, I did not dismiss your arguments or ignore them to the best of my knowledge. If you think I did, sorry.

Nonetheless, here's my answer:

1) Yes you are right. You can, however, take the price history for any individual apartment in Manhattan over time and replicate what Case-Schiller did. Look at the beginning of this thread, and there you will see it.

2) That may all be true, and it may affect nominal prices for apartments in any particular area, but it still doesn't affect the long-term p/e ratio of 12. Remember Robert Schiller traced a single property in Holland back for 350 years - lots of changes then - and still got the same answer: long-term real growth .4% per year.

3) Yes that's true, but there are also advantages to renting, such as not having to take care of the unit, having the freedom to move whenever you want, and not investing a huge amount of capital that is subject to downside risk. Over time - as is shown by the long-term correlation between rent and owners' carrying costs - those are a wash.

4) Wall Street represents 11% of employment in New York City, 33% of all wages earned. That's huge. Each Wall Street job supports 3 other jobs in the city. It has a multiplier effect. As I said, I wouldn't touch real estate here just as I wouldn't in New Orleans with a hurricane spinning off the coast. It's extremely risky right now, because we don't know how this will play out.

5)There is a premium paid in Manhattan, and that will affect nominal prices. The p/e ratio may historically be slightly higher over time since living in Manhattan you can switch your income around: relatively no transportation expense, for instance, means you can use that money for rent. But I would be very wary of anything above 13, because the constraints of income and market rents are huge.

Your friend overpaid, the agent sold her a big one. Check out the rental rates at thewestminster.com. I told you, they're down a lot from where they were just two years ago. They are falling.

Steve, no need to apologize. I enjoy the discussion, and it is all in the spirit of inquiry.

2) Ok. I still don't see how that index reflects dramatic changes in the quality of life, quality of a given neighborhood, etc. You may be right that in 100 years it will even out, but for my purposes, I can see why someone would pay more to live in the West Village today than they would have in say 1988, and it has nothing to do with price of shelter, but rather that the neighborhood is much more desirable.

3) I agree with your observations regarding the benefits of renting. All I am saying is that there are similar types of benefits to owning. How much those benefits are worth, and how much they can be factored into the price remains to be seen.

4) I hear what you are saying about Wall Street, and it cannot be disputed. I would never touch real estate unless I planned on using it. Were I to be looking to buy in this market, I would find a few properties that I like, negotiate for the lowest price, and then buy, with the intention of living in the apartment for several years. At say 6,000 a month in rent. If you know that you will definitely be buying, but you wait two to three years in hopes of timing a bottom, you will have spent around 120,000, with no tax deduction, not control over your living costs (at least for years two or three, they could go down or up). That may be wise, but it is a low of equity to lose if you know that you want to own and are simply trying to time a bottom.

5) You say 13 is the right number. I am not so sure. I think a lot has to do with how Bloomberg manages the current situation. If Manhattan continues to attract buyers from around the country and the world, something few other markets do, and if other industries manage to grow, thus leading to higher incomes, that number may be higher.

As for my friend. I can't dispute your point because I have no idea about rents. However, even if we use your number of 4k (maybe her building is the better than the westminnster, maybe not), that is still arounf what a million dollar mortgage will run you if you do a 5 year interest only or a 1 month libor. I recognize that banks like those loans, but they can be attractive vehicles for owners if you are liquid and if you have a decent amount of equity in the unit.

Steve. The Westminster is on 20th and 7th. I would prefer that area to the upper east side (by far), however my friend likes it up there. Let's not wast time doing rental comps, but simply observe that they are different neighborhoods on the Island of Manhattan and, even though they are both "shelter" one may command a higher price due to the perceived desirability of a given neighborhood ( see earlier post(s)).
Also, I noted that the westminster only had two units available for immediate occupancy during what has traditionally been a slow time of the year for renting.

Juice - I dont do rentals so I really dont know how that market is doing but from what I hear, managers are offering OP's and free rents again so that tells you something. Obviously that is desired method over lowering rental price.

My business is great, as I focus mostly with buyers that are serious and qualified. Got a good pipeline. I have not focused at all on sales or procuring new sales listings, but got a new listing in Bklyn that is back on market today. I went on only 3 sales pitches in the past 3 months, none of which decided to work with me. One is with stribling, one with citi-hab, and the other with elliman. Only one sold so far and I must admit that it was at a price I was willing to do, but not what I thought the seller would be able to get given comps. Props to that agent.

I havent been reading this thread much lately so I dont know what you are relating P/E too in terms of real estate. Its still costlier to BUY vs rent and obvious transaction fees for the luxury of owning. But the clients I am working with are long term buyers, so they simply do not want to rent even at the lower price for 5+ years.

Its funny, a year ago I wouldnt say this but today, I would much rather work with a serious buyer than an unrealistic seller. Sellers are still expecting 10-15% appreciation from comps 6-8 months ago. Human nature is an amazing thing. Realistic sellers are hard to come by in my opinion, but when they do hit market, they usually sell fast. Some anomolies of course like that one listing that sold so far above comps at 315 Seventh Ave at 869K.

mh23:

2) All that changes is the relative price of different neighborhoods, which changes the income mix of people living there. Chelsea today is one of the most expensive neighborhoods in the city; when my grandmother grew up here it was an Italian slum. Property will still sell for about a p/e of 12, just the relative income level will change.

3) You are right, but the figures indicate that, overall, the benefits between the two forms of shelter are a wash.

4) Go again to the discussion of "imputed rent": imputed rent = market rent. All of those deductions are included in the market rent. They accrue differently over time, but they're all included.

5) Besides those mortgages are going to be unavailable shortly, they're not an accurate measure of the true cost of borrowing, since they a) transfer the interest-rate risk to the borrower; and b) are not correlated with the cost of depreciation.

Investment housing is depreciated over 27.5 years at a fixed rate. Land can't be depreciated. So a 30-year fixed mortgage approximates the depreciation of the asset. That is, you take out an 80% mortgage for a building that you depreciate over 27.5 years. The cost of financing that building through the time it is fully depreciated is what you need. Hence the 30-year mortgage. If you take out a variable rate mortgage, you don't know the full financial cost of the depreciating asset. If you finance more than 80% then you're not reflecting a) the non-depreciability of land; or b)you're financing for a period in excess of the depreciation. (30 - 27.5)/30 = 83% vs. 80% financing (building only, not the land).

That's why that rate is used. It correlates to the useful life of the building, and mimics the percentage financing.

To work, guys...I'm way behind!

baabamaal I believe stevejhx is saying 15x Imputed Rent (=Market Rent). In your example it would be $33k * 15= $495k or $792sf

mh23, that's what I said. The income mix of the area will change, not the ratio of their income.

What's important in the Westminster is the price, not the gross number of units. If they only have 2 units and are lowering the price 15%, that tells you that even at that inventory level nothing is moving.

See urbandigs' comments - he's an expert on this.

mcap - your figure looks about right.

Interesting NYT article today re psychology of home sellers and why housing busts take so long to play out (loss aversion, etc):

http://www.nytimes.com/2008/03/26/business/26leonhardt.html?em&ex=1206676800&en=10e15b4f7a0824e6&ei=5087%0A

just to make it clearer, mh23, why the 30-year fixed rate is so important in determining market rates: you finance long-term assets with long-term financing. Variable-rate mortgages may be long-term, but since you don't know the long-term interest rate, you're really buying a revolving short-term instrument that resets every x number of years.

Hey Steve,

No time to read all that but I did skim as much as I could.
You know I agree with you about retrnechment overall to 2004 levels - except I disagree with respect to the $ psf number as you know. I also think you bring a lot of good insight to this board but agree with some that your tone does you no favors and you do come across as vindictive. However, I understand that this is the nature of forums such as this where nuanced interactions are not possible.

Having said that I wish you wouls stick to a point that you make.
For example, you said "As I said, guys, it all depends on when you bought. If you bought in 2000 in Manhattan you probably won't lose money, thought I believe the value will fall far from its current heights. If you bought last year, you're screwed." so eah addressed that specific point and you said it depends. Then when he called you out on your statement that he was specifically addressing where you said "If you bought last year, you're screwed" and you reverted back to the old, I keep saying it depends routine.

I believe that some ppls' frustrations with you are due to this kind of switching that you do. Like I said, please stick to your point and in this case, you could have said, sorry - I mispoke earlier with that blanket statement because it does depend on blah blah...

Anyway, I have some questions for you:
1. You talk about the parity between rents and carrying costs of a purchase but you also mentioned that the traditional way of making money on a rental was with your fixed rate 30 year mtge and eventual rising rents. So does that not mean that with all your examples where you say you must use 20% down and a 30 yr fixed there has to be upfront discounted premium for the expected difference (in the buyer's favor) over those 30 years and beyond? What value to you place on on that rise in imputed rents over 30 years discounted to day 1? Furthermore, what kind of discounted premium can you apply to the fact that after 30 years the loan will be paid off and all that will be left are maintenance and taxes? Is there a way to capture that difference?

Converse to an example like an interest rate swap whose npv on inception should be 0, because no one knows for sure the direction and magitude of whatever index's cashflows are being swapped, you said that in the traditional investment case, rents are assumed to rise over time while the 30 yr fixed mtge stays the same. Thus, if this were a swap then that known advantage to the fixed rate payer would mean a premium for same, right?

2. You talk about ppl not being able to buy at $2000 psf on their income but many ppl I know do not rely on just their salaried income. They have siginificant cash reserves from selling during the RE boom. Look at ppl who bought into the Hubert, 124 Hudson, or 66 Leonard (3 examples that appreciated at much higher rates and magnitude than many other tribeca buildings since 2000) and sold recently. I guess my question is, can you include cash from RE sales as income when it comes to affordability of current homes? If not then I can't see how anyone except the rich can afford anything above $2M.

Divvie--the question of how to think about increases in rents is a good one. I did some back-of-the envelope calculations, and it looks like with 3% annual rent increases you end up with 24% more in total imputed rents over the course of 15 years and 59% more over 30 years. With 4% increases, it's 33% in 15 years and 87% in 30.

Steve, you're kidding me right? I can't believe I did this but last night at dinner I asked friends if they could think of one person in the industry who rented. We actually discussed this topic for some time. What we came up with was a guy in Asia who rented and that people sometimes rented if they only had to be in the city for short periods of time. Like people who had to go to Chicago if they did business with Citadel. More or else everyone purchased an apartment. Why? Because we're fairly ego driven and want to own, I guess. You're kind of bullshit, Steve. If you are in the industry, as you say, you must be on the serious fringe. Once you have a few million banked you just don't care if you lose money in the short term on real estate. You want to be king of your castle--to put it in very simple terms. Owning in the top end of the economy is more for psychological reasons than financial sense.

divvie, sorry about nuanced tone but sometimes I'm answering several people at once so it seems like I'm switching topics & I'm not. I have yet - however - to call anybody Hitler. :0

Think about it like a debate; we all need to correct and clarify from time to time if we're not making ourselves clear. I am no exception to that rule. (mshlee seems to be, however.)

1) The long-term correlation between rents and owners carrying cost is using a 30-year fixed mortgage, which was the industry standard for a long time (and one that we're reverting to). The reason why it is important is because it is long-term fixed financing for a long-term fixed asset. You wouldn't normally finance any long-term asset with short term instruments, because you have no way of establishing your return with any certainty.

Once you change the down payment or vary the interest rate, you add leverage. If that leverage is a new market feature - such as, from now on, all mortgages will be variable-rate 10% down - in the short term people will get a deal, but in the medium- to long-term the asset price will change to offset the increased leverage, to return to the long-term ratio. For instance, if you got rid of the mortgage-interest tax deduction, for current owners that would cause a lot of pain, but future owners would merely pay a lower price for the property, and the long-term mean p/e ratio would be reestablished.

That was handily proved by Robert Schiller, who did his research in the US back to about 1900, and then did it for a single property in Holland over 350 years. Regardless of the market, regardless of the leverage, regardless of the tax benefits, regardless of the constraint on land (also existing in Holland), the long-term real rate of return on residential real-estate is always 0.4%. You can change it in the short-term and make (or lose) a lot of money, but in the long-term it is always the same.

I'm not sure what the next part of your question is, but it seems to be confusing the economics of residential real estate with the economics of investment real estate. They are different. The theory of imputed rent says that your economic return on buying a property is the right to live there, and the value of living there is what you would otherwise pay to rent the same place. Therefore, imputed rent for residential properties includes everything involved in the transaction. The difference between the two is that a developer who rents out properties includes a return on investment which is calculated based on the future flow of income, aka rents received. A residential property owner does not have that return on investment; his return on investment is the right NOT to pay a developer's return on investment - that is, not paying a developer's profit - so therefore it is imputed in his rent.

What you say in 2) is true, but it's still imputed in the rent because they are using their own assets in lieu of financing. Therefore, there is an opportunity cost that is calculated into the imputed rent - that being the opportunity cost of not investing that money somewhere else. It is a very high opportunity cost, as well, because the real rate of return over time of stocks is FAR higher than the real rate of return on residential property, because residential property does not generate income or efficiencies, and companies - what you're buying stock in - do.

jordyn, your example is interesting, but impossible. First, you never wind up with "imputed rents"; you wind up with "market rents," and market rents are not set to housing costs, but the other way around. That is, imputed rents are a backward calculation to set the price of housing given interest rates, tax benefits, charges, etc., to equal market rents. Everything is relatively fixed in the short-term, so what adjusts is the housing cost to take that into account.

You can hypothetically increase rents all you want in your mind, but in effect rents are constrained by incomes. Real incomes over time increase at the rate of increased productivity; more would cause inflation,. Real incomes (I believe) increase at about 1.5% per year over time, though I'd have to check that figure. It is mathematically impossible for rents - or anything - to increase over time in excess of that figure.

This is the market rental rate constraint: to rent you must prove you have income of 40x rent. Otherwise, you're too much of a risk and won't be able to rent. So if market rents cannot increase more than real income, neither can housing prices because over the long-term housing prices and rents are extremely closely correlated because they are interchangeable goods.

If you do the calculations and include all costs, you will see that 40x income gives you nearly the exact same number as 28% total housing costs vs. total income, over time. Because of the effects of amortization and compounding yields, in the short-term housing seems more advantageous, but in the long-term - investing your money elsewhere at compounded rates - they are the same.

There is no such thing as a long-term rent bubble, any more than there is a long-term income bubble. We have experienced both in NYC in recent years; you're watching them deflate very, very quickly.

That is why this market is so out of whack. I know it seems impossible that someplace that today sells for $1,000,000 will in the future sell for $500,000, but in real terms, over time, that is what must happen since it always has happened, and it has always happened for very good fundamental reasons.

All this rent vs. buy discussion has long ago left any connection to helpful discussions. Steve writes with a mania unsurpassed by anyone I've ever encountered on a blog. It's kind of disturbing--the length of the posts, the frequency, the dogmatism, the pedantic tone... What no formula accounts for, as eah touches upon, is the same intangible the underlies why people drive BMWs and Mercedes and luxury vehicles versus Yugos. Both are cars that would get you from A to B. One is a colossal "waste" of money, the other more fiscally prudent. But obviously, people drive expensive cars because they like them for lots of non-monetary-oriented reasons. Similarly, people buy for reasons beyond the balance sheet. Sure you can rent, but maybe not in the building you want to live, or on the street you want to walk home to everyday. Having a say in what staff level your building maintains or who is on the staff, how the building is maintained and improved, how you configure and decorate your home...all of these are things you relinquish in a rental. Prefer a stable group of tenants over transcients? Well, that's a problem if you rent. Problems in the rental building? Good luck to you even figuring out whom to contact and what to do if the first or second avenue of recourse falls short. Coop or condo? Much more able to resolve building issues and problems with shareholders/owners. How do you calculate these things? Basic buy vs. rent formulas are good things to consider, but weeks of endless verbiage on every thread steve writes on about this issue is just monotonous. All the prognostications and compounding and financial acronyms (the blog equivalent of name dropping to impress it seems) is just so tedious.

All this rent vs. buy discussion has long ago left any connection to helpful discussions. Steve writes with a mania unsurpassed by anyone I've ever encountered on a blog. It's kind of disturbing--the length of the posts, the frequency, the dogmatism, the pedantic tone... What no formula accounts for, as eah touches upon, is the same intangible the underlies why people drive BMWs and Mercedes and luxury vehicles versus Yugos. Both are cars that would get you from A to B. One is a colossal "waste" of money, the other more fiscally prudent. But obviously, people drive expensive cars because they like them for lots of non-monetary-oriented reasons. Similarly, people buy for reasons beyond the balance sheet. Sure you can rent, but maybe not in the building you want to live, or on the street you want to walk home to everyday. Having a say in what staff level your building maintains or who is on the staff, how the building is maintained and improved, how you configure and decorate your home...all of these are things you relinquish in a rental. Prefer a stable group of tenants over transcients? Well, that's a problem if you rent. Problems in the rental building? Good luck to you even figuring out whom to contact and what to do if the first or second avenue of recourse falls short. Coop or condo? Much more able to resolve building issues and problems with shareholders/owners. How do you calculate these things? Basic buy vs. rent formulas are good things to consider, but weeks of endless verbiage on every thread steve writes on about this issue is just monotonous. All the prognostications and compounding and financial acronyms (the blog equivalent of name dropping to impress it seems) is just so tedious.

All this rent vs. buy discussion has long ago left any connection to helpful discussions. Steve writes with a mania unsurpassed by anyone I've ever encountered on a blog. It's kind of disturbing--the length of the posts, the frequency, the dogmatism, the pedantic tone... What no formula accounts for, as eah touches upon, is the same intangible the underlies why people drive BMWs and Mercedes and luxury vehicles versus Yugos. Both are cars that would get you from A to B. One is a colossal "waste" of money, the other more fiscally prudent. But obviously, people drive expensive cars because they like them for lots of non-monetary-oriented reasons. Similarly, people buy for reasons beyond the balance sheet. Sure you can rent, but maybe not in the building you want to live, or on the street you want to walk home to everyday. Having a say in what staff level your building maintains or who is on the staff, how the building is maintained and improved, how you configure and decorate your home...all of these are things you relinquish in a rental. Prefer a stable group of tenants over transcients? Well, that's a problem if you rent. Problems in the rental building? Good luck to you even figuring out whom to contact and what to do if the first or second avenue of recourse falls short. Coop or condo? Much more able to resolve building issues and problems with shareholders/owners. How do you calculate these things? Basic buy vs. rent formulas are good things to consider, but weeks of endless verbiage on every thread steve writes on about this issue is just monotonous. All the prognostications and compounding and financial acronyms (the blog equivalent of name dropping to impress it seems) is just so tedious.

kylewest, if you're not interested, don't read it. But if you don't understand it, or find it tedious, then you shouldn't be investing in real estate because you don't understand the fundamentals of how the market works.

Your example, BMW's vs. Mercedes: a waitress can't afford a BMW. That's what we're talking about. You're talking about someone who can afford either, which would he choose?

Those are two very different topics.

eah, if what you said about "king of your castle" were true, there would be figures to prove it. Unfortunately, the fact is that housing prices and rents are correlated almost 1:1 over time. If what you say were true, that wouldn't be the case: housing prices would be unaffected by rents.

But the figure say they're not. So what I'm saying is not BS. Unless you can find the one study out there that says that housing prices and rents aren't closely correlated. But you can't because it doesn't exist.

So stop with your flights of fancy. Ditto kylewest. Look up the figures. Look what's happening all around you.

No, Steve. You've rarely (I have no stomach for reviewing the 100's or perhaps 1000+ posts you have lodged in the last 4 weeks, so I can't be certain and say "never"), have said that your rent vs. buy posts apply only to those who may only be able to afford one versus the other. What do you even mean by "afford"? A person will end up in a soup kitchen if she buys and you think she should rent? She'd default on a mortgage? Or she'd have less for retirement? If the waitress you speak of is in a position to buy an apartment, she may well also have a car that isn't the cheapest one she can find. Maybe that's the right thing for her. Maybe it contributes to the quality of the life she wants to live. What formula says otherwise if the car is consistent with her budget and financial goals. The same applies to the decision to buy versus rent once the financial pros and cons have been chewed through. But that isn't enough for you. Neither are seemingly unending, pedantic, redundant posts. You offered an interesting perspective on the question when you started posting, but then sort of came unhinged and at this point I think the forums suffer for it.

I have found most of the Streeteasy forum threads of interest over the past months, but your arrival and endless posts frankly have come to clutter many threads and I suspect they have similarly discouraged others from weighing in and thus reduced the diversity of opinion on the Streeteasy threads. You have made your points and now really just reiterate them in one form or another many, many times a day. Even in the world of finance and real estate, one may do well to abide the virtues of restraint and parsimony.

I liked the point made earlier that long term assets should be purchased using long term funding. Best long term funding is equity. In real estate terms, that would be 100% down payment on house. Next best option is a long term loan (with locked in long term interest rate that is close to the duration of the asset life).

Financing a long term asset with a short term financing vehicle exposes people to yield curve risks, that so many people are just realizing. Now, you might be a wealthy person and might be able to absorb the risk - but then, to determine the proper value of the asset, (basic CAPM, etc), the suitable long term funding rate needs to be used. I believe this is what Steve is trying to point out in his abrasive tone.

eric_cartman, sorry you find my tone abrasive; I was trying just to sound reasoned (with the exception of with mshlee). Again, nuance is not possible on a post.

You are right about LT-funding. 100% financing is the ideal, though it still wouldn't affect the economic principles involved; they would just be recalculated to reflect that situation. And if everyone were required to fund real-estate 100% cash, all that would happen is that property prices would collapse until they became affordable again.

This is my point: no matter what short-term remedies you put in place, over the long-term the result is the same, and we're seeing the market return to that norm right now.

kylewest, I've had my own issues with steve, but in fairness, people are asking him direct questions and he is answering them. eah made a point the other day to just leave it alone, but the comments and questions kept coming (including from eah himself) Also, for the most part, steve has stayed on his own thread. I know you hate the rent vs. buy banter, but at least it is contained in one area. This debate wouldn't end if steve were to go away, it would just be a different steve.

JuiceMan - you are right - Steve, unlike the last remaining real estate bulls ,does not go around to all threads annoying everyone.
Steve: I am ok with abrasive - I work in consulting where I have to put up with much worse. Over time, I have learned to look past the tone, at the content. I like your content.

kylewest: "You've rarely (I have no stomach for reviewing the 100's or perhaps 1000+ posts you have lodged in the last 4 weeks, so I can't be certain and say "never"), have said that your rent vs. buy posts apply only to those who may only be able to afford one versus the other."

Not only have I not rarely said it - I have never said it because it's not what we're talking about. There is a constraint against buying for people who can't afford the down payment, that's true, but it's no relevant at the macro level; it's a function of risk, which we're not discussing for the most part: it's risky to lend to people who don't have a down payment, since they're not invested in their asset.

However, what I said is that we are discussing the affordability of housing, what you're discussing is if someone can in fact afford it, which one does he choose?

I say again: don't read if you're not interested.

Thanks JuiceMan and eric_cartman. You'll see I did try to end the thread but people kept posting and kept asking so I kept answering. Sorry if you're finding me testy for the most part I don't mean it (mshlee aside) but nuance is difficult. And I do only make occasional posts on other threads, if I think they're insane.

I'm just trying to give people the economic theory behind what's going on right now. I think it helps ease the fear and cut through the BS. I've seen a lot of people lose a lot of money in real estate, and if I just make one person think twice about what he's doing before jumping in (or off a cliff), that's a good thing. People are free to do what they want, but a lot of people don't understand how, fundamentally, housing actually works.

You're right, JuiceMan, this argument isn't going to go away. When I checked what Related was asking for 1-bedrooms where I used to live ($4,095, psychologically below that $4,100 figure) this morning, I was shocked. They were literally asking $4,600 six months ago.

Yeah, for now you discuss housing affordability, but sooner or later it always comes back to the brilliance of your decision to rent versus buy and the lunacy of anyone who would do otherwise. Many of your arguments just seem to be elaborate constructs that serve what emerges as your own need for cognitive consonance with your own decisions.

Look, regardless, you are very right about at least one thing: I can just stop reading. But you see, Steve, I can't. I have tried. But I can't. And I hate myself for it. The part of me that lacks the control to stop skimming over your daily volcanoes of verbiage in the same part that lacks the self control to stop watching "The Real Housewives of NYC." There is just something about crazy that fascinates me.

You should really write a book for us all. At the rate you write it could be done in, I don't know, maybe 2 or 3 days.

There really is a weakness is relying solely on an economic model to make all decision. Similar to rational choice theory in the study of politics, it is far to reductive of the motivations behinds human decisions. While risk and investment factors are a part of any real estate decision, it is simply not the only part.

Kylewest - have you ever considered - it's probably not steve's own need for cognitive consonance with his own decisions - it's probably the cognitive dissonance of economics theory with yours?