Market firming up

300,
They asked what the argument was. That's the argument.

Or even if prices simply remain flat and for some reason you need to sell in 4 years. Transaction costs would add North of $4k/month to your costs.

That is correct. No monthly saving in NYC will save you from more than 5- 10 percent decline. I will leave the rich like to own and pay some monthly premium for freedom of not having to move and customization for another thread - assuming they are going to live in it.

Absolutely agreed - but they aren't buying on "rent vs buy" economic decisions. They will always own no matter what the market is doing. The concept of being a tenant is off the table entirely.

Also as far as "for freedom of not having to move" the rollback of RS guidelines to pre-1993 today is going to put thousands of units (10's of thousands?) back into that status with the removal of "preferential rent."

If you assume that a big percentage say 75 percent of RS tenants could not afford to live in the city if it were not for Rent Stabilization (they would have moved to burbs or Florida), it will limit the supply of basic resale units which would have been decontrolled under previous rules.

Are there any actual examples of listings on SE that people have seen where buying is cheaper than renting? I don't think I've seen a single example yet. In most cases, it still seems like renting the same or similar unit is cheaper than buying.

Some good points here. 30, I believe a bit high re the sales price range to find a place that would be in a comparable building/apartment/location/quality as 10k/rental in UWS. Having seen about every 3BR on the market in the area, I can tell you prime UWS apts currently listed for 2.5-3M likely would fetch significantly more than 10k in the rental market.

Let me give you my real life scenario so we're not working in the hypothetical. Let's say I have ~50% to put down on a $2.3M apartment. We'll call it $1.2M deposit. Assume I have a 10/1 ARM @ 3.2% (I have no idea where some of you are getting 2.7% quotes but more power to you).
That's $4750 mortgage (~3k int/1750 principal) plus let's say $2500 maintenance = $7250/mo. Checking the amortization schedule, in 4 years that's $121K interest paid plus $120K maintenance paid = $241K. With the 750k mortgage cap for interest deductions, that's about $2k/month in interest deductions for the first year, saving about 34K in 4 years (using 35% tax rate). All this making your effective "rent" for lack of better word $241K minus $34K = $207K total for 4 years. Assuming 10% transaction costs, that's 207+220 = $427K down the drain. I know this is a totally inelegant calculation but I don't think it is far off.

Renting - for a fair comparison we have to also factor transaction costs. $10k/month at 12% broker fee to get in and out (i.e. rent elsewhere) - that's 29K in brokers fees. 4 years rent = 480K plus 29K = $509K. This is being very forgiving since In 4 years time your rent will be $11K+. Maintenance on an owned prop will experience similar % increase but on a much smaller amount here.

A few things to consider - if I have a large positive cash flow I can pay down the mortgage to lower both my effective "rent" (less interest by jumping ahead in the amortization schedule) and my actual monthly payments (with mortgage recasting). In that sense, the longer I own the more the monthly delta between owning and renting. And if I *dont* have to move (or am able to sell higher) my transaction costs are decreased (or offset) significantly.

30 asked the question what if I need to sell in 4 years and it sells 10% lower. A fair question but it seems this is the calculated bet I'm making by buying right now - that 1) I won't need to sell in the next 5-7 years, 2) that the apartment I'm buying has "priced in" current and near-term market conditions and 3) the location and quality of the apartment will provide *some* protections.

One factor when you're looking at rentals in this price range. As rent is ever increasing, where is my break limit if I plan to be here for the next 20 years? Do I want to pay 10K a month? 12K? 15K? Where does it stop? If it comes to the point that I've decided enough is enough, I'm back to the same dilemma of own vs buy and at that point possibly at much higher prices.

As I posted in another thread earlier:
At this point in time I think you have to do rent vs buy comparisons based on the full purchase price since a) you can get the same rate on CDs and other safe instruments as you pay on your mortgage, and b) you can't assume any return on your down payment due to appreciation. So you would have to include the opportunity cost of the return on investing your down payment at an equal rate, so it's a wash.

If you do that, your monthly effective interest is $6,133. That flips the calculation. But my real point is that you can't use a rent vs buy calculation to definitively give the answer right now: you really need to call the sales market. If you think it's going up then you should buy. But if you think it's flat or going down, probably not.

As far as examples of what's available to choose from, this is available for $11,700:
https://streeteasy.com/building/one-riverside-park/14a
If it sells for less than $3 million the market is absolutely in as bad shape as I claim it is.

I am guessing you are looking at coops. A few points
1. Transaction costs amortized over 4 years will make any buy vs rent not work. Usually people have a horizon of 7-10 years. They can be reduced.
2. Principal payments should be excluded as you are building equity or you can just get interest only.
3. Marginal tax rate may be a bit lower but you know you taxes better.
4. I will post my Streeteasy email for mortgage info at Wells.
5. You monthly maintenance is likely to higher at $3500-4000 for a three bedroom around 1800 sq ft.

300streeteasy@gmail.com

+1 on 30yrs’ point about using full purchase price such that opportunity cost on downpayment (as well as any principal repayment) is part of the equation. With that said, if you have a family and want some stability in residence, there is some number that you should also assign as the “cost” of the instability inherent in renting. I suspect annual rent increases are higher than actual tax and maintenance increases for any given apartment that has a corporate landlord.

Also +1 on the point about where it all comes down to whether one thinks the particular apartment will appreciate at a rate greater than the risk-free rate. I like it that we have 300 providing the bullish analysis with 30yrs providing the bearish analysis. I am in 30yrs camp, but that does not mean I am not rooting for 300’s outlook to prevail. We own our NY apartment as a consumption decision with some savings component, but do not anticipate that it will appreciate at a rate that would make owning less expensive than renting. Time will tell; keeping my fingers crossed that 300Mercer will be right even though my outlook is more like that of 30yrs.

Mcr,

I do not view myself as bullish - just factual. I have expressed plenty of bearish views on ultra-luxury and high priced new development.

On including the risk free return on downpayment (alternative return analysis), you can include it if you include expected real estate price increase or decrease in your buy vs rent and expected rent, moving cost, and monthly expense inflation. Also, if you do that, do not forget to do the analysis in post-tax numbers as in risk-free interest after short term income taxes, first $500k of gains being free for married etc. Since, the asset returns are highly subjective, why not put another subjective factor “freedom premium” of not having to move in the model.

I can tell you the end result, in the absence of “freedom premium”, you would buy if you think prices are going up and not buy if prices are going down. So defeats the purpose of a clean buy vs rent analysis as the end result is obvious if you do “alternative investment analysis”.

@300_Mercer

I called Wells Fargo last week, the same day you indicated a 2.75% rate and I was quoted 3.125, APR 3.750. Thought I posted this.

As far as APR, that includes origination and discount points.

Oh, the closing cost for a 2mil condo is around $80,000 if i remember right

300 - Agree on all counts. (The “freedom premium” is what I was trying to capture by assigning some cost to the instability of renting.)

Streetsmart, I have four hard data points with no points and appx 3k bank closing close at 2.75 or below including refi for jumbo >$1mm (70 LTV or less). 10/1 interest only. One of them I even forwarded to 30y.

Mcr, My “freedom premium” is appx 20 percent with eqt rent in >$10k range. For lower rents say low priced 1 bed room, I would think “freedom premium” is much less but still there in Manhattan. What is yours?

Excellent question - I am one of those for whom renting is off the table for anyplace I plan to be for more than 5 years. On the other hand, I will pay an irrationally high rent if my time horizon is uncertain (remember, I am the idiot who payed $11,500 for a 2/2.5 in midtown east when I first arrived in NY with no sense of how long I was going to be here).

To add one more point of subjectivity of “alternative return analysis”, one may reasonably think that equities are their alternative investment and they will make at least 7 percent annually over time. Any real estate annual return assumption less than 2-2.5 percent with 30 percent down will simply lead to “rent” result. Hence, I like to keep it simple and pure with 25 percent down typical for apartment purchases in NY over $2mm for decent mortgage rates.

Yes, that is the point I was always trying to make to w67th in the old days. That guy's opportunity cost on his downpayment and principaly repayment was a lot higher than mine. I would use the risk-free rate, whereas he would use his personal return on equities.

I do remember those debates with Nada and W67.

@300_mercer - anything specific about your 4 data points that drives such low rates? What kind of NW are we talking about? Does it assume the max 50bps relationship pricing discount?

@300_Mercer, Wells quoted a higher rate for an interest only loan and it's only for a rate and term, i/o 10/1 jumbo 3.375, 760 fico score

I will send you my rate.

Here's a perfect comp (same unit available to buy or rent) where the rent vs. math doesn't seem to be anywhere close, unless I'm missing something.

You can buy this unit:
https://streeteasy.com/building/15-william-street-new_york/sale/1384763

Or you can rent it:
https://streeteasy.com/building/15-william-street-new_york/rental/2758267

So rough number
$3300 monthly including taxes
$150 insurance.
$400k down at $1.7mm. Mortgage 1.3mm. 2.75 I/O 10/1. $3k in interest.
$200 per month expected assessments
Less $400 per month in tax benefit.
$6250.

So rough number
$3300 monthly including taxes
$150 insurance.
$400k down at $1.7mm. Mortgage 1.3mm. 2.75 I/O 10/1. $3k in interest.
$200 per month expected assessments
Add $300 per month unit upkeep. New dishwasher etc.
Less $400 per month in tax benefit.
$6550

Both scenarios still less than rental. Bump up interest rates 25bps. Add another $250 per month net of tax benefits.

And you can probably do better than $1.7mm on price.

$6250 or $6550?

to get i/o loan, there's strict monthly cash flow requirement, many w-2 people are not qualified

In that case, you have to remove the principal payment component from your mortgage payments as you are building equity. Calculations above remain the same. And W2 people indeed do qualify for I/O. DTI requirements are a bit higher.

If I were to do the calcs for myself, I would use the $6550 number and but would only buy for longer than 7 years hold horizon.

As you know, assumptions about property price increase will always lead you to buy and decrease will lead you to rent.

of course some W2 people do qualify , but the problem is many w-2 people are NOT qualified, and you need to assure interest rates remain so low in the next decade(s) and you need to do i/o all the time

also, this william street condo tax abatement expiring this year,

starting next year, who knows how high would the tax be

Anton, Higher taxes have already kicked in. Next years taxes are available on DOF website new tax notice for July 2019-June 2020.

Yes, the new tax amount is out already, this william st condo's yearly tax is $29,000, about $2400/month. the listing agent lied and put $1800 on the website. so the monthly carrying cost is about $4000, not $3300

I think in this new market we are going to see a much higher percentage of deals falling apart after accepted offers and not going to contract. Mostly because without the pressure/frenzy, finding defects during the discovery process is going to be much more impactful. Understating maintenance, common charges, Real Estate taxes, forgetting to disclose assessments, pet policies, cash requirements/reserves are all going to cost deals.

Anton, Did you factor in the primary residence discount (17.5 percent) which the current owner may not get?

300, i never heard such thing, i only know the primary resident can get a STAR credit about $300 or so per year

and, you mentioned tax benefit, but aren't most people use standard deduction now? there is no tax benefit any more

https://www1.nyc.gov/site/finance/benefits/landlords-coop-condo.page

The current owner is LLC. They do not get the 17.5% off. So taxes will $1993 appx per month for primary residence bought in the individual name. So add another $200 per month to buying cost.

300: Thank you. A few follow-ups:

1. Unless I'm missing something, Anton's correction for carrying costs already puts rent / buy at parity at best and buying worse than renting at worst vs. your 6250/ 6550 scenarios, respectively, no?
2. I don't see transaction costs for the purchase - wouldn't they be pretty substantial? And make the math look much worse?
3. And of course 2 key assumptions: you need to actually have $400k for a downpayment (as opposed to just 20%) and you can get the interest rate you mentioned above, which some people noted they had trouble getting.

Anton is missing the primary residence rebate. $6550 becomes $6750 with next year’s taxes.

And if you can’t afford 25 precent down with sufficient liquidity afterwards (say 1-2 year of expenses depending on your job stability) and are not sure if you will live there for at least 7 years, renting is clearly better choice regardless of buy vs rent. That is what I did for a while.

Buying Closing costs can be minimized by buying broker rebates.

"And if you can’t afford 25 precent down with sufficient liquidity afterwards (say 1-2 year of expenses depending on your job stability) and are not sure if you will live there for at least 7 years, renting is clearly better choice regardless of buy vs rent. "

One of the factors in my market prediction is that I think a shockingly high percentage of the buyer market over the past decade fail at least one of these criteria, but bought anyway, and those in the same circumstances today are (correctly) making the decision to rent instead. But I think the consequences of that are going to be sure for the sales market.

I have no way to know what percentage of buyers in Manhattan fail the above criteria but the cash buyers are appx 50 percent of the condo sales in Manhattan. So can’t be that large of a percentage who do not meet the criteria above.

https://www.millersamuel.com/charts/manhattan-cash-purchase-market-share-by-property-type/

I particularly wonder about job stability. I don’t know many in finance who feel like they have any job stability, and I had a recent conversation with a friend who says that had they fully appreciated their lack of job stability, they would not have purchased. They are currently trying to sell and mildly panicked about their burn rate and inability to get their capital out of their over-improved apartment they had intended to make their long-term home. I could feel their stress as they beat themselves up.

Yes. There has never been a shortage of people in Manhattan who overextend. Hedge funds blow up. Short sellers blow up. Lehman blew up. Market neutral funds lose 20 percent. We are at the center of the biggest casino - stock market. Similar stories do exist in the rest of the country and have existed for a long-long time.

http://www.famouspictures.org/black-tuesday/

That's what I was thinking. This is an individual who grew up in great privilege and went Ivy League all the way through business school; I don't think it occurred to him that he would not be able to raise his multiple children in Manhattan in the same manner in which he grew up. I was like "what were you thinking?!" but he is already saying enough of that to himself that I genuinely felt for him and his family.

Multiple children in Manhattan - I guess private schools - expensive!! Education is $75k per kid post tax per year including donations and activities excluding childcare. You need at least $1mm cash income or a lot of savings for 2 kids in private schools if you do not want to be stressed. More than 2 children and less than $1mm cash income, they are better off doing what people did for a long time - suburbs with good schools.

A problem with that Miller-Samuel chart is that it doesn't take shadow financing into account which ran rampant in the last decade, especially with foreign buyers who were mostly listed as all-cash deals but very often actually were not.

There was a big change last fall when the limit for recording sales to LLCs for cash was dropped all the way to $300,000. I would be interested to see the record of cash sales since then.
https://www.6sqft.com/buyers-of-all-cash-llc-purchases-above-300k-in-nyc-must-be-disclosed-under-updated-rule/

@300 don't completely discount New York city's public schools as an option.

Indeed.

I'm still amazed at how aggressively some people are bidding for some properties, most recently a townhouse in Murray Hill, 6 bids. And a well priced two bedroom on the upper west side, we bid above ask and seller countered 50,000 above our bid?! That was a first!

Also just spoke with a potential new client (seller) not willing to list where I think the market is. Said his neighbor was shocked at current prices in building, there are number of units for sale for months in this particular building. Quite frankly they're pretty appealing price points, well under $1,000 a square for a nice one bedroom in good condition with great views, dm.

I said I've been here since 1981, have seen much worse than we currently are experiencing. This market could continue softening for another year or two, this would not be unusual nor necessarily a bad thing(unless you purchased a couple of years ago and are forced to sell into this market). If you have an alternative plan and can wait it out that's great, otherwise you have to face the reality of where things are currently trading. I politely declined the listing.

Am I starting to sound like 30:)

300, thanks for the info. I think 15 william's 421 abatement is not completely phased out yet, that's why the downstairs unit 37E which owns by individuals are not receiving the 15% discount you mentioned either, they are paying $29,000 per year as well.

if they will receive 15% discount, that would be one more year later, by then the base tax amount should be a step higher

You have to live in it to get 17.5 percent rebate not just own in your name.

300, then why some people lost STAR credit but still have 17.5 percent rebate on their condo?

Do not know about star, which is typically small, but for 17.5 percent rebate you both have to own in your name and live in it.

Keith,
Wait till you speak to the same people a year from now and hear "But you told me I could get $X" and you have to respond "That was a year ago!"

We are about to enter "Chasing the market down" territory. I'm sure I've told this story before:
A woman had a loft on West 17th St. When she was asking $649,000 we brought her $625,000 and she turned it down. When she was asking $599,000 we brought her $550,000 and she turned it down. When she was asking $549,000 we brought her $500,000 and she turned it down...

What did she eventually take?

My recollection is $225,000.

Of course the bullish side is staring at us in very low 10/1 ARM rates which will go down further tomorrow.

Latest published rates from Wells. Usually 25 percent down, high credit score 760 plus and below 40 DTI can do much better by upto 50bps with no points.
10/1 ARM 3.125 and today’s 5bps decrease has not kicked in.
https://www.wellsfargorelo.com/relo/todaysRates.page?suffix=yourcompany1096

One thing which could be interesting is with the huge number decrease in apartment renovations due to rent regulations reform, there are going to be a lot of contractors looking for work and I would bet prices are going to come down. Will it be enough to lower the spread between renovated units and those which need work?

No. As the spread is driven by finished inventory choice and Reno plus carry plus trouble. Also the contractors for rental and high end are different.

To elaborate a bit more, when there is tight inventory, people have no choice but to renovate and they do not put as much value on the trouble component of renovation. But when you can get finished inventory why deal with uncertainty and make your life hell for 1 year when you have a busy and stressful job.

You may be considering high end Reno's only. Up until fairly recently only the top 5% of units would even consider doing the kind of high end Reno's which are common today. But these types of Reno's you see in rental units (which still include pressure balanced valves, marble bathrooms, granite counters, stainless steel appliances, etc) are still the norm in middle end coops/condos, and are certainly all that is necessary to turn an estate sale into a perfectly livable apartment. In the past under such conditions I have seen contractors do jobs at or close to cost just to hang onto their crews. So if instead of doing a half million dollar job which takes a year, someone can spend $150,000 and take 3 months and end up with an "acceptable" unit by buying a wreck, then I think there is some segment of the market which will jump on it (How do you get a $500,000 Reno down to $150,000? It's a mixture of leaving things out - Central Air, new floors, top of the line appliances, etc - cutting back on expensive materials - subway tiles on bathrooms rather than marble slabs - and a huge cut in the GC working for close to nothing).

I think Reno is a discussion for a separate thread. All I will say is architect, permits and trouble cost remains the same and never heard of a semi-gut reno driven by an INDIVIDUAL owner getting done in 3 months in a coop or condo unless it is replacing fixtures in place and new stock cabinet kitchen without layout change. Basically walls have to mostly stay in place.

Just to give an idea of how much longer the average renovation is taking these days, in the early 2000s I was doing a job at 885 West End Ave and after 6 months the board called me in for a meeting because they couldn't conceive of what could possibly be taking so long.

DOB and Buildings are much tougher now. 1 bed room can certainly be done in 3 months but at 3 bedroom 3 bath, not sure.

It is impossible to do a real renovation in 3 months even for a 1bm

But I believe the price spread will narrow by 1% ~ 5%, typically renovation cost of $300/sqft will become $290/sqft now

A wreck place of 1000 sqft should sale for $10,000 higher

Sent my Wells contact info to Keith Burkhardt. He can get 2.75 10/1 ARM I/O with 25 percent down and strong credit for $1.5mm loan.

No decline MOM in Manhattan in Streeteast condo index. Look at the chart (May vs April). See if it continues next month as one month of data does not mean much.

https://streeteasy.com/blog/may-2019-market-reports-queens-sales-record/

Streeteasy held an event the other night for agents to explain their data tools. Regarding the index:
1) it only takes into account multiple sales of the exact same apartment. So it leaves out most of the market because there are not multiple sales.
2) It doesn't take into account condition at all. So if a unit is bought, renovated and sold the entire gain is credited to market appreciation.

I do not think there is an alternative to Streeteasy condo index (down appx 6 percent from the peak) besides median sales data from Jonathan Miller or Urbandigs which show similar price decline.

One may say that Streeteasy is weighted to average transaction price not say appx 3mm resales which may be down say 1.15-1.25 times that of the Streeteasy condo index (say 7-8 percent range). Clearly ultra-luxury gets no weight due to limited resales data and we know that it is down 15-20 percent from the peak actual sale price 3 years back.

For your point 2, Streeteasy does remove outliers based on large price increases or decreases. So major renovations are likely factored in. Most other statistics available do not remove outliers.

Re: removing outliers:
Lets say a townhouse sells for $9.1 million, gets a full renovation, then resells for $9.5 million. I guarantee you that they don't remove it as an outlier, but instead call it a 4.4% gain.

Believe they define outliers based on relative price declines. Not sure if they define outliers by percentage changes per price point.

Believe they define outliers based on relative price declines. Not sure if they define outliers by percentage changes per price RANGE.

the market appears to be very soft since the summer started. lots of listings being pulled. I doubt it will strengthen in the Fall. What do others think?

Statistics from Urbandigs point otherwise. Market Pulse is 0.47. It is certainly not worsening and the downtrend seems to be broken in resales segment. I would even say market is better (certainly not strong) with the incredibly low rates bringing out many buy vs rent calculators.

Urbandigs Market Pulse is down year-on-year from the abysmal 2018 numbers. You really have to stretch to look at any sales figures and come up with anything positive.

30, What market pulse number in resales will convince you that the market is stable?

Completely anecdotal small subset opinion here.. overall the market continues to be weak. But there appears to be an appetite for well-priced, well located homes. We've had a very strong 2 weeks, including accepted offers and contracts out on two of our listings that have been sitting for a few months.

On the buy side we've been busy, other than a townhouse in Brooklyn that attracted multiple bids and we paid ask for, clients have been negotiating hard and making very good deals. in a few cases we were contacted by listing agents weeks after we initially presented an offer that was met with disdain:) and told the sellers would now accept.

What's interesting to me is the fact we're personally seeing so much activity this late, especially after what was a much more difficult peak spring season. Perhaps low rates are driving, more confidence in the economy?? I still maintain it's an excellent time to be a buyer, a patient buyer...

If you're selling and you don't have the creme Dela creme of a home. Pricing is everything, buyers appear to be ignoring aggressively priced homes, especially with a little patience you can find sellers being more realistic about price.

Just some rambling thoughts about the markets before I leave for vacation tonight.

Keith
TBG

Feels like the market is pricing in future rate cuts and even another round of QE money printing, three of my friends' units had been on the market for 1 yr+ all got into contract in the past 2 weeks.

Of course I think paying attention to the street easy index Urban digs information, provides a much deeper picture of what's going on.

Keith, Good insight. We need to further improvement in Market Pulse - as in staying close to 0.50 for some time to call it normal resale market. Street East condo index lags by three months due to time taken for the sales to get recorded but is the best available price index. See how it comes out.

New Urbandigs numbers today show contracts signed for June down both month-on-month and year-on-year.

Have a good trip Keith!

Miller-Samuel/Douglass Elliman reported a large Q2 YOY increase in sales but I'm having trouble matching up their numbers with UD figures.
https://www.millersamuel.com/files/2019/07/Manhattan-2Q_2019.pdf

This article does a nice job of talking about some of the market conditions.

https://therealdeal.com/issues_articles/cleanup-brokers/

https://therealdeal.com/2019/07/02/for-one-month-manhattans-resi-market-returned-to-glory-why-it-wont-continue/

I think JM will compare sales vol yoy an use the prior year posting value.. not the current value, as acris sales committing to file in well after quarterly reports are published.. so sales vol highly affected by how you count

UD takes a different approach and waits 2 months to accommodate for that closed filing lag

You can do a closed search on UD, and fill in real time acris sales volume that way

acris sales committing to file in well - meant continue to file in....

Noah, Why not use "sold" flag in the listing systems for "number of sales" even though recorded sale information is not available? I realize that for price statistics you do not need to wait and JM is likely using the lagged data but calling it Q2.

https://www.wsj.com/articles/manhattan-condo-slump-starting-to-imperil-city-developers-11563274801

UrbanDigs Market Pulse for New & Recent Dev at 0.3 - down 26.8% from last year (which was already notably horrible).

300 - good question. The answer is the sold status in listing systems are incomplete, unreliable and often do not have correct closing price. Too risky to use. Instead we use acris as our closed verify point. We may change and use listing sold status at some point, but we would say something similar to SE.. sold, pending govt record..

is supply is less, then price will go up further