Bloomberg Article on NYC real estate

wyndcliff, there may be a correlation between property ownership and wealth, but that does not mean that property ownership caused them to be wealthy.

Let's do an SAT-like logic test: On paper I'm not a property owner because I own a co-op. I have more money than my mother, who lives in a condo. What made me rich? The stock market.

stevejhx - I'm not saying ownership caused wealth. I just wanted your thoughts on it since you suggested ownership reduced wealth. So by that logic wealthy owners should become renters and become more wealthy?

mmafia - What am I spinning? I just pointed to a survey, didn't even editorialize on it. chill.

tenemental, West81st - Absolutely agree with the sidelines sentiment. While I didn't predict this would happen, I started looking last March and decided to be very patient about my search. I just signed last week because I found a place I really like that I see myself in long-term. I could have waited longer, but sometimes there's a right opportunity that presents itself, and I decided to go for it. If I hadn't felt that, I probably would have held off for at least another 4-5 months. I've talked with a few buyers here and there, and the sentiment is the same - there's NO rush anymore. And thank God. Too many (not all!) sellers and owners have developed this sense of entitlement that has just snowballed. I know the areas both of you are looking at and imagine both will come down to some degree (though maybe more in tenemental's favor). It's just hard to see how every neighborhood here won't be hit to some degree.

wyndcliff, point taken. chilled. i'll save the ammo for the lamer crew of spunky, et al.

I don't think that these big picture statistics (like from Bloomberg) give the real story of what's truly happening in the NYC real estate market. I don't think it's as simple as NYC real estate is going up, or NYC real estate is on its way down. This isn't the stock market! I think that New York City real estate is a complex and segmented market. Some segments (the overbuilt properties) will come down hard and fast, while other properties (the underbuilt segments) will probably remain flat or go up a little. I've been saying for awhile that large, luxury, family-sized apartments have been overbuilt over the past year, and now seem extraordinarily overpriced. This segment has been the one appealing to Wall Street types, too. Has this segment started to fall yet? It seems to me that standard, non-luxury family-sized apartments (the not-over-the-top ones) have had lots of price drops. Is this segment hurting? Could there be some opportunity here to turn a lackluster 3BR into two spectacular 1BRs? Or, will that start to happen more in 2009? Anyone have an educated guess?

wyndcliff, what I said was that if owners invest their money in assets other than residential real estate over time they will be wealthier because other assets appreciate faster than residential real estate. Different people buy for different reasons, but if you buy at a point where your costs are equivalent to market rents on a cash-flow basis, you will be as wealthy as if you rented. If you buy at a cost below market rents, your property will increase faster in value than in general. I don't think I explained myself well, for which I apologize and stand correctly. Buy above the long-term norm, you'll be poorer buying; buy below the long-term, you'll be richer buying. By at the long-term norm and it makes no difference at all.

Steve - you have lived in Europe. The Swiss are a unique example and much of the reason that they rent has to do with their unique social factors. And housing is very expensive in that country and has been long before London and NYC increased. Also, there is an intricate social system in Switzerland - there is only so far you can fall. I am not going to review all this as I suspect you do know what I am referring to. It's simply not an applicable analogy.

Buy above the long-term norm, you'll be poorer buying; buy below the long-term, you'll be richer buying. By at the long-term norm and it makes no difference at all.

Um, Steve..no sh$t, this is true for just about everything...

I realize that it's true but it corrects something I misspoke on before. You actually have to buy very far under the line - someplace it rarely gets - to do better in real estate than in stocks long-term. (Real appreciation of 8% vs. .4% per year.) But I get accused of lots of things so I'd might as well correct myself.

You're confusing what I said about Switzerland: they chose the system they did over time, but it has not affected their relative wealth very much, though the Swiss economy is not something I'm an expert on.

Does owning real estate make one wealthy? What if you hold it, without selling? If you do sell at a massive profit, most people then reinvest back into another property. So it's not cash. So what is the wealth? A more expensive home? Usually means a higher mortgage pmt and higher taxes? Here's some ways buying a property long-term and staying in it makes the difference for your "wealth:" You lock in what your monthly nut is (fixed rate mortgage, stable taxes, which is an old-fashioned concept) and if the market rents and everything else triples over time, you save money, even though your first few years you're paying a bit of a premium. Or, you cash out in your golden years and "move down." Or, you pay down the mortgage over time and have a rent-free dwelling, thus saving money.

Paper "wealth" isn't what it's cracked up to be. If you have a paper gain in stocks, you can quickly make them liquid cash. Knowing homes like yours have gone up in price is a nice feeling, but it doesn't make you wealthier.

Steve, about Miami, I agree, the place has no real economy. A friend of mine always says, "Here in Miami there are only hotels, real estate drugs, and right now real estate is in the toilet and the hotels are doing poorly." The second-home dwellers spend very little time there and spend as little as possible. There used to be a very important industry that flourished in Miami: money laundering. But Miami will come back.

I think if people on both sides of this argument (going up? going down?) will find tht if they pull out news stories from 1989-1992 they will find that nothing they're saying is new. Actually, back then there were NO "real estate bears." We had only what real estate brokers and developers said in interviews to papers. Here's a few of the arguments I heard, even as NYC real estate plummeted by 50%: New York City is unique; foreign money is investing here because this is a bargain to them (then it was Japan, not Ireland); prices have only stopped going up, but are not going down -- but followed by "the market is a little soft" -- but followed by "there is some decline in certain segments of the market"; the market has plateaued, but will soon start accelerating at a much faster rate (this was absolutly true, but people were predicting it would happen in 1990, then in 1991, then in 1992, but what they were predicting really didn't start until about 1998 or 1999); cheaper construction in questionable neighborhoods will lose value, but the prime areas will never go down (actually, all areas went down, including the UES).

I actually think this downturn will take less time to work itself out than that last one.

Lastly, although I have no training in economics or finance, I don't believe all this junk paper the investment banks are holding is as worthless as it is being marked to (zero). I think this crisis has to do with the reverse side of the double-edged sword of splitting up the pieces of risk into small pieces and repackaging them, the reinsurance model. It does work perfectly well, as long as no one really questions it. When they began to finally question what their AAA paper was worth, they panicked. Many mortgages are foreclosing and slipping into delinquency. That does not mean most mortgages are anywhere near delinquency. But the reverse side of the reinsurance sword is that you don't know if your derivative's component parts has 50 parts poison in it, 5 parts point in it, or 500,000 parts poison in it. Therefore, it all gets marked to zero. It doesn't trade hands.

Eventually, the true value of all those derivatives will make itself known. It's nowhere close to worthless. I also suspect those same investment banks are going to make a killing on this, as they have on every other crisis. It still means Manhattan r/e prices are going down, though.

Why do you think this downturn will take less time to sort out than the last one? Would seem to me that valuations are considerably more stretched this time around and we may be do for the first inflation cycle in a long time, which could keep rates structurally high.

I'm hedging. We don't know which way mortgages will go. We don't know how long it will take for confidence to come back to the lenders. We don't know what effects new regulations and bailouts will have. We don't know how long this recession will be in NY, how deep. And if I say that condos are going to go down 50% in value I will open myself up to abuse. I do think people who save cash and buy at the bottom will be very happy they did both.

I like Lowery's point about paper wealth. It is frustrating for me with this board as a potential Manhattan homeowner and not a real estate investor that the bulls who all seem to investors have theoretically won the investment game and there are still arguing. The first rule of investing is buy low sell high. Some of these people have millions in paper gains according to their posts.

The investors have risks in a downturn. Please admit that there is some probability of a down turn. But there is an additional risk to the investors. The tax rates may go up with the next adminstration either ordinary income or capital gains rates. Your potential gains or rental profit or sale will be reduced. If you sell now you lock in your tax rate and the current very favorable rates and don't have the risk of a downturn as well.

lowery, pez - Despite what you might like to believe, owning real estate the past few years has created plenty of realized wealth. lowery - I don't think most would "sell at a massive profit" and put it all into another property. You'd pay the minimum down payment and invest the rest someplace else, keep it in cash, or rent till you thought we were near the bottom. And up to 500k profit from the sale (if you're married, 250k if single) wouldn't get taxed.

steve, all I know is that often banks advertise rates but those aren't their best rates.

Regardless, what do you think of this?

http://www.astoriafederal.com/cgi-bin/nymort.pl

Thanks ccdevi, I think Steve just got killed.

ccdevi,

As I read Astoria's rates that you link to, there is no jumbo fixed rate mortgage loan quoted. I assume many, if not most, purchasers in NYC are looking for jumbos, not conforming loans? So, only ARMs are available at the jumbo level?

I don't recall what steve's point that you were responding to, but for me, this is not good news.

Kiss: It certainly is true that many bank's 30 year jumbo rates suck right now. Many big banks, Citi, etc are basically out of that market. That said, as I posted somewhere a couple days ago, my buddy locked a jumbo 30 year with Apple Bank (I didn't name the bank the other day) at 6.25% last week. I also did a quick search on bankrate and a number of 30 year rates in the low to mid 6's came up. I don't know if those listings are reputable but Steve seems to put a lot of faith in eloan so I figured why not. So if you look around enough, you might be able to find something decent at 30 years.

That said why so focused on the 30? 10 years is a long time. and 15 year jumbo fixed rates seems pretty good too.

Steve's made many posts on this subject, citing much higher rates, in the 9s or even higher.

Thx ccdevi,

I am not focused on the 30 yr, but rather a fixed jumbo product (I am currently carrying a 15 yr fixed, and prefer the 15 yr product to the the 30). But, I didn't see a 15 yr fixed product on the Astoria chart, so if you're saying they are out there at reasonable rates, that indeed would be good news to me.

As to the 10 yr ARM, yes for many buyers who don't intend to stay that long, I agree they should look at that product. However, in my case, I do intend to stay for a much longer period of time, and I'd rather not in 10 yrs take either re-set risk or have to refi.

Astoria is telling me they will give me a 5.65 rate on a 15 year jumbo, but on the size of my purchase (over 2.5 mil) they will only loan 60%, so depending on the size of the jumbo, the equity might be high. my sense is that 15 year jumbos can be had certainly below 6.5 and probably in the 5's.

hey steve, the stock market was flat from 1968-1982. curious, what happened to home prices in that time frame?

oh, right.

Good point. In a similar manner, home prices will be flat from 2008 - 2022. Funny how that tends to happen to the most expensive asset classes. Thank goodness most people don't bother doing the math.

ccdevi,

I have heard the same anecdotally, i.e., the more equity you put in, you can buy down the quoted rate. At least with certain lenders.

evillager, pretty sure stevejhx has repeated time and again that he isn't correlating home prices to the stock market, no?

wyndcliff - yes, those are good ways to create wealth via real estate. But that's short-term gain, not what some people tout as the can't-lose variety, long-term gain. If someone bought a condo in this area in 2002 and sold it in 2008 they could make a whopping windfall, tax-free profit. In your example of using the minimum downpayment from that profit on the next purchase, though, they are of course by definition paying more in carrying charges on the next property, unless they move from a 3-brm to a studio. And the important thing here is perfect timing -- buy before the market shoots up a whopping 17% per year for 6 straight years and sell when it appears to plateau. If you do that, you're a great success. Many people seem to be saying, though, that pick any six years and you can't go wrong, this will be result. Nope. Flipping has been a great tax free way to make money.

I was referencing steve's above comment re: stock market vs real estate: "Real appreciation of 8% vs. .4% per year"

lowery - I agree with what you say about timing. I was responding more to what sounded like a blanket (it's just paper wealth) comment. In your condo example, it's just as easily conceivable someone who could save for a down payment for a starter studio in '02, could have saved enough during the next 6 years for their next down payment and pocket all of the profits. And it's not like rents haven't increased during that same period, and that a renter would have to have had a serious increase in income to trade up from a studio in '02 to a 2 or 3 bedroom rental today.

wyndcliff - I actually had never thought that people were doing what you've mentioned, and it's absolutely possible. I assumed when people were getting the primary residence exeption they were moving from one owned apt to another owned apt, and only assumed they rolled their equity forward.

BTW, here's a great case of perfect timing I remember reading about in the early '90s: a Manhattan "power couple" foresaw both the coop crash coming AND the stock market crash coming. They sold their coop at the peak of the market and used their profits to SHORT STOCKS. So timing the market IS possible. I do think most people's increased wealth in the recent boom of R/E is on paper only, but everyone knows that psychologically it makes homeowners feel more comfortable knowing that paper wealth exists. If one takes steve's (and mine, sort of...) formula of 20% downpmt and then the carrying charges = comp. rent, there are several premiums added on to it: the tax deduction (at least at first); the expectation of steady rent increases in the comps, and the expectation of equity appreciation. I think the first two got priced into the market and the only thing to account for the huge gap today between buying and renting is the momentum expectation of constant 17% per annum equity appreciation. Things don't move in straight lines. For the same reason, the bottom of the market will probably not be a 1:1 rent:buy parity either - the buyer's comps and future expectations will be fluid.

I wonder if people have ever thought of cashing out their equity at the peak (tax free) and then putting it into an investment property to rent out. With a large enough downpayment, they can pick a price point at which they'll probably always make a healthy profit over their carrying costs. Over time their rental income will increase, as will their investment property's value. The profit could offset their cost of owning or renting somewhere else, especially if it's less expensive than the investment. But people don't generally make those kinds of choices.