Real Estate is a Bad Investment

petrfitz, no one said it's "always a good time to buy stock." It's a good time to buy when prices are relatively low, which is not the case with real estate right now on a historical basis.

1 - being a landlord is NOT always better than being a renter. Ergo the Bronx burned in the 1970's.

2 - for the last 10 years in NYC property prices rose. The ten years prior to that they fell. The S&P500 performs better than residential real estate over time. Pure fact.

3 - prices did not raise significantly Dallas, Houston, Denver, New Haven, etc. Where they did rise the most - Florida, San Diego, Las Vegas - they are now collapsing.

4 - tax benefits are factored into market rent. Fact. More than a fact: it's a definition. Imputed rent = market rent. Cannot be avoided: renting and purchasing are substitutes to obtain the same output: shelter.

5 - stocks have historically always been a better "investment" than owner-occupied residential real estate. Just a fact, look it up.

If you had invested in the dot.com boom in 2000 because prices had risen without correlation to the fundamentals, you would have been burned, and you still would not have recovered your money. You can't extrapolate short-term behavior into long-term trends. Just can't be done, because they aren't necessarily correlated.

The fact is that property prices are correlated to incomes and leverage. They compete directly with rental properties. It makes no sense to buy a property that will cost you twice as much to buy as to rent.

Or if it does, tell me why.

HMMMM?

Steve - Stupid is as Stupid does.

nough said about your moronic position.

Can we get back to buying in Brazil? Or anything positive or forward moving?

petrfitz, I'll hold you to that.

I just got an email from a friend who had looked for a summer rental in Southampton last year, but couldn't get one because there was no availability. His REAL ESTATE AGENT just emeailed him saying that things are so bad that they can now offer him a full-year deal.

What do you think that that portends?

Stupid is as Stupid does.

Where in Brasil Steve?

eah, I can't tell you specifically where to invest. I am invested in profunds' and direxion's "bull" funds. They are highly volatile but are pegged to twice the performance - up or down - of the market indices. They are short-term instruments and the dividends are non-qualified, so they are not tax efficient. But last year's return was 80%.

Will this year's be? Don't know. I just happen to think that Brazil is a great place to be invested in. And I like China, too, which I think is oversold: everybody was thinking things would be great until the Olympics, so they sold beforehand.

Look at forward p/e ratios versus growth. Forward p/e of 16, China is growing at ll%. Seems cheap to me. Bovespa's aggregate is about 18, economy growing at 5%, with lots of advantages.

Manhattan residential housing has a p/e of 24x, and it doesn't even produce income!

I invest in what I know & I spent years traveling in emerging markets. I know how they work, what happens with all that pent-up demand. I remain very bullish, & am willing to take the risk.

steve:

It's no big deal, you can call it 4x leverage or 5x leverage, that's just a terminology. If I put in my money but don't borrow any, I'd call that 1.0 leverage but you call it 0.0, that doesn't change the math when we compute returns. But you still show you haven't understood my point (I've posted it enough times this thread that I won't do it again). I think the problem with this thread is that you are having too much trouble tracking 5-6 different conversations, and understandably that's a tough task to manage when you lose your context each time.

I'd be happy to discuss it with you, offline, if you would email me at stevejhx@leelin.com (I made a dropbox just for you). For your trouble, if I haven't convinced you, I will promise to paypal you $1.00 USD (yes, 100 cents, enough for two apple pies at McD if you foot the sales tax bill).

Steve,
how is tax benefit factored into rental?
When you rent, none of your rent is deductible, whereas mortgage is.

thanks, leelin, but I don't bet. My margin calculation is correct. If you put your money but don't borrow any, there is ZERO leverage, b/c that's the definition of leverage.

I have understood your point. As indicated, I have worked extensively in Latin America and I am familiar with inflation accounting. I am still involved in it.

Here is the issue: lenders look for "real" returns, that is, returns after inflation. Mortgage rates are pegged to long-term bond rates. Long-term bond rates factor future expectations of inflation into them.

A simplified example. I lend you $100 at 10% interest for 1 year. I expect inflation to be 5%.

One year is over. You pay me $110 back. Inflation was 5%. That means your initial $100 is now worth $105 in TODAY'S money. I have $110 from you in TODAY'S money. I have made 10% on the initial investment at the purchasing power of the initial investment (($110-$100)/100). In TODAY's money I have made 4.75%(($110-$105)/$105).

This is somewhat simplified because markets calculate the discounted cash flow of the future stream of income based on a discount rate, which takes inflation into account, but it serves the purpose.

You make the same mistake as you make when you calculate "leverage": you calculate "leverage" to include your money, which it doesn't. You count inflation to include only the difference between today's money and yesterday's, but you also need to do it the other way around: count yesterday's money in terms of today's money. When you correct you must correct in both directions. It's basic high-school algebra: if you multiply one side of an equation by a factor, you need to multiply the other side of the equation by the same factor to keep them equal.

I don't know another way of saying it. Just as you can't count "leverage" using your own money (because there's no "leverage") when you pay a past debt back in current money, you also have to REVALUE the past debt into current money. If you don't, it will look like you're getting a great deal, but you're not: you're just adjusting one side of an equation without adjusting the other side.

Do the calculation with any figure you want, and revalue the initial principal by inflation. It is always true: if you lend money, as long as nominal interest rates are above nominal inflation, you will make money in real terms because the value of the thing you're being paid back for changes.

If this weren't so, no one would lend you money. Ever. Because inflation is built into economic growth.

And therein lies a lesson for evillager and mshlee, who insist that there is a benefit to inflation that only the buyer gets, which is really dumb and proves how little they know.

Do the math. You pay back in inflated currency, you must inflate the value of the good you borrowed against. That is a fundamental tenet of inflation accounting.

Which is illegal here.

I wasn't asking you where to invest, Steve. My foreign investment protfolio doesn't need anon. help. I was more engaging around whether you prefer inland, coastal, or urban.

China...interesting. I have quite a bit invested in Malaysia and have been pleased with the results - particularly in Penang.

steve: No need to bet, we'll just talk offline, without the distractions. I see where you are confused and I am confident I can convince you. I'm not relying on either inflation magic, interest rate arb, or a factor of 1.0 in leverage

sorry I misunderstood eah! I don't like to give anon advice, either. LOL.

Ipanema.

I've also been to Malaysia, prefer Singapore for the stability.

steve said: "Do the calculation with any figure you want, and revalue the initial principal by inflation. It is always true: if you lend money, as long as nominal interest rates are above nominal inflation, you will make money in real terms because the value of the thing you're being paid back for changes."

One last time, if you agree to read and understand this post, you should see the light....

Let's assume some reasonable economic numbers below:
Inflation: 3.0%
10-year treasuries: 4.5%
30-year mortgage rates: 6.0%
Volatility index: normal

Now let's plug in your OWN numbers which do not conflict with the assumptions.
S&P 500 returns: 11%
Real estate returns: 3.7%

Now let's buy some stock with $100K, no margin, no options, no leverage. Hold it for one year.

$100K in S%P 500
(gains 11%)
Final nominal value: $111K
Final real value in today's dollars: $111K / (1.03) = something close to $108K

Instead let's buy some real estate with $100K, 20% down, gets us a $500K house. Hold it for one year.

$100K downpayment, $500K house
(3.7% gain)
Final nominal value of house: $518,500
Now you have: $518,500 house with a $400K mortgage, so $118,500K in equity.
Final real value in today's dollars: $118,500K / (1.03) = something close to $115K

I didn't use magic inflation, the mortgage company didn't get ripped off as they got a 3.0% spread on inflation and 1.5% spread on treasuries, and I used your numbers of 0.7% real appreciation of real estate vs 8.0% real appreciation in S&P 500.

Steve--please--property in Singapore? Not even the wealthy there generally get that chance.
Seriously. You think NYC is ridiculous?

Malaysia has been an up and down ride but now is trending solidly up.

Actually, funny you should bring up Singapore..they do have over 90% home ownership...even though kids typically have to live at home until their 30s before affrding it. Sort of the anti-Swiss example.

Let me try to make the inflation problem clearer. If you're a lender, you're worried about the value of the collateral, not the value of the currency. If you have to execute (foreclose on) the mortgage, you get your collateral back in today's money.

That's why deflation is so dangerous.

So, if I've been clear: the net present value of the future flow of payments at a specific discount rate is how banks calculate the profitability of mortgages (grossly oversimplified). The discount rate for the NPV INCLUDES inflation. If the bank executes the mortgage, it gets its collateral back in today's currency. That is why leelin's example is fatally flawed.

ba294, you do get the tax benefit, in terms of lower rent.

Malraux buys an apartment and rents it to me. (Highly unlikely, but humorous in any case.) When making his decision to buy the apartment, malraux used the discounted cash-flow method. That method takes tax considerations into account: part of cash flow is how much is paid in taxes.

So malraux's discounted cash-flow analysis tells him that if he rents the apartment out at $10,000 a month, he will break even. Anything more than that is profit, less is loss. That $10,000 includes his taxes.

Let's say that market rents for that apartment are only $9,000. Malraux won't buy because he'll lose money. If market rents are $11,000, he'll not only buy one, he might buy two. Everybody doing this over time will cause market rents and carrying costs to be the same at the time of any particular purchase: equilibrium. Properties too pricey to make money, nobody buys until they come down. The reverse is also true.

So if I rent an apartment that malraux is breaking even on it (because it's a new purchase), then I am getting malraux's tax benefit. Where malraux makes a profit is that, over time, I am paying off his mortgage, so over time his expenses go down and his income goes up. The property also appreciates.

Malraux is constrained in what he can charge in rent - constrained to income levels - so he can't charge me more at any particular time than the market will bear at that time, which is a function of income. He still makes money, though, because I'm still reimbursing him all of his costs and paying down his principal, and the longer the time goes by, the more he makes.

But at any particular moment, he can charge only what the market is charging. If he charges more, I'll move. And if it costs less to buy an apartment than to pay his rent, I'll do that - as will everyone else - until the costs are the same, because the benefits are.

I don't know if that's clear. Malraux won't invest in a property he will lose money on on a cash-flow basis. That basis includes his tax. The best he - not him in particular but the market as a whole - can do is, when the transaction is first made, break even, because no one will willing lose money, and if there is an enormous profit to be made, as JuiceMan would say, it's a tremendous "buy" signal.

If I buy an apartment to live in myself, and it costs me more than it would cost me to rent on a cash-flow basis, then I'm dumb, because malraux is willing - in the first year - to give me his tax benefit calculated as part of the rent, so I will rent his apartment from him and he breaks even. He will make money over time as I pay his expenses and principal, but I won't lose money because at any particular time I am paying the market rent - which at any particular time reflects the tax benefit of a property if I were to buy a property at current market prices, and not the historic price of the property that malraux might have paid - and will have invested my own principal in a different asset.

It's impossible to avoid. Except in a bubble mentality like today's, market rents = owners' carrying costs AT THE TIME OF THE PURCHASE. Market rents include the tax benefits. Over time malraux as my landlord will make money. Over time, if market rents are half owners' carrying costs, it makes no sense to invest to get a tax benefit that I would otherwise get indirectly, through rents.

steve, you didn't even read my post, or at least not carefully enough. I gave you numbers that make perfect sense for the mortgage rate, inflation, long term risk free rate, and your own numbers for the appreciation of stock and real estate.

I think you are a pretty smart guy, certainly intelligent enough to understand my point, which is pure math, not opinion.

I attribute your lack of understand right now to the difficulty of tracking the context of our conversation on this forum, so I offer to talk to you offline and discuss.

Your refusal means you either don't have time, don't think highly enough of me, or simply want to keep all the discussion on this forum because you derive some pleasure out of it. Personally, I don't care who's reading the forum and who looks good or bad, I'm just a guy who knows what I'm talking about offering to help you out.

stevejhx@leelin.com

Offer still stands.

Funny, leelin, I was going to suggest offline talk too...but I think Steve mostly feels comfortable in this cyber world he created.

Interesting since Steve hit the scene we don't hear as much from Urbandigs.

steve,
I sort of skimp through your post and see where you are getting at but if owner occupied here is how i see it.

I can either put in $1000/month toward rent or $1000/month toward mortgage.
$1000 rent comes out of $2000 after tax income leaving me with $1000 to spend
$1000 mortgage comes out of $2000 after tax income leaving $1000 to spend but $350 back from (35% bracket) so if rent, $1000 net, buy $1350 net.

If renting out, tax benefits are factored in from what I understand.

If you are assuming lower rent compare to mortgage & carrying cost. This is not typical.
I have an apt which I purchased in '05 for $470k is now renting at $3,200. I was able to find a tenant 2 days after I listed it on the market (market rent was $3,400). Neighboring unit was recently sold at 650k. If you compare this with mbz's apt, 2.4M apt should be netting $12,000 not $7,000. I believe Malraux is getting tens of thousands for CPW. I also believe mbz found that 2.4m for $7,000 but very unlikely in nyc.

If you are assuming lower rent compare to mortgage & carrying cost. This is not typical.
I have an apt which I purchased in '05 for $470k is now renting at $3,200. I was able to find a tenant 2 days after I listed it on the market (market rent was $3,400). Neighboring unit was recently sold at 650k. If you compare this with mbz's apt, 2.4M apt should be netting $12,000 not $7,000. I believe Malraux is getting tens of thousands for CPW. I also believe mbz found that 2.4m for $7,000 but very unlikely in nyc.

eah, I lived in Singapore and hated it. I was talking about the stock market, not property. The reason for the high ownership rate in Singapore is that almost all the housing stock for nationals is subsidized - the government builds them and allows people to use their Social Security payments to cover the cost.

leelin, I didn't read your last post because you wrote it at the same time as I was writing mine. But really, "Your refusal means you either don't have time, don't think highly enough of me, or simply want to keep all the discussion on this forum because you derive some pleasure out of it."

That's a bit over the top, no?

In your example, these figures are immaterial:

Inflation: 3.0%
10-year treasuries: 4.5%
Volatility index: normal

You forgot to include the interest you paid on the mortgage, the total cost of renting and the opportunity cost of not investing property tax, maintenance and repairs in the stock market.

ba294, if you rent it out the economics are entirely different.

I'm assuming rent = mortgage + other carrying costs.

Therefore, my assumption was that rent was the full cost of the mortgage but not other carrying costs for my 40x example, but the 28% example included the full cost of the mortgage plus other carrying costs.

That is, I made my 40x monthly rent = full mortgage payment, and reinvested taxes and maintenance elsewhere (I excluded repairs), making my full disbursement the same as owners' carrying cost, just allocated differently. If I had made the 40x rent = full owners' carrying cost, then the renter would not be able to reinvest maintenance and taxes in a different asset, so the comparison wouldn't be fair.

My point is that at any particular time - for owner-occupied residential real estate - the break even point is market rent. You are comparing an apartment you rented out that you bought years ago, which falls under the malraux scenario, which can in fact be very profitable because someone is paying you today's rents for an apartment you bought years ago. But someone who bought that $650k apartment could not make that same transaction today without losing his shirt.

You are correct that someone who bought recently would be paying much less than market rents right now, but the recent spike in the market is not normal under any historical circumstance. If you buy a $100,000 apartment and it increases at the historical rate of 0.7% real per year, after 30 years it will be worth only $123,277.58 in today's dollars. Which means that in 30 years' time, $1,000 rent will only be worth $1,237.79 in today's dollars, 30 years hence.

My point has never been to say that no one should ever buy real estate: I own some, I've owned some, and I'll own some more in the future. Rather, it's been to say that there is a price to pay if you buy at the wrong price, and there is a vast difference between the price to buy and the price to rent right now, and I believe it is unsustainable.

Steve said: In your example, these figures are immaterial: Inflation: 3.0%

If you think the inflation figure is immaterial, then you still haven't understood my point. The reason you need inflation is to convert your 0.7% real appreciation of real estate figure into the rate your 5x (or 4x) leveraged downpayment earns. Try going through my example again and you'll see the light. If you still don't understand, you can still email me and I'd be happy to answer your questions.

Steve said: In your example, these figures are immaterial: Inflation: 3.0%

If you think the inflation figure is immaterial, then you still haven't understood my point. The reason you need inflation is to convert your 0.7% real appreciation of real estate figure into the rate your 5x (or 4x) leveraged downpayment earns. Try going through my example again and you'll see the light. If you still don't understand, you can still email me and I'd be happy to answer your questions.

Regarding your forum love: Actually I don't think it's over the top at all that a standard forum troll derives hours of pleasure from posting and pissing off a sea of cyber strangers... but I make an exception in humoring you because you are a smart guy, you are pretty funny (based on the standup video), and I can feel warm a fuzzy enlightening someone worth about 2x me in net worth.

stevejhx@leelin.com

Offer still stands.

leelin, I actually am very funny.

After 30 years your $500,000 if it compounds at 3.7% will be worth $1,487,074.40. My $100,000 investment will be worth $2,995,992.21 if it compounds at 12%. You will have paid $463,325.76 in interest at 6%. Your profit would be $1,023,748.64 less your initial investment of $100,000, which is $923,748.64 (final value $1,487,074.40, less $463,325.76 interest, less $100,000 down payment).

My profit will be $2,895,992.21 ($2,995,992.21 less $100,000 initial investment).

You do not use a risk-free rate unless you're using a risk-free asset. Real estate is not risk free.

You said, "Instead let's buy some real estate with $100K, 20% down, gets us a $500K house. Hold it for one year.

$100K downpayment, $500K house
(3.7% gain)
Final nominal value of house: $518,500
Now you have: $518,500 house with a $400K mortgage, so $118,500K in equity.
Final real value in today's dollars: $118,500K / (1.03) = something close to $115K

I didn't use magic inflation, the mortgage company didn't get ripped off as they got a 3.0% spread on inflation and 1.5% spread on treasuries, and I used your numbers of 0.7% real appreciation of real estate vs 8.0% real appreciation in S&P 500."

No, you didn't do any of those things. You forgot to include the $23,328.88 you paid in mortgage interest. Subttract that from your $18,500 in appreciation, and you've lost $4,828.88, excluding taxes and maintenance, whereas I have gained $8,000.

Those are your numbers, I have to get back to work.

steve said: "No, you didn't do any of those things. You forgot to include the $23,328.88 you paid in mortgage interest. Subttract that from your $18,500 in appreciation, and you've lost $4,828.88, excluding taxes and maintenance, whereas I have gained $8,000."

Clearly I'm wrong. Oh wait... you must have been homeless that whole year and I must have left the home completely vacant.

As for your 30 year simulation, I agree, which is why I've said many times that the trick is ensuring you maintain your 5x leverage (4x with your terminology). I'd have to either become a landlord (which is what I've done in reality), or I'd stay in the same home and do cashout refis every few years (putting the money in stocks), or sell every few years to trade up homes (not so sustainable once you acquire too many millions).

But if you just look at my example carefully for a 1-3 year time frame, you have to admit the real estate investor came out ahead (and if he deals with the re-leveraging problem well, he'll always continue to come out ahead).

I'm surprised there is such disagreement on the price to rent ratio. I pulled up a random large building in my neighborhood (large buildings make finding comps easier) and within 30 seconds found an example that shows that buying costs 2x more than renting. I'm happy to change my view on this point but have yet to see any examples of more realistic ratios other than anecdotes. Anyone got any examples on streeteasy?

2BR/2BA 1008 sqft 26th floor for sale at $1.65m ($11k monthly cost).

http://www.streeteasy.com/nyc/sale/194016-condo-425-fifth-avenue-apt-26-b-murray-hill-manhattan

2BR/2BA 1008 sqft 21st floor for rent at $5500/month.

http://www.streeteasy.com/nyc/rental/319849-condo-425-fifth-avenue-midtown-south-manhattan

leelin, in my original post I included all rent paid, so I didn't "forget" it. It's not included in your example, so I didn't bother to reintroduce it.

It's not "my" terminology for leverage; it is how leverage is defined.

Real estate is not a short-term investment, but if you want to take a 1-3 year horizon then you must factor in transaction costs - real estate agent commission, closing costs, points, conveyance tax (charged on the value of the transaction, not the profit), mortgage recording tax (condos), flip taxes (co-ops), income tax (NYC, NYS) that would normally be amortized over the length of the mortgage.

If you do that, and add in maintenance and taxes, you will find that your loss is far higher than what I calculated. A 6% commission on $500,000 is $2,500 a month, which alone is 1 year's rent for a home of that price.

You keep on changing your way of viewing this, and it keeps on being wrong.

A 6% commission on $500,000 is $2,500 a month if flipped after a year

I meant

mbz, I've been giving those same examples for months - dozens of them - and nobody has ever proved anything different to me, at TODAY'S prices, not 2004 prices, when things were still in balance.

I'd change my mind, too.

And 2BR/2BA 1008 sqft 21st floor for rent at $5500/month is not out of line with the $4,500 I pay for a similarly sized apartment in Chelsea, on the 8th floor.

Steve:

I have never changed my view. If we had a Gtalk conversation, you could easily see that, but I wont make you reload pages of 100 posts looking for my context.

I'm happy to move the discussion to include carry costs and transaction costs, but I've spent my energy trying to convince you first that 0.7% vs. 8.0% is not the right numbers to compare. I hope we are on the same page now.... if we can't at least agree on that then the rest of the discussion is moot.

So if you've belive me now that the real estate investor in 1 year will have $118.5K in equity and the S&P500 investor will have $111K in liquid assets, then we are ready to move on to the rest of the discussion, which involves carrying costs, transaction costs, and re-leveraging.............

I'm still offering to take this offline, but you seem bent on e-peening, which is a shame.

On a lighter note, yes I found your gig to be very funny... I don't remember which joke exactly, but I was definitely LOL'ing, and it was tasteful, witty, and rated-PG, which is all the more constraining.

Glad you enjoyed the humor, I'm all over town maybe you'll see me one day. People seem to like my parrot joke, but being Catholic my favorite is INRI. I may curse from time to time, but I never do blue b/c it makes me uncomfortable, I don't like it, and it doesn't sound like I'm being sincere when I say it. Other than that, it's fine.

Actually, I don't agree with you that the 0.7% and 8.0% are the wrong numbers. If you're an economist as I am by training, it's always best to work with real numbers, and those are the real numbers. Inflation represents a change in the value of money, not in the value of things. But if you include inflation, it doesn't matter.

Do the full math and get back to me with the outcome.

Steve - one question for you:

Does the market always follow logic?

leelin, why are you comparing a leveraged return with a non-leveraged return? Leverage doesn't create value - it simply magnifies the outcome. I remember when lots of folks were leveraging extremely safe AAA rated bonds that never go down in value. You have to compare apples-to-apples.

petrfitz, in the short-term the market is not logical. In the long-term it always is. That's the basis of "value investing," and why it's far superior to modern portfolio theory (MPT).

In other words, as deucescracked will attest to, if I'm rolling dice the probability of rolling snake eyes the next time is always 1/36, or 2.7%. Yet the probability of rolling snake eyes twice in a row is 0.077%.

Why is the probability of rolling snake eyes always 2.7%, yet the probability of rolling snake eyes 2 times in a row is 0.077%? Because of I roll snake eyes once, the dice don't know that I did.

It's because short-term probability is unrelated to long-term probability. Entirely uncorrelated.

That's the basis of a bubble. Everything always returns to the mean. That's how value investors make money, and why they beat MPT investors every time. Because MPT investors extrapolate - if the market is doing this, then it will continue doing this. But value investors don't look at things that way.

We WILL return to the norm of 12x "p/e" ratio between home prices and market rentals, because that is the value that results from the 40x/28% income ratios for housing expenses. Now we're at 24x. If someone can explain to me how that is sustainable at the same time as 40x/28% is sustainable, as with mbz, I'll listen.

mbz, the beauty is, it virtually doesn't matter how much leverage leelin has, since there's a 1000+% difference between 0.7% and 8%. He'll need more leverage than god would give him with a plank.

mbz: Good point, the main reason is that the most normal mode of putting your money into stocks is not to use leverage. A sophisticated investor could use options, or shudder, margin debit, to lever up on stocks. Most stock investors do not. Most home buyers, though, will only put down 20%. Keep in mind I never said real estate is the way to go... I only said the original assumption, that 0.7% real vs. 8.0% real is misleading, because with leverage, it is 8.0% real vs. 3.5% real. Then when you realize that a house sells for its nominal value, and you pay back your loan in nominal dollars, then you get 8.0% + inflation vs. 3.5% + 5*inflation.

Steve: Every time I think I'm making progress with you, you fall back to the bad math in your original post. I have to assume at this point, that you are smart enough to see the light, but you get a kick out of pretending that you do not.

I do hope to catch your gig sometime soon though. I think it was the parrot joke.

Steve: I'll do the full math. Here it is.

Stocks:
[8.0% real return + inflation] / (100% + inflation) = your return = about 8%

Real Estate with 5x leverage (4x in your terms):
[5 times (0.7% real return + inflation)] / (100% + inflation) =
[3.5% real return + 5*inflation] / (100% + inflation) = about 3.5% real return + 4*inflation

So comparing, approximately:
8% vs. 3.5% + 4*inflation

So, if inflation is greater than 1.2%, real estate provides more equity.

If you agree, then I'm ready to debate carry costs, transaction costs, and tax benefits, but those are minor compared to your misunderstanding of real vs. nominal when leverage is involved.

I'll make things even simpler:

S + I = S + I

5*(R + I) = 5R + 5I

Make sense so far?

Let S = stocks = 8.0%
Let R = real estate = 0.7%
Let I = inflation

Which is bigger,

5R + 5I or S + I

Solve for I

5R + 5I > S + I

when

5R + 4I > S

when

5*0.7% + 4*I > 8.0%

when

I > 4.5% / 4

when

Inflation > 1.125%

Dude, you're out of your mind:

S I = S I

5*(R I) = 5R 5I

Where the fuck did the R come from?

This is OVER. Show me raw numbers based on historical facts. Then we'll talk.

Dude, you need to have your lithium adjusted. b/c what you just wrote is psychedelic.

There is no relationship between S and I.

leelin, I suspected this, but you are truly out of your mind.

And it's 4x, not 5x.

That is the fucking weirdest "equation" I have ever seen.

"5R 5I > S I when 5R 4I > S"

WHAT?

Stay away. Begone. You went from inflation accounting to Salvador Dali in 1 day. Oh, dude....

steve, it is really simple. Just let R = 8675309, sing it out loud, and the answer will be clear.

Steve: You must be checking these forums on some weird browser or font (or blackberry), which doesn't use the '+' signs. Either that or you need to relearn 8th grade algebra.

I can understand algebra being a bit tough to learn, as is does take a full year in many schools, but maybe I can teach you how to multiply.

How many 20%'s of something do you need to make 100%? Is it four 20%'s, or five 20%'s?

To summarize:
No matter how you slice it, renting is ALWAYS financially more beneficial over time than owning.
Let's make some financial assumptions that are borne out by decades of empirical evidence:
1) Real property prices and rents increase at the rate of income, or 0.7% per year adjusted for inflation.
2) The S&P 500 increases at a real rate of 8.0% per annum.
These being true, it is ALWAYS better to rent property than to buy, if you invest the down payment in the S&P 500. Watch:
Say you make $100,000. This implies that you can spend up to $2,333.33 per month in total housing expenses (28%).
An 80/20, 30-year fixed $375,000 mortgage at 6% gives you monthly mortgage payments of $2,248.31.
Assume that taxes and common charges amount to a VERY CONSERVATIVE 10% of total mortgage payments, or $224.83 per month.
A $375,000 mortgage implies a purchase price of $468,750, and a down payment of $93,750.
If rented an apartment for the amount of the mortgage payment, you will have paid $903,455.33 in rent over 30 years if it increases 0.7% per year.
If you invest the down payment in the S&P 500 for 30 years, $943,374.08 at the end of 30 years, for a total net profit of
$39,918.75. To that, however, add your yearly maintenance and tax payments $2,697.96, increasing 0.7% per year and accruing 8.0% per year over 30 years, and you will have earned an additional $330,084.36, making your total profit $370,003.11.
Now do the same thing for your house. If your $468,750 home appreciates at a real annual rate of 0.7%, at the end of 30 years you will have a home worth $577,863.68, for a profit of $109,113.68. Add to that the original loan of $375,000 - the rest of the equity you will have built - and you get a gross profit of $484,113.68. But you would have paid $434,393.21 in interest, so your real profit is $49,720.47. In addition, you will have spent $90,343.15 in tax and maintenance, making your GRAND TOTAL PROFIT a whopping NEGATIVE $40,622.68.
That's right! You rent for the amount of your mortgage, all values go up linearly in line with historic data over time, and you will wind up with a total profit of $370,003.11. Whereas if you buy a home you will wind up with a loss of $40,622.68.
This of course excludes special assessments and all the transaction costs associated with owning real estate: brokers' fees, conveyance tax, etc. It also ignores the tax effect on dividends. But dividends and capital gains tax rates are currently the same (and can't be predicted in the future). The only further benefit from owning is the $250,000/$500,000 tax exemption. But it is doubtful that $410,625.79, which is the absolute value of the difference between the owner's loss and the renter's gain.
Guys, it's indisputable: renting is FAR better in the long-term than buying. All the figures and assumptions I used are real and verifiable. Do your own calculations: rent for the price of your mortgage payment, invest the down payment and maintenance and property taxes in the S&P 500 at the real rate of increase of 8.0%, increase your property value, rent, taxes and maintenance payments at the real rate of 0.7%, deduct the mortgage interest paid, and you will see IT IS ALWAYS MORE BENEFICIAL TO RENT.
Do your own calcs, or criticize the model. I'm waiting....
evillager, you fell into my trap!
1) 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
That's where the 8% real return on the S&P 500 comes from, on a rolling average basis, which corrects for specifically-targeted dates.
2)0.7% real gain on real estate is from Robert Shiller of Case-Shiller fame:
http://en.wikipedia.org/wiki/Housing_bubble
"Robert Shiller's plot of U.S. home prices, population, building costs, and bond yields, from Irrational Exuberance, 2d ed. 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."
3) Market rents are constrained by market factors: 40x monthly rent in income. Therefore, if incomes go up 0.7%, rents can at most go up 0.7% because constraints.
"Rents, just like corporate and personal incomes, are generally tied very closely to supply and demand fundamentals; one rarely sees an unsustainable "rent bubble" (or "income bubble" for that matter)."
http://en.wikipedia.org/wiki/Housing_bubble
And that constraint on the demand side is 40x monthly rent in income, 28% total household income in housing expenses.
4) Historical averages do not equal future returns: that is true in the short-term. But it is also true that over long periods of time everything returns to its equilibrium. And the 12x annual rent = sale price is real, and constant over time specifically because of those market constraints:
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!
You say: "If the stock market and real estate go up the same annualized % over the long term (which I think is much more reasonable, especially for manhattan where they are so highly correllated)"
If you the market prevents you from spending more than 40x annual rent / 28% percent of household income on housing expenses, HOW CAN RENTS / PRICES GROW AT 8% UNLESS INCOMES DO?
Well, sweetheart, THEY CAN'T!
"I'm not going to waste my time to go find the numbers for a pointless "discussion" with you, but I think this post of yours once and for all proves that your opinion is basically worthless."
Because you can't. You're in over your head. You're blind to the fact that the market is constrained by 40x/28%, and that real income rise only 0.7% per year on average, and therefore housing prices can rise only that much.
Your claim is so ridiculous that if you take the example of the $468,750 and increase it at a real rate of 8% per year, after 30 years it will be worth $4,716,870.42. But if your $100,000 income only rises a real 0.7% per year, it will be $123,277.58 after 30 years.
WHO MAKING $123,277.58 CAN AFFORD A HOUSE WORTH $4,716,870.42?
Them there's the numbers, baby, if you do what you are claiming.
wyndcliff, ignoring the rest of them, I'm trying to show that the people who are so "into" real estate don't even know the fundamentals of the market. Yes I would like to buy, but for emotional reasons, not as an "investment," because it's a crappy one from a financial perspective. From having a secure place to live it's a marvelous thing to have.
My numbers are all proved over DECADES. I remember the dot.com bubble - the "New Economy" is special. Well that's what the real estate bubble is all about.
"Take 100 people who have lived in NY City for the past 10 years and have been property owners. Take another pople who have lived in NY City for the past 10 years and have been renters. Same income, same martial status. Steve, I am willing to bet you $10,000 that the hoome owners net worth is not only greater than the renters but significantly greater if not exponentially greater."
That's exactly the danger! Extrapolating from the most significant increase in property values in the history of the world - the last 10 years in Manhattan - onward toward the future. You need to take much longer periods, and moving averages, and look at the market constraints.
All my numbers are real and provable. Claims like property prices rise at a real rate of 8% per year - which is what evillager is betting his future on - are not only historically inaccurate, but theoretically impossible given the market constraints.
verain, you missed the point.
1 - Purchased equity of companies in the stock market is levered at the outset, because the corporations in which shares are purchased have a capital structure inclusive of debt.
You need to take accounting.
2 - Real estate is not a levered asset.
??
3 - Take the same money and invest it in two competing asset classes. The results are set out above.
In fact, so accurate is my model that it's part of the definition of "imputed rent": opportunity cost.
Nice try Verain. Redo the math and come back to us in a couple of days.
40x / 28%
Lesson 1:
Stock price times number of shares = market value, not equity value.
Equity value = Assets - Liabilities.
Equity plus debt = total assets. The value of a corporation depends on the definition of value.
Lesson 2:
Earnings are after a company pays interest expense AND PRINCIPAL to its debt holders.
The "therefore" is a non sequitur. There is no difference between an equity holder and a debtor, except who has priority over the company's assets. Equity and liabilities add to total assets.
A company borrows money from equity holders just as it does from debt holders.
You claim to have gone to Wharton, and you can't even read a balance sheet!
Ha ha ha!

Point 1:
"Market capitalization (aka market cap, mkt cap or capitalized value) is a measurement of corporate or economic size equal to the share price times the number of shares outstanding of a public company."
http://en.wikipedia.org/wiki/Market_capitalization
Assets - Liabilities = Shareholders Equity. Basic bookkeeping.
Point 2:
I see. So your earnings include the amount you've paid back in principal. Novel idea.
I make $100. I repay a loan, $9 in interest, $1 in principal. My net - OBVIOUSLY, according to you - $91 because I don't count the repaid principal. Somehow, I've managed to keep it.
Dumb. I make $100. I repay a loan, $9 in interest, $1 in principal. I have $90 left. Those are my earnings.
You are shown to be a charlatan.
leelin, you may have the equity, and you will have to pay taxes on it, but in terms of purchasing power you have nothing new.
I make $10. An apple cost $1. I can buy 10 apples. Inflation is 10%. Now I make $11. The apple costs $1.10. I can still only buy 10 apples.
I make 10% more money but it's gained me nothing in real terms.
That's why the AMT affects so many people: $100,000 was a lot of money in 1969. It's not today, but the AMT was never indexed to inflation.
"That's why I'm taking inflation back out at the end, but you still come out ahead. You get 5x inflation + 5x real appreciation, and then your money only suffers from 1x inflation when discounting back to today's value."
What?
I make $10. I borrow $40. Now I have $50. Inflation is 10%. I now have $55. But my $10 is now worth $11, and my $40 is now worth $44, so the ratio remains the same.
You can't "take inflation back out at the end" without readjusting your principal and loan amounts in the same amount. Yes you make a gain - and yes you have to pay tax on it - but you're paying tax on inflation, not on real values.
evillager, you are partially correct. The wiki article is poorly written, but you are correct that it is discussing the FASB treasury stock method of calculating equity value.
I, however, was discussing stock prices as a function of expected forward earnings and said verain should take an accounting course. verain then introduced the completely unrelated concept of equity value. In accounting - which is what we were discussing - the value of equity is operating assets - debt. That is I was discussing and that is what I understood when he wrote it.
You changed the type of equity value - perhaps in line with what verain meant - to being the sum of common stock value and the value of total outstanding options. That is the definition of equity value you are speaking of; it is not what verain said equity value was - total outstanding shares x share price - and it is not what I was referring to when I said equity value.
The wiki article is unclear, but it relates to the FASB treasury stock method of calculating eps, which includes, by definition, option dilution.
I do hope that clears up the misunderstanding. I said accounting, using the definition of equity value in accounting. verain made an incorrect statement about the financial term equity value, which I corrected using the accounting definition that we were talking about. You added equity value as a financial term which is not what I was thinking of. When you did it dawned upon me what verain was referring to - which is still wrong - and I posted the poorly written wiki article.
So, you are right in what you said as a market term; I was right in what I said as an accounting term. verain was wrong in all terms.
And this is why verain was wrong:
Lesson One:
Stock price times number of shares = equity value.
Equity value plus debt = the value of the corporation.
Equity value in finance is what I said - value of shares + options.
Equity value in accounting is somewhat what verain said: it is operating assets minus debt.
Now do you see the stupidity of verain's "Wharton Business School" post? His equity value (price x # of shares) could not in any way be related to debt. That's why I said what he said was nonsense, and why it caused confusion.
However, since you caught half of what he was trying to say, I give you credit because I would not have thought of that. I caught the other half. My experience is as an auditor with Price Waterhouse and Bank of America. Yours is as a portfolio manager. That's why we came to different answers.
EnterHome, despite my reputation, I always apologize if I misunderstand something or make a mistake. I was not over-apologetic to evillager. I told the truth. The wiki article is poorly written, but I give him credit for identifying an equity value definition that I would not have thought of when I read what he wrote.
I will say it again: when verain made his first post "equity value" I thought he was discussing shareholders equity, since I was discussing accounting. He gave two definitions: the first was for market capitalization, which is what I said it was. It is NOT equity value. The second definition he gave was for the accounting concept known as value of equity, which is what I saw when I reread it, but he only kind of got it right: value of equity is operating assets minus debt.
Here's what verain said:
a) Stock price times number of shares = equity value.
That's not true; that's market capitalization. Equity value includes the value of options.
b) Equity value plus debt = the value of the corporation.
The way he wrote that technically means book value / shareholders equity: equity + debt = equity + liabilities = assets = book value. Though some people exclude goodwill and other intangibles from book value: see below.
That's what I thought he meant when I made my first post. evillager - to his credit - made me look again and I realized that verain meant value of equity, which is operating assets - debt. "Equity value plus debt" is essentially book value - intangibles, as above.
What is not possible is to confuse two different meanings of equity value:
Stock price times number of shares = equity value
Equity value plus debt = the value of the corporation.
Equity value as a market term is COMPLETELY unrelated to DEBT of any sort, yet that is what verain said. No Wharton graduate would ever say that (if he passed). Those are two different concepts entirely, even if they share the same name.
I don't take back what I said, but I do give evillager credit for looking at it in a different way.
dudes, enough! I stand by what I said. He did not say "enterprise value," and if he had, it's more complex than that: market cap plus debt, minority interest and preferred shares, minus total cash and cash equivalents.
evillager, you can't even say, "market cap and equity value are interchangable, because options have to be counted," because the options aren't in the market.
So stop - you're talking out your ass.
Market capitalization is not the same as equity value, it is not interchangeable. Market capitalization is the total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying a company's shares outstanding by the current market price of one share. The value of options varies, and it can, in fact, have a huge effect on diluted earnings per share, especially in the case of ESOP's: they can HUGELY dilute the per-share value of of a company. That's why there's an FASB about it, and that's what the poorly written wiki article was about.
I actually wrote an ESOP accounting system back in the day, when I worked at Arthur Young.
So stop - you're talking out your ass.
"I think you should know that no one calls equity value based on accounting statement numbers."
That's dumb. You need to know the net value of your operating assets to see what return you're actually getting on them. If your return on your operating assets is less than the cost of owning them, then you're in dire trouble. And you can only know your cost of owning them by knowing your debt.
"He said that equity value plus debt is equal to the value of the company." No, I said the value of shareholders equity plus liabilities equals assets. evillager then tried to add in "enterprise value," earnings before interest, taxes, depreciation and amortiation (EBITDA), and all sorts of other completely unrelated nonsense.
I did not say that debt is intangible. I said that some people for some purposes do not include intangibles in book value.
"also, your analogy of value of a corporation to the total price paid for a house is 100% correct."
Wow! The total value of a corporation is the same as the total price paid for a house? You've got to be kidding. The total value of a corporation is calculated using the discounted cash-flow method. I defy you to apply a discounted cash-flow method to the price of owning a home, since there is no cash flow.
UNLESS - you use imputed rents for market rate rentals. Which is, in fact, the true value of a home: the price you would pay to rent it.
EnterHome, I was not way off base. What's happening here is obfuscation. I repeat - you are 100% exposed as someone who is talking out their ass, and anyone who listens to you is a fool.
So, let us stick to the premise, boys. Rather than (futilely) trying to prove me an idiot - deucescracked tried that with probability and failed - stick to the point. When you're heavily invested in real estate and prices are about to plummet - and are plummeting - you resort to the time-honored Karl Rove technique of smearing the messenger.
Won't work. Go back to the original post: since you're so smart, REFUTE THAT rather than trying to divert what the thread is about to things you claim I don't know about but do.
Real estate prices are constrained by incomes and leverage. 40x/28%. There is no way around it. Those ratios give you a p/e ratio on real estate of 12. There is no way around it.
But it's not going to work.
Dudes, you're WAY out of your leagues.
Sure, lorenzonyc. If you buy you're limited to monthly housing expenses is 28%. If you rent you're constrained to 40x monthly rent. The 12x ratio of home prices to annual rents 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. But when you add in other costs - taxes, maintenance - you really can't afford that $400,000 mortgage, lowering that 13.3x ratio to around 12x.
malraux, you are correct for INVESTMENT PROPERTIES. The economics are entirely different, and I'm not discussing that. The $500,000 tax exemption saves you at most $75,000 (15% * $500,000) but it also could make you subject to AMT, which you can't control, and whose rate is 26%.
Unfortunately - and this is my entire point - if you buy right now and try to rent the place out, for the most part it your carrying costs will be twice your investment income. That is the problem. Historically, when you first buy a place, you start by breaking even on a cash-flow basis.
evillager, 6 whole years of experience, ha? Well, that's very impressive.
You've never seen a down market, that's your problem. You don't have enough experience in the real world. You try to obfuscate market realities by throwing in non sequiturs about terms whose value is debated.
I've seen 3 - yes three, not counting this one - severe corrections in the real estate market. In the late 80's in NY, in the early 90's in London, in recent years in Miami.
I remember Black Monday very clearly. I remember the evisceration of Bank of America when it was where Citigroup is today. I remember the dismantling of large parts of Price Waterhouse when the market collapsed in London and Madrid. I've seen it at my clients'.
You say bizarre things like "I think you should know that no one calls equity value based on accounting statement numbers." That's arrogant, and ignorant. You don't have enough experience in the world, haven't seen how these things operate in the real world.
There is no way to get around the 40x/28% income constraints on property prices, which leads to housing prices fluctuating around 12x annual rent. It is inexorable. You've yet to come up with anything to dispute that. You've yet to come up with anything that disproves that over long periods of time the S&P 500 ALWAYS outperforms housing as an "investment." No one anywhere debates that but you. You are even so bold as to spew that equity value is the same as market capitalization, and that stock options are immaterial to per-share price dilution.
It's nonsense.
I also have an Ivy League education, and I've also worked in some 25 countries. I've designed and written the very computer systems that you rely on to do your work. I've audited and consulted for most of the major investment and commercial banks around the world, and clearing and settlement systems. I'm involved on a daily basis in litigation on the very things you're talking about, as well as rights issues, takeovers, CDO's, you name it.
And I can probably fix your laptop. Get your thumb out of your mouth, study what is a down market. You're cocky, and you have a lot to learn.
Like 40x/28%.
First of all, MARat, I wasn't discussing the terms - others added them in. It's not what we're discussing on this board. They throw it in to obfuscate.
You say, "I'm sure that Verain and Evillager understand completely that when they say debt...." Yet when I say something, it comes from wiki. I do the wiki thing so people reading can have a reference, that's all. I don't always understand thing and when I don't I'm the first to admit it.
You rode the elevator with Bernie Ebbers in 1998 up 51 stories. Wow. Once I was sitting at the table eating lunch next to Paul Volcker. I'm on my way to the Fed.
lorenzony, the numbers come from the market. The usual rule for renting is that you must earn at least 40x the monthly rent, else they won't rent to you. The usual rule for mortgages is that no more than 28% of your total income can be allocated to housing expenses. As shown above, they're virtually the same number.
They can change, and if they do the structure of the market will change. But they've held pretty constant over time, because one default can wipe out the profit on many compliant transactions. If I have a $100,000 loan and default on it, and the bank loses, say, $10,000, it will never recover that amount, and it wipes out the profit on many other loans.
Ditto lending: if I default, it can take a year to kick me out during which the lessor makes no money, and he then has to pay to get me out. That is very expensive.
And, MARat, your Bernie Ebbers story proves my point. It takes a lot more than accounting or finance to know the value of a business. Ebbers did a really great job with that takeover, didn't he? Like capitalizing expenses so they could be amortized when they weren't capitalized expenses.
I (and others) were very concerned when we had MCI Internet service in the late 90's and they kept on sending us bills for services we didn't have, or had canceled. It smelled of fraud.
Ditto Enron. I was deeply involved with litigation surrounding that company, and I knew something was out of control, because they were paying me 40% more than market rates to do their work. It came as no surprise.
And elsewhere I have told the story of why I left Price Waterhouse - Banesto wouldn't give me data to check loan amortizations. I wouldn't certify their systems, I was overruled, I left and formed my own company. One month later, the entire Board of Directors was thrown in jail.
When I was at Price Waterhouse I also told Reuters that their Globex system (not today's Globex system) wouldn't work. I had the project halted once, but I was overruled the second time. Read this from 1992:
A pivotal test of the GLOBEX 24-hour trading system was postponed almost immediately after it began in early March due to what some sources call "a minor glitch." The failed test is not expected to cause further delays to the project's launch, currently planned for July. The 250 trading station (dubbed "keystation") test, conducted March 3 in New York, London, Chicago and Paris, ended abruptly "due to a software bug which Reuters believes can be quickly corrected," says Gary Ginter, the managing director of the GLOBEX project.
http://findarticles.com/p/articles/mi_hb3104/is_/ai_n7763436
I know a hell of a lot more than you idiots give me credit for.
lorenzonyc, 8% S&P return is not nominal, it's real. The nominal rate on a rolling-average basis (eliminating the effect of choosing arbitrary start and stop dates) is 12%.
There have been "good reasons" for the increase in housing prices. In Manhattan the median property price is highly correlated to Wall Street bonuses: that's where the money went. Wall Street bonuses = income, and - as I've always said - property prices are tied to income, and leverage.
It remains a fact: if you are market-constrained at 40x/28% of income, BY DEFINITION housing prices are constrained by income, and it is those relative constraints that set the 12x "p/e"ratio.
Leverage is an issue, but only on the margin. The first person to use a lot of leverage gets a good deal. Every next person gets less and less, because property prices rise to offset the leverage.
In Manhattan we were in a long real decline in property prices until 1998. The population then started to rise, Wall Street bonuses rose, leverage rose through new mortgage products. My point is that though the population continues to rise, incomes are falling b/c of the Wall Street effect, leverage has been greatly reduced, and new construction more than offsets the growth in the population.
Robert Shiller proved that over 350 years, land constraints do not make property prices more expensive. Property prices increase along with incomes.
"If I were doing a contrast of stock returns to housing returns, I think you really need to compare housing prices to stock prices."
The problem with that is that housing prices are uncorrelated to stock prices. They are correlated to household income.
evillager, again: "the P/E ratio is also tied to interest rates - the higher the rate, the lower the P/E and vice versa."
That is true only because it affects your cost of capital. But there is no market constraint on corporate earnings - they can be whatever they are. For residential real estate that is not true; for residential real estate the constraint is an income-driven constraint. Therefore, if you have incomes fixed in the short-term and interest rates fixed in the short-term, the only thing that can change to get you to reach the 40x/28% constraint is the price of the property.
"Rates are way lower now than in the early 1980s, hence the P/E multiple expansion, since your hurdle rate is lower. In fact, you can think of the inverse of P/E as earnings yield. If it's true for stocks, it should be true for real estate."
That is true for investment real estate, not residential real estate. The value of residential real estate is its output value: market rents. The value of investment real estate is its discounted cash flow. And if you take the discounted cash flow of investment real estate right now, I believe you will find it negative in the long term, because market rents - what you could get for renting a property - are 50% below owners' carrying costs. If - as is happening - market rents decline, and incomes return to a normal level of growth, you'll never be able to make money.
MARat, I am weasel boy, and I wear the label proudly. Your last significant post is accurate. There is an income skew in Manhattan that affects the median price of property. I think the point I've been making is that incomes are falling, and we're not talking about the very high or very low ends: we're talking about well-off people who still have to work to make ends meet. For them - which includes me - the income ratio holds true.
Sometimes IT auditors limit themselves to looking at computer operations. Other times they help build sophisticated trading platforms, settlement systems (like Visa) and payment systems (like SWIFT). You just have to know whom you're talking to.
malraux, I never suggested that any particular property was under- or overpriced. I said the market was overpriced. You can make as much (or more) money in a falling stock market as a rising one, if you know how to do it. That's not what I'm talking about.
I'm not talking about investment properties; I'm talking about residential properties.
nlo, your post is accurate. Minor differences can have huge effects over time. Chaos theory, which please don't start to discuss b/c I know very little about it. K?
My original post was meant to get people to change the way they look at real estate. I'm glad you did.
Popomobile, mortgage rates don't matter but the type of mortgage does. The analysis works with a standard 80/20 30-year mortgage, because that's the depreciation schedule for real estate: 27 1/2 years less the land portion. Mortgage rates don't matter because prices rise and fall in value to compensate for interest rates.
ba294, you don't know what you're talking about. The 28% constraint does not include tax benefits: it is 28% out-of-pocket housing expenses of income. Moreover, the value of residential real estate is by definition its output value: not paying market rents. Market rents include the tax effect because landlords get that same deduction and more: they can defer capital gains tax indefinitely, which homeowners cannot.
leelin, in actuality your "inflation effect" only works if the nominal rate of inflation is above the nominal interest rate. Otherwise, what you're really doing is not paying the principal back with devalued currency, but rather paying a lower real interest rate for the property, this because mortgage rates are pegged to long-term bond rates; long-term bond rates take expectations of future inflation into account. Therefore, the interest rate you pay is a real rate + expected rate of inflation, discounting the cash flows to current prices. If the market is efficient, what you think you're doing - paying back with deflated currency - is actually taken into account by the portion of the nominal interest rate that takes future inflation expectations into account.
While your analysis is true to some degree, I believe you have to look at it in a broader context.
evaillager: corporate earnings are tied to GDP growth. corporations can grow earnings a little more than GDP, but not much.
True. And property prices are tied to incomes and can grow a little bit more than incomes, but not much.
What you're saying about the risk premium for the S&P 500 is true, but you're not accounting for the risk in real estate.
See my answer to leelin regarding inflation accounting. Assuming a perfect market, inflation is already accounted for in the mortgage rate (as it's tied to long-term bond yields), to arrive at a desired real rate.
Another point to note is that it's not just "inflation": there are many ways to account for inflation, and the behavior of each inflation component is important. Right now inflation is rising because market rents - which make up 41% of the CPI - have been rising (though that's stopped). Housing prices ARE NOT calculated into inflation; IMPUTED RENTS are the measurement of inflation in the CPI. Rents are rising because - overall - because housing has become unaffordable (for reasons already discussed). Perversely, however, housing PRICES are falling. So we are seeing massive deflation of an entire asset class that - oddly - causes inflation to rise.
This is because up until 2000, imputed rents were correlated to housing prices. Then with subprime and exotic mortgage products, that correlation was lost. Imputed rents were much lower than owners' carrying costs, which they never were in the past. Housing prices skyrocketed, owners' carrying costs skyrocketed, and market rents fell.
That is not normal behavior. Inflation has been understated over the last few years, and it is now being overstated. That's why the Fed isn't all too worried about inflation: as property prices become more affordable the demand for rental housing will fall, causing deflation.
Thus, you're not looking at inflation in imputed rents, you're looking at deflation in property prices, which does not in any way benefit property owners.
The problem with inflation is in how the numbers are calculated.
To be even clearer, what I said was, "But there is no market constraint on corporate earnings - they can be whatever they are."
What you said was - sigh! - "corporate earnings are tied to GDP growth."
GDP growth - sigh! - is not a market constraint on corporate earnings. Sigh. Corporate earnings are PART of GDP. Therefore, corporate earnings are a constraint of GDP growth, not the other way around.
Sigh.
The only market limit on corporate earnings is the size of the market, because no firm can hold more than 100% of it. But that's a short-term limit, because the closer you get to controlling 100% of a market, the greater pricing power you have. The constraint on that is demand elasticity of supply - you can only charge so much for a product before people stop buying it, unless you have a monopoly on a necessity, like water or electricity, when the government will not let you control prices, but will limit price increases to a percentage of input costs.
It's about the only time that input costs determine prices; output values determine prices. The former is what makes regulated monopolies highly inefficient; the latter is why the value of residential real estate is the cost of renting it.
While I do appreciate your Ivy League MBA, you missed the class on economics.
mbz, Warren Buffett said the same thing about residential real estate. It doesn't produce income, so why is it so expensive?

Unfortunately, you have all the hotshot finance types who seem to believe that they are, in fact, Masters of the Universe, that they know everything, that they can't make a mistake (let alone admit one), that everything always goes up. Especially the young ones like evillager who has all of six years' experience and has never seen a down market in his life, and so his only reference point for sensing a down market is to look at what his MBA textbooks said when he was a TA, which is of very little use in the real world.
This argument we've been having here has basically come down to an argument about CAPM valuations and value-investing valuations. Read from the top of the page - all the fancy ratios and this that and the other thing is basically CAPM, and it suffers from all the defects of CAPM and modern portfolio theory.
Value investing isn't quite so testosterone oriented as CAPM, and doesn't excite these finance guys because you not only have to look at numbers, but you have to feel it. You have to know the intrinsic value of things, and not rely on fancy statistics and models and myths.
The value of things is measured by the value of their output. The output of residential housing is what it would cost you to rent it. What it would cost you to rent it is tied to household income. Leverage * household income = price. Total housing expenses are market-constrained at 40x/28%. That gives an inexorable p/e ratio of 12x annual rent = home price.
All of these fancy CAPM people versus me, the lonely IT auditor and translator. But if I'm not mistaken, it was all of these fancy CAPM people who got us here in the first place, and 75% of actively managed mutual funds underperform their indices. I don't think they're so smart, and if you read evillager's most recent post, it pretty much proves it.
mbz, BRAVO! I have been making that argument for months. My rent is $4,500 per month, buying a nearly identical apartment across the street would be about $1.2 million, giving the same ratio.
You see, these CAPM people have made their models so incredible complex by including things like the potential tax effects and risk premiums and enterprise value and all sorts of very complicated things, when what is required is simplicity.
It seems amazing to me that so many obviously very intelligent people could be making such a complex argument about something that is so easy to understand. All you need to do is be able to add, subtract, multiple and divide. You need to be able to determine the value of something, and in the case of residential property, the value of it is what it costs you to rent it. Period, case closed. "Imputed rent." Imputed rent = market rent, so how in God's holy name can someone say that there is 100% inherent added value to owning?
The only way they can do it by coming up with complex valuations that give them the number they want, by correlating uncorrelated things, and by counting things, like the supposed "tax benefits" to having a mortgage that are already factored into the price of market rentals.
It's true that in the past property has been expensive in Manhattan. That's because the people who live here make a lot of money. Property prices have risen in line with their incomes, and in line with rents.
Until recently.
evillager, you are cracking me up. You met Warren Buffett? Did you ever ride in an elevator with Bernie Ebbers?
Oh - when you sat down and pow-wowed with Warren, did you ask him about his thoughts - or Charlie Munger's - on real estate?
On the real estate bubble:
Buffett: "What we see in our residential brokerage business [HomeServices of America, the nation's second-largest realtor] is a slowdown everyplace, most dramatically in the formerly hottest markets. [Buffett singled out Dade and Broward counties in Florida as an area that has experienced a rise in unsold inventory and a stagnation in price.] The day traders of the Internet moved into trading condos, and that kind a speculation can produce a market that can move in a big way. You can get real discontinuities. We've had a real bubble to some degree. I would be surprised if there aren't some significant downward adjustments, especially in the higher end of the housing market."
On mortgage financing:
Munger: "There is a lot of ridiculous credit being extended in the U.S. housing sector."
Buffett: "Dumb lending always has its consequences. It's like a disease that doesn't manifest itself for a few weeks, like an epidemic that doesn't show up until it's too late to stop it Any developer will build anything he can borrow against. If you look at the 10Ks that are getting filed [by banks] and compare them just against last year's 10Ks, and look at their balances of 'interest accrued but not paid,' you'll see some very interesting statistics [implying that many homeowners are no longer able to service their current debt]."
http://money.cnn.com/2006/05/05/news/newsmakers/buffett_050606/index.htm
That's what I mean by cocky. You are really arrogant and full of yourself. You met Warren Buffett and you work for a billionaire. What does that make you?
Very different from Warren Buffett who is very humble. You are Wall Street cocky.
I took classes too, and alas, and I have an Ivy League degree, but I didn't make $1 million last year. A mere $750,000. So you beat me. But I've been making lots of money year after year without ever incurring a significant loss.
That's the trick. Ask Bear Stearns. Or Merrill Lynch. Or Citigroup.
Sometimes I work for Goldman Sachs. That doesn't make me a trader, let alone a good one. Sometimes I work for Proskauer Rose. That doesn't make me a lawyer, let along a good one.
If you can give me one good reason why real estate is valued at twice its historic price / income ratio, and why it will stay there, then you might continue to make a million dollars a year for a long time to come. But you can't because there isn't one, so you will likely be caught in every asset bubble that ever occurs in the future.
You don't even know what you don't know.
You should "pass on my words of wisdom," but not the way you mean it. Pass them on to others.
You are the one who likened home prices to the value of a company.
Sigh.
thanks for your concern malraux. you're often right. and the way you write you probably are a value investor of higher-end properties - as long as you see it in positive cash-flow terms, that's good enough for me.
but that's for investment properties, not residential real estate.
i also never claimed that the time i sat next to paul volcker for lunch - he was at the next table over - that any of his wisdom rubbed off on me, like the bernie ebbers (please don't rub me, bernie!) in the elevator story or the i met warren buffett so therefore i know story.
mbz, if you read all the things that evillager has said and how he tries to switch topics, you will see that if what he is saying as his job and income is true, he's highly overpaid. he talks like someone who just got a fancy degree and likes to spew out words yet says:
to enterhome: "your analogy of value of a corporation to the total price paid for a house is 100% correct."
and to me that corporate earnings are constrained by GDP growth when in fact corporate earnings form part of GDP, and so limit GDP, which is not a constraint in the economic sense.
so of course, mbz: value investors are all out there now looking to pay twice as much to own an apartment as to rent it. Yup, that's what they're doing.
Actually, leelin, you didn't "convince" me that I need to compare nominal rates rather than real rates, but that's a different matter. What I said was the what you said was true in one regard, but not on the whole. On the whole, mortgage rates are tied to long-term bond yields, which factor in expected future inflation. Therefore, where the "inflation money" comes from is the mortgage interest.
Except in cases of extremely high inflation, or where nominal inflation is above nominal interest rates, the effect is negligible, because inflation is necessary for the economy to grow.
In countries with high inflation they "correct" nominal values for year-on-year comparisons. We don't do that here.
Moreover, your leverage rate for a 20% down payment is 4, not 5: 20/80 = 1/4.
evillager:
1) value investors look at lots of things, but the the stock market bubble you referred to would have never bought a stock in a company with an infinite p/e because there was never any e.
If you have $30 million to spend, then this analysis does not apply to you. Already stated.
2) As usual, you count the tax benefit without calculating the opportunity cost. Your tax benefit amortizes; your opportunity cost accretes.
The "model" is not "mine": it is the definition of "imputed rent" extrapolated over time using real historic data. The 40x/28% constraints are widely accepted market constraints.
Nothing is "ridiculous" about the stock market returns: they're based on a 50 year rolling average of returns on the S&P. Documented.
I NEVER compared nominal and real interest rates.
I have repeatedly prove that the 24x ratio is constant across the city. I don't care if you "believe it": it's not to be believed or disbelieved. It simply is true.
Regarding your insults, first I'm not 50, second I live in a 2-bedroom apartment, 3rd I have a vacation home that I own, 4th I have a Lexus SC430, so I'm not hurting. And I've also made a ton of money in real estate over the years, both here and in South Beach.
None of my posts has been self-contradictory; I've always said I've invested in the same thing: Brazil.
But those aren't reasons to listen to what I say. Do the math and the research yourself. Calling somebody a blowhard when you make all the amazing statements that you do seems rather odd.
Then of course....
johnknyc, Hope Springs Eternal!
evillager can buy if he wants and can afford it - just know the downside risk if he's forced to sell in the short- to medium-term. Eventually, the market will recover, but right now for the most part owners want twice as much to sell an apartment as to rent the same one, so how long can that last?
mbz, here's to Columbia, my alma mater!
leelin, please. If you have $20 and I lend you $80, I am lending you 4x your money. That is $4 for every $1 of yours, not $5. Your argument is wrong because you're attributing your gain entirely to the $80 you borrowed, not the $20 you put down yourself.
If you have $20 and I lend you $80, and you make 10%, you will wind up with $110. But only $8 of those dollars are attributed to leverage, the other $2 are attributable to your own money. Therefore, you argument is fatally flawed.
As is your inflation argument, not only because inflation is factored into mortgage rates, but because a low level of inflation is a necessary part of economic growth. If inflation falls too low - as if it rises too high - the economy is in trouble. To follow your silly argument to its silly conclusion, every bank would wind up losing money on every mortgage it ever made if there were even moderate inflation. As I repeated, the only time inflation matters is when nominal inflation rates exceed nominal interest rates, because it then eats into the real interest rate, which has factored long-term inflation in.
Argument over.
MMafia is correct, we're discussing the economics of residential real estate. Evillager, read what I wrote: the economics of this argument do not work for investment real estate. My point is that you should not look at residential real estate as if it were an investment, because it's not a good one over time.
Investment real estate - what malraux is talking about - is entirely different. It may seem the same to some but it's not, because there is value-added in what the landlord does, and he gets paid to do it, which you don't if you rent to live in. You don't get paid, there is no cash flow. And as malraux stated, he breaks even on a cash-flow basis from the get go. If you can find a property like that - one that costs you on a cash-flow basis the same to buy as to rent - then it is properly priced, because, AS I HAVE REPEATED SO OFTEN to you financial types, it is decided economic theory that in a free market, goods and services are valued at their OUTPUT VALUE, not their input value. The OUTPUT VALUE of owning a property is what it would cost you to rent it, because that's the sole benefit you get from it: the right not to pay rent.
With malraux's investment properties, he does in fact take advantage of someone else paying his mortgage and taxes and expenses. Therefore, that's a profit for him. For the owner-occupier, that is an expense, not income, and the only thing that renting does is give him the right not to pay that expense.
If I grow an orange and eat it, the value of that orange is exactly what it would cost me to buy it in a store. If I grow an orange and sell it to someone, I profit the difference between the marginal cost of growing the orange and the price I get for it. If I grow an orange and sell it to a wholesaler, who sells it to a retailer, and I go to the store and buy that orange back...
I'm a fool.
Yet that is essentially the argument you are making. Malraux is in the retail orange business - he buys the orange and sells it at a profit. He makes money. If I take that same orange that I sold to malraux and eat it, I don't make any money. The only thing I've done is save the cost between what I sold the orange to malraux for, and what it will cost me to buy it back from malraux.
That is why a) there is a fundamental difference between investment and owner-occupier real estate; and b) the benefit of owning as an owner-occupier is precisely the right not to have to pay rent. The only benefit I get from growing oranges to eat them myself is the right not to buy them in a store. No profit. The benefit I get from growing oranges to sell them to someone else is the difference between the marginal cost of production and what I get when I sell them. Profit.
That is also why you can't include the tax effects alone, because they are factored into market prices. I pay tax on my profit from selling the orange. Malraux pays tax on selling my orange retail at a profit. We count those deductions when we set our prices.
Malraux sets his retail orange price. That's what oranges are worth, taxes included. If I buy it, the tax is factored in. It's already in the retail price.
Just as it's already in the retail price of market rents. If you buy a place to live in and it costs more than it would cost you to rent it, it's like me selling malraux an orange, malraux putting the orange for sale, and me going back and buying the very orange that I had sold to malraux. Not only do I pay the tax on growing the orange, but I reimburse malraux for his taxes, and even pay him a profit for the honor of doing so.
Guys, this is first-year microeconomic theory. I don't see what's so difficult for all you modern portfolio theory types to understand. Imputed rent = market rent. Not only is that how the CPI is calculated, it's how property taxes are calculated for apartments in NYC.
evillager: "I do, however, think he would roll over in his grave if he hard value investors say they can expect a 12% nominal return from the market going forward, and using that as their hurdle rate vs. other investments."
That is the historic return on the S&P 500 on a rolling basis over 50 years. It is not useful to forecast future behavior. It is, however - since it behaves that way over long periods of time and always has - useful to compare long-term gains. In fact, it's all we have.

Who is discussing "hurdle rates"? You really, really need to drop your text books now. First, we're not discussing investment real estate and what return you would need to choose to allocate your money there versus elsewhere. What I am saying is precisely that that analysis does not apply - owner-occupied real estate is NOT an investment. It merely substitutes one expense for another. In essence, it's a capitalized expense, and that's how it should be treated.
If I'm a bank and buy an ATM, I capitalize the cost of the ATM and depreciate it over its useful life. That is what I do with owner-occupied real real estate. If I'm Diebold, I make money selling them.
mschlee, I think you owe me some 14 apologies for the stupid things you said on one of my prior threads.
Nonetheless, "if you assume a 5% appreciation on real estate, and 10% on the market, you’ll break even in about 5 years (assuming 30% tax bracket and married) and be way better off when you stop paying your mortgage after you retire."
First, residential real estate can only increase as fast as incomes. Incomes went up considerably on Wall Street over the years, and you will see that median Manhattan sale prices correlate almost 100% to Wall Street bonuses. Your assumption is that they will continue; mine is that they will not.
"Dont forget that if you assume you pay rent of 3K/mo now, in 30 years at 4% inflation that will be about $9K/mo which means you need about $1.5 MM when you retire, earning 6%, to pay your rent until you die 15yrs later. Owners do not have to worry about that."
First of all, increases in rent cannot long exceed increases in incomes. If incomes continue to rise, landlords can raise rents. But second of all, if you take the numbers that I started this thread with and extrapolate them beyond 30 years, you will see that at 30 years an owner-occupier will have lower tenancy costs but no income-generating assets. The investor will have to pay slightly more per month out-of-pocket but that will soon be erased with the compounding of the investment assets. Plus the investor will have a lot more assets.
5% appreciation on real estate
10% on the market
4% rents.
Those are all historically flawed assumptions. Real estate and rents increase at the same rate over time, with leverage the "fudge factor." 12% is the historic nominal rate of return on the S&P 500. Unless you can come up with documentation to prove your numbers, as I did mine.
So, finance people, I hope you go back and retake Econ 101. Because you don't know what you're talking about.
Erratum: It is not useful to forecast future behavior
should be
It is useful to forecast future behavior, just not in the short-term
petrfitz, read the orange example. It's all factored in.
1 - what?
2 - true for the last 10 years, but not the 10 years prior to that, and not compared to the S&P500
3 - not remotely true: Dallas, Houston, Denver, New Haven, etc.
4 - it's factored into rents: read the orange example
5 - stocks have historically always been a better "investment" than owner-occupied real estate.
To buy owner-occupied real estate is to capitalize an expense. You are extrapolating from a short-term past without looking at current market conditions.
petrfitz, no one said it's "always a good time to buy stock." It's a good time to buy when prices are relatively low, which is not the case with real estate right now on a historical basis.
1 - being a landlord is NOT always better than being a renter. Ergo the Bronx burned in the 1970's.
2 - for the last 10 years in NYC property prices rose. The ten years prior to that they fell. The S&P500 performs better than residential real estate over time. Pure fact.
3 - prices did not raise significantly Dallas, Houston, Denver, New Haven, etc. Where they did rise the most - Florida, San Diego, Las Vegas - they are now collapsing.
4 - tax benefits are factored into market rent. Fact. More than a fact: it's a definition. Imputed rent = market rent. Cannot be avoided: renting and purchasing are substitutes to obtain the same output: shelter.
5 - stocks have historically always been a better "investment" than owner-occupied residential real estate. Just a fact, look it up.
If you had invested in the dot.com boom in 2000 because prices had risen without correlation to the fundamentals, you would have been burned, and you still would not have recovered your money. You can't extrapolate short-term behavior into long-term trends. Just can't be done, because they aren't necessarily correlated.
The fact is that property prices are correlated to incomes and leverage. They compete directly with rental properties. It makes no sense to buy a property that will cost you twice as much to buy as to rent.
Or if it does, tell me why.
HMMMM?
petrfitz, I'll hold you to that.
I just got an email from a friend who had looked for a summer rental in Southampton last year, but couldn't get one because there was no availability. His REAL ESTATE AGENT just emeailed him saying that things are so bad that they can now offer him a full-year deal.
What do you think that that portends?
Stupid is as Stupid does.
eah, I can't tell you specifically where to invest. I am invested in profunds' and direxion's "bull" funds. They are highly volatile but are pegged to twice the performance - up or down - of the market indices. They are short-term instruments and the dividends are non-qualified, so they are not tax efficient. But last year's return was 80%.
Will this year's be? Don't know. I just happen to think that Brazil is a great place to be invested in. And I like China, too, which I think is oversold: everybody was thinking things would be great until the Olympics, so they sold beforehand.
Look at forward p/e ratios versus growth. Forward p/e of 16, China is growing at ll%. Seems cheap to me. Bovespa's aggregate is about 18, economy growing at 5%, with lots of advantages.
Manhattan residential housing has a p/e of 24x, and it doesn't even produce income!
I invest in what I know & I spent years traveling in emerging markets. I know how they work, what happens with all that pent-up demand. I remain very bullish, & am willing to take the risk.
thanks, leelin, but I don't bet. My margin calculation is correct. If you put your money but don't borrow any, there is ZERO leverage, b/c that's the definition of leverage.
I have understood your point. As indicated, I have worked extensively in Latin America and I am familiar with inflation accounting. I am still involved in it.
Here is the issue: lenders look for "real" returns, that is, returns after inflation. Mortgage rates are pegged to long-term bond rates. Long-term bond rates factor future expectations of inflation into them.
A simplified example. I lend you $100 at 10% interest for 1 year. I expect inflation to be 5%.
One year is over. You pay me $110 back. Inflation was 5%. That means your initial $100 is now worth $105 in TODAY'S money. I have $110 from you in TODAY'S money. I have made 10% on the initial investment at the purchasing power of the initial investment (($110-$100)/100). In TODAY's money I have made 4.75%(($110-$105)/$105).
This is somewhat simplified because markets calculate the discounted cash flow of the future stream of income based on a discount rate, which takes inflation into account, but it serves the purpose.
You make the same mistake as you make when you calculate "leverage": you calculate "leverage" to include your money, which it doesn't. You count inflation to include only the difference between today's money and yesterday's, but you also need to do it the other way around: count yesterday's money in terms of today's money. When you correct you must correct in both directions. It's basic high-school algebra: if you multiply one side of an equation by a factor, you need to multiply the other side of the equation by the same factor to keep them equal.
I don't know another way of saying it. Just as you can't count "leverage" using your own money (because there's no "leverage") when you pay a past debt back in current money, you also have to REVALUE the past debt into current money. If you don't, it will look like you're getting a great deal, but you're not: you're just adjusting one side of an equation without adjusting the other side.
Do the calculation with any figure you want, and revalue the initial principal by inflation. It is always true: if you lend money, as long as nominal interest rates are above nominal inflation, you will make money in real terms because the value of the thing you're being paid back for changes.
If this weren't so, no one would lend you money. Ever. Because inflation is built into economic growth.
Let me try to make the inflation problem clearer. If you're a lender, you're worried about the value of the collateral, not the value of the currency. If you have to execute (foreclose on) the mortgage, you get your collateral back in today's money.
That's why deflation is so dangerous.

So, if I've been clear: the net present value of the future flow of payments at a specific discount rate is how banks calculate the profitability of mortgages (grossly oversimplified). The discount rate for the NPV INCLUDES inflation. If the bank executes the mortgage, it gets its collateral back in today's currency. That is why leelin's example is fatally flawed.
ba294, you do get the tax benefit, in terms of lower rent.
Malraux buys an apartment and rents it to me. (Highly unlikely, but humorous in any case.) When making his decision to buy the apartment, malraux used the discounted cash-flow method. That method takes tax considerations into account: part of cash flow is how much is paid in taxes.
So malraux's discounted cash-flow analysis tells him that if he rents the apartment out at $10,000 a month, he will break even. Anything more than that is profit, less is loss. That $10,000 includes his taxes.
Let's say that market rents for that apartment are only $9,000. Malraux won't buy because he'll lose money. If market rents are $11,000, he'll not only buy one, he might buy two. Everybody doing this over time will cause market rents and carrying costs to be the same at the time of any particular purchase: equilibrium. Properties too pricey to make money, nobody buys until they come down. The reverse is also true.
So if I rent an apartment that malraux is breaking even on it (because it's a new purchase), then I am getting malraux's tax benefit. Where malraux makes a profit is that, over time, I am paying off his mortgage, so over time his expenses go down and his income goes up. The property also appreciates.
Malraux is constrained in what he can charge in rent - constrained to income levels - so he can't charge me more at any particular time than the market will bear at that time, which is a function of income. He still makes money, though, because I'm still reimbursing him all of his costs and paying down his principal, and the longer the time goes by, the more he makes.
But at any particular moment, he can charge only what the market is charging. If he charges more, I'll move. And if it costs less to buy an apartment than to pay his rent, I'll do that - as will everyone else - until the costs are the same, because the benefits are.
I don't know if that's clear. Malraux won't invest in a property he will lose money on on a cash-flow basis. That basis includes his tax. The best he - not him in particular but the market as a whole - can do is, when the transaction is first made, break even, because no one will willing lose money, and if there is an enormous profit to be made, as JuiceMan would say, it's a tremendous "buy" signal.
If I buy an apartment to live in myself, and it costs me more than it would cost me to rent on a cash-flow basis, then I'm dumb, because malraux is willing - in the first year - to give me his tax benefit calculated as part of the rent, so I will rent his apartment from him and he breaks even. He will make money over time as I pay his expenses and principal, but I won't lose money because at any particular time I am paying the market rent - which at any particular time reflects the tax benefit of a property if I were to buy a property at current market prices, and not the historic price of the property that malraux might have paid - and will have invested my own principal in a different asset.
It's impossible to avoid. Except in a bubble mentality like today's, market rents = owners' carrying costs AT THE TIME OF THE PURCHASE. Market rents include the tax benefits. Over time malraux as my landlord will make money. Over time, if market rents are half owners' carrying costs, it makes no sense to invest to get a tax benefit that I would otherwise get indirectly, through rents.
eah, I lived in Singapore and hated it. I was talking about the stock market, not property. The reason for the high ownership rate in Singapore is that almost all the housing stock for nationals is subsidized - the government builds them and allows people to use their Social Security payments to cover the cost.
leelin, I didn't read your last post because you wrote it at the same time as I was writing mine. But really, "Your refusal means you either don't have time, don't think highly enough of me, or simply want to keep all the discussion on this forum because you derive some pleasure out of it."
That's a bit over the top, no?
In your example, these figures are immaterial:
Inflation: 3.0%
10-year treasuries: 4.5%
Volatility index: normal
You forgot to include the interest you paid on the mortgage, the total cost of renting and the opportunity cost of not investing property tax, maintenance and repairs in the stock market.
ba294, if you rent it out the economics are entirely different.
I'm assuming rent = mortgage + other carrying costs.
Therefore, my assumption was that rent was the full cost of the mortgage but not other carrying costs for my 40x example, but the 28% example included the full cost of the mortgage plus other carrying costs.
That is, I made my 40x monthly rent = full mortgage payment, and reinvested taxes and maintenance elsewhere (I excluded repairs), making my full disbursement the same as owners' carrying cost, just allocated differently. If I had made the 40x rent = full owners' carrying cost, then the renter would not be able to reinvest maintenance and taxes in a different asset, so the comparison wouldn't be fair.
My point is that at any particular time - for owner-occupied residential real estate - the break even point is market rent. You are comparing an apartment you rented out that you bought years ago, which falls under the malraux scenario, which can in fact be very profitable because someone is paying you today's rents for an apartment you bought years ago. But someone who bought that $650k apartment could not make that same transaction today without losing his shirt.
You are correct that someone who bought recently would be paying much less than market rents right now, but the recent spike in the market is not normal under any historical circumstance. If you buy a $100,000 apartment and it increases at the historical rate of 0.7% real per year, after 30 years it will be worth only $123,277.58 in today's dollars. Which means that in 30 years' time, $1,000 rent will only be worth $1,237.79 in today's dollars, 30 years hence.
My point has never been to say that no one should ever buy real estate: I own some, I've owned some, and I'll own some more in the future. Rather, it's been to say that there is a price to pay if you buy at the wrong price, and there is a vast difference between the price to buy and the price to rent right now, and I believe it is unsustainable.
leelin, I actually am very funny.
After 30 years your $500,000 if it compounds at 3.7% will be worth $1,487,074.40. My $100,000 investment will be worth $2,995,992.21 if it compounds at 12%. You will have paid $463,325.76 in interest at 6%. Your profit would be $1,023,748.64 less your initial investment of $100,000, which is $923,748.64 (final value $1,487,074.40, less $463,325.76 interest, less $100,000 down payment).
My profit will be $2,895,992.21 ($2,995,992.21 less $100,000 initial investment).
You do not use a risk-free rate unless you're using a risk-free asset. Real estate is not risk free.
You said, "Instead let's buy some real estate with $100K, 20% down, gets us a $500K house. Hold it for one year.
$100K downpayment, $500K house
(3.7% gain)
Final nominal value of house: $518,500
Now you have: $518,500 house with a $400K mortgage, so $118,500K in equity.
Final real value in today's dollars: $118,500K / (1.03) = something close to $115K
I didn't use magic inflation, the mortgage company didn't get ripped off as they got a 3.0% spread on inflation and 1.5% spread on treasuries, and I used your numbers of 0.7% real appreciation of real estate vs 8.0% real appreciation in S&P 500."
No, you didn't do any of those things. You forgot to include the $23,328.88 you paid in mortgage interest. Subttract that from your $18,500 in appreciation, and you've lost $4,828.88, excluding taxes and maintenance, whereas I have gained $8,000.
Those are your numbers, I have to get back to work.
leelin, in my original post I included all rent paid, so I didn't "forget" it. It's not included in your example, so I didn't bother to reintroduce it.
It's not "my" terminology for leverage; it is how leverage is defined.
Real estate is not a short-term investment, but if you want to take a 1-3 year horizon then you must factor in transaction costs - real estate agent commission, closing costs, points, conveyance tax (charged on the value of the transaction, not the profit), mortgage recording tax (condos), flip taxes (co-ops), income tax (NYC, NYS) that would normally be amortized over the length of the mortgage.
If you do that, and add in maintenance and taxes, you will find that your loss is far higher than what I calculated. A 6% commission on $500,000 is $2,500 a month, which alone is 1 year's rent for a home of that price.
You keep on changing your way of viewing this, and it keeps on being wrong.
Glad you enjoyed the humor, I'm all over town maybe you'll see me one day. People seem to like my parrot joke, but being Catholic my favorite is INRI. I may curse from time to time, but I never do blue b/c it makes me uncomfortable, I don't like it, and it doesn't sound like I'm being sincere when I say it. Other than that, it's fine.
Actually, I don't agree with you that the 0.7% and 8.0% are the wrong numbers. If you're an economist as I am by training, it's always best to work with real numbers, and those are the real numbers. Inflation represents a change in the value of money, not in the value of things. But if you include inflation, it doesn't matter.
Do the full math and get back to me with the outcome.
petrfitz, in the short-term the market is not logical. In the long-term it always is. That's the basis of "value investing," and why it's far superior to modern portfolio theory (MPT).
In other words, as deucescracked will attest to, if I'm rolling dice the probability of rolling snake eyes the next time is always 1/36, or 2.7%. Yet the probability of rolling snake eyes twice in a row is 0.077%.
Why is the probability of rolling snake eyes always 2.7%, yet the probability of rolling snake eyes 2 times in a row is 0.077%? Because of I roll snake eyes once, the dice don't know that I did.
It's because short-term probability is unrelated to long-term probability. Entirely uncorrelated.
That's the basis of a bubble. Everything always returns to the mean. That's how value investors make money, and why they beat MPT investors every time. Because MPT investors extrapolate - if the market is doing this, then it will continue doing this. But value investors don't look at things that way.
We WILL return to the norm of 12x "p/e" ratio between home prices and market rentals, because that is the value that results from the 40x/28% income ratios for housing expenses. Now we're at 24x. If someone can explain to me how that is sustainable at the same time as 40x/28% is sustainable, as with mbz, I'll listen.
Dude, you're out of your mind:
S I = S I
5*(R I) = 5R 5I
Where the fuck did the R come from?
This is OVER. Show me raw numbers based on historical facts. Then we'll talk.
Dude, you need to have your lithium adjusted. b/c what you just wrote is psychedelic.
There is no relationship between S and I.
leelin, I suspected this, but you are truly out of your mind.
And it's 4x, not 5x.
That is the fucking weirdest "equation" I have ever seen.
"5R 5I > S I when 5R 4I > S"
WHAT?
Stay away. Begone. You went from inflation accounting to Salvador Dali in 1 day. Oh, dude....

oh.

my.

god.

steve you have surpassed any semblance of being a balanced individual and are obviously completely, morbidly obsessed

holy $hit.

I think morbidly refers to obese, not obsessed.

oh man .. someone has a lot of time in their hands :) Steve could write a book on this topic.

w o w

He is obseesed with a concept that is not correct. He is a tin foil hat kind of guy.

Guys, the reposts are a website error.

I looked at the thread this morning b/c it had been updated an hour ago, and I saw all those "posts" by me, but I didn't make them like that. Those posts are the aggregate of several posts I'd made over several days.

Lawl @ Steve.

But I will say, well played, my friend, well played.

wow--steve. get OFF the meth. or, if you stay on the meth, at least have compulsive (though safe) sex or something. just get of fthis topic for a few days. you can always come back later.

I guess if you repeat the same thing enough times, people will start believing it. I think they call it the Big Lie.

Steve, do you get laid? Also when is your next stand up show in NYC and where was that youtube link of you? I want to see your unintentional comedy on stage.

steve, I'm not sure I totally understand, can you repeat in Spanish?

I found an interesting long-term historical perspective. A few economists at MIT were able to piece together 100 years of commercial property transactions in Manhattan. Here is their conclusion:

This paper is able to put together a data base of 86 repeat sales transactions for office
properties in lower and mid town Manhattan spanning the years from 1899 through 1999.
Using this limited data base, decade-interval changes in real property prices are estimated
- with varying degrees of precision. Our conclusions are two. First, adjusting for
inflation, commercial office property values are 30% lower in 1999 than they were in
1899. Secondly, within any decade values often rise and fall by 20-50% in real terms.
With these results, the long term appreciation in commercial property is seen to be no
greater than inflation and to experience considerable decadal risk.

While commerical and residential diverge from time-to-time I think it is a safe assumption that they track each other over time as they have the basic fundamental drivers (other than recently, when the easy credit boom pushed residential prices up). The key takeaways are that Manhattan real estate has underperformed inflation over the long-term (i.e., you'd have been better off in bonds) and has experienced tremendous volatility.

Full paper is here:
web.mit.edu/cre/research/papers/WP90wheatonbaranski.pdf

Mbz, isn't one other conclusion, which many have reached, that Manhattan residential RE was actually severely undervalued in 1999, which is a key reason that it keeps appreciating and was not impacted by the housing bust.

I suppose that's theoretically possible; however, I find it hard to believe that an asset is "undervalued" for 100 years and then suddenly finds its true value and that just coincidentally hapens to coincide with a bubble in cheap, easy credit and inflated investment banking profits.

The conclusion I draw is that real estate has to be thought of as somewhere between a pure commodity and a productive asset. Corporations are productive assets and therefore have outpaced inflation over time. Pure commodities have way underperformed inflation over time. I personaly believe real estate lies somewhere in between and will generally keep pace with inflation.

With all due respect mbz, who cares? Real estate (as a place to live) only needs to be $1 better than renting over the loan term for it to be a worthwhile "investment". Anything more than a $1 is gravy and it isn't worth getting excited about. Investment properties, as malraux has pointed out many times, can be a hugely productive asset and will certainly outpace inflation when purchased intelligently.

Sorry, that's wrong. The benefit of renting is the ability to invest that capital in an asset with greater appreciation. I haven't done the math but if you'd rented over the past 100 years and invested your capital in stocks you'd be far, far ahead of those who bought a home 100 years ago - probably by a factor of 5.

maybe you should do the math mbz, we may not be talking about apples to apples here. You can't just compare stock returns with real estate returns, you have to figure leveraged apreciation in real estate vs. stock returns for money that would otherwise be equity. It is a simple rent vs. buy analysis with a very long time frame.

Leveraging your stock portfolio is cheap and easy if you dont mind the risk. The same risk exists in real estate but owners just pretend it's not there (until a recession comes along). If you want to compare leveraged with non-leveraged returns, then the best asset class over the past 100 year would probably be whichever one was the most leveraged (assuming you didn't go bust at some point). If that sort of math worked, Bear Stearns would still be in business as they were applying cheap borrowing to fairly safe assets with higher yields. First you find the mix of assets with the best risk/return profile then you make an independent decision on how much to leverage your portfolio.

Understand what you are saying mbz, but you need to live somewhere. The only return analysis that you should care about for a home you are going to live in is a rent vs. buy. I don't view the home I live in as a wealth builder, I view it as a home. It has upside (and potential downside) but I sleep at night knowing that at some point, it is a better fiscal decision to buy than to rent. $1 better is all you need to know you made the right "investment" decision. The rest is gravy.

Some have mentioned on this board that home ownership is a bad investment compared to other asset classes. That is probably true. However, unless you plan on living with your parents, home ownership only needs to be better "investment" than renting.

mbz says: "...I haven't done the math but if you'd rented over the past 100 years and invested your capital in stocks you'd be far, far ahead of those who bought a home 100 years ago - probably by a factor of 5..."

That may very well be correct - no dispute. On the other hand, for the past 20 years (+/-), as I've said before, my annual point-to-point ROR is about 20% in Manhattan residential real estate. And that does NOT count the properties I am currently holding, that I have mentioned above and whose return is significantly higher (yes, even if I were to fire sale them today). Looking at these things as broad based indexes over their past 100 year history really isn't all that terribly helpful in predicting anything meaningful in the current environment.

For me, however, a 20% ROR over the past 20 years is a useful enough benchmark by which to measure my success or failure.

mbz - the point isn't to leverage your stock portfolio, but to recognize that equities are inherently leveraged because they represent ownership interest in corporations - the asset - that have debt as a built-in part of their capital structure. Real estate appreciation, on the other hand, is just a view of the appreciation of the asset itself. Real estate _investment returns_ on the other hand, would be more comparable.

With respect to 1899 vs. 1999, among other factors just inherent to Manhattan real estate are the differences in technology then vs. today. Sometime in between 1899 and 1999, buildings went from 3,4,5,6[,whatever] stories in median height to heights multiples higher, which would change the entire nature of the usage of land. Technology also goes hand-in-hand with transportation which in the past 100 years increased the prime area of Manhattan, but also increased, by way of increase in access, the value of the areas outside of Manhattan. My point isn't to argue how one factor increases or decreases the value of Manhattan real estate in the past 109 years - and there are many more factors we could discuss than the short few I mention - but rather to reflect that there are a tremendous number of factors over such a long time horizon to be able to make a simple comparison between investments in Manhattan real estate and investments in U.S. equities.

There are few persons (in the broad definition of person) who have historical 100 year time horizons anyway, with notable exceptions being government, churches, institutions of higher education, and native charitable trusts.

Jugoso, si puedo en espanol, pero tu no puedes, asi que, ¿por que te tengo que hacer el efuerozo?

I can do that in Portuguese & Italian, as well.

verain again: "but to recognize that equities are inherently leveraged because they represent ownership interest in corporations...."

Didn't we prove that verain doesn't know what he's talking about? "Leverage" in a corporation - capital contributions - are unrelated to real estate. Duh! And a "contribution" is not the same as buying stock?

"among other factors just inherent to Manhattan real estate are the differences in technology then vs. today"

What? You are kidding, aren't you? Technology ALWAYS has the same MARGINAL effect.

"there are a tremendous number of factors over such a long time horizon to be able to make a simple comparison between investments in Manhattan real estate and investments in U.S. equities."

NO! EQUITIES ARE A FUNCTION OF EXPECTED FUTURE CORPORATE EARNINGS. PROPERTY PRICES ARE DIRECTLY CORRELATED TO PRESENT HOUSEHOLD INCOME * LEVERAGE.

Your moronickness is more readily apparent each time you post.

what the fuck is a "native charitable trust"?

Charlatan.

Guys, looks like it was the stevejhx impostor who made those insanely lengthy posts above. Very tricky.

Really weird.

Fine detective work, bjw2103. The real steve caught quite a few insults from the imposter's post.

I think I know who the impostor is - a true stalker - but I shall leave that up to streeteasy.

Steve, my post above did not address you and I stopped engaging you a number of days ago, so I don't know why you are addressing me with terms like charlatan or moron when I was engaging in conversation with mbz.

As far as I'm concerned, you've repeatedly exposed your severe lack of understanding of corporate finance and just exposed similar about the benefits of technology on the economy. Not to mention your antiquated views on marketing practice. Your capitalized absolute statements and personal attacks don't add to overall cred or make you look like a very rational person.

I agree that corporations have some inherent leverage but it is nowhere near the amount of leverage people put on their homes. Actually, I could argue that since everyone buys a home using massive leverage the asset is, in effect, leveraged. Consider a stock that is entirely owned by investors on 5x margin - that stock would be considerably more volatile than if it were owned by non-leveraged investors. My belief is that real estate is considerably more volatile than people understand b/c it is not marked-to-market and because we are coming out of a long up-cycle. People are learning this the hard way in many parts of the US.

malraux, as for your 20% return I think that's great. However, it means nothing to me going forward. In retrospect, these last 20 years were an absolutely perfect time to own real estate - low rates, good economic growth, and a big shift away from renting towards owning. I'm worried that this is all priced in (and then some) as evidenced by all-time high price/rent ratios. I try hard to stick to asset classes with reasonable valuations and improving prospects that are not yet fully understood and priced in.

I also agree that a home is a place to live and it is more than a financial equation. However, NYC is one of the rare places where you have the luxury of a vibrant rental market. Certainly if someone sleeps easier knowing they "own" (the bank truly owns) their house they should go ahead and buy. However, they should also be well aware of the fact that this is a very pricey preference in this market as renting is half the price. I don't think many people do this math; rather I think it becomes a simple game of "I can borrow at 6% and homes always go up at 8% so the spreadsheet says I'll be rich in 20 years." That's called a carry trade and they typically end in disater when applied to overvalued assets with poor cash-flow generation.

"As far as I'm concerned, you've repeatedly exposed your severe lack of understanding of corporate finance and just exposed similar about the benefits of technology on the economy. Not to mention your antiquated views on marketing practice."

Fortunately, it's only as far as you're concerned.

Re "leverage," you're confusing 2 different definitions of "leverage." One - that most people refer to - is buying an asset with borrowed funds in excess of the principal contributed. Two - what you're referring to - is the borrowed capital of a company as opposed to its contributed capital. What you might call "gearing."

That is why no one is understanding what you mean - you're taking 2 different definitions of "leverage" and using them to mean the same thing.

When I said that technology had a "marginal" effect, I meant it in the economic sense of "marginal," not in the sense of "negligible." Each unit of technology adds marginally to productivity.

Technology does not cause Manhattan real estate to increase in value.

malraux, you seem to have done extraordinarily well. The apartment I used to live in in the WV was converted in 1988 for $250,000. I bought it in 1998 for $218,000. It currently would sell for approximately $1.4 million.

That is a 9% compounded annual return since 1988. Adjusting the original purchase price by inflation it's $450,000. That gives you an approximate compounded real yield of 6%.

From January 1970 to December 2007, the average compounded rate of return for the S&P 500, including reinvestment of dividends, was approximately 11.4% per year (source: www.standardandpoors.com)

You're still better off with 11.4%.

"Real estate appreciation, on the other hand, is just a view of the appreciation of the asset itself. Real estate _investment returns_ on the other hand, would be more comparable."

Again, verain, no. First, as stated, you can't compare a corporation's financial leverage to the leverage used to buy stocks (margin) or property (mortgage loans). Same word, different meaning.

Then, the "real estate appreciation" includes appreciation on the leveraged portion of the property: say 80% of its value.

Malraux, try your returns assuming you put down 20% back in 1988 and borrowed the remainder. At 6% rate on a 30 year mortgage, in 2009 (21 years) your principal would be 50% amortized on the original loan. Or you could also assume that every 5 years you refinanced to 80% of the fair market value.

Heaven help us all.

hi verain:

Again, please remember - once I put down my initial 20%, my renters pay all mortgage and associated maintenance costs for me until the mortgage is paid off, and then I own the place free and clear (plus the associated increase in value). My renters also put positive cash flow in my pocket every month, which more than pays off the mortgage and associated maintenance costs for the home I actually choose to live in.

So, in the end, IN ADDITION to buying my investment properties for me, my renters ALSO buy MY home for me, AND put positive cash flow in my pocket each and every month!

There's just no getting around the fact that done knowledgably in Manhattan, this type of investment(s) kills stock market returns and in my estimation is a far better investment.

Dividends could easily cover your financing costs on a leveraged stock-market bet. I don't think the existence of rent changes the analysis.

hey what happen to my posts they were erased--Wah wah wah

I would posit, spunky, that the webmaster is aware of who my impostor is, and has taken some preliminary steps to shut him down, or up, or both.

What a gem this discussion turned out to be.

Buying an holding real estate is ALWAYS better than renting (and making the landlord rich). Real estate on average has doubled in value every ten years, period. Stocks do well and you need to be in both but buy real estate first for your long term investment. If NYC propety is out of your budget look south. The demographics show the population shifts heading south so get on board. A $100k property will be worth $1MM for your retirement.

Today Steve said that there are circumstances in which it is better to buy.

He is also a property owner on Fire Island.

Just wanted to point that out to all those who listen to Steve.

I am a B E A R these days
but it has been great to own since the late 90s and will become great to own again in a year or so after this market corrects 10% or so.
Clearly it can't be always a bad idea to own an apartment.

Wow, here's another gem of a discussion. What is with everyone here?
298 posts telling you that real estate is a bad investment, which is just an absurd statement given how many American fortunes were made in real estate.

Here's the list from the Forbes 400 of people who have made their fortune in real estate ... 33 names, all more than $1bn

Rank Name Net Worth ($bil) Age Residence Source
23 Donald Bren 13.0 75 Newport Beach, CA real estate
46 Eli Broad 7.0 74 Los Angeles, CA investments
52 Samuel Zell 6.0 66 Chicago, IL real estate, private equity
68 Paul Milstein & family 4.5 85 New York, NY Emigrant, real estate
68 Stephen Ross 4.5 67 New York, NY real estate
79 Leonard Stern 4.1 69 New York, NY real estate
105 Matthew Bucksbaum & family 3.3 81 Chicago, IL real estate
117 Richard LeFrak & family 3.0 62 New York, NY real estate
117 John Sobrato & family 3.0 68 Atherton, CA real estate
117 Donald Trump 3.0 61 New York, NY real estate
130 Melvin Simon 2.9 80 Indianapolis, IN real estate
165 Theodore Lerner 2.5 81 Chevy Chase, MD real estate
188 Mortimer Zuckerman 2.4 70 New York, NY real estate, media
195 Edward Roski Jr 2.3 68 Los Angeles, CA real estate
220 Neil Bluhm 2.1 69 Chicago, IL real estate
220 Archie Aldis "Red" Emmerson 2.1 78 Anderson, CA timberland, lumber ls
239 Alan Casden 2.0 61 Beverly Hills, CA real estate
239 Harry Macklowe 2.0 70 New York, NY real estate
239 Sheldon Solow 2.0 79 New York, NY real estate
239 Jerry Speyer 2.0 67 New York, NY real estate
271 George Argyros 1.8 70 Newport Beach, CA real estate, investments
271 Edward Debartolo Jr 1.8 60 Tampa, FL shopping centers
271 Jorge Perez 1.8 57 Miami, FL condos
271 A Alfred Taubman 1.8 83 Bloomfield Hills, MI real estate
286 Igor Olenicoff 1.7 65 Newport Beach, CA real estate
297 Richard Peery 1.6 67 Palo Alto, CA real estate
317 John Arrillaga 1.5 70 Palo Alto, CA real estate
317 Carl Berg 1.5 70 Atherton, CA real estate
317 Steven Roth 1.5 65 New York, NY real estate
317 Tamir Sapir 1.5 60 New York, NY real estate
317 Herbert Simon 1.5 72 Indianapolis, IN real estate
380 Timothy Blixseth 1.3 57 Medina, WA timberland, real estate
380 Walter Shorenstein & family 1.3 92 San Francisco, CA real estate

Verain - "He is also a property owner on Fire Island.
Just wanted to point that out to all those who listen to Steve."

Duly noted.

Steve, why? FI seems to be a better place to rent than to own.
Chelsea seems to have proven a much better long-term investment.
Any thoughts on that? Planning to retire out there? I just
think of the skin show, replenished each year with a new crop
of boys, while the longer-term hangers-on get older, grayer,
fatter, but have nothing surrounding them but...... a skin show.
What's in it long term?

lowery
about 10 hours ago
ignore this person
report abuse Verain - "He is also a property owner on Fire Island.
Just wanted to point that out to all those who listen to Steve."

Duly noted.

Steve, why? FI seems to be a better place to rent than to own.
Chelsea seems to have proven a much better long-term investment.
Any thoughts on that? Planning to retire out there? I just
think of the skin show, replenished each year with a new crop
of boys, while the longer-term hangers-on get older, grayer,
fatter, but have nothing surrounding them but...... a skin show.
What's in it long term?

...
nasty