Poll: Growing majority avoid buying homes

Why would anyone in NYC buy an asset for 1, 2 or 3 million $ when most likely in the near term the asset value will drop substantially? Why not wait at least a few mos to let sellers come down? Unless the seller factors the expected price drop into the agreed upon price today.

"Why would anyone in NYC buy an asset for 1, 2 or 3 million $ when most likely in the near term the asset value will drop substantially"

Do you know this is going to occur for a fact or this this just a forecast of yours. Like I said before people are terrible at predicting short-term market movement at the best of times, and predictions are particularly bad during a crisis.

actually, spunkster - though i appreciate your newfound moderation - in the short-term real estate prices tend to be very stead because real-estate isn't highly liquid. So you're kind of right there, but not quite. In the medium- to long-term, however, it's pretty safe to say prices always return to the mean like all other assets, and since they're so much above the mean according to Case Schiller - which admittedly doesn't take Manhattan into account - they MUST fall.

If you look at the Case-Schiller index it was at 185 when the crash started; 100 was the mean from about 1900. If you only include the post-WWII period, the mean was around 110 - factoring out the war and the depression and premodern times at the beginning of the last century - which would mean that prices, on the whole would have to fall 41% (75/185). They will probably overshoot because falling asset prices almost always do (else the moving average would change, which it hasn't since 1945); hence my prediction.

Anyway you look at these data that I can see, there's no way to go but down.

Just a few possible reasons someone may want to buy in this market:

1) The purchase is seen not as an investment but as a home which will not be sold for a long period
2) Despite what anyone says, the bottom line is that no one knows exactly how much the market will fall or when sellers will "come down" - thus, trying to time and predict this is useless
3) People think that the correction that eveyone is talking about in Manhattan is happening NOW and there are reductions, deals and incentives to be had now
4) Despite what's happening in Cleveland or (insert city of choice here) - those cities are not New York - New York is an international city and, as such, is still priced relatively low when compared as such
5) Many people have been waiting on the sidelines for a number of years already for a so-called crash that has yet to really occur in Manhattan - how long do you presume that they should continue to wait? 1 month? 6 months? 1 year? No one knows for sure and eventually, there are a glut of wannabe buyers on the market who are waiting to jump in and the right time.
6) Despite supposed increased inventory and market softness, there are still a very limited number of quality apartments in prime areas on the market. Value is proportional to supply and demand and the demand on these apartment is still very high compared to the supply

And you as a broker presumably sell only "quality apartments in prime areas", while all the rest will go down in price.

joepa, comments:

1) it had better be a real long time - the last housing bust in NYC lasted 10 years.

2) this comment is true for anything you buy and sell, including stocks and bonds and marshmallows - so it's really not a useful comment

3) that may be true; they may or may not be right. Indeed, your this point directly contradicts your point 2.

4) first, the relative price of property in different "international" cities is for the most part irrelevant; what is relevant is the price of NYC prices to incomes and leverage. Second, read today's NY Times about what's happening to prices in other "International Cities." Third, take a look at what's happened in Tokyo (and the rest of Japan) after a similar boom years go: crash, then flatline.

5) Not true - last year had 50% more the average number of sales in Manhattan than the average of the 10 prior years. If people are "waiting on the sidelines," they sure did it in an odd manner: by jumping right in the middle of the game.

6)Completely untrue: Miller Samuel showed about 5,100 apartments available on December 31. Their figures are usually very close to what's on streeteasy, which currently shows over 7,000 active listings in Manhattan, representing nearly a 10 month supply at historic turnover rates (under 10k units per year) with an enormous - unquantified - amount available but not listed (developers holding back inventory) and all the new development still underway.

So, joepa, try again. This time do some research.

I'm not a broker - I'm not even close to one. Unlike many, I don't profess to know one way or another what the market is going to do. You asked "why" and I merely gave you some possible reasons why someone may want to purchase in this market.

steve, why are you such an a$$hole?

steve

1) How do you know? It constantly amazes me how you are so sure how long a housing bust that has yet to really occur is going to last.

2) Why is it a useless comment just because it's true for anything you buy and sell?

3) My points aren't supposed to be read together - they are individual possible reasons why someone may want to purchase in this market. The fact that it contradicts another point is irrelevant.

4) If you say so.

5) Just because more buyers jumped in last year doesn't mean there is not a glut still waiting. I've been speaking with people and reading message boards for a while now - sure does look like there are still a lot of people waiting to jump in from my angle.

6) Again - I don't know how Miller Samuel's stats have anything to do with the amount of quality apartments in prime areas. I've been looking for an apartment in a certain price range/condition/area for a while now. When I search the sites, I weed out 99.9% of the listings without having to even click on the thumbnail (before you jump on me for throwing out fabricated stats - the 99.9 is an estimate). I'm usually left with 1 or 2 possible apartments that fit my "quality" criteria at any given time. The numbers may be up but the quality is just not there - despite the increased inventory.

Look - I'm not trying to convince you. I clearly know I have no shot at that. street_easy asked for some reasons and I simply pointed out a few that some people may find merit in.

I didn't say you were a broker, and ccdevi: that's one man's opinion. If you make baseless comments you should expect to be called out on them. Sorry you don't like to hear it - I had briefly regained some respect for your posts when you finally said why you thought housing prices would remain high - even though I disagreed with it and you didn't provide any empirical evidence - but comments such as "Despite what anyone says, the bottom line is that no one knows exactly how much the market will fall or when sellers will "come down" - thus, trying to time and predict this is useless" are not meaningful because they apply to everything.

here we gone again stevejhx and his repetitive autistic behavior and comments for everyone to read over and over

there goes my newfound respect for spunky, as well.

joepa:

1) Just a historical fact. In fact, this time I think it won't take so long to deflate, because market conditions changed very quickly.

2) A useful comment is something that is particular to the subject. Saying "stocks will rise and fall" is also a useless comment when making investment decisions.

3) One or the other is true - which do you think is?

4) It's not me who says it - increases in median property prices in recent years in Manhattan are almost 100% correlated to Wall Street bonuses. Rents 100% correlated to income; property prices are nearly 100% correlated to rents. These are ratios that have remained constant throughout time, and have been proved empirically. Therefore, what do prices in Tokyo have to do with prices in Manhattan, when different people making different amounts live there?

5) Fine - quantify it. Sure lots of people would love to buy; some can afford to, some can't. The problem is at what level will they buy, and the statistically proved answer over long periods of time is when rent and owners' out-of-pocket carrying costs are the same. Right now rents are half owners' carrying costs, and falling.

6) "Your" criteria may not be other people's, which is why it's not a valid indicator. The only indicator is what the market is doing as a whole, since it represents an aggregate of what all buyers and sellers are doing.

I don't have any problem with what you're trying to do, but conjecture isn't really very accurate. If you tell me with facts and figures - as ccdevi did - then fine, we can agree to disagree on the interpretation of those facts and figures. But you didn't provide any.

If you can I'll be glad to discuss them with you.

http://www.millersamuel.com/charts/gallery-view.php?ViewNode=1132752161iuzhS&Record=6

Above plus crime and cold war ending recession dropped Manhattan prices by 30%. Look at it are you blind bears! Once that inventory was absorbed by 1994..it was back to the march to HIGHER PRICES. That was an INSANE level of available units coming to market and even that downturn was shortlived...YES THAT IS 25,000 new available inventory for 1985-86-87-88.

"I don't have any problem with what you're trying to do"

What am I trying to do? I neither disagree or agree with you interpretation of the facts and figures you cite because I profess not to know either way what is going to happen. Unlike you, I have no need to try and convince anybody of any certain way that the market is heading. Thus, since I have no clear stake in this, continuing this "debate" would prove to be a waste of time. In fact, it was never a debate. You are just choosing to make it one.

joepa, steve debates with the television, the homeless guy behind his rental building, his favorite spoon, and his three year neighbor (among others). Don't take it personally, he argues with himself most of the time and his one condition for arguing with you is that you had (heaven forbid) a somewhat optimistic stance. If your opinion doesn't entail Manhattan real estate crashing to the ground with overwhelming carnage, steve doesn't want to hear it. He doesn't really believe it himself, but that ship has sailed and he is on it without a paddle.

As for his statistics and numbers to back up his position, the only number that matters is $1500, which I think up to this point, he has been unable to defend.

Yes, steveF, we've seen that chart before. You're confusing the glut of co-op conversions in the 80's - which DID NOT increase the overall housing supply - with the glut of new construction today, which will.

In fact, I believe I even provided you with building permit figures and conversion data. In 1994 building permits in Manhattan reached an all-time low: 428. Don't believe me?

http://www.tenant.net/Oversight/RGBsum95/p77.gif

And if you read (again) the 1988 article in the NY Times: (http://query.nytimes.com/gst/fullpage.html?res=940DE2D9103AF934A15750C0A96E948260)

"The Anatomy of a Co-op Conversion

"By IVER PETERSON
"Published: March 27, 1988

"Co-op conversions began in New York City in the 1920's, and in the last 10 years alone, a period of intense activity, more than 3,000 rental buildings containing 242,000 apartments have become cooperatives."

And you merely divide those 242,000 apartments over ten years and you get - what? - 24,200 new units available, almost the same as your 25,000.

Here's a very interesting article about overbuilding in New York City, from 1988:

http://query.nytimes.com/gst/fullpage.html?res=940DE5D6143FF930A35757C0A96E948260

Here's a piece of what it says:

Real estate specialists are confident that residential construction in Manhattan, prodded by a strong underlying demand, will eventually regain its momentum. In the short run, however, they say a scarcity of sites, rising land and construction costs and more restrictive zoning rules will make apartment production too expensive even for the affluent people developers have been building for, almost exclusively, in the last few years.

It will take a significant rise in the prices developers think they can get for new units - well above current levels of roughly $400 a square foot, or $250,000 for a one-bedroom unit - or some unforeseen new stimulus to trigger a new wave of production. Some developers expect that as the apartments now nearing completion are absorbed by buyers and renters, the supply of new units will shrink far enough to move the market to a new price plateau and trigger a new cycle of construction.

THIS WAS 1988.

But of course you already knew this.

''Anybody who can get in the ground by the beginning of next year should have no problem with sales because there won't be much else around,'' said Henry Robbins, the associate publisher of a comprehensive guide to construction activity in Manhattan.''

1988

Unfortunately anyone who disagrees, dispute or argues with stevejhx is is going to a victim of his psychotic rants, rages, and ratios.. Why even waste your time. He is a classic idiot servant who has high narrow level intelligence in field of unrelated statistics and facts intertwined with Manhattan real estate.

Correction : Unfortunately anyone who disagrees, disputes or argues with stevejhx is is going to be a victim of his psychotic rants, rages, and ratios. Why even waste your time. He is a classic idiot servant who has high narrow level of intelligence in field of unrelated statistics and facts intertwined with Manhattan real estate.

it's IDIOT SAVANT, not idiot servant. Which is pretty ironic, Spunky.

JuiceMan, that's pretty funny (for real)! I do find I have to take myself with a grain of salt now and again.

My favorite spoon is a sterling silver Mary Poppins spoon that my mother bought me when I was four. I still have it. Unfortunately I no longer have my favorite cup, which was a red Hershey's Strawberry Quick cup from the same era, whose eyes fell out. And I think I had a crazy straw, too.

:)

joepa -
You are right on.
We closed on an UWS apartment a few weeks ago. Even though the price we paid represents a very significant portion of our net worth, we do not view it as investment. It is a home. For us, both the location and the apartment are outstanding - and we do not want to wait another 6, or 12 or 18 months to be able to pay less (maybe), while competing with many others (likely if we wait) for a different apartment. We want to live there as soon as we finish with redecorating. We will, of course, sell it someday (or our children will). Maybe we will lose money, maybe we will make money - either way the value to us of living in it far outweighs the risk.

steve, you can rest assured, that is not one man's opinion. I also have to note how crushed I am, your respect was the reason I post on this board and now I've lost it.

Know one's telling you not to make your points, but the way you do it, well I won't repeat my earlier comment. Some people deserve it, joepa didn't. Although somehow I just realized that joepa must be a rapid penn st fan, so my sympathy for him just disappeared ;).

The other thing is, and I've asked you this question before, maybe you've answered it and I missed it, but put everything else aside, what you think will happen etc, why why are you so happy about the prospect of a crash in the real estate market?

very well said 680, enjoy your home.

Happy? No. Was I happy about the dot.com bust? No. Did some people - and me to a small degree - lose money? Yes. I put out warnings, that's all.

Why then did you refer to the "gleeful bears" recently?

The other thing is, and I've asked you this question before, maybe you've answered it and I missed it, but put everything else aside, what you think will happen etc, why why are you so happy about the prospect of a crash in the real estate market?-ccdevi

ccdevi do you really want stevjhx to answer this or are you just egging him on because you enjoy having him write a 10,000 word reply of unrelated facts, figures , ratios, links and statistics.

A "warning" is an engine light on your dashboard, a yellow card in a soccer match, or a red flag in a race. You're using a naso-gastric tube and an enema to force feed your sermon. It's a little beyond a warning in my opinion.

cc - don't hold it against me. It's tough enough being a fan these days.

Well, joepa, it is my thread.

But Oxford says it means this:

warning

1 a statement or event that warns or serves as a cautionary example.
2 cautionary advice.
3 advance notice.

wow

stevejhx- And people wonder why I fear the worst is still ahead of us. The revolving debt is coming to and end. Millions of more foreclosures will follow in the next 6 months. I have said it from the beginning, this was never just a sub prime problem. Cost far exceeded salaries for the last 5 years. People just kept buying and buying on credit and know they have no way to repay. The Banks are not even close to fully disclosing their loses. The truth is they still have no idea how much they will actually lose. The Banks are a joke. Loan someone $500,000 that makes $40,000 a year and if that's not enough let them open a HELOC for $100,000. It's a good thing they let them open a HELOC or how else would they be able to pay the mortgage.

Aol Poll "Fully one in seven mortgage holders fear they won't be able to make their monthly payments on time over the next six months."

How many homes does 1/7 actually represent?

Look, dco, as I said, I was a property bull for 10 years. I thought it was cheap, and a good investment, which is why I'm here: I love real estate.

But you're right: lending $500,000 to somebody who makes $40,000 - and it happened. ARM's to people who can't afford the reset is stupid. Negative amortizing loans are stupid. $2,500 psf is stupid, when 10 years ago the price was $250 psf.

It wasn't most of the banks, just some. Mostly it was the unregulated guys, who sold to the banks. And investment - not commercial - banks, who packaged all this sh*t, then paid their people huge bonuses for packing sh*t. Well, the rooster's back, the loans are worthless, and Wall Street will never return to this.

Nothing like this has ever happened before. And like tulips and dot.com, nothing like it will ever happen again. Owning real estate is great. Speculating it in, and taking out leverage that you can't afford or don't understand, is just plain dumb.

stevejhx- I sense a little anger. Are you having a bad day. I agree that real estate is a good investment. "Investment" is the key word. Just like buying stocks you should always do your homework and try never to buy at the top and stay away from areas that have a greater chance of a downturn. It's called risk vs reward. Just some rules I try and practice. Oh and by the way the NYC real estate market is just beginning to slow and the next direction is down a bunch.

No anger, dco, swear. Sometimes I admit the spunkster gets on my nerves, but I've seen some of the spunkster's smarter posts & I know he's no dummy.

I do get annoyed, however, at people who write conjecture, without spelling out exactly why they think it's true. My own weakness, foible. I admit it. :0

I also get annoyed at people who try to sell credit products to people who can't afford them. Maybe b/c I just paid off my mother's mortgage so she can live her last years in peace - I don't want people to struggle for things they can't afford, when what they can afford might be just fine.

ccdevi: like I said - those were the numbers I had. maybe I just had a good deal. but those were my numbers. I did not represent them as average, representative, or even wide spread. I just said that those were the numbers I was working with. no question of proving me wrong here.

If you notice, I invited you to try out with your numbers - if it works for you, more power to you.

and no, I did not kick up a stink with 7% .. I had a throw-away one sentence that you have been obsessing over all this while.

why all that anger? chill. prices are going down - the sooner you accept it, the less the angst.

"I also get annoyed at people who try to sell credit products to people who can't afford them."

steve, I agree. I can't f*cking stand this. Congrats on what you did for your mom, a very nice thing.

JuiceMan, I disagree w/ you on a lot of stuff, but I do respect your opinion. You seem like a kewl guy, but you'd whip my ass at poker. :0

Real estate I'm not so sure, but poker...I'm lame.

stevejhx - it looks like you just enjoy typing. Nothing wrong with that. It's just your incessant prozelitising that has an agenda.

westelle, as far as I can tell, I started this thread.

steve, right back at ya. You have made a lot of people (including me) think differently about the market and I respect that. We probably agree on more than you think. kylewest even said something nice about you yesterday. Talk about building bridges!

That said, I will still attempt to keep you honest when you stray to far from common sense. :)

stevejhx - And?

westelle - you don't like my threads, stay off of them. ;)

JuiceMan, and when I stand corrected (as I often do!) I stand corrected.

stevejhx - I enjoy your posts, not because of any mood, but because of their earnest attempt to look at a subject as cold numbers, which is one way to point out the human condition, i.e., "markets" are subject to folly. I believe all buyers/investors should look at things as cold numbers on a balance sheet as well as the emotional and mood factors. When it comes to real estate, it is easy to overlook that investments ought to stick to cold numbers and not be swayed completely by emotional states. I don't think we can look at real estate as purely cold numbers and stats and macro principles, but we have been in a market progressively more divorced from reality, so.......

Now I would like to know what you think of what happened around 2000-2003 when looking at the stock market and real estate together. Not to start an argument or prove or disprove anyone's theories. A conventional wisdom used to hold that stock market disasters are always followed two to three years later by a decline in New York real estate. It did not happen. The reverse happened. My take on it is that it was not because one asset class collapsed so the goldrush speculators all ran to the same alternative asset class, but that the Fed's hyperactive rate cutting hysteria, accentuated by the 9/11/01 fear/paralysis, made it stupid for anyone to do anything but borrow cheap money to buy long-term assets. Any ideas on this?

steve - all of the threads are yours. You take them all over. By the way, we strongly believe that LOWERY and some others with 15 paragraph incoherent drooling are all you. Ciao!

westelle, I'm only me, I have no other aliases. And I don't post on most threads.

toodles!

lowery, my numbers show that real estate prices in Manhattan stagnated or grew slightly after the dot.com boom, which is when interest rates fell and all the new exotic mortgage products came on line, massively (and dangerously) increasing leverage. If that's what you're saying, then I agree.

stevehjx - I would have expected prices to drop sharply after stocks dropped. They didn't. drool.

Why would housing prices fall after stock prices fell? Stock prices are tied to the incomes of companies; housing prices are tied to the incomes of individuals. There is some relationship, but not much.

Stock prices fell because they were inflated by the "New Economy" - that didn't exist - a term that somebody invented to justify infinite price/earnings ratios for companies with no earnings. Pity you can't divide by zero.

Similar to what we're seeing now: housing prices disconnected from incomes, incomes falling, and leverage drying up. The fact is that housing prices would have dropped anyway until they became more affordable. Add in falling incomes and no leverage, and you have that Perfect Storm!

So what happened after Black Monday '87 that caused NYC real estate to plummet?
I always thought it was the layoffs. The dotcom crash and later Dow plunge also led to layoffs. Lots of people took a bath. Real estate went up.

What the pundits touted at the time was that people took their money out of the market and put their money into real estate. This all then fed into the super low fed interest rates that meant cheap mortgages. At least that was the explanation many have used. Who really knows?

I don't remember what happened after Black Monday - I was living in Miami & about to be transferred to London.

I like how Steve talks about the "glut of new construction today" and yet he still feels that the brokerage industry is cornering the market in an illegal manner and driving up real estate prices.

(ps - no relation to the brokerage industry directly, one degree of separation, or two degrees of separation).

the market is concerned with rising inventory, price cutting, longer sales turnover rates, and stats indicating many potential home buyers are backing out at the last minute. purchasers should consider the aforementioned in their decision making process.

verain, really! "yet he still feels that the brokerage industry is cornering the market in an illegal manner"

First, I never made that claim - specifically didn't in fact - it was a hypothetical example.

Second - and most important - the two are completely unrelated: the fact that nobody wants to buy overpriced properties has nothing to do with brokers conspiring to limit inventory. You can only limit inventory so long, then you have to sell, or file for bankruptcy.

steve and street_easy - after Black Monday NYC real estate plunged, though not immediately. By 1989 there was a chill, then 1990 a silence ... money did not pour into real estate out of stocks. I don't remember what mortgage rates were doing, but Fed rate cuts did come. My hunch is that the fallout from the dotcom crash and later Dow sputter was an anomaly compared to other crashes - immediate Fed rate cuts. It came at around when the flat NYC R/E market was starting to come out of a long trough. It may be that when this boom began in the early '00s R/E was undervalued, so trying to figure out where it needs to return to is a tough call. I agree with steve's rent/buy comparisons, but don't see 2br/2bath apts under $700K. And if mortgage rates go up, it would need to be under $600K or under $500K to cost $4,500.

Steve you seem to give a lot of hypothetical examples and then if called to the question if you actually agree to it, you specifically disavow the possibility of that hypothetical. Sounds like a bit of deceptive marketing on your part.

lowery, look what's happening to prices everywhere around the country where they shot up. I say $800 psf, the 2004 rate, versus $1,600 psf that people are listing at now in, say, the West Village. So a 1,000 square foot 2-br 2-ba would cost $800,000, not $700,000.

That's already happened in Miami, and even in heady South Beach. What I bought in 1999 for $600,000 (pre-construction) would in 2008 sell for $700,000 - if it could sell. I sold at the end of 2005 for $1 million.

Miami was driven by flippers; we were driven by Wall Street.

Steve,

I meant to ask you this in another thread, but what is the basis for your prediction of prices reverting to 2004 levels? Is that tied to current NYC income levels?

verain, I specifically said I don't know if there is collusion and I wasn't accusing anyone of anything. Can I be clearer?

KISS, I base that figure on the 12x annual rent ratio, using today's rents. I live in an apartment that costs about $4,500 to rent. Across the street a nearly identical apartment sells for $1.1 million or more. Using a 30-year fixed jumbo nonconforming loan rate of 7.5% (if you can get one!), 20% down, that gives me total mortgage payments of $6,153. Add in (non-abated) property taxes of $1,000 and common charges of $1,000 per month, that gives me total monthly costs of $8,153, or 81% more to buy than to rent virtually identical apartments. That would mean that that property would have to fall by 45% in value for the monthly cost to buy it to equal the monthly cost to rent it.

It happens that prices have doubled since 2004 - not necessarily medians, but using a Case-Schiller like index of following the price of the same apartment over time. If you go here:

http://350bleecker.com/policy/sales.html

you will see an excellent source of information tracking apartment sales over time at the building I used to live in. Here are two virtually identical apartments:

10/06/07 5K $775,000
11/05/03 4R $425,000

The price rose 82% from the end of 2003 through the end of 2007. Returning to that value will require a fall of half that amount, percentage-wise. Approximately the same ratio as where I currently live in Chelsea and the place across the street.

I've done this for dozens of apartments - compare virtually identical sales and rentals - and it always comes out the same: right now it is on average about twice as expensive to own as to rent. Today's rents indicate that prices have to fall to 2004 levels to be in long-term equilibrium, which is 12x annual rent = purchase price. That is the ratio that brings the 40x annual rent / 28% total housing expenses into equilibrium; they are the same figure just calculated slightly differently.

Unless incomes rise suddenly, which since Wall Street is decimated I doubt will happen. Rents are nearly 100% correlated to incomes, property prices are nearly 100% correlated to rents. Over time.

But they're way out of whack right now.

To return to those prices would therefore require a 50% decrease from today. You can see that that's approximately what the apartment across the street would have to fall for today's rents to be equal to today's purchase prices.

Thanks, Steve, that is clear enough, and makes sense. Obviously, caveated for income increases. Also, I would add, based on my experience living through the 1988 - 1996 NYC RE bust, that it may take some for prices to find the long term equilibrium, as sellers try to wait out opportunistic buyers. And, finally, who knows what exogeneous events -- rapid credit market recovery, low interest rates, etc -- may occur.

Thanks, Steve, that is clear enough, and makes sense. Obviously, caveated for income increases. Also, I would add, based on my experience living through the 1988 - 1996 NYC RE bust, that it may take some for prices to find the long term equilibrium, as sellers try to wait out opportunistic buyers. And, finally, who knows what exogeneous events -- rapid credit market recovery, low interest rates, etc -- may occur.

Thanks, Steve, that is clear enough, and makes sense. Obviously, caveated for income increases. Also, I would add, based on my experience living through the 1988 - 1996 NYC RE bust, that it may take some for prices to find the long term equilibrium, as sellers try to wait out opportunistic buyers. And, finally, who knows what exogeneous events -- rapid credit market recovery, low interest rates, etc -- may occur.

Thanks, Steve, that is clear enough, and makes sense. Obviously, caveated for income increases. Also, I would add, based on my experience living through the 1988 - 1996 NYC RE bust, that it may take some for prices to find the long term equilibrium, as sellers try to wait out opportunistic buyers. And, finally, who knows what exogeneous events -- rapid credit market recovery, low interest rates, etc -- may occur.

Thanks, Steve, that is clear enough, and makes sense. Obviously, caveated for income increases. Also, I would add, based on my experience living through the 1988 - 1996 NYC RE bust, that it may take some for prices to find the long term equilibrium, as sellers try to wait out opportunistic buyers. And, finally, who knows what exogeneous events -- rapid credit market recovery, low interest rates, etc -- may occur.

sorry for the dupe posts above, I don't know if that was me or this website

Steve - not arguing with your analysis (heaven forbid) and I agree that credit is getting tighter. That being said, if you have good credit you can still get 30 year fixed (jumbos) at around 6.2 (0 points, no fees). Don't scream at me about showing you proof, other than calling the bank yourself (which you are free to research on your own) or showing you my commitment letter (which I will not do), you just have to trust me that it does, in fact, exist.

Kiss, it was the website.

joepa, even at 6.2% - which based on everything I've seen and read and been quoted is impossible, since Chase quotes 5.875% with 1 point for a conforming loan and 6.75% with 2 points for a jumbo nonconforming - it brings your mortgage down to $5,389 from $6,153. Making your monthly payments $7,389 vs. $8,153, for an apartment that costs $4,500 to rent. Still 64% more expensive to buy than to rent.

Interest rate would have to fall to 1.3% on a 30-year fixed-rate mortgage to make renting equal to buying.

Not happening. Prices will fall.

steve - Put a specific date, down to a month, when the prices will FALL! CRASH! and when that date is come and gone, what are you going to do?
Maybe some political blog will catch you and prop you up again.

steve - Put a specific date, down to a month, when the prices will FALL! CRASH! and when that date is come and gone, what are you going to do?
Maybe some political blog will catch you and prop you up again.

That's a stupid thing to say, westelle, but if you don't believe me, ask Jamie Dimond:

JPMorgan's Dimon Says U.S. Real Estate Market `Getting Worse'

By Sharon L. Lynch

April 16 (Bloomberg) -- JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said he expects U.S. home prices to drop as much as 9 percent this year as even borrowers with the best credit are having difficulty keeping up their mortgage payments.

``Real estate is getting worse,'' Dimon said in a conference call today with investors after the bank, the third largest in the U.S., reported first-quarter earnings. ``Home prices we still expect to go down.''

Dimon's forecast is more optimistic than many homebuilding analysts and executives. Deutsche Bank analyst Karen Weaver said in February that prices may fall as much as 26 percent from the third quarter of 2007 before hitting bottom. PMI Group Inc., the second-largest mortgage insurer, last week said U.S. housing prices will probably fall by an average 20 percent from their peak in 2006.

Steve - are you forgetting the tax benefit of owning? That 7,389 will be more like 5,389 for the first few years adding in tax savings. Also, that monthly payment is fixed for 30 years as opposed to rents which will continue to increase.

joepa- you know some people with themselves, "If I don't take the subway and walk 4 miles to to work every day, I'll save a lot of money! AND I'll get to know the streets! AND I won't have to dress nicely because people who walk 4 miles to work and 4 miles back are not expected to dress nicely - another saving!" And so on and on and on.

no, joepa, I'm not, because the "tax benefit" is exactly offset by the opportunity cost of not putting the down payment in a different asset. Do the math; the S&P 500 has an annual appreciation rate of 11% compounded over time, 8% inflation-adjusted. A $1,000,000 at the 6.75% rate Chase just quoted me is $68,115 in interest the first year. If your average tax bracket is 30%, that gives you a tax benefit of $20,435.

A $1,000,000 mortgage implies a $1,250,000 property, or a $250,000 down payment. An 11% return on $250,000 is $27,500 in opportunity cost. Your interest deduction benefit FALLS over time, whereas the 11% is COMPOUNDED over time. You're also forgetting about charges that have to be amortized into the rent like real estate fees, transfer taxes, capital gains taxes, mortgage recording taxes, etc., and the money you invest in maintenance and upkeep.

Yes your monthly mortgage payment is fixed, but taxes and common charges aren't. Rents sometimes go up, sometimes go down. They are 100% correlated to income. Read the math about the relationship between rents and purchasing prices in the MANDATORY READING thread. It's all explained there.

There is no difference between buying and renting: the benefit is the same, a place to live. Over time, out-of-pocket expenses for rents and owners' carrying costs are the same, everywhere, including NYC. Do the research. If you're paying significantly more to purchase than you would to rent then you're overpaying, since you're getting the same product back: shelter.

So many people are drunk on the real-estate Kool-Aide!

Yes - but now your formula assumes no rate of return on the real property. Assuming you put down $250,000 on a $1,250,000 apartment and the apartment increases a paltry 4%/yr over 15 years, your $250,000 investment will net you over $1,000,000 in 15 years. Assuming you invested that $250,000 at 8%/yr, you'll only net less than $800,000 in that same time frame. And that formula assumes you are getting twice the rate of return in your stock portfolio than on your real estate investment, which I believe greatly exceeds historical figures.

I can't believe you sucked me into this.

joepa, I actually didn't forget the return on residential real estate, because there isn't any.

From http://en.wikipedia.org/wiki/United_States_housing_bubble

"Robert Shiller's plot of U.S. home prices, population, building costs, and bond yields, from Irrational Exuberance, 2d ed.[9] Shiller shows that inflation-adjusted U.S. home prices increased 0.4% per year from 1890–2004, and 0.7% per year from 1940–2004, whereas U.S. census data from 1940–2004 shows that the self-assessed value increased 2% per year."

The real rate of return on residential properties - over time - has been 0.7% per year. And there's a very good reason for that. Stock prices are tied to the earnings of companies; residential housing prices are tied to incomes because they're tied to rents that are tied to incomes. Therefore, housing prices cannot increase for long periods of time over the rate of increase in incomes, which increase at the rate of increased productivity.

So your "paltry 4%" appreciation is actually 10x what the actual appreciation has been since 1890, and 5x what the actual appreciation has been since 1940. So inflation adjusted, the S&P 500 has increased in value at 8% per year since 1940, but housing prices have only increased by 0.7% per year. Nearly a tenfold difference.

This is all well-reasoned in economic theory, which has been borne out by hundreds of years of empirical data. What we have experienced in recent years is a complete anomaly based on low interest rates, excess liquidity, lax lending standards, and, in NYC, bankers paying themselves for taking on the risk of excess liquidity and lax lending standards, thus driving their incomes up.

Unless you can find me better data, but no one has been able to in the months I've been posting here, so it seems not to exist.

Those numbers that you quote (.7%) are inflation adjusted. Thus, my 4% rate of return is probably fairly accurate, even if you agree with Schiller's numbers.

Yes you're right about that but this still holds true: Inflation adjusted, the S&P 500 has increased in value at 8% per year since 1940, but housing prices have only increased by 0.7% per year. More than a tenfold difference.

That's why I didn't forget property appreciation; there is virtually none. Corporations become more profitable by squeezing out inefficiencies, inventing new products and services. Real wages only go up with productivity. Rents cannot go up more than wages, and property prices cannot go up by more than rents: both are constrained by the 40x / 28% ratio. So the only thing that can change the price of housing beyond incomes is leverage, which is what we have seen: excess leverage. And that leverage can only be used by the first ones to take advantage of it, because as it becomes more widely available it has a decreasing marginal effect, because property prices go up to the point where the 28% ratio - the market constraint - is reached.

But leverage cannot increase forever: eventually it all collapses, which is what we're seeing now. Leverage is drying up, incomes are falling. There is only one thing that can happen: owners' carrying costs will fall back to market rental rates, because imputed rent = market rent.

It is a definition. Market rents include everything, even expectations of future increases in property values.

Unless you can find different numbers and a different theory that would suggest otherwise, but I've given you all the math that exists.

joepa - please stop, or it will never end. Steve takes over all threads and just keep typing. Don't you see what's going on here. That's how initially very good blogs and message boards die.

westelle, I started this blog so I can't possibly "take it over."

elsewhere joepa asked a reasonable question about the "benefits" of owning, so I referred him here.

Sorry you don't like what I write, but as far as I can tell you haven't contributed anything remotely quantifiable to the discussion on this topic. If you think what I write is wrong, then correct it. If you have something constructive to say, say it. If you don't understand what I'm writing - which seems to be the case - you should study it, because it's how the residential real estate market works.

Sorry - if it matters, I'm ashamed at myself too.

Steve, your numbers are awful (and you know it). Stop trying to bullsh*t people. You and I had this conversation months ago. Have a look at joepa’s example above:

1)First, a portion of your payment is principal, in this case about $1,000. So, you should be comparing $6,389 vs. $4,500

2)Next, your 11% is laughable for a couple reasons (and you know this):

a.If you were able to make 11%, it would be taxed (eventually) so your 11% is more like 7.7% short term 8.8% long term

b.Your 11% is not risk adjusted. You talk about the 11% like an automatic return that investors will receive in perpetuity. You know this is not true. What if you lost 5% the first year? Your nest egg would then be $237,000. That guaranteed tax break is looking pretty good then right? ($20,435 vs. -$13,000)

c.You really need to use a risk free (taxed) rate of return for this comparison steve. The deduction is risk free, so you cannot make the argument any other way

d.I can’t believe you are still trying to sell this, makes you look like a damn rookie. The statement that tax advantages and investment returns are a wash is a fabrication. .

3)So assume steve’s calculation is correct that the tax benefit for owning is $20,435 and the return on a risk free investment after tax is (generously) 5% = $12,500 with a difference of $7,935 for a total monthly benefit of $661. Which get’s us to $5,728 vs. $4,500

4)Real estate tax is deductible as well. So, $12,000 is $3,600 in benefit or $300 a month. Which gets us to $5,428 vs. $4,500

5)You say the tax benefit goes down because you interest amount goes down over time, but you forgot to mention that you are building more equity, which is better than a tax deduction for your rent vs. buy calculations. (You put more in the “bank” the longer you own )

6)Combining these calculations with your “theory”, prices would have to fall by 16% to be in “equilibrium”.

7)I have repeatedly stated that your “theory” of “equilibrium” is an economic impossibility because it is an overwhelming buy signal. With that in mind, it would be impossible for prices to fall that much without investors jumping in at some point during the decline. I’m not exactly sure what that point is, but it is somewhere between 1-16%. Let’s pick the midpoint of 8%. And that my friends, is a reasonable estimate for any correction

8)A very important point, (which steve will never make because he likes sweeping claims) this is an educated guess for that particular apartment. It will be more or less for a given neighborhood and set of (comparable) apartments. No two scenarios are the same.

9)This assumes zero appreciation and zero rent increases (BIG FRIGGAN ASSUMPTION) Assume any reasonable rent increase over the term of the loan and any reasonable appreciation……..and you are at break even VERY quickly.

So you see steve, the sky is not falling and your 50% is ludicrous. I’m sure you will respond with some sweeping claims and garbled numbers to say I’m wrong, but this is a reasonable calculation, using your numbers, and your theories. You made the statement that you are willing to stand corrected, are you?

Ah, JuiceMan, you make me do it again. I'm going to do it again, this time very simply.

You are constrained in what you can rent: 40x income. You are constrained in what you can buy: 28% total housing expenses.

They are virtually the same ratios; using them, if you make $100,000, you can you can rent a property that cost you $2,500 ($100,000 / 40). You can buy a property that will cost you $2,333.33 in total cost ($100,000 * 28%).

So:

1) It doesn't matter that you're paying principal or interest. If the interest were 1%, you could still pay $2,333.33. If it were 50%, you could still pay $2,333.33. The only thing that would change is the price of the property.

2a) From January 1, 1950 through December 31, 2007, the average capital gains from the S&P 500 was 8.66%.

http://www.moneychimp.com/features/market_cagr.htm

That does not include reinvested dividends.

"If you were to go all the way back to 1928 and dissect the S&P 500 into rolling twenty-year periods, there would be fifty-nine of them (1928-1947, 1929-1948, etc.). The average annual rate of return over those periods was approximately 12 percent."

cdn.digitalcity.com/coaches/historic-market-returns-murray05262006.pdf

2b) The comparison is made over long periods of time, since you normally hold properties for long periods of time.

"The deduction is risk free."

What? First, it's contingent on income to deduct from; second it's contingent on no changes intax law. Third, there is more than a tax deduction involved: there is the risk that the property will fall in value, which is a very high risk since real estate is very expensive, highly illiquid and you could get screwed (as people in the 70's did, the 80's did, and now).

2c) Therefore, the S&P500, which is a broad measurement of alternative investments with average market risks, is a proper comparison. It is more volatile than housing costs, but not riskier over time.

2d) "The statement that tax advantages and investment returns are a wash is a fabrication."

Do the math using a non-risk-free interest rate - since housing is not risk-free - and you'll come up with my answer. Add in a variable-rate loan, and the risk is even higher.

3) Yes, if you compare a risk-free rate of return for assets using a risk rate of return you will get that answer (though I didn't recalculate). But only a FOOL thinks that real estate is risk free. If anybody here thinks that real estate is risk free, they should just look at what's happening throughout the world.

4) Real estate tax is sometimes deductible, sometimes not. But that's irrelevant. (See below.)

5) "You forgot to mention that you are building more equity." You can do that exact same thing in other assets. You can even use leverage, and increase it more. But you don't need to, because housing prices have on average risen a real 0.7% over long periods of time, and the S&P500 has increased a real 8% over time. That adds up.

So much so, in fact, that I did a little calculation. Let's say that you buy a $100,000 house and it appreciates at the real rate of 0.7% as calculated by the Case-Shiller Index. In the 30th year, that house would be worth $123,277.58 for which you will have paid, over 30 years, $92,670.55 in interest, leaving you $30,607.03. Then let's say you merely took the down payment - $20,000, and invested it a the real compound rate of 8%. At the end of 30 years, you would have $201,253.14, and it wouldn't have cost you a penny in interest.

So, Mr. Wise Investor Who Has Equity - you have $30,607.03 in "equity" - without including all the other charges involved, just the mortgage. I will have $201,253.14 - without including all other charges involved, just the compounding. I think it's better not to invest in real estate.

6)See above.

7) The "theory" of equilibrium is not a theory. It was calculated using real historical data. The 12x ratio (if that's what you're talking about) exists because of the ratio of prices to income. If you make $100,000, you can you can rent a property that cost you $2,500 ($100,000 / 40). You can buy a property that will cost you $2,333.33 in total cost ($100,000 * 28%).

Let's just use rents vs. mortgages to make it easy. At 6% interest, you can afford a $400,000 mortgage, giving you payments of $2,389.20 You can afford annual rent of $30,000. $400,000 / $30,000 = 13.3.

Very close to the 12x, right? And 6% is a very low interest rate and I greatly simplified the math. If you - like ccdevi - claim that the rent to purchasing price ratio is 18x annual rent, then making $100,000, being able to afford $30,000 a year in rent, you could afford a $540,000 house, but that would give you monthly mortgage payments of $3,237.57. Your monthly pay is $8,333.33, giving you monthly housing costs of 39% of your monthly income.

OH WAIT! I FORGOT! NOBODY WILL LEND YOU THAT MUCH MONEY BECAUSE THE RATIO IS 28% TOTAL HOUSING COSTS TO INCOME!

8) I've done the calculation rent/buy ratio for many apartments, and it always comes out the same. I've published a bunch of them. Unfortunately we don't have a lot of historical price data for New York City because co-op data is only recently available. Since the prices of all comparable units in that building went up more or less at the same rate, it's safe to assume that that is what happened everywhere in the city.

Unless you're denying that property costs a lot more now than just 4 years ago.

9) Rents do go up, but over long periods of time never more than incomes. "The three decades prior to 2000 saw average annual household income increases that ranged between 0.4% and 0.9%. This is in stark contrast with a 0.33% decline in the 2000s since hitting a peak in 1999."

From http://www.epi.org/content.cfm/webfeatures_snapshots_20070905.

Let's take the midpoint: 0.675%.

OH WAIT! That's surprisingly close to the 0.7% that housing costs increase annually. WHY? Because housing prices are directly correlated to INCOMES!

So let's use the 0.7% annual increase.

Let's say you have a 30-year mortgage for $167,000 at 6%. That gives you a monthly payment of $1,001.25. Let's say I start with rent of $1,001.25 and increase it 0.675% per year. My rent at the end of 30 years will be $1,234.32, and I will have spent $402,339.91 of rent in that time. At the end of 30 years, if I had taken the down payment of $41,750 and invested it in the S&P 500, it will be worth $420,115.93. Subtract from that the rent I will have paid, and you get a net profit of $17,776.02.

Your mortgage, however, will have cost you $193,449.78 over 30 years. If you take the cost of the home for the 80% mortgage, it will be $208,750. Invest $208,750 at the historical rate of 0.07%, and it will be worth $257,341.96, giving you a profit of $63,892.13.

Add in property tax of $1,200 a year and common charges - in lieu of everything a homeowner would pay that's included in rent - of $1,200 a year. That's $2,400 per year. But in fairness, they also increase, so let's increase them at the rate of 0.7%, the same as everything else. After 30 years, you will have paid $80,367.52. Subtract that from your "profit" of $63,892.13, and you get a LOSS of $16,745.39.

Without including special assessments.

So you have a LOSS of $16,745.39 and I have a PROFIT of $17,776.02, and you did better than me? LOL.

The "overwhelming buy signal" is when carrying costs are lower than rental income if you're an investor. If you're a buyer, it's when it's cheaper to buy than to rent.

You say, "I’m sure you will respond with some sweeping claims and garbled numbers." Well, here's what I did:

Your points 1) and 5) are completely disproved by the empirical evidence and, in fact, merely investing the down payment in the S&P 500 gives you far more money than the leveraged increase in housing prices, which historically increase 0.7%. Rents historically increase at the same rate (real rate, remember - we've held inflation constant).

Your point 2) is disproved by the historical performance data.

Your point 3) isn't even a point, unless you believe real estate is risk free.

Your point 4) is absurd - I've taken out all taxes for the sake of the argument, but you are arguing that paying property tax is a good thing, when it's not.

Moreover, the tax rates are the same for these asset classes, and we can't predict future tax rates or policy.

What's ridiculous is any claim other than housing prices are tied to income and leverage, and are directly related to rents because the output value - shelter - is the same. And that ratio is always around 12x annual rent = purchase price, because it's determined by the 40x/28% constraints.

Unless you deny that housing prices are tied to income and leverage, and that there is a 40x/28% constraint, and that renting and buying don't give you the same thing: a place to live. Oh yeah - and factor in the risk-free nature of real estate!

You do the math. There is no way to calculate it. IMPUTED RENT = MARKET RENT. Always, always, always, because it's a DEFINITION, and the DEFINITION includes EVERYTHING, including "tax benefits."

Oh, I increased the rent 0.7%. Erratum.

Figured that neither JuiceMan nor ccdevi would respond, since my math is inscrutable.

No steve, your math is awful and the your post above is dribble. It is a waste of time to debate with someone that twists, turns, and deflects reality.

Example, when I say "the deduction is risk free" and you turn that into "your saying real estate is risk free". That is a joke and a waste of energy to respond. There are another 354 examples of this above.

You are an A+ bullsh*tter, enjoy your dribble.

Figured you'd be speechless. I said the deduction is not risk free because it depends on income to deduct it from and future tax law.

And I said that you use a risk-free interest rate ONLY if you're comparing it to another risk-free investment, and real estate is not risk free.

wrong

Right, because we're measuring opportunity cost, not a risk premium.

not only wrong, but really really silly. Actually makes no sense what so ever. Why don't you tell me about key measures for opportunity cost vs. risk premiums? This should be good.

Sure.

Under CAPM, equity shareholders demand a minimum rate of return equal to the return from a risk-free investment plus a return for bearing extra risk. This extra risk is often called the "equity risk premium", and is equivalent to the risk premium of the market as a whole times a multiplier--called "beta"--that measures how risky a specific security is relative to the total market.

Thus, the cost of equity capital = Risk-Free Rate + (Beta times Market Risk Premium).

That good enough for you.

The point remains - you can't assume that real estate is a risk-free investment, which is what your model requires. If you want to say that equities are riskier than real estate - and they're not, over long periods of time - then you can adjust for that risk premium in the model, but you can't merely say that real estate is 0 risk and the S&P 500 is high risk, when real estate is not 0 risk. In fact, being highly liquid, it is a very high risk. Higher still since it's currently far outside its historic mean.

highly illiquid, I mean

Your argument is sort of like all those programmers Chase was going to hire to integrate its systems with BSC's. Let's see what the numbers are when they come out.

No steve, I understand CAPM. I want to know how you would change your measure of "opportunity cost vs. risk premium"?

Also, I want to understand why you keep talking about the risk of real estate when we are talking about a tax dededuction. These are very different things you know. Don't you?

steve, I still can't figure out what you meant by "different measures for opportunity cost vs. risk premium" Please steve, enlighten us on what these different measures are and what that has to do with tax deductions. The streeteasy population really needs to know.

JuiceMan, I didn't say, "different measures for opportunity cost vs. risk premium." You did.

How I would change my measure of "opportunity cost vs. risk premium"?

I didn't have one, so I couldn't change it.

If the streeteasy population needs to know, you really should explain it to them since you made them up.

You want to understand why I talk about "the risk of real estate when we are talking about a tax deduction." Easy: you said the mortgage interest tax deduction was risk-free. I said it was contingent on a) your having income to deduct it from, and b) tax laws.

So there is a considerable risk in real estate if you're counting on a tax deduction that is contingent on two things that are uncertain: your ability to take the deduction, and the legal existence of the deduction.

I would think a man as smart as you would have been able to figure that one out, JuiceMan.

Again, as with all the bulls, rather than addressing the issue at hand, you make up stupid things to try to make me look dumb. You'd be better served explaining why you think real estate is risk-free, because you compare it to the opportunity cost of a risk-free investment, when, in fact, it is not risk free.

You all seem very worried that people might be swayed by my arguments, because all you do is attack me, not what I say.

In case you forgot, this is what you said.

"Right, because we're measuring opportunity cost, not a risk premium"

I want to know how that changes the measurement steve. You said it not me. Tell me how?

"So there is a considerable risk in real estate if you're counting on a tax deduction that is contingent on two things that are uncertain: your ability to take the deduction, and the legal existence of the deduction"

So your saying the risk of having zero income or having a change the tax laws = the risk of putting your nest egg in a high risk investment hoping for an 11% return? Is that what you are saying steve?

"You all seem very worried that people might be swayed by my arguments, because all you do is attack me, not what I say."

Nope. I'm just asking you to clarify your dribble and you hate that, so you lash out with more dribble.

How what changes the measurement? You're asking me how the measurement changes the measurement. That is a silly questions.

"So your saying the risk of having zero income or having a change the tax laws = the risk of putting your nest egg in a high risk investment hoping for an 11% return? Is that what you are saying steve?"

Actually, yes. If I have zero income but liquid assets like stocks, I can sell them quickly. If I have zero income but one illiquid asset like a house, I'm screwed.

N'est pas, mon JuiceMan?

And if you think the S&P 500 is a high risk investment, you're mistaken. Ask any financial planner where they think you should put your money: S&P 500 indexed funds. Because over time the index beats 75% of managed funds, and 100% of real estate.

Fool!

S&P500 is a very high risk investment unless you have a long time horizon. That is why financial planners will tell you to reduce your exposure as you age / near retirement, or as you approach the time when you'll need liquidity for a major purchase or a child's education.

"S&P500 is a very high risk investment unless you have a long time horizon"

but you see, steve thinks there is an equal amount of risk in receiving your home ownership tax deduction. So simply, steve is saying:

there is a better chance you will get a 11% YOY return on the S&P than receiving a tax deduction at the end of the year if you own a home.

Amazing, steve. You have hit a new low.