Bidding wars in the suburbs (Part 2)

https://therealdeal.com/2020/07/23/home-prices-set-new-records-as-inventory-falls-across-long-island/

"In the Hamptons, the median sales price hit $1,080,000, up 9 percent over the first quarter and 27 percent year over year, according to the latest Elliman report. The median price is the highest recorded in over eight years of tracking by the real estate company. And the average sales price increased 21.1 percent year-over-year to $2,090,000, the highest level since 2015."

Not great news for those wanting to move out of Manhattan into a suburb... Great news if you're a seller.

We'll see. We put in an offer today.

Meanwhile from Fritz's OH report:

"It was slow last weekend! The average attendance per open house dropped to 1.34 per open house, from 1.80 the weekend earlier. The only time it was slower since we opened up for business with open houses was on the July 4 weekend!

"61 open houses reported zero traffic! This is 44% of all open houses that did not have anyone coming – where are the buyers?"

Everywhere but in the city. At least until sellers get the message and start slashing prices.

George, Are you really going to buy a property with 2 percent cap rate unless you found something with say 3+ cap which with say 2.5 percent or lower 10/1 financing can give you 4 percent plus ROE on your downpayment?

Given that both prices and rents are falling simultaneously, that should be a clear indicator to anyone where NY RE is right now:

https://streeteasy.com/blog/q2-2020-market-reports/

"World’s largest commercial landlord reported strong Q2 earnings but company president Jon Gray pointed to challenging years ahead for cities"
https://therealdeal.com/2020/07/23/the-future-according-to-blackstone-less-density-and-a-lot-less-new-construction/

https://nypost.com/2020/07/21/nyc-is-now-the-worst-place-to-do-business-retailers-say/

@300 - the unlevered cap rate on the property we bit on is ~2.8%. The price we're offering is 62% of what the owners paid in 2007 despite doing a reasonably robust refresh of the property during covid. With maybe $200k, we could add a custom in-ground pool, smart home tech, better decking and landscaping, etc., and take it much more upscale as a rental. The investment would be a bet on continued interest in properties away from big cities in locations that still have robust recreational and cultural opportunities and no civil disturbances, which we can either rent or use ourselves should NYC continue to decline into chaos.

George, Good luck. Seems like a fair deal. If you finance it at 2.25% 10/1 (it is possible to get even lower with private banking relationship), you will get your 4% ROE on down-payment as well assuming unchanged prices. I am always in favor of improving your living environment if you can easily afford it - the type of stuff you are talking about doing rather than redoing a bathroom in good condition.

I can't help but point out that one of the reasons I have been saying NYC is overpriced is that in much of the country prices still have not recovered to pre-2008 crash numbers. Here we see an example where even during this supposedly insane COVID-19 bull market this property George is negotiating on is still 40% down. If we continue to see a shift in demand away from NYC and towards these areas, what does that say about where prices are potentially headed?

The specific subdivision where I'm bidding was the subject of insane speculation in the 2000s. The house tripled in price and had 3 owners from 2003 to 2007 (one of whom did a fix-and-flip). Prices are still very high, but there is a ton of construction in the neighborhood, so people are actively redoing properties, and the renovated properties with the best locations run as high as $10m despite the weakness for the last 12 years.

One of the big differences vs NY is that there is basically no transfer cost aside from the brokerage fee. There are no transfer taxes, mansion taxes, flip taxes, recording taxes, or mortgage tax. The realtors draw up the contract, which is always standard (check boxes to indicate which wording is to be used), so no lawyers fees. Title insurance is bought by the seller and is less than NY. I figure that if I have to sell, I've only lost 6%. In NY, it's closer to 10-12%. That makes a difference when we're talking in the millions.

> George- just add minimum +30% to your estimated Reno budget - once you start everything begins to look old

Actually probably way more than that

300, at what cap rate do you think I should become a buyer? And how do you calculate it: (rent - tax - maint) / price?

Free Mrs. George!

And, to be fair, there are quite a few who want to free Mr. MCR . . .

Nada, In your ultra-luxury segment, it still does not make sense to buy in my opinion. George had his ROE target which he seems to have met. Lower rates clearly help to meet the ROE target.

Sure, but at what cap rate do you think it would? I want to be ready ;).

Another issue that I would like to bring up is that we have seen a lot of reporting about large increases an online viewing of listings. However at the same time the 1 benchmark I know of people actually visiting units is Fritz Frigan's open house report, which shows a HUGE decrease in actual traffic. To me the 2 most likely explanations for this are either:
1) The majority of online traffic is coming from people who aren't actually imminent buyers, but instead people bored at home and spectator sport Real Estate window shopping, or
2) Most people on line are fully expecting moderate to large price corrections and since they aren't seeing them yet they aren't even bothering to go physically look at properties as a perceived fool's errand.

Nada,

Just for fun. Let us ignore you personal ROE target for a moment. Let us assume you want to put down your roots and want to stay in one place (we know that is unlikely but things change). I think 1.50/1.75 percent cap rate (cap rates are higher for lower price per sq ft) is all you would get for ultra-luxury as for a lot of very rich people ultra-luxury is just like art-work. Naturally I understand that there is no long term standard for rent in ultra-luxury segment due to wide bid-offer. Hence, I can't really translate that into a price decline.

What is your view and how much price decline does it suggest for ultra-luxury from last trades?

30,
Have you looked at this or does it not meet your narrative?

https://fred.stlouisfed.org/series/CSUSHPINSA

"I can't help but point out that one of the reasons I have been saying NYC is overpriced is that in much of the country prices still have not recovered to pre-2008 crash numbers."

FHFA index
https://fred.stlouisfed.org/series/USSTHPI

Regarding Mrs. George, y'all will be pleased to know that we're bidding first on her preferred property and then on mine. It turns out that her love of NYC is less than her fear of out of control mobs and vagrancy. In any event, this is a second home, but there's a chance it becomes permanent, as the NYT wrote about yesterday:

https://www.nytimes.com/2020/07/24/realestate/coronavirus-second-homes-.html

The comments section is great - everyone's bashing the NYT for writing about the issues their subscribers actually care about.

I think 1.5% cap rate was peak-ish, with pre-Covid drop finding its way closer to 2%. I think 4% would get me to pull the trigger, maybe 3% if I’m feeling generous.

It’s unclear if the market gets there: maybe, maybe not. But eventually rich people cut loose their crap investments when they see the writing on the wall, or they die and their heirs just want some money, or whatever.

Walker PH at $18M is an example that could work, if it goes through. What do you think rent on that is?

I think 1.5% cap rate was peak-ish, with pre-Covid drop finding its way closer to 2%. I think 4% would get me to pull the trigger, maybe 3% if I’m feeling generous.

It’s unclear if the market gets there: maybe, maybe not. But eventually rich people cut loose their crap investments when they see the writing on the wall, or they die and their heirs just want some money, or whatever.

Walker PH at $18M is an example that could work, if it goes through. What do you think rent on that is?

What is the cap rate here assuming you can get it for $50k rent (you may know better about the negotiability in rent). And $25mm (30% off ask)? CC+Taxes plus Upkeep/Insurance etc = $25K per month.

https://streeteasy.com/building/432-park-avenue-new_york/rental/3019918
https://streeteasy.com/building/432-park-avenue-new_york/sale/1436987

So price ~25% off ask.

Anyone want to meet for brunch at Nice Matin?

https://www.westsiderag.com/2020/07/24/lucerne-hotel-to-house-283-homeless-men-recovering-from-substance-abuse

30, you're leaving out another large piece of the puzzle. I'm not holding open houses at all and don't expect to for the foreseeable future. All my buyer traffic is appointment traffic. Where does that traffic get reported?

George, Do not tease us and tell us which state?

I am wondering if the Georges are in Vermont. That seems to be the place to be for many we know.

Ali,
I can only use sources which actually exist to quote. But if you keep records of all the showings you do please feel free to pick comparable properties and let us know the number of private showings you are doing now vs last year, etc. Everyone I know is so happy to be doing any business at all they are saying they are "busy" but when pressed for actual numbers have admitted they are doing less than 50% of "normal." Maybe I'm just talking to slow brokers.

The cockroaches survive the bomb blast; the butterflies die. NYC will be even more of an overpriced suburb. There will be even more bank branches and drug stores, while the unique places are gone.

https://www.nytimes.com/2020/07/27/nyregion/coronavirus-small-business-nyc.html

George, I would have thought you found peace by deciding to buy in the suburbs or will that happen only after accepted bid and contract signing? Of course, always happy to hear your opinions.

No, what we're bidding on is far beyond the suburbs of NYC. It would be a second home / seasonal rental, although people are talking about these seasonal areas becoming more permanent, with NYC being the pied-a-terre rather than the full-time residence.

We're in NYC for at least another year (just renewed the lease). So you're stuck with me.

We may be in a bit of a Catch-22. I think without retail largely re-opening people won't have the desire to live in Manhattan. But with only something like 10% of office workers returning so far
https://therealdeal.com/2020/07/27/where-is-everybody-city-workers-still-home/
And almost no tourists, there's no one to patronize these stores.
https://nypost.com/2020/07/21/nyc-is-now-the-worst-place-to-do-business-retailers-say/

30, People care about restaurants and many of them have reopened. Most companies are targeting post Labor Day for in-person. So the 10 percent will go to 50 percent that time.

George, I figured you went to place like CO where real estate taxes are low.

I don’t see the Georges having a second home that requires plane travel. Definitely see them having one where plane is an option, but not necessity. That is how a number of our friends settled on Vermont. Burlington airport is great with short hop direct flights, but is also within a doable car radius.

30, Do not forget that people like George still renewed their lease despite having an option to buy in a suburb.

30, And Central, West Village, Nomad with outdoor seating in restaurants feel really nice. Waterfront is amazing. Mid-town restaurants are naturally suffering a lot. Retail will continue to suffer unfortunately till tourists are back (perhaps by the end of the year). Could we have lost some families who always were on the fence about living in the city? Surely.

George, where did your renewal come in relative to last year?

George, where did your renewal come in relative to last year?

When it comes to a second home, I don't get the appeal of places that are a 6-hour drive away. Fine, it's a short flight, but unless you're flying private, the time on both ends really adds up. If I'm going to get a place that requires a plane, it's going to be somewhere warm.

If the argument is that you're going to spend long periods of time there, then who cares about the short flight at all? I'd cast a much broader net in that case, well beyond the northeastern US.

I've had a place on Cape Cod for years. It's four hours driving from NYC... doesn't bother me going there, but coming back gets really old. I used to go for weekends (up Friday, back Sunday) but that got to a point where it wasn't worth the eight hours in the car any longer. There's no way I would consider somewhere even farther away.

I think the sweet spot is two hours drive time. The ability to stay at a place through Sunday night and come back Monday morning (without hitting the road at 2am) is huge.

@flarf - My understanding is kids and the dog change things. With all of our Vermont friends, the primary bread winner has to travel a lot and requires air option for going back and forth between the city and second home, whereas spouse with more flexible schedule who may want to spend weeks at a time at the second home with kids and dogs needs a driving option.

1/ I don't see office occupancy I'm NY hitting 50% until schools fully reopen, which I don't see any time soon bc teachers unions want to be part of the problem not the solution.

2/ Our lease renewal was 2 weeks free. I'm not happy about that but we didn't find online what we really expected. Maybe if we had a later renewal it would be better.

3/ I actually don't like vacation houses that are 5 hours away. Too long to drive, too short to fly. I have memories of sitting on I95 coming back from Newport, Boston, Vermont, etc, just hating myself for ever thinking that 5 hours is actually 5 hours.

Thanks, George.

Thanks, George.

Btw, our lease a year ago was also 2 weeks free, so actually it was a flat renewal. Rather disappointing. The building has 16% of its apartments listed as available on Streeteasy, which is the highest I've ever seen.

Did you take a serious look elsewhere? I never rented in a rental building in NYC, always from individuals for a variety of reasons, but my impression is that rental buildings give preferential pricing to new tenants.

How is the teachers’ union playing into the problem? Are you referring to a refusal to teach classes in person in public schools, or something else? Aren’t non-union teachers holding the same stance? Surely holding classes in person in the fall will only increase transmission rates.

Moving is always annoying- body at rest stays at rest

My husband still refuses to buy a second home - would rather rent than buy

My husband still refuses to buy a second home - would rather rent than buy

My husband still refuses to buy a second home - would rather rent than buy

My husband still refuses to buy a second home - would rather rent than buy

My husband still refuses to buy a second home - would rather rent than buy

My husband still refuses to buy a second home - would rather rent than buy

My husband still refuses to buy a second home - would rather rent than buy

My husband still refuses to buy a second home - would rather rent than buy

https://nypost.com/2020/07/28/apparent-junkies-turn-part-of-nycs-midtown-into-shooting-gallery/?utm_source=facebook_sitebuttons

https://nypost.com/2020/07/24/homeless-encampment-in-nyc-growing-despite-de-blasios-crackdown/

https://nypost.com/2020/07/25/video-shows-nyc-sanitation-department-clearing-homeless-encampment/

https://nypost.com/2020/07/26/homeless-rebuild-east-village-encampment-in-less-than-24-hours/

This afternoon the homeless were out in full force along 6th Avenue between Houston and 14th as well.

https://nypost.com/2020/07/29/nyc-cab-drivers-down-75-percent-amid-covid-19-but-uber-lyft-on-upswing/

https://www.nytimes.com/2020/07/16/nyregion/nyc-shootings-nypd.html

Arrests have declined drastically this summer, falling 62 percent across the board for the last four weeks compared with the same period last year, police data show. Narcotics arrests fell 85 percent. Detectives in the gang unit made 90 percent fewer arrests. There were similarly steep drops in the number of arrests by officers that patrol the subways and housing projects.

Gun arrests have dropped 67 percent during the same four weeks compared with last year, even as shootings have continued to spiral upward.

Some public officials who represent hard-hit parts of the city have accused the police of pulling back from their most basic responsibility — keeping the public safe — in response to the protests.

From Barr'r prepared remarks. You may hate him or get triggered by him - all expected in the current politically divided country - but there is truth to what he is said and crime increasing in poorer upcoming neighborhoods as in Bed Stuy.

"When a community turns on and pillories its own police, officers naturally become more risk averse and crime rates soar. Unfortunately, we are seeing that now in many of our major cities. This is a critical problem that exists apart from disagreements on other issues. The threat to black lives posed by crime on the streets is massively greater than any threat posed by police misconduct. The leading cause of death for young black males is homicide. Every year approximately 7,500 black Americans are victims of homicide, and the vast majority of them – around 90 percent – are killed by other blacks, mainly by gunfire. Each of those lives matter.

And it is not just that crime snuffs out lives. Crime snuffs out opportunity. Children cannot thrive in playgrounds and schools dominated by gangs and drug pushers. Businesses do not locate in unsafe neighborhoods. When the police are attacked, when they are defunded, when they are driven out of urban communities, it is black lives that will suffer most from their absence."

https://www.justice.gov/opa/speech/opening-statement-attorney-general-william-p-barr-house-judiciary-committee

So 300, what is your proposed solution? Just let the police come in and indiscriminately beat and shoot blacks? Accountability is too hard so you just want things to go back to the way they were because the discrimination benefits you? Seriously, what is your point? Have you followed the defund the police debate at all? Do you understand that it is not about eliminating the police at all but rather decreasing the paramilitary gear and arms they have that have no place in their day-to-day duties? Again, when I see someone I otherwise respect react to a superficial and misleading talk track exactly the way I know those who write these talk tracks want them to, it makes me cringe.

You can debate your peeps in DC.

Or mayors in forever democrat Mayor led cities.

Once again, you make it a partisan issue by invoking a political party? exactly as they want you to. You won’t get it until one of your own kids experiences it.

Sorry, I choose not to engage with you.

No apologies needed. I personally win no matter how all this comes out. You and your family, not so much. I have friends who didn't get it until their kids were bullied for being spreaders of the Chinese virus. Their family has been in the United States for generations, but that was lost on the other children in the locale where they have chosen to live, in much the same manner it is lost on the police in that locale. People never get it until it affects them personally. As long as you stay in New York, it won't affect you because those mayors whom you lament value your civil liberties as much as they do those of black people; however, I suspect you would understand pretty quickly were your children to come home one day in tears/confusion/fear after having been prejudged and treated horrifically for no reason beyond their physical appearance.

Well said MCR. I am always disappointed that your viewpoint is derided so intensely around here, thinking back also to that George Floyd thread from earlier.

So Barr says, "The threat to black lives posed by crime on the streets is massively greater than any threat posed by police misconduct."

So of course the intended reaction is for the listener to think, "hmm, Attorney General, Person in Authority, says that X is the threat, so X must be the threat."

But I think that part of the idea of the anti-racism work is that it might not be for Bill Barr, who... regardless of his level of authority or political affiliation.. is not Black, to tell the Black community which threats to their community have consequence and which threats to their community don't have consequence.

Ali, Could your comment be misconstrued as “segregationist”? Knowing you, you are not at all.

Thanks lrshober. I don’t normally get into on the Internet, but I like both 309_mercer and his wife from the limited interaction I’ve had with them and resolved a few years ago that I wasn’t going to remain silent anymore when anyone I know persists in a talk track/line of thinking that I find personally offensive.

Next time we have a black attorney, he had less authority than a while AG on certain matters to express his opinion.

had=has

And Biden can’t speak for blacks.

@Ali - Good luck. I am left mouth agape.

https://magazine.realtor/daily-news/2020/07/24/more-than-a-quarter-of-buyers-seek-out-of-town-moves

The message from law enforcement (at least in NYC) is pretty clear at this point:
If we can't do WTF we want without being held accountable then we're not going to do our jobs until you let us go back doing what we feel like. It's the same technique Bill Gates used against Netscape: if the other side has a superior product, you "choke off their air supply" to force capitulation.

It's not like I haven't been telling y'all this has been coming for a couple of years now.

We're in contract. Made the offer an hour after the showing, had another offer arrive at the exact same time at basically the same price, and got a signed contract back a day later. There is a standard purchase-and-sale agreement, so no lawyers are involved in the transaction. It's so much easier (and cheaper). The realtor just checks the boxes of the wording to be used (or not).

Home sales volume here is running twice the level of last year, so the title companies, inspectors, and appraisers are all backed-up... probably 60 days to close if we're lucky. Even "meh" properties are getting sold in a matter of a few days if they're not totally overpriced.

Maybe the Democratic Socialists in Albany could improve housing affordability by eliminating all transfer taxes and recording fees under $1 million of purchase price (replaced with higher property taxes on properties above $5 million), promulgating a standard contract for any property under $1 million to eliminate lawyers from the process, and demanding price competition in title insurance by making permanent the DFS anti-inducement rules. This would be a win-win for both realtors and buyers/sellers.

George, Many congratulations!! I am sure you will enjoy your new (vacation) home for a long time to come.

OR George’s kids get to be an age where they have no interest in going to the vacation house and it becomes a full-time rental with all the joy that entails. Global warming continues and changes the appeal of the locale such that 15 years later, George is wondering what he was thinking when he purchased a high maintenance monstrosity in Nowhere, USA. Meanwhile, Manhattan has returned to its full glory, and George is priced out even of rentals forever due to an abysmal investment in Nowhere, USA. Okay, that last part is a bit extreme. I am totally rooting for the Georges, but really, this could go either way. I wish we knew the city where the Georges bought so we could chart the progress of their investment.

The place I bought upstate was from a couple who had it for about 15 years. Their kids were in their 20s and never went there any more, so they decided to punt. They took a bath on it and didn't seem to care... you could tell during the walkthrough they had a ton of happy memories.

Vacation homes are not investments, they're expenses.

@flarf - Totally agree, but if you have been following George’s posts, his is intended as an investment.

@flarf - same here with place in PA. Lots of happy memories but worrying about everything that could (and did ) happen when we weren’t there, as well as not using very much led us to the same place - sold!

I've owned a handful of vacation homes upstate, all expenses, but lots of fun! One I actually built when I was 19 on 10 acres in a town called Summit (NY) paid $150 an acre! Also had a place in Costa Rica, my heaven on earth. Only place that worked out well financially, an oceanfront condo I had in Jupiter, Florida, we purchased it at a very big discount to Market. Hit on all cylinders there, seasonal rental covered expenses for the year, family got to enjoy it! Recently sold and made a very strong return. But the worry wore me down. When the seasonal tenant offered to buy it, I bit this time around.

Now we prefer to travel....just finished a road trip through the South. Savannah, Charleston, Asheville and Blowing Rock...loved Blowing Rock, NC, top contender for home base in retirement!

Keith
TBG

Charleston, Asheville and Blowing Rock all have great memories for me. My family’s first vacation home was on a little island outside Charleston in the late 70’s. There were only 12 houses on the island at the time. That little island was Kiawah, and I would not trade the memories I have of Kiawah between 1976 and 1986 for all the riches in the world. My mother hung on to it for a few years after we had all gone to college; no what the numbers were coming or going, but again, absolutely priceless in terms of memories.

Kiawah must have been a dream then. I have equally wonderful memories spending my summers throughout the 70s with my grandparents in a little town called Mantoloking(just south of Bay Head) on the Jersey shore. Uncrowded beaches and beautiful sand dunes.... I don't know the economics of it and I don't care.

And I shouldn't say retire, or at least in the conventional sense of the word.

On the vagaries of real estate, back in the day the family had a really special place on the ocean side of Beach Rd on Jupiter Island. My father was distressed as the ocean started licking the guest cottage and sold at some point in the 90’s because he was sure the Atlantic was going to claim the entire east side if Beach Rd in the foreseeable future. He bought a very cool house on the non-ocean-front-west side of Beach Rd in anticipation of the imminent erosion, and then . . . Mother Nature inexplicably reversed her plans. Sadly, the now expansive beach in front of the old home is inaccessible to all but the new owners due to interesting rock outcroppings etc, and the value has since skyrocketed. When asked if there is anything he regrets, the only thing my father will cite is selling that piece of real estate.

@keith - Your selling your Jupiter condo made me think of that story because rumor has it Mother Nature has reversed herself again and the beaches are eroding again. What motivated you to sell the one place that “worked.”

I'm already priced out of NYC below 96th and have been since about 2005. The taxes, living expenses, childcare cost, rent, etc all eat up budget that might otherwise go to saving for a house. These costs are half to a third of NY in other places. At some point, this has to start to balance out by NY becoming cheaper and other places getting more expensive.

I've been surprised how many ppl come thru Nowhere USA. Being in NY, you tend to think of the world like the "View of the world from 9th Ave" cartoon. But actually I've built some really useful business connections out in Nowhere.

https://en.m.wikipedia.org/wiki/View_of_the_World_from_9th_Avenue

There is a lot of activity in the hinterlands. There is an enormous influx of wealth, capital, and talent into places as diverse as Nashville, Columbus, Palm Beach, Austin, Teton County, Blaine County, Eagle/Pitkin Counties, SLC, Phoenix/Scottsdale, Tahoe, etc.

Each of these places is booming for different reasons, but I wouldn't bet against any of them.

We will still be NYC residents, but as renters. Folks like us are saying as loudly as possible that if NY costs don't fall, we will put our money elsewhere.

https://www.npr.org/2020/07/29/896942333/the-coronavirus-housing-boom

So back country Greenwich may not be the best idea either... https://www.nytimes.com/2020/07/31/nyregion/greenwich-ct-coronavirus-covid-parties.html?surface=most-popular&fellback=false&req_id=398101550&algo=top_conversion&imp_id=587103167&action=click&module=Most%20Popular&pgtype=Homepage
There are precious few counties whether urban, suburban, or rural that have not had a spike at some point, so it doesn't seem to make sense to flee New York, which is now relatively much safer, on that basis. A vacation home that gives the option of more space, as the George family is pursuing, makes much more sense.

And congrats George!

@mcr the tenant made me an offer I couldn't refuse. I've also really consolidated my life, one less thing to worry about. I think we have quite a bit a ways to go before the erosion gets us, does the streets in Miami get awfully flooded with just a big rainstorm these days! But hurricanes are definitely a more imminent threat. I also own a home in the area a few miles from the ocean...

Some recent data points for you George from a broker in Vail /Beaver Creek;

The highest priced sale in June was 151 Vail Lane #13 in Vail Village. This 5 bedroom, 6 bathroom, 5,560 square foot duplex sold for $18,500,000.
212 properties went under contract in June compared to only 122 in June 2019.
181 properties are under contract so far this month vs. only 160 in all of July 2019.
Get YTD details for each neighborhood in the Valley in my Mid-Year Market Report