Market is HOT!!!!

Regrading annualized returns you may not define it as "hot". However if you are a buyer/seller "hot" can be defined as multiple bids on almost every home, prices going beyond 2008 highs and most apartments trading above asking prices. What I am finding so remarkable is the highs being set in some of the sub-markets of Brooklyn like Boerum Hill, Crown Heights etc.

Keith Burkhardt
TBG

inonada: I sent Sofia a note asking her to clarify whether the condo index is currently adjusted for inflation. I understand your point about the section of the methodology paper that discusses removing the inflation adjustment. To me, that evidence by itself would be inconclusive: the paper says they removed the adjustment only for comparison with Case-Schiller, not for publication.

I agree with your further - and more important - point that the chart in that section of the paper, which supposedly shows the SE index WITHOUT inflation, seems to match the published index values for the period 1995-1997. In short, you seem to be right. It's just weird that Sofia's team would make such a fundamental change to their methodology without updating the documentation.

One other point to consider is that a hot market in Q1 2013 (assuming there is one) wouldn't show up fully in the statistics until Q2, because of the lag in closings. So I think you have to give some weight to what buyers, sellers and brokers say about the current market. Although they are all flawed sources, they are relatively real-time.

Sorry, brain-lock in previous post: 1997 should be 2007.

The January NY Metro market was adversely affected by Hurricane Sandy. Someone got his mortgage commitment the Friday before Sandy arrived, but was unable to close until January 4, 2013. Go figure who were the people that closed in the rest of January.

I don't see how this discussion is helpful. Unless you are buying and selling frequently, what is the value of this market timing commentary?

Inonada:

1. I agree with the "selective timeframe" critique of your comparison of RE and stocks/bonds
2. I bought 4 outer borough apts in February 2001 for $120,000
3. today they are worth 7x purchase price and net over $50,000/yr. in rent
4. compare that to what my return would be if I had bought NASDAQ at 5,000 13 years ago

where's the rental figures?

Regarding inflation-adjustment, here's Matt Walker's reply on behalf of SE (also posted by Streeteasy on another thread):

"What is published is the nominal value so that users can compare to Case Shiller's number, which is also nominal. We wanted users to be able to compare like-to-like.

... Also, there is a lag in calculating the inflation rate and therefore the lag on our index would increase by another month."

In short, inonada is 100% correct, and the real returns on apartment purchases - even for those "happy" 2009 buyers - have been pretty tepid.

>In short, inonada is 100% correct, and the real returns on apartment purchases - even for those "happy" 2009 buyers - have been pretty tepid.

Are you factoring in the real or imputed cash flow elements?

1. it is statistically methodologically improper to compare NYC real estate
returns between 2007 and 2012 with those of the stock and bond markets
during that same period, and even more improper to use those returns to
argue that stock and bond investments are more profitable long term

2. first, the zero interest policies of Greenspan and Bernanke were deli-
berately designed and implemened to create buddles in stcok and bond
prices, which they clearly have: those buddles kicked in almost immedi-
ately, and sooner than the one now emerging in real estate, because
stocks and bonds weren't suffering from the legacy headwinds and non-
recurring problems that afflicted real estate from 2007-2012

3. second, real estate during the period 2007-2012 suffered from unique
non-recurring problems which suppressed prices and demand, specifically,
the collapse of the sub-prime market, the collapse of Lehman, which left
3400 developement projects nationwide without funding; the insolvencies
of FNMA and Freddie Mac, and collapse of the MBS markets, which TEMPOR-
ARILY - constricted financing for apt buyers, and the REO overhang

4. the real estate and stock and bond markets are now moving in different directions
5. real estate is now starting to re-bubble thanks to Uncle Ben's vice

6. by contract, both the stock and bond markets, in the aggregate, will incur large
sector-wide losses when interest rates rebound, as they inevitably will

7. the higher inflation we are virtually certain to experence, despite the deflation-
ary effects of fracking and shale oil/gas, will gut bonds as a class, and likely
damage many different publicly traded companies

8. by contrast its emergence, and the prospect and risk of continued or even higher
inflation, are likely to increase demand for real estate because it can be financed
with cheaper current dollars and paid off in future with diluted dollars

rb345: I don't see any comparisons to stock or bond returns on this thread.

West81st:

You are correct. But that comparison has been an issue in many
recent threats posted here at SE.

Threats? Biting sarcasm, maybe. Threats? Not from inonada.

Thanks for checking, w81st.

>> One other point to consider is that a hot market in Q1 2013 (assuming there is one) wouldn't show up fully in the statistics until Q2, because of the lag in closings.

Agreed. Perhaps we'll see something finally. Perhaps after witnessing 4 years of excitement & broken dreams since I've been here, maybe their number is finally due.

Arby: I can only speak for calls and predictions people have made here. I'd be the first one here to tell you how stupid buying NASDAQ (or S&P) would have been 13 years ago, and I would have told you that 13 years ago in real-time.

What I'm about to say is a good thing, so please don't take it the wrong way. I am guessing investing in RE will always make more sense in your mind because you conflate investment and labor. Say you have $5M cash to put in RE. Option #1 is to buy a fancy apt in Manhattan to net $80K a month from some wealthy, credit-worthy tenant while you sit on your ass. Option #2 is to scour the outer boroughs for 25 deals at $200K a pop, renovate them, deal with renting them out, repair them, deal with bad tenants, etc. so that you can net $12K a pop for $300K total. You don't have a better use for your time, and you'd rather collect $300K than $80K, so that's what you do.

God bless you for it, that's what an economy's all about. But you're conflating investment with labor. If you get paid while sitting on your ass for years on end, that's investment. If your capital depends on your labor and/or your labor depends on your capital, that's a high benchmark for investment to beat.

>> first, the zero interest policies of Greenspan and Bernanke were deliberately designed and implemened to create buddles in stcok and bond prices

You got it all backwards. Fed policy today is in direct response to the RE bubble. The govt is on the hook for most of all housing debt in the country, so they had to support it.

You'll note that the Fed has bought $1.1T of mortgages in recent years. That is about 15% of ALL outstanding US mortgage debt. Through Freddie/Fannie, govt guarantees 90% of all mortgages originated.

You'll note that the Fed has not been out there buying trillions in stocks, and the Federal govt does not go around guaranteeing stock investments.

anyone have any stats on whether making a condo building non-smoking improves or hurts property value?

He got
#4
#5
&
#6
Wrong
2.

#1: = "0" (zero)
anything after zero is sub-zero?
- 1 (minus one)?
#2 zero interest... blah, blah, blah...

Brooks, fuel up the jet.

West 81st:

1. threats was a mis-spelling
2. should have been "threads"
3. so now you know I faied Evelyn Woulds typing class

Inonada:

1. I am going to spend my life sitting on my ass regardless of whether tenants pay me to do so
2. do you think I write my postings here standing up?
3. but as a normative preference, I would rather be paid to sit on my ass
4. means I dont have to re-sole my sneakers as often
5. now, turning to the merits of my point about Fed bubble-blowing

6. while writing his doctoral theses at NYU in the late 1970's, Alan Greenspan
discovered the "wealth effect": that when stock or real estate prices are
rising their owners feel wealthier and spend about 3-5% of their increased
paper wealth as current consumotion, in the process stimulating the demand
for unrelated goods and services - with the possible except of Viagra

7. Greenspan put that knowledge to use to revive America's post 9/11 economy by
deliberately engineering stock market and real estate buddles for the purpose
of goosing GDP, with the hope that the real economy would become self-sustaining
as a result of that goosing before his bubbles burst

8. Bernanke is doing the same thing and following the same strategy

9. real estate was late to join the party because of its post-Lehman structure problems
10. it is now a fully participating member, but at the low end of its next bubble

11. stocks and bonds have been bubbling for years, in part because of Bernanke's zero
interest policy, in part because of all the extra liquidity he has created and forced
into the hands of America's investor class, which at one point last year was PAYING
THE TREASURY for the "privilege" of owning Federal debt

12. that is the buddle you keep citing in your postings
13. but that bubble is long in the tooth and will eventually if not very soon be reversing

Is there anything dumber than saying (over and over again) x outperformed y for the last four years, therefore y is a terrible investment. That's not analysis, it's a backward looking, cherry picked observation, and decidedly non- analytical .

Rb345 - what's the least bad investment strategy now?

Saying least bad because there is quite a bit of risk in every alternative.

reallynow:

1. I need to think about that
2. I have scoured the country and numerous websites in recent months and have found also nothing

>Is there anything dumber than saying (over and over again) x outperformed y for the last four years, therefore y is a terrible investment. That's not analysis, it's a backward looking, cherry picked observation, and decidedly non- analytical .

Make sure to adjust for inflation and deduct cost of labor.

Booya Nada!! 6 percent times 3 x leverage. No taxes to pay on the gains.

Let me know which of these facts you disagree with, if any:

1. SE index is up 5.4% since you proclaimed yourself a buyer and a bull in mid-2011.

2. That's true both Manhattan-wide and in the downtown sub-index.

3. Which amounts to inflation.

4. And ignores negative carry.

5. It is not even enough to cover transaction costs.

6. So there are no gains at this point.

7. Meanwhile, stocks are up 30% during the same period.

8. Bonds are up 30% too.

9. Which all well exceeds your expectations of 3% annualized on cost-of-capital.

10. Even after we consider the $7.99 commission.

Inonada: Your 10-point analysis looks right to me, but I think you are excluding the most realistic scenario. Taking the same mid-2011 decision point, suppose a buyer had $2MM in cash and three (admittedly over-simplified) options:

1) Pay cash for a $2MM apartment;
2) Invest the cash in stocks - or a sensible mix of liquid assets - and rent a comparable apartment;
3) Put 25% down, borrow the remainder of the purchase price and invest the remaining $1.5MM.

I understand that Option 3 involves greater risk, but isn't it the norm? And hasn't it worked at least as well - so far - as Option 2?

By the way, I agree that Option 1 has been a total dud, even if the stories of a 5-10% pop in Q1 2013 are true. Paying cash for Manhattan condos makes sense for foreign oligarchs who can afford to treat an apartment as a repository of wealth. Anyone who actually needed their money to work for them would have been far better off in stocks.

Another factor to consider - though it's hard to quantify - is that most ordinary people who buy actually want to own, for whatever crazy reason. So, suppose an aspiring owner went with option 2 in 2011, and wanted to buy today with her 30%-appreciated stock portfolio. She might not be in a significantly stronger buying position now than two years ago, especially after setting aside money to pay capital gains taxes.

Just want to point out that real estate investing in small scale multi-families or even single family homes isn't a lot of labor if you hire property managers. You still have to manage the managers, it's true, but it's not that much to do and it can be really fun. I would suggest it's comparable to managing your money in stocks or bonds or commodities, you do have to make decisions on any investment as you go along.

What to do with your money is a nice problem to have. No one's asking for any sympathy here, but it is nonetheless a problem to be reckoned with.

I like reallynow asking about the least bad investment, that's my perspective as well. I personally don't know of any great investments.

The stock markets are high which sounds like a selling opportunity to me, not a buying one. Bonds are high, pay poor and who believes interest rates are never moving up?

We're mostly doing tax free munis and growth and income mutual funds, and REITs. But I dunno. The old formulas don't seem to apply.

> Running at or below CPI is the new killing it!!!

Right on the nose...

> I would suggest it's comparable to managing your money in stocks
> or bonds or commodities, you do have to make decisions on any investment as you go along.

No, not even close.

An S&P index fund, which is how most of the true pros recommend most folks invest, take no such effort.

"Is there anything dumber than saying (over and over again) x outperformed y for the last four years, therefore y is a terrible investment. That's not analysis, it's a backward looking, cherry picked observation, and decidedly non- analytical ."

Not when the actual point is that stocks have vastly outperformed RE over time, in that the long term real return on real estate is... ZERO.

The past 4 years is just to contradict specific nutjobs who didn't know that AND missed the fact that we were in a bubble.

West81st, obviously option 3 would have worked 75% as well. Is that the norm? No clue, doubt there is any single "norm". But somehow I don't think the bulls here who have been cheerleading meager Manhattan RE positions and results over the past 4.5 years I've been here are 75% in stocks.

Not saying no owners are there, just not the ones who have been drooling over nothing. My guess is that crowd plopped the majority of their liquid net worth into a downpayment at time of purchase. Why would someone with 75% in stocks act so deluded about the relative performance of their assets? So the reality may be more like options 4 & 5:

4) Put $1.5M down on a $5M apt and keep the other $0.5M liquid & safe to deal with mortgage & illiquid apt.
5) Invest $2M, rent $5M apt.

Interesting. Option 4 is a high-wire act I couldn't even imagine. I guess with sufficient income, it would be possible to get that $3.5MM loan. Still, I don't see a lot of people (post-2008) with $2MM liquid buying $5MM homes. Certainly not coops. Hard to know what goes on with condos.

Option 5 assumes you can rent a $5MM apartment for the same cost as buying a $2MM apartment. We could argue that one forever, but I think you might be exaggerating slightly. Your point is well taken. I just think the number is inflated.

Nada's numbers are inflated? But nyc re mini burp up is not? Give me a break.

Apple from $390 to $435 in a week, plus 3% div all year every year till even when mortgages hit 7%.

And my favorite, Sprint from $2.4 to 7.10 in a year.

W67 been around long enuf to know 7% is not that CRAZY. What is crazy is holding onto an asset which can only be sold to a newer I banker making $500k to cover a $10k/month carry when mortgages hit 7%. On 2mm going from 4% to 7% is a $4k/month swing. Good luckzzzz.

why do have have a feeling that 2013 will show at least a 10-15% increase in prices yoy for Condo's.

I ma referring to condo's closing from March 2013 to March 2014.

I bought in early 2011 for $2 million, including the cost of a fairly extensive renovation. I originally financed $1.3 million. I just re-financed the whole thing with a $2 million mortgage (appraisal at $2.7 million) and thus have pulled all original equity out after 2 years and I am generating pretty significant positive carry at this point based on a fairly conservative estimate of equivalent rent. My cash cost is $7,200/mo. excl. any tax benefits.

(I've normalized these figures a bit to protect identity)

My equity portfolio was up around 26% over the same time period. The current market looks a bit frothy to me (I am heavily hedged on at this point on my equity portfolio) so I'm happy with my positive carry and effetively a zero basis long dated call option on Low manhattan real estate as of now.

"Why would someone with 75% in stocks act so deluded about the relative performance of their assets?"

'nada, not that it's rational, but an RE purchase can feel like a very unique, individual thing, at least vs being one of many buying equities. Hence, some get a bit more emotionally involved in the former.

Absolutely. The same "involvement" that leads many to overpay...

West81st,

I was more referring to option 5 (rent $5M place) as an alternative to option 4 (buy $5M place), not as an alternative to options 1/3 (buy $2M place). My point was mainly on the fraction of net worth used in downpayment, was using your $2M net worth as a baseline. Could have just as easily been about a $500K net worth with rent / buy-cash / buy-levered on choices ranging from a $500K place to a $2M place.

Your views on the hypothetical $2M net worth folks seems to come from a very specific place. Had it been a $500K net worth person and a $1.25M apt, would putting $375K down been all that strange a proposition? I am guessing the $2M folks in your mind got to that $2M by "getting lucky" in some form rather than earning it. An income of $350K would be qualified for a $1.5M mortgage (though not more), but I'm not sure how one gets to a $2M net worth in reasonable time from there without some form of non-recurring "getting lucky".

'nada: OK, got it. I misunderstood the comparison.

WRT your last comment: one thing I've learned from looking at a lot of people's income/asset statements is that the paths to a particular level of wealth are as varied as sands on the shore. (Apologies to Confucius for mangling his metaphor.)

Nada,
1. Add 3 to 3.5x leverage to 5.5% and reread your point 3. Greenwich Village up much more but there is not index I can point you to.
4. Carry is greatly positive for me as a coop owner. What we own could not be rented for under $4.5 per sq ft average over the last 2 years (currently at $5 per sq ft). At ~$1000 per sq ft cost. 65% financing at 2.75% average (take off ~20% taxes), 2.2%. $1.20 per sq ft per month
$1.15 maintenance.
Upkeep spent 0.10 per sq ft month actual much less.
$200 per sq ft spent every 30 years on high-end updates (not a gut which would be an upgrade to the apartment) $0.55 per sq ft per month. Realistic estimates lower.

$3 per sq ft per month

2% back from Keith at closing. 7% cost to sell. 10Y cost 5%, $0.40 per sq ft per month

$3.40 vs >$4 moving cost broker fee . There goes the negative carry myth out of the window.

7. SPX at $1300 level first half of 2011, Up 20% 4% (less 25% for taxes) percent dividend = 23%. If sold, more taxes due.

Plenty of money still in the stock market but reducing the exposure to get back in 3-5 percent lower.

1. Owners all claim $5 ppsf rent for $1000 ppsf buys on their very-special apts.

2. Yet I've only paid $2.8-3.5 ppsf myself for $1000 ppsf.

3. But why pay $5 ppsf for a very-special $1000 ppsf apt

4. When $6 ppsf gets you an unspecial $2500 ppsf apt like http://streeteasy.com/nyc/rental/961239-condop-230-central-park-south-central-park-south-new-york?

>2. Yet I've only paid $2.8-3.5 ppsf myself for $1000 ppsf.

Not to mention you got your friend a very similar deal just last week.

Market is simmering , but it's not HOT .
Parts of the city are still 30-40% below 2007 prices

This sand on the shore made its $2mm by shorting what you are selling and buying a special piece of paper called a stock with $7.99 in transaction cost. Forgot I gotta get a closing date, get a mortgage and pay 6% and pray mortgage rates gotta go down...... Flmoazzz.

Watch me do it again with apple. Not a doubler but a pretty good shot at $500 to $600 in the next year w/ almost zip downside and w67 gets a $7.6k div chk quarterly. This is toooooooo easy. W67 unloaded all his ford shares and doubled down on apple. Both pay 3% one's got tons of debt and 10% margin another can borrow at us gov't rates and arbitrage it's own capital structure..... It's a mini LBO. Flmaozzz. If you don't know what w67 is sexting about..... Buy more nyc re. Ha.

Still 20% down. That is delusion, alright.