Caveat Emptor: Manhattan Still Way Overpriced!

eric_cartman: touché!

kylewst: sorry about your man-crush.

briguy: by the time the book comes out, it'll be too late.

And so everybody knows again, I did buy. Just that I bought far from here, a place that had been on the market for 2 years, whose price was cut 30%. I made that choice when I saw they were holding viva-voce auctions of properties, and open house lines literally went around the block.

There were no data at that time (since data are backward looking and hadn't been published yet) to support my decision. Just, I'd never seen an open-house line around the block, or a viva-voce auction for anything but a foreclosure. I got scared and bought elsewhere. It was an emotional decision not to get caught up in a frenzy.

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. <--oh jesus. that has to be about the gayest thing you've said. if you want to help people you can always trot down to the local gay mens health crisis center and talk people into using condoms. you'd probably lower the HIV rate by quite a lot.

oooppss--i forgot..cant use parenthesis. I was saying to use your energies in a positive way, like convincing people to use condoms or helping brain injured people and let others worry about their housing decisions on their own. the statemnt above is really the gayest thing i've ever read on here.

oh, eah!

It's useful posts like that that reinforce what I'm saying: people who don't like my message insult me rather than look at what's happening around us.

Rather than look at fundamentals, you resort to cheap (and futile) shots. Remember, I do stand-up comedy on the side. I deal with heckling drunks all the time. Certainly you don't think that personal insults thrown at me on a blog are going to affect me, do you? You're stooping even below the level of mshlee, who at least - to her credit - tried to come up with figures to support her case.

People ask me questions, I answer them with sound economic theory. If you like property so much, post some fundamental reasons why.

For instance: rents are falling precipitously, and NYC will come out of this financial mess unscathed, and is exempt from market forces. Maybe I'd believe that after a few dozen drinks.

steve...way back when I agreed pruces will fall in nyc. i believe we even discussed numbers. recall? what i object to is your endless need to make this thread into a "steve is right" rant when others try to bring other points in.

i was serious in what i posted above. your energies could be used in such a more productive way. your need to use them to be right on a RE thread sort of proves you're just another middle aged, self centered fag who should get off the computer and have a meaningful and real relationship with another human being.

"you're just another middle aged, self centered fag who should get off the computer and have a meaningful and real relationship with another human being."

oh, eah! How old are we?

This is not a "Steve is right" thread; see cartman's post: people ask me questions, I answer them. That's all. If you're not interested, then go elsewhere. Or did your mommy never teach you that if you have nothing nice to say, shut the f*ck up.

It happens that I'm translating some boring document, and I take breaks. I tried to end the thread yesterday but people kept on posting, so I kept on answering. It's the polite thing to do.

I'm not pressing the "report abuse" button because I prefer that people see you for who you are. It's enjoyable.

:)

Stevejhx inflexible mindset is similar to that of the Grand Wizard of the KKK. No matter how inflammatory his remarks are, and who disagrees with his prejudicial views he's not going to change his mind. He even digs his feet deeper in the ground.

What would happen if we didn't respond to his posts and left this thread to stevejhx and his few fans? That would drive him up the wall because stevejhx is addicted to arguments.

Jesus, spunky, you're comparing steve to the KKK? Can we get some moderation on the SE boards? This is getting ridiculous.

Haven't commented on this ongoing discussion, mostly because I can't keep up with the sheer volume of posts. Steve, just curious, I know you're an economist by training - how much behavioral econ have you studied? I've only taken a couple courses myself, but I find it highly applicable to RE here and much of what people are saying.

Spunk, the truth shall set you free!

bjw2103, funnier is what they say and then they say that my remarks are inflammatory!

I am no expert on behavioral economics, but I believe that in real estate the market forces are too strong to have any long-term effect. That would seem to be what the data indicate.

However, since the correlation between rents and housing prices isn't exactly 1 but close, you might see some behavioral effects at the extremes: people who can't afford the down payment so can't buy, and people who have so much money that they don't care what it costs. I've not read anything to prove that, just a hunch that that may be what's missing in a perfect correlation.

bjw2103=fan of stevejhx

spunkster, watch your English. That would be "fan of stevejhx's."

Sort of like "A friend of my mother's."

bjw2103 sorry I hope you didn't take that as an insult.

This thread is hilarious. steve, I actually stuck up for you. What the fuck am I doing?

Ta-da! JuiceMan to the rescue!

I don't mind having a debate and even a little testiness now and then, but really: Hitler, KKK, middle-aged fag?

Only one of those is true.

I think you were also called douchebag, windbag, asshole, anal retentive, hyper, self centered, and a dickhead. I may have missed a few.

So I think all and all, people really like you.

A couple of those are probably true, too, but they're offset by my self-effacing humor.

lol.

After all this typing I say STeve needs a drink. You're hilarious Steve! How about we meet up in a nice wine bar in chelsea and discuss RE and this wonderful street easy website. What do you say? ;-)

Juice Man you're pretty fun too! ;-)

Can't spunky come?

Hey, Sharise, I already invited Steve for a drink.

you can come too 112. what do you say spunk? are you in or out?

Aren't we all doing shrooms at Poorishlady's new co-op? That's what JuiceMan said!

Guys - I'm off to do a stand-up show. C U 2morrow!

What's sad is anyone who wants to meet steve would like to offer him a drink or some form of barbiturate. Steve be careful, I would definitely be wary of drinking or ingesting anything that was offered to you from someone you met on this thread.

spunky, I'm a fan of yours as well. Hope that's not insulting. And despite what you think about stevejhx's proselytizing and its brainwashing abilities on most people here, I'm signing a contract tomorrow. It's a sizeable risk, and I'm buying in an area you'd probably sneer at anyway, but I need a real home, have been seriously looking for about a year, and am not flipping for at least 6-7 years. While my gut tells me prices will take a hit in the near term, I don't think they'll come down quite as much as stevejhx thinks. And if they do, well, I'll have a pretty nice looking home, and my girlfriend will still only live one subway stop away.

Yeah . . . . I've got some really good sh!t for the chill. Where and when? I'm signing the contract for my new coop on Friday am, so there will be champagne and other good sh!t . . . .

wow...there a lot of overleveraged real estate investors on this. I can taste the fear in your venemous attacks on Steve. Be very careful Steve, I have seen this before. Any losses these people sustain will be blamed on you as opposed to their own financial mismanagement.

They will attack you hoping that you go away. As if that will change what inevitably must occur.

yeah I'm leveraged up to my eyeballs and wished I was renter just like you flmd. Dam I'm so envious of those who get to send $40,000 to $50,000 annual rent checks to their landlord for a one bedroom apt. Dam I miss those days. I also miss the good old days of not knowing whether or not my landlord will renew the lease so my wife and I are forced to shop around for another apt. Yep those were the good old days.

Oh, Spunkster, I was hoping you'd come to the party!

bjw2103, congrats! You know the risk, you're cool with it, that's fine. No different from me investing in emerging markets, gaining and losing a quarter of a million in a day. I know the risk, even if sometimes I want to cry. ;0

poorishlady, where is your place, Friday night: we're having a signing ceremony, just like George W., when he signs bills into law stating categorically that he's not going to pay any attention to them.

flmd, I can take the flak. I have my supporters. Hell, I have two drinks waiting for me already, shrooms at poorishlady's, even the JMan comes to my defense. I must be doing something - that I'm completely unaware of.

Ah, Spunky, I will sleep well at night knowing that yours is the last post I have to answer. If your landlord doesn't renew your lease, it's usually because you don't pay. Is foreclosure now in the offing?

No answer from mshlee? Such a shame - she owes me 16 counts of apologies....

Now, once and for all, perhaps with a mallet we can get the spunkster to understand the speciousness of this statement: "Dam I'm so envious of those who get to send $40,000 to $50,000 annual rent checks to their landlord for a one bedroom apt."

Spunkster, it seems that you fail to grasp 2 fundamental principles of the housing market. The first is that, minus inflation, in the long-term the annual increase in asset values on residential real estate is 0.4%. That has been constant for at least 350 years, everywhere in the world. And it's constant for a reason: housing costs cannot rise faster than incomes because rents are constrained by income and housing costs are restrained by market rents. Housing does not earn you income; if you live in it it does not produce income or create efficiencies. That's why it doesn't increase in value.

As an asset, 0.4% that's one of the suckiest yields anywhere. In fact, you could actually make more money photocopying $1 bills than you could on housing in the long-term. For instance, say it costs you 50 cents to make a decent color copy. You manage to pass the photocopy off as real. You have just earned a 100% rate of return (50 cent return on a 50 cent investment).

Of course that's just luck, and you're greedy. So let's take this case instead: 0.4% is the same as 4 out of 1000, or 2 out of 500, or 1 out of 250. Given the odds, you decide to make 250 photocopies, for a cost of $125. If you manage to pass off just 1 of those 250 copies, you will have earned the same yield as on housing over the long-term, because 50 cents earned on a $125 investment = 0.4%.

At 0.4% per year compounded, it will take you 176 years to double your money. At that rate, it is actually more cost-effective to photocopy money than to invest it in real estate: pass off 2 of your fake $1 bills a year, and you've doubled the yield on housing, and chances are, at that rate, you won't get caught.

That's the first thing you seem not to understand. But since you can probably sing M-I-C-K-E-Y M-O-U-S-E pretty much in key, you should be able to understand that concept if you put your ears on, close your eyes and concentrate hard.

Now on to lesson #2, more directly related to this nonsense: "$40,000 to $50,000 annual rent checks to their landlord...."

This one is harder. We have repeatedly discussed the concept of "imputed rent" - understood by every capitalist in the world except My Spunkster - but we'll try once again, since all of the economic policy of the Western World depends on it. The Spunkster - since his ears are on and he's concentrating hard - will be able to get this, I know he will.

The theory says this: you buy a house. The return that you actually get from buying the house is the right to live there. That right BY DEFINITION cannot be worth more than what you would otherwise have to pay to rent the place where you live.

Why is this so? Let's say you go to the grocer's, and you see two identical eggplants. One costs $1 and the other costs $2. But they are identical. You decide to buy the $2 eggplant, thinking - ooh! there must be intrinsic value in it because it costs more! - but since it's actually identical to the $1 eggplant, it's really not worth $2. It's only worth $1.

We'll get back to that. You buy a property, your "yield" is what it would otherwise cost you to rent the place. Of course properties go up and down in value as does everything, and there are ancillary (big word, that!) costs involved: mortgages, attorneys' fees, closing costs, taxes, maintenance, insurance, etc.

If you rent, however, you have none of those expenses, do you? AHHHH, YES YOU DO! Because your landlord is paying them for you, and you're reimbursing him for them, plus - if he's lucky - a profit.

So everything that an owner-occupier has - mortgage interest deductions, tax expenses, maintenance expenses, etc. - the landlord has, and he's charging them to the renter. That means both the renter and the landlord have the exact same debits and credits, benefits and charges; the only difference is the landlord's profit. As an owner-occupier, then, you keep that benefit for yourself, right?

No. That's where the Spunkster and all the weak-minded like him make their mistake. That is the gist of: "Dam I'm so envious of those who get to send $40,000 to $50,000 annual rent checks to their landlord for a one bedroom apt." Unfortunately, the - I'M KEEPING THAT PROFIT FOR MYSELF! - is not true.

In effect, though you don't realize it, YOU ARE PAYING NOT TO PAY THAT PROFIT TO THE LANDLORD, and that payment costs you exactly what the landlord is receiving.

It must, because it is, by definition, an equality: Market rent = imputed rent. The only benefit you get from buying property is the benefit of not paying rent. But that benefit of not paying rent costs you money. And the money it costs you is precisely the difference between the real long-term yield on investing your money in residential real estate - 0.4% - versus the real long-term yield on investing your money in any other long-term asset, such as stocks - 7.0%.

The reason is that, over time, all income-producing assets produce the same long-term yield. Residential property is not an income-producing asset, whereas investment property is. Therefore, over the long-term, investment property will produce the same long-term yield as all other investment assets: it generates income, and produces efficiencies. It is a business. When you buy real estate to live in, the premium you are paying - with all costs factored in - is the difference between the real long-term yield on residential real estate - 0.4% - versus the real long-term yield of investing in any other asset class: 7.0%. That is, the landlord's profit.

This cannot be disputed because it is the definition: market rent = imputed rent. By buying real estate you are in effect foregoing the benefits of buying any other, higher-yielding asset class. It is the opportunity cost of buying residential real estate.

Thus, what will happen in the real-estate market is inevitable. Right now, market rents are far lower (and falling quickly) than the carrying cost of buying residential real estate with a 30-year fixed mortgage which, as per above, is the only benchmark rate that can be used, because any other implies excess leverage over the depreciated life of the asset (minus land).

Getting back to eggplants, Spunkster. You buy your eggplant for $2 (market price) but it's only worth $1 (imputed rent). You overpay, and you lose. Let's take my case: I pay $55,200 a year in rent. That's the market price (or it was in October; next October it will be far lower and I'm asking for a decrease.) The historical equilibrium between rents and purchasing prices is 12x annual rent. That would give me a purchase price of $662,400. An apartment equivalent to mine currently sells for $1.2 million, or approximately 24x annual rent. Therefore, although I am paying $55,200 a year in rent, someone who would buy an equivalent apartment would be paying $67,000 in interest, $12,000 in taxes, $12,000 in maintenance, $200 in insurance, amortized closing costs, attorneys' fees, mortgage recording taxes, anticipated conveyance taxes and real-estate brokers' fees, the opportunity cost of not investing the $240,000 down payment elsewhere, for an approximate grand total of twice what I pay in rent.

Yet you get the exact same benefit I get: the right to live in an apartment. So you're paying $2 for an eggplant that's only worth $1. Not only that, if you buy it today you'll be paying $2 for that eggplant even when it falls back to the market value of $1, so lose 50% of your investment. Meaning that you're actually spending 4 times what it's worth over time: twice the rental value plus the fall in value of one-half. But Spunkster would say, "Dam I'm so envious of those who get to send $40,000 to $50,000 annual rent checks to their landlord for a one bedroom apt."

Because the Spunkster has no clue about what's going on.

Spunkster, put your ears on, close your eyes and concentrate hard. Sing M-I-C-K-E-Y M-O-U-S-E. This is what has happened in real estate everywhere in the world for at least 350 years. You are watching it happen before your eyes. WAIT! I FORGOT! Your eyes are closed and your ears are busy listening to your own voice sing. M-I-C-K-E-Y M-O-U-S-E. Forever let us hold our banner high....

Real estate.
Real estate.
Forever let us hold our banner high....

Steve. First of all, that was a very instructive and clear lesson on imputed rent and the economics of owning and renting. However, there are a few distinctions that your analysis does not take into account, and I feel they are worth mentioning.

1) You assume that the rental unit is identical to the purchased unit. Housing is not like stocks, there are distinctions. I am not saying in all, or even in most case, but in some there are. those distinctions must factor into to the price of ownership because the product that one is purchasing cannot be replicated. There are no brand new custom designed and custom built houses in Bergen county to rent like the one I am buying. I am paying a premium to have that kind of home. I could get shelter elsewhere for less money, but it would not be the same product. So, it is not two eggplants. Rather the analogy would be two vegetables.

2) To the extent that there are a group of like minded consumers who all share the same view of the premium to be paid for owning the exact product that they like, say 15 cpw, than that pool of consumers will set the price for units in that building, not the macro principles that you describe.

3) Your argument is a purely macro argument on shelter. It is a valid argument, and one with a good bit of merit. The best example might be your 99 jane street one because there the variables are more or less identical. A less neat example would be 99 jane vs. Ricahrd Meir building. Both shelter, different products.

Finally. I spoke with a friend of mine that is a senior executive at one of the big houses last night. I asked him if they were planing to discontinue interest only or 1, 6 1 year Libors. He looked at me like I was a moron. Then I asked about any regulatory changes in the pipeline. He said there is a lot of discussion to get read of teaser rates, no l/v mortgages, and revisisting the review process for mortgages. However, there is no way they will be getting read of a 7 year interest only to a qualified buyer that puts down 20% or more. I understand why, for purposes of your argument you use the 30 year mortgage, but I am just making an observation.

bjw congrats on you upcoming purchase. I'm glad for the most part you ignored stevjhx even though he's entertaining. He's also a lot of fun to egg him on in writing such long posts. I read the first two sentence of his long winded post and fell asleep.

Spunky. I, like you, am bullish on Manhattan real estate. While there is no doubt that the economic boom on wall street has helped to fuel real estate prices, it is very clear to me, at least, that all of the organic improvements to the city itself have helped to make the place a more attractive place to own by more people then at any time in recent history. I also believe that the new changes to tax laws in England will make London less desirable (their housing market is in a downturn) and make Manhattan more attractive to those individuals.
I think it is important to remember that, while Wall Street is a huge financial engine, there are several pockets of the market that are supported by those who work in other industries, and that those pockets do not contain buyers that will have fire sales. I, of course, agree with Steve that a downturn on Wall Street is a negative for Manhattan's economy. However, 9/11 was a big downturn as well. The local economy, and the nation went into a recession, and housing prices fell 7.5%. While it was a while ago, I remember many well respected people saying that downtown would never come back, that the financial center would move out of Manhattan, etc.
I remember that in New York Magazine, for every year beginning in 2003 an article talking about how Manhattan real estate was too high.
I agree with Steve that people cannot buy what they cannot afford. We will have to see how far incomes will fall, and how desperate, if at al, certain sellers become. There is fear in the market, as there was after the bsc bailout. We need to let the emotions get filtered out in order to see, if Steve is right, that prices will retreat back to 2004 levels. I think that is way too bearish. In the downturn of the 80's through say '94 there were a myriad of issues that adversely impacted Manhattan real estate other than just Wall Street, which in '87 the market lost over 20% of its value in one day. We need to isolate those other factors and see what impact they had to drive down prices, and then see if those factors exist today.

bjw2103: Good move. 6-7 years is a good plan. You'll make out in the end. And in the meantime, you'll be living in a place that is yours. Did you end up in Williamsburg?

it was a joke spunky...get over yourself!

mh23:

1) 2 vegetables are still subject to the same laws of economics.

Of course there are unique products, but overall shelter isn't among them. You are - as always - talking about a very high-end niche of trophy properties, available to only a few. These are, as we have agreed, subject to slightly different rules because at that price point the elasticity of demand is lower, meaning that every increase in x units of price decreases demand by less than x units. There are also supply constraints through limited land (which has very little real impact over long periods of time) and zoning laws, which can make one product unique with respect to all products.

But that's not true for all people for all houses in Bergen County. It is true for the Hope Diamond; there's only one. You are projecting your own personal experience onto all consumers: "There are no brand new custom designed and custom built houses in Bergen county to rent like the one I am buying." That may be true for you, but what you consider a unique product may not be viewed by someone else as such. You are looking for one specific thing, and will take nothing else. You want zucchini and will take nothing else. Fine, but all data show that that is not true for the market as a whole. If zucchini costs $2, and yellow squash costs $1, people are going to start buying a lot more yellow squash, even if they can afford the zucchini.

Yes, the price elasticity of demand at the very high end is lower than the median, but since it's a curve that's the definition. You could get to the point where for someone like Warren Buffet the price elasticity of demand is zero: he doesn't care what it costs, he can buy it because he wants it. But overall it's offset by the other end where price elasticity of demand is close to infinite: if I only make $1,000 a month, I cannot afford to live anywhere that will cost me more than $280, because I need the rest to live on. $281 could put me over the brink.

Elasticity is a microeconomic principle: how each individual decision is made. I'm talking about a macroeconomic principle: how changes in income will affect market behavior.

2) Again, I refer you the above: first, you're talking about a product with a very low price elasticity of demand. We're talking about market forces in general. But even what you say is not absolutely true. You always refer to 15 CPW. Let's assume there's an identical building next door, called 17 CPW, that has virtually identical units at half the price. Which are going to go first?

Then, let's assume that there's a recession. Each of those two buildings has 50 units in them, 100 total. But now only 50 people have or make enough money to afford those units at that price level. What's going to happen to prices?

Then, let's assume that not everyone feels he MUST live at 15 or 17 CPW. Let's say that, for some, the Dakota is a viable alternative, and there is an available unit. Any potential purchaser - since to him the products are virtually identical - will choose on price regardless of how much money he has.

Every example you give you commit the same fallacies: 1) that, like you, every purchaser wants just one thing and he will buy just that one thing and nothing else. It's simply not true; and 2) that the price elasticity of demand for very expensive property is the same as it is for all property, which is also simply not true; and 3) that there are more purchasers of these "unique" properties than there are properties available, which right now seems not to be the case.

"That pool of consumers will set the price for units in that building" is half of the story. You forgot supply side of it: when supply exceeds demand, prices fall. My argument from the very beginning has been that right now there is much more supply than demand, and because of what's happening in Wall Street - the economic engine of NYC - that is gong to get worse. Therefore, prices will fall. The aggregate of all microeconomic decisions leads to a macroeconomic event.

3) "99 jane vs. Ricahrd Meir building" are the same product - shelter - with different price elasticities of demand, because the most expensive unit at 99 Jane would probably be offered for around $3 million. The least expensive apartment in the Richard Meir building would probably go for around $15 million. It's comparing a Lexus to a Lamborghini.

Your friend: that's probably true, but read what I said, and read today's New York Times' story about re-regulation of the financial services industry. What the proposal I read was was that it would be illegal to offer anyone a variable-rate mortgage if they could not, when they take it out, afford the highest possible reset. My point is that the pool of people who will be able to afford that is very small compared to what it used to be.

I have a variable-rate mortgage that I put 20% down on, but I can pay it off in cash if I want to, so I'm not exposed to the yield curve. I can afford that type of product, up to a point, and I would have never taken it out if I couldn't afford to pay it all off. You probably can, too, up to a point. But according to New York Mortgage, jumbo ARM's make up 65% of all jumbo loans made. I daresay that not all 65% of those borrowers can a) afford to pay their loans off in cash; or b) can currently afford the maximum reset.

Nonetheless, those products don't affect the theory of imputed rent, which uses long-term interest rates to finance long-term assets. Those products just change the opportunity costs for people who choose to use them.

Spunkster: "I read the first two sentence of his long winded post and fell asleep."

Asleep at the wheel!

Steve.

I think we have reached the essence of your argument. If an economic downtnturn, coupled with what may be an increase in supply occurs that outpaces demand, prices will fall. I cannot disagree with that. I guess we will have to see what the demand will be and at what levels. My sense will be that it will be far less pronounced than you do, and that, if it occurs at all, it will be felt more acutely in certain areas and at certain price ranges, but we shall see.

Since you like articles, go to the New York Sun today and check out the article regarding new developments.

This article, mh23?

Analysts Advise Against Waiting for Real Estate Price Cuts

http://nysun.com/real-estate/analysts-advise-against-waiting-real-estate-price-cuts-0

"Analysts"!

“A price cut at a new development is the kiss of death,” the developer of such projects as Sheffield 57 and 25 Broad Street, Kent Swig, told a room full of brokers during a recent speech at the Real Estate Academy."

“Price is part of the marketing strategy,” a real estate appraiser, Jonathan Miller, said."

"A director of sales for both buildings, Stephen McArdle of Sedona Realty Group, said the developer lowered prices to speed up sales so that it could begin new projects."

“A price cut is usually very intentional as a marketing move,” the director of development marketing at Halstead, Stephen Kliegerman, said."

Oh, MH23! You surprise me! THEY'RE NOT "ANALYSTS"! They're REAL ESTATE AGENTS! This article is a plant, and it's exactly the type of plant that you see happening when things start to get bad. Go back to what they said about the Inland Empire in California 2 years ago. They were telling you the same thing.

On Sunday, there were 6,733 listings in Manhattan not in contract on this website. Today there are 6,820. Miller Samuel said at the end of the 4th Quarter 2007 there were 5,133 active listings in Manhattan. Rents in the super-luxury building where I used to live have fallen 15% in 6 months.

You got the gist of my argument all right, mh23, and I'm sorry if this comes out harsh, but your analysis is not very sophisticated. I'm glad your bullish, and I see why.

Steve. Take it easy. Why are you getting so emotional? I have refrained from personal attacks against you, and will continue to do so.
Now, you seem like a smart person in this area. Surely you can see the absurdity of arguing that those new articles that support your position are worthy while those that do not are not. Your argument is too much supply, not enough demand. I guess that is sophisticated, but it seems pretty basic to me.

"News articles."

Mh23, I was so surprised! Sorry. I said it would be harsh but it's not an attack, but I was shocked.

Publicists (I used to have one) plant these articles, mh23. It's not a "news article." A publicist sent out a press release notifying newspapers of this "conference," and The Sun picked it up to fill its columns.

If they quoted anybody but a real-estate agent I guess I wouldn't have been so surprised, and if they called real-estate agents anything but "analysts," I guess I wouldn't have been so surprised. I'm showing newspaper articles that quote economists. You're showing newspaper articles that quote salespeople.

Go back and read all the hype during the dot.com boom: "Pile on board, you're missing the boat!" This is the exact same thing: "Don't wait for prices to fall," cry the sales people! "Pile on board, you're missing the boat!"

My argument is an equal amount of supply and demand: there's too much supply and not enough demand. And there's tons more supply being built right now, and demand is drying up faster than ever. Read the articles today about mortgage rates, on Bloomberg, for instance: banks aren't lowering their rates because they're hoarding cash. They're not lending because they're afraid. They're afraid because they see the writing on the wall.

Those anticipating a collapse: let's face it, even $50000 drop on a $800000 property will not help you. Manhattan has always been and always will be overpriced, just like London and Rome and Moscow. Cursing this fact and salivating over a disaster will not help you. If it were not for the internet, nobody would be aware of your sentiments. Steve would have been forced to stick with rejected letters to newspapers, single-spaced, double-sided.

Steve - how does your analysis of rent vs buy change if the buyer is putting more than the minimum 20% down? For example, lets say that the market rent for a property is 10k. Carrying costs on it are 13k with 20% down but 10k with 30% down.

What is the economic interpretation of this situation?

inquirer, not true: Manhattan has always been and will always be relatively expensive, but not overpriced. Relatively expensive because the people who live here make a lot of money. Overpriced is when people can't afford it anymore, and that's what's happening right now, because even in historical terms the people who live here can't afford it (shown by the census data), and forward-looking because Wall Street is slashing jobs, and income is collapsing.

In 1998 it cost 12x rent to purchase an equivalent property. Now it costs 24x rent. It will fall back to its historical norm over time, as nominal prices fall and real incomes rise.

Real estate is a cyclical industry. Always has been, always will be.

BillyRes - we'll be neighbors (well, not the same building, but you know). I really think the area's going to take more hits in the coming year, but I'm planning long-term here, the neighborhood will only get better, and I like the building quite a bit. Plus, if Bloomberg gets his fees for drivers into Manhattan, my parking spot will appreciate pretty nicely.

duecescracked, the economic analysis of such a purchase doesn't change: the price analysis is always done using a 30-year fixed mortgage with 20% down because it approximates the 27.5 year depreciation of the asset, but not the land it lies on, which can't be depreciated.

The market rent is the market rent, which is the benefit you gain from owning a property: the right not to pay a market rent. Nothing you do will change that: pay more than the market rent in any form, and you're overpaying.

If you put down extra you will of course reduce the monthly carrying costs, but that has an opportunity cost associated with it, which is what you could have made on that extra 10% had you put it into an income-producing asset. That's the overpayment. At first the difference isn't not much, but stock yields compound, whereas mortgage-interest deductions amortize. Over the life of the asset, it's a wash.

It works this way because it's defined this way: imputed rent = market rent. Your yield on buying a place to live is the right to live there. Your landlord's profit is offset by what you lose by not investing your money in an income-producing asset. It's an equivalence.

understood.

so basically what you are saying is that you are a genius?

Yes, a genius who rents.

stevejhx has a seven figure savings yet his emerging stock fund fluctuates 250k sometimes on a daily bases. Now that's a well balance portfolio that I'm sure he either day trades from his rental unit in Manhattan between stand up comedy gigs and his few hours that he spends on his translation services business. He also claims his 2 bedroom house on Long island has appreciated from 340k to 550k. However he thinks that 550k may be more like 450k or 390k.Only problem the market for a 2 bedroom pad even in certain areas of fire island is no all that great. Okay you pass the expert test. BTW stevejhx care to give any stock tips.

It is so interesting how we can use economic theory to make all human decisions precise. It is clear that economic theory has help us all avoid any market turbulance, since the simple application of core principles will always produce an exact real world outcome. Of course, sometimes you realize that there were "externalities" that you didn't consider that kind of screwed up your whole model. But don't mind that. Just understand that all economic principles are absolute and reductive. If you just pay attention to the model Steve has presented you can perfectly predict your financial future. Until the Fed has to come bail you out because of some unknown factor not added to the model.

duecescracked, I'm saying that that's how the economics of residential housing works works by definition. Don't take my word for it; look it up. There are 350 years of historic data to support it. Residential housing does not appreciate significantly over time because it doesn't produce income; rental property provides an exactly equivalent product at a far different price right now. Market rents are constrained by income and unaffected by leverage. They are a far greater indicator of property values than purchase prices, which are affected by leverage. Reduce incomes and rents will fall; reduce leverage and property prices will fall. They must.

For all others who don't believe me, I recommend this 2006 tome: "Why the Real Estate Boom Will Not Bust—And How You Can Profit from It," by David Lereah. If you call him up maybe you can get him to autograph it for you.

For Spunkster & eah, I have no more comments. They don't know how to add value.

eah, spunky: do you guys, like SteveF, agree that real estate is a ponzi scheme, and you guys are just perpetuating it since you guys are already bought into it, and cannot cash out till you find the next generation of suckers?

See SteveF's statement on the other thread, where he says: "hey it's nothing personal inquirer just business. I'm trying to create value for my condos. If I feel street easy influences that than I'll be there to counter anyone who prevents that. I don't want some would be condo buyer being influenced to not buy. I want him/her to buy to increase value. This way I win and all apt owners win. It could be the never ending, everyone wins ultimate pyramid scheme. BTW, let's hope Manhattan follows and becomes as "overpriced" as London, Rome and Moscow."

briguy, what are those externalities that you are referring to, precisely?

If you're blaming the current status of the market on economic principles, I'd say that you have it backwards: people saw that soaring housing prices were unsustainable; people knew that loans were being given to the unworthy. People knew that there was excess liquidity in the markets. That laissez-faire supply-side Republicans are hellbent in their belief that markets are perfect until, of course, they need the government to bail them out, decided not to do anything about it is not the fault of economic theory. It's the fault of policymakers who didn't realize or didn't want to do anything about what was happening, through regulation. It is overreliance on their own economic myths of perfect short-term markets that led us here.

The Economist magazine had a cover story in 2005 about the impending housing crash. In the dot.com boom people were warning that price/earnings ratios were way out of line with historic values, yet people kept on buying. There were plenty of warnings about all the credit being given out like candy - but people were willing to take the money, banks and others were willing to lend it, and the government was willing to watch it all happen.

Therein lies the problem. Is that your externality?

eric_cartman, another great post. All Ponzi schemes collapse of their own weight. Everybody bought into the notion that real-estate would increase in value forever, of course until it didn't.

Poor SteveF: he thinks that talk will help. I think it was kylewest who attacked me for talking real estate down. Talk can't do it: the overwhelming pressure of falling incomes leading to falling market rents leading to dried up liquidity will do all the work for us nicely. We just need to be like Warren B. - wait on the sidelines with gobs of cash to mop up the inevitable result.

Warren Buffett is brilliant in his simplicity: if he doesn't understand it, he doesn't by it. If he thinks it's overvalued he won't buy it.

Of course you need to understand it to know if it's overvalued, which is why Buffett won't buy anything he doesn't understand. Spunkster et al. don't understand it and don't want to learn, so they have no way of ascertaining whether it's overvalued or not. Hey - what's a few more Ponzis in this world?

Again steve, you are kind of missing the point. While your macro analysis has some merits, I am suggesting that the direct application of that macro model to an individual micro decision is flawed. For instance, there might be further government intervention into the system that keeps housing prices in NYC at the current level. You can talk all you want about why this might be right or wrong, but if it happens then your predictions about a downturn would be wrong. That would be an unaccounted for externality. The tone of your posts leave very little room for any such possibilities. Nuance is possible on a post, I believe. For instance, try saying one way to look at things is using this economic model, blah blah blah. Instead we get stern reprimands for not completely buying into your ideas.

steve - What is it you want, exactly? What is it, baby?

inquirer, spunky, eah, stefeF: what is it YOU want, exactly? perpetuate the ponzi so you can cash out as soon as you find the next generation of suckers?

eric - I don't want anything. I'm not selling because I love my place. Bitterness is not a good advisor. Class war does not work ,either, especially an artificially invented one. There's always a seller for every buyer, you know. That is, unless you want a designer coat for the Conway price. Just ain't happening. But me - I don't want anything. Just watching.

"Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years."--Warren Buffet

Briguy, I fully agree with what you say that "the direct application of that macro model to an individual micro decision is flawed." I've always said that. Ask mh23.

However, I don't agree that "there might be further government intervention into the system that keeps housing prices in NYC at the current levels." Any intervention by the government would be short-lived, and offset by the market, or simply alter the structure of the market. That's borne out by Schiller's data.

Let's say the government raises conforming loan limits to $1 million and keeps them there. All that does is shift the risk to the government from the private sector for large loans (and I don't hear any supply-siders calling for the elimination of Fannie Mae), and add further liquidity. The guarantee won't affect the basic definition of imputed rent = market rent. All it will do is allow people to borrow more money at a lower rate. You're right that that cushion would help to sustain prices, but only if it's enough of a cushion to offset the current disconnect between market rents and owners' carrying costs.

So let's say you could borrow $1 million at 6.0% if it's got a government guarantee. Otherwise that loan would cost you $7.5%. The difference in the total monthly payment between the two is $5,995 vs. $6,992. With an additional monthly owners' carrying costs of $1,000 tax, $1,000 maintenance and other expenses, makes the totals $7,995 vs. $8,992.

That mortgage implies a unit worth $1.25 million. Units of that size are currently renting for about $4,500 (and the rents are falling). To return to equilibrium, then, would still require a hefty fall in principal values of 43% in one case, and 49% in the other. And that's assuming incomes don't fall as a result of what's happening on Wall Street, which is unlikely.

Honestly, prices went up so far so fast that I don't know of anything that the government can do to sustain these price levels. If you can think of one, I'm all ears.

So if the government were to do that, it would help, but prices would still fall a lot.

inquirer, why the anger? i just asked you the same question you asked steve :-)
can dish it out but cant take it - huh?

"Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years."--Warren Buffet.

Therefore, rent.

inquirer, what do you mean, what do I want? I have everything I want. Do I want property prices to fall? Well, I own a property, so you can fathom the answer to that. Do I think property prices will fall?

Absolutely. And hard.

"There's always a seller for every buyer, you know." If that were true, there wouldn't be 6,820 listings on this website, and everyone would be married.

eric - Sorry, I didn't see the anger in my post. Sorry if you see it. I'm really content with RE situation, that's all. No anger.

"stevvejhx is a jerk so pay him no mind"--Warren Buffet

"stevvejhx is a jerk so pay him no mind"--Warren Buffet

There are two ways the disconnect between market rent and owners' carrying costs can change. Your prediction, owners' cost go down. Another prediction, market rents go up. What will happen in the short term? Doubtful. Maybe owners' cost go down a bit. Crater? Hard to know. I know you think you know for sure. I am just more skeptical of broad based claims on both sides of the argument.

sorry Warren really didn't say that about stevejhx

briguy, eventually lots of things will change and we don't know what they will be. Market rents are indeed falling right now, Wall Street is reeling. My advice yesterday was just to wait to see how it will play out. I have some ideas, but no one can predict accurately.

What I've been saying here is that, all things being the same, it won't be pretty.

OK good. So if I go back to your post to spunky on rent vs. buy I can use a metric other than your 350 year 0.4% return on real estate to conduct a more real world based analysis. In doing so I might actually come closer to predicting an outcome in today's NYC real estate market. I could be wrong. So could you. It all depends on risk tolerance.

The 0.4% is a real return on investment. I wouldn't stray too far from any long-term mean, especially if you look back at what the real return on investment has been since the bottom of the cycle, 1998.

Rather, I'd use the p/e ratio of 12x annual rent = long-term equilibrium purchase price for virtually identical properties. Since imputed rent = market rent, and market rent includes the projected real return on investment, you'll get approximately the same figure with considerably less work. These are, as you say, approximations.

Of course doing that you have to use the long-term 30 year fixed mortgage rate with 20% down, since it's tied to the useful life of the asset.

Here is a rent to buy link. I was wondering if someone can incorporate some numbers in this calculator and let us know what they come up with. Is renting actually better than owning? Just curios with what numbers they come up using this calculator.

http://www.abkrealty.com/Homes.aspx?tabid=1981674&__ts=1206639985964

Eric, apologies for the delay in responding. I was doing that funny thing called lunch with other humans. So, to you question..what do I want? Well, if you read through several threads you'll see I have been remarkably consistent in my thoughts on real estate. It IS a fluctuating asset. To hedge I buy a property a year and have over the past ten years tried to go more global. In terms of NYC real estate I have not seen a great return downtown so have turned my attention way uptown to Washington Heights where I am able to buy cheap and do more creative things. For example, I have a 6 unit brownstone (not cut up to my liking but good enough) that I rent weekely topeople hwo have long term care relatives at Columbia Pres. As I've stated, when I think normalacy has been restored to the downtown market I will likely buy in either Chelsea or the West Village.

The reason I resent people like you and Steve has more to do with your defensiveness/hopelessness than your views. I share many of your views but am of the mind to overcome than to constantly bitch. There is money in all markets. If Steve is as flush as he claims to be he can make an all cash offer downtown at, say, $850 sq. ft., and after a few offers it is likely to be accepted. You work the market you're in..you don't try to time it.

briguynyc - I think its ok to use numbers higher than 0.4% - but if you use the last 5 year's growth rates (of 15 - 17%), you'll overestimate by a long shot. a quick back of the envelope calculation showed that if we use 15% growth rates, a $10 M apartment in Manhattan will be worth more than the US GDP in 141 years (calculated as 15% real growth for manhattan apartment, 4% real growth for US GDP in today's $s)

eric_cartman, I disagree with you on that if I understand what you mean. Even if you raise it to 2% p.a. real growth - unsupportable over time - if over the past 5 years the real growth has been 100%, you're still due for a 90% fall in prices.

I don't think prices will fall like that, but it's just an example. If prices shoot up very high, they tend to fall just as far to compensate. If we're at a peak, and our lives are limited in length, we have to assume at least a short- to medium-term negative return.

Again, I think the p/e ratios or some of the variants you can find on wikipedia are the best ways to calculate what you're looking for: they're easy, and elegant.

eah, I don't know why you would "resent" anybody. My decisions are my decisions, based on what I'm saying and what I think will happen. This thread is about that; if you disagree, fair enough, start your own.

I don't think I'm defensive at all - I just haven't been shown data or a theory that would support a happy outlook for the market right now. I think I've engaged - after having been called some very nasty names, including by you - in as good a discussion as I can in between some very boring translation work.

As you know, I am not an "upcoming depression" advocate. I'm working at a record pace right now. I've never made so much in the first 3 months of the year as I have this year - it's usually my slow time. That's why I don't see all the economic doom and gloom.

I do, however, maintain that housing is seriously overpriced in Manhattan.

And I don't live downtown because it is a wilderness. I don't care how much it costs, I'm not that cost sensitive. I don't live in the Bronx, either, though I could probably buy a mansion.

There was a time when I was a property bull: when it was cheap and underpriced.

Once again here the rent vs Buy calculator plug your own numbers into calculator and see what numbers you come up with.

http://www.abkrealty.com/Homes.aspx?tabid=1981674&__ts=1206639985964

Your customized rent versus own analysis is based upon:

An initial monthly rental payment of $4,500.00. We assume that your rent will increase by 2.5% per year.

You are considering buying a home valued at $1,200,000.00, with a down payment of 20% or $240,000.00. Your monthly mortgage payment of $6,483.90 includes both principal and interest and is based upon a loan amount at an interest rate of 7.15%. Because your down payment is less than 25 %, we have included Mortgage Insurance to be paid on a monthly basis.

Summary:

You should keep renting.

Notice they're charging PMI now for down payments of less than 25%, rather than the old 20%.

This is a somewhat oversimplified article, but it covers some good ground:

http://seekingalpha.com/article/70003-how-will-the-housing-crisis-end

In the comments section afterwards, a Boston resident is commenting. (As a RE market, Boston is sorta like NY, except the constant influx isn't so much overseas tourists as students.) I thought he put it nicely (i.e., where we could be headed down here):

"Can't speak for some other markets like the southwest though, but here in the northeast the problem seems to be availability of credit to people who can handle it, or fear that the market will continue to fall keeping people who should buy from doing so."

bjw2103: There are a few of us taking the plunge to buy in this market and even fewer enthusiastic about Williamsburg. But I see Williamsburg's future as you do. Will take some hits in the next couple of years but has a great amount of potential to become a very desirable place to live for professionals and families (equals huge return). I like Williamsburg as it is and am very excited that I found a place that I love. I too am going for a parking spot. No car (perhaps a Vespa) and paying a premium but looking long term. You'll probably close and move in before me. Schweet.

anotherguy, this is hilarious from that article: "Secondly, and equally important banks need to reduce lending standards to allow qualified buyers to purchase new homes."

Well obviously, if they were "qualified buyers" banks would lend to them. It is a complete and utter non sequitur.

"Reduced lending standards" is what got us into this mess in the first place.

"the problem seems to be availability of credit to people who can handle it"

steve keeps saying this as well. I haven't heard that people with good credit are having a tough time finding a loan. I don't get it. Is there anyone on this board currently in the buying process that is having difficulty getting a loan? bjw2103, you mentioned you just bought a place. What is the story on your loan?

JuiceMan, when they're raising the PMI so you need a 25% down payment to avoid it, they're reigning in credit and covering their arses. They have balance sheets to build back up - notice today's article about mortgage rates not going down, either. They're not playing the Fed's game. Banks are sopping up all that extra liquidity and using it for themselves.

A 25% threshold for PMI means that they expect more delinquencies, and a further deterioration of the housing market, and they want to transfer the risk onto somebody else. They don't want risk. "Handle it" is in the eyes of the beholder.

Ok Steve--got it. You want/think/implore/suggest/pray that people who are buying their first property (or who are on the fringe) wait because you think it is not the time to buy. It is kind of you to splice and explain the stats. Truly. If your heart is in the right place, you've done a mitzvah. For someone who has a lot to lose, I would also suggest not buying.

You've made your point over and over. So...what next?

When do we move on to the dicussion about hwo to adjust to current market conditions? Is your position to rent until...??

1.2 mil at 4,500 per month rent. Boy talking about finagling numbers so one can prove their point.

I understand that steve, but an article is different than what is actually happening. I am curious about folks securing loans right now and what they are experiencing. I’m tired of reading articles about what could or may happen, know what I mean?

No Spunkster, that's exactly about right:

To buy @ $1.25 million

http://www.streeteasy.com/nyc/sale/185697-470-w-24-st-chelsea-manhattan

To rent @$4,570

http://www.nybits.com/apartmentlistings/ee20969bcf260516ee6e149994ca6138.html

Figure neither place will go for the listed price.

Seeing all this stuff I'm writing, don't you think I research before I made my decision to rent.

That's just about right.

You can find even

Chelsea Landmark @ $6,295

http://www.nybits.com/apartmentlistings/351fa5fb08caabe6aaacc32341171ef7.html

versus Chelsea Stratus, across the street @ $1.95 million

http://www.streeteasy.com/nyc/sale/88656-condo-101-west-24th-street-chelsea-new-york

There you have 2 different price points. Do more research yourself.

JuiceMan, you should start a different thread for that, because I doubt they're reading here.

See Spunkster, that's my whole point. The numbers I'm putting up are the right numbers. If they weren't, I'd be on your side, believe me. In fact, I'd love to be on your side.

Just FYI, too: that Casa place for $4,750 is waaaaay down from what they were asking a year ago. I live down the block in a similar building, inquired when Casa opened a year ago, figuring they needed to fill the place, would offer something cheap: opening prices for 2-bedrooms were $5,700.

Don't you think somebody as meticulous about details as I am would have researched this to death? No matter what you do, those are today's figures.

eah: When do we move on to the dicussion about hwo to adjust to current market conditions? Is your position to rent until...??

My advice today is what it was yesterday: if you're someplace happy, stay put, whether you own or rent. If you own and think we're in for a downturn, give it a shot. If you rent and think we're in for a downturn, give it a shot.

We're about to go through a rough period, and no one knows how it will play out.

and I meant: own: "give it a shot and sell." rent: stay put.

If you own and think we're in for a downturn, give it a shot.

Give what a shot? If you own, you own. Give what a shot? You mean sell? I have no clue what you're talking about.

$4,570 seems really low steve. A friend of mine just moved out of a 2/2 rental that he was paying $5,300 a month for. They re-rented it in a week for $5,800. He bought a 2/2 in the same building for less than $1.3M. Different line but similar sq footage.

JuiceMan, those are real listings. I gave you the high end and the low end. Using the 12x p/e, an apartment renting for $5,800 would sell for $696,000, or almost exactly half what your friend paid for it. If you bought a $1.3 million apartment you couldn't rent it out for half what it cost you to keep it.

And therein lies the problem: I've been saying it for a long time. Imputed rent = market rent. If it costs you twice as much to buy something as it does to rent it, you're overpaying by twice. The only benefit you get from buying is the right to live in the very same place you're renting.

That's why this market is all over the place. For almost all of recorded history, if you bought a place you could rent it out to meet your costs in the first year. No more.

stevejhx you are by far one of the biggest bullsh**t artist are this board.

spunky: can you back that up with something? different numbers, different frameworks, different anecdotes and examples? anything that might add value to this discussion?

all you have done on this board is add insults and taunts - not facts or perspectives to any discussion.

and spunky, you still haven't answered my question - do you, like your buddies steveF and inquirer, agree that at this point Manhattan real estate is like a ponzi scheme, with current owners disparately trying to find the next generation of suckers so they can cash out?

SteveF stated it outright, and inquierer agreed, and then tried to weasel his way out of it by pointing out to the garden in his apartment. where do you stand in all of this?