Prime townhouse not keeping up with inflation

1) Tough comparison. 2007 was almost the very peak of the previous real estate bubble, while 2021 is hardly at the level of 2019 prices yet, and 2019 was already down relative to the last peak in 2017/2018.

2) Condition. Real estate is a depreciating asset. Is it possible that the property was in better condition then than it is now?

3) Benchmark rate. You are assuming inflation of 2% (consistent with CPI measurements over the period) to calculate $8.1M. However, some experts argue that CPI does not capture improvements in product quality and therefore overstates inflation by 0.5% to 1%. Assuming a lower "actual" inflation rate of 1.5%, it would appear that the house kept up with inflation.
Expert article: https://www.schroders.com/el/sysglobalassets/digital/insights/pdfs/2016/ih5_is-inflation-overstated.pdf

Uh yeah, sure. Despite the formative experiences of many people living through / participating in the housing bubble, this is how RE works (and should). It basically tracks inflation over long periods. Except going into a bubble, it outperforms. And coming out of one, it underperforms. The house was in prime West Village in 2007, nothing has changed about that.

I am guessing after negotiations, round-trip, taxes, and expenses over the years, they are going to break even.

They had a ~$3M mortgage, averaging around ~4% over the years. So $10K/mo, plus $2K/mo in taxes. So they were paying $12K/mo instead of $17K/mo in rent (noting 2017 asking rent & discounting). After 14 years, that amounts to saving $840K. So a 28% return on $3M over 14 years.

Alternatively, S&P 500 quadrupled over those 14 years (also from a high point in 2007) while more conservative 60/40 funds tripled. So on the one side, $840K in savings over renting. On the other, a $9M or $6M gain.

Owners didn’t seem like they were swimming in money in 2007 beyond the $3M down payment: one of them was 30 & grinding away in a finance job, so I’d guess the $3M was the vast majority of everything they had. I’m sure they’ve made more in the meantime, but an additional $6M or $9M couldn’t have hurt. Maybe markets are too risky for them, maybe they have kept it in cash otherwise, maybe they really care about owning their own home, I dunno.

Moral of the story: if you care about the financials, don’t buy into a bubble.

It's all about timing, for the most part. Let's cherry pick a townhouse sale from 2009 or 2010 in the West Village, and track that. You'll probably find slightly different outcome.

You can't argue with Nada's math, relatively speaking that time frame from 2009 until the present, equities created a lot of wealth for my family. I'm a rabid advocate for investing in equities consistently and early. I'll admit I learned my lesson late in life, but even more than a house, there's no better way for the average person to build wealth. I also bought a house in 2011, well below what I could afford or at least what the bankers told me I could afford.

Don't over stretch on real estate at the expense of other investments. Unless, perhaps you plan to own that townhouse for 30 years.

One thing I've found, most of the clients I'm working with are first concerned about finding a home that they can afford, they love and just have a bias towards owning over renting.

2007 was such a fiery time in New York City real estate, that even a dunce like myself started a company to offer people discounted commissions on renting an apartment. My advice at the time was rent, don't buy into the frenzy, you can read my interview in the real deal, from that time. And strangely just as many people thought my reduced commission model / commission rebate model wouldn't work, they said the same thing about discounted rental commissions (mostly disgruntled old old school brokers). It actually worked quite well. But my point being, even I knew that 2007 market was insane, with a little influence from some insightful financial folks.

And to get back to my point about timing, like most things in life it has a lot to do with outcomes. Let's not forget how traumatizing the financial crash of 2008 was. Sophisticated and educated professional investors recognized this as an opportunity to buy. But many more average folks were absolutely traumatized, and to this day, I can name at least half a dozen acquaintances/friends that would not invest in the stock market. For 10 years I've been twisting my sister's arm to invest, she thinks it's a rigged gambling casino. She prefers real estate.

Another friend comes to mind, a very very successful yacht broker. Owns a beautiful house, keeps all of his savings in cash or cash equivalents thanks to the PTSD from 2008.

Anyway, this is a fun game to play on Streeteasy. However in real life everyone has to play the hand they're most comfortable with.

Keith
TBG

@nada I've done no digging into the buyers of that townhouse. But from what you say they don't quite fit the profile of a townhouse buyer, financially speaking. New York City being what it is, who knows what kind of family money might be involved.

I just did a relatively straightforward, cash deal, nothing too extravagant but still a lot of money in the big picture.

Wound up becoming a little closer with these clients than most because of some things we share in common. Turns out they're related to one of the wealthiest families in the US... Only in New York.... And you would never know it.

My point being if you just examined their situation, my draw conclusion that these folks were stretching a bit...

Here is an example of outperformance in a prime-ish Manhattan: https://streeteasy.com/building/newport-east/b301
This home was sold for 875k in 2009 with description stating a renovated kitchen, and is listed for sale now at 1,350k (with what looks like probably the same kitchen). If sold near asking price will have appreciated by 3.7% per year, or almost double the rate of inflation.
Why? 1) it was purchased two years later in 2009 2) the city added Q train to 2nd avenue, increasing desirability of east side of UES 3) not sure how, but the common charges in this building somehow grew slower than average and than CPI inflation, increasing 1.8% per year from $1350 to $1682 per month.

Better examples of inflation outperformance are in Harlem and in Brooklyn, areas that gentrified during the period.

The point here is that this is a highly prime asset on one of the most prime streets in Manhattan, bought during the wee days of a long boom in nationwide HPA, being sold during a huge boom in nationwide HPA, and the people are probably selling for less than a gain in inflation. Don't forget they may owe capital gains taxes on the supposed gain.

Of course, people who took more risk by going to Harlem or Bed-Stuy or Brownsville or wherever had better returns. That's not the point. The point is that at least one super-prime NYC asset has a now-14 year history of not keeping up with inflation. That's not the story being sold to buyers who are led to believe that prime assets in NYC resi housing only go up.

Taxes on gains above exclusion limit are a given, no need to even mention.

At least it is not a loss like here:
https://www.bloomberg.com/news/articles/2021-01-08/billionaires-row-condo-records-51-resale-loss-in-luxury-glut

Krolik, I don’t see B301 going near $1350K. The most recent sale in that line was B901, which went into contract at a cooler time in the market (early spring) in a month for $1050K:

https://streeteasy.com/building/newport-east/b901

No renovated kitchen, but much better elevation. A $300K difference seems steep. After B301 sitting 4.5 months across the busiest summer in forever, I think the market agrees. Prior comp was B501 in 2017, which went for $1360K:

https://streeteasy.com/sale/1243378

Condition was similar to B901.

No argument from me, real estate doesn't always go up anywhere. After the financial crash of 2008 it took suburban markets far longer than many Urban markets to recover.

And also just for the record 2007 was a much different market than 2021. We've made a very nice comeback from a global pandemic, however we haven't been in a rising market for years coupled with the most lenient lending practices I can ever remember (2007).

And I think we all understand that dissecting one or two listings doesn't make a market. And look you're already I had the time I would dig up a few to paint another picture.

George>> That's not the story being sold to buyers who are led to believe that prime assets in NYC resi housing only go up.

Are you still hearing that story? I heard that story in 2005, in 2010, and in 2015. But honestly, I’m not hearing that story anymore.

The good folks at StreetEasy have done all the work of same-home resales across prime, no -prime, whatever:

https://streeteasy.com/blog/data-dashboard

The bottom print, shortly after the B301-ers bought, was 884K. The latest is 1035K. That’s 17% overall and 1.3% a year. And as you say, that’s from a bottom to what seems to be a booming time w.r.t. housing prices in the U.S.

Now will these folks beat 1.3% and pull off 2.5% or even a hail-mary 3.7%? Who knows, we shall see. But I’m kinda “whatever” — I’m looking at the 6.3x return in the S&P 500 between the day the went into contract, thinking they’ve swooped in to buy Manhattan RE at a once-in-a-lifetime price, and today.

On this house at 245 Waverly, the SE index was at 975k when they bought vs. 1035K now. A 6% increase. So if they sell at $6.5M or higher, they’ve done better than the market average.

That’d be of little consolation to me, because I’m looking at the down payment I quadrupled in the meantime, but the brokers were right. Manhattan prices don’t ever go down if you just hold long enough!

And who's taking investment advice from a real estate broker, someone compensated based on commissions when they sell??? You do know it only takes a 75 hour class and a pretty simple test to get your license?

I've had all kinds of sales people tell me all kinds of b******* over the years. I've always taken that advice with a grain of salt. And I'm a guy with a community college education along with a bit of a city college education.... But the streets taught me well.

Buying a primary home in New York City that you're going to live in for 6 and 7 years is not an investment. You're buying a place to live, enjoy, make memories in and all that other intangible and emotional stuff. If your timing was right and it turns into a good investment, awesome.

Again it's lots of fun too Pick-A-Part a few listings that have posted, and remind the buyer they're an idiot for not putting their money in the S&P, lol.

Especially when you cherry pick listings from a bubbling market like 2007. Emotions were running very high to secure homes and people were bidding recklessly. And buying a home has a lot of emotional input, something you can't really quantify versus the S&P 500. Real estate buyers get crazy in strong markets, then when real estate goes on sale, all the bears tell them not to buy, "I don't want to catch a falling knife". And suddenly buyers become very timid, frozen by tumbling prices and economic turmoil.

And just like real estate, stock markets have also sat in the doldrums and provided poor returns for long periods of time. And you can't throw a dinner party in a stock, cozy up to a nice fire or have a barbecue in your backyard ; )

For the period of December 31, 1999 through December 31, 2009, the S&P 500 index had an annualized price return of -2.72%. That was no fun.

Why so bitter about New York City real estate George? My guess is you probably had a bad experience. You've even been critical of my model, where I share my commission with you, never ever try to sell you anything, and offer 100% transparency. I was quite surprised when you criticized the model, and said you should just get a broker and trust them!? Lol.

Keith
TBG

Wonder what the price increase is on this one after factoring in reno cost - call it $4mm max with carry and trouble.
https://streeteasy.com/sale/755693

Another one from close to pre 2008 peak. Doesn't even seem to have an elevator. So probably $2mm reno at most but hard to tell without pictures.

https://streeteasy.com/sale/1531449

"For the period of December 31, 1999 through December 31, 2009, the S&P 500 index had an annualized price return of -2.72%. That was no fun."

https://www.millersamuel.com/charts/manhattan-average-price-per-sq-ft-co-opscondos/

The data is not repeat sales like SE Price index but gives you the general idea.

Clearly forward forecast of Nada in 2010/11 of SPX over NYC real estate has been a winner and he has been collecting and perhaps securing his winnings.
Nada, What is your view on NYC real estate (non ultra luxury resales) vs SPX looking forward?

I think we often discount how much of the 90s-00s price return of NYC RE was 1) national RE bubble, 2) demographic/generational preference change to cities from GenX/Millenial onwards 3) NYC crime rate plummeting 4) Chinese expat capital flow.

A buyer in 99-05 was rewarded for buying into what at the time may not have seemed like a sure thing the way the city does now in terms of being safe, well managed, with ample high paying jobs across a variety of hot sectors. City living became quite normalized again in a way that suburban living was normalized in the 50s-60s.

It's hard to see that kind of near decade bull run replicating, but I'd imagine we return to a more upward trajectory from the sideways trading we've been in for last 5~6 years? Nor am I sure what generational change or new China-sized country of expats could make NYC any more attractive than it already has become.

As far as near term upward pressure on prices, I will say that compensation has come uncorked as of late so you may see some interesting bidding wars next year as people who were already buyers suddenly have (a lot) more money. I am seeing compensation bumps, buy-outs, signing bonuses, written guarantees, etc that have been generally unheard of post-2008.

We will likely have a mayor who cares about reducing crime and supports schools choice. In addition, NYC hasn’t had the price increase the burbs have had. And RTO improving earlier next year with third dose and kids vaccines approval.

+1 on compensation’s coming “uncorked.” I am curious to see what Jan-Feb brings as the $2-3M buyers spend the 2021 bonuses that will be hitting their accounts about then.

Boom and Brooklyn together again.

https://www.brownstoner.com/real-estate-market/brooklyn-real-estate-closed-sale-prices-third-quarter-2021-rise-boom-continues-elliman-report-miller-samuel/

You can always torture the numbers any way you want

300>> Nada, What is your view on NYC real estate (non ultra luxury resales) vs SPX looking forward?

Vanguard is projecting 3.4% in expectation for SPX (https://advisors.vanguard.com/insights/article/marketperspectivesaugust2021). If you are talking about NYC RE whose rental yield is 3%, I’d guess it’s in the same ballpark unlevered. So not very exciting in either case. Risk in RE is much lower (a third?), so to the extent you believe in comparing on a risk/reward basis (which I do), NYC RE yielding 3% is better. E.g., levering it up 3x to equalize risk, using 2% money (30yr bonds, say) gets you to 6.2% rather than 3.4%. For NYC RE whose rental yield is 2%, it’s probably a wash. And at 1%, probably worse.

Or, one give up trying to compare owning his or her primary residence to alternative uses for cash, particularly for those properties where the level of investment is entirely frivolous spending on excess space, fancy neighborhoods, luxury finishes, renovations to personal taste, etc. I just traded in a 3.5 year old vehicle for which I paid $110k for about $70K. Yes, that money would have made rather than lost money in the market. Yes, I would have "lost" less money on a Honda. Yes, renting a car when I needed one would have been much, much cheaper than owning, parking, insurance, maintenance. Sure, in many places you can buy a house for $110k. So what? Is anyone really sitting around saying should I buy that SoHo loft for $5MM or rent a Winnebago and invest in munis?

Real estate booms are are relative. My parents bought a house in an outer borough in 1963 for $7,500, and sold it 30 years later in 1994 for $350k. Over the nearly 30 years since, its value (same owner) has probably about doubled. Both owners probably think they did pretty well.

@nyc_sport once you decide which kind of apartment you like, luxury or not, with excess space or not, in any neighborhood) you still need to decide how to pay for it: either own or rent.
Whether you prefer to own or rent will depend on a few things including availability of cash for down payment, availability of cheap credit, alternative uses for that down payment cash, outlook on price performance of that apartment as well as outlook on future rents. If you think prices and rents would go up, you might be inclined to buy. That's what we are discussing here. What do you think? Can real prices (and rents) double again in the next 20 years (sorry, cannot think with 30 year horizon)?

Krolik,
1. Main issue is that rentals of the type and location you want are not always available. Then you have to move every few years. Think Mouse. Also, there are plenty of people in NYC with significant portion of cash in their portfolios due to their risk tolerance for equities. Down payments does not make any difference to their portfolio allocation to equities.
2. Clearly, it is much cheaper to rent ultra-luxury than buy it as that market is still flooded with unsold supply which can last another 10 years.

@300_mercer

1. I think it is not so much about rentals vs sales availability, as it is all about willingness to pay. Mouse wants a lot of things that he is not willing to pay for. Low price, high ceilings, recent renovation, W/D and super prime neighborhood. If he relaxed any of these requirements, there are good rental apartments out there for him to find. With all the parameters he has, any such unit would cost an astronomical amount to buy, possibly it is a much worse deal (as you note, at the luxury level rentals are a better deal anyway).

2. Why? Lowering price and selling off some of the luxury units would lower the cap rate denominator, while simultaneously reducing supply of rental units and lifting price in the numerator. Why is the market for luxury apartments NOT getting rebalanced towards a more normal cap rate? Where is the market failure?

On 1. The key as you pointed out is that renters in non ultra-luxury have to relax their requirements to get a good rental deal. In buying a coop on prime UES, not so much as long as you are willing to deal with stuffy coop boards.
On 2. Ultra-luxury prices have come down by 15-40% depending on the building and I think still have more to come down due to over-supply. Market adjustment in real estate takes a long time as in years. Also, ultra-rich like to own as cost of equity does not matter to most of them (Think Ken Griffin or Bezos as an extreme example and rich people buying $10mm++ artwork), they want to personalize and they want freedom of not having to move. They have plenty to invest after paying for their apartment in cash. The above are the reasons why rental in ultra-luxury will continue be cheaper vs renting and offer opportunities to Nada. But for mere luxury resale of $2-3mm of the type Mouse wants, cap rates are higher at 2.5-3%.

Krolic, Here is a appx 1300-1400 sq ft 2 bedroom in prime location with $7 plus sq ft in rent. It has low ceilings of 8 foot. Kitchen is clean but not fancy. Bathrooms also the same type. If this were to be sale, it will probably sell for $2mm.

https://streeteasy.com/building/the-hilary-gardens/34j

@nyc_sport, what Krolik said.

The more appropriate analogy would be whether you should have bought your car or leased the same one. If you could have leased it for $100 per month, you’d have probably considered that, no? And the rate that the leasing company charges is the cost of capital.

Krolik, I think the inefficiency comes from a few factors.

First, unlike cars, there is wide uncertainty and dispersion in the future value of a home. A person who thinks something will appreciate more might be willing to rent it for less.

Second, there is the “work” involved in renting a home. Renting a $10M apt is 100x less effort than renting 100 $100K apts, possibly less because you are dealing with people with high ability to meet their obligations.

Third, unlike car leases, nothing is institutionalized. So while people here talk about a “personal” cost of capital, e.g. if I keep my money in the bank then the cost of capital for a down payment is 0%, financial institutions don’t last very long with that sort of questionable viewpoint. But individuals do. If an individual’s “personal” cost of capital is 0%, why shouldn’t they lend an asset to you at 0%, particularly one that appreciates (despite yielding 0%)?

Fourth, the higher you go in price, the more people can invest relative to the number of people who are willing to rent.

Nada, Individuals are not financial institutions and financial institution who risk all their capital on a risk adjusted basis (not talking leverage being full utilization of capital) have a run on them like Lehman. All bank now maintain a huge liquid asset pool as per the regulation. GS has almost $200bn liquid asset pool which makes 50bps at most and debt costs them much more.

Forgot to ask who are the individuals who keep 10s of millions in the bank or money market accounts?

$318bn for a stressed cash outflow (very draconian as I know it well) of $178bn. Essentially $140bn extra vs prudent business management.
https://www.goldmansachs.com/investor-relations/financials/other-information/2021/2q-2021-liquidity-coverage-ratio.pdf

US banks are overrun in cash...
https://www.wsj.com/articles/banks-debt-sales-are-driving-the-corporate-bond-market-11635240601

Do you mean overrun in cash as they are issuing bonds at 1.5 to 2%?

Nada, Look at page 13 for cash kept by Individuals with $1mm investible assets. And this figure may not include the cash these individuals keep in the bank for emergency. So 27% cash.

https://www.capgemini.com/es-es/wp-content/uploads/sites/16/2019/07/World-Wealth-Report-WWR-2019.pdf

Just wanted to share the linked article that says they are issuing bonds to maintain long-term vs short-term capital ratio. Requirement to always have a certain proportion of bank liabilities be long-term was designed to prevent bank runs, but it was not anticipated that banks could end up needing to issue bonds just because of too much deposits, and in an environment with limited opportunities for lending.

@ionada

1. Why is this dispersion more pronounced at the high end? Why are people at the high end more inclined to think the price of their unit of real estate will go up?

300, I’m not sure I understand your point. All I’m saying is that while financial institutions play by a relatively fixed set of rules, individuals do not. This can lead to vastly different rates for leasing.

I’m pretty sure the lease rates of a Honda Accord and a Bentley are the same. And you don’t find lease offers on some trims of Bentleys from some dealership that are half of others. I figure that’s because they all agree (through markets) on a cost of capital. Individuals with cash in the bank, not so much.

>> Forgot to ask who are the individuals who keep 10s of millions in the bank or money market accounts?

I guess you answered your own question, 27% of $40M is over $10M?

Krolik, that’s a fine question.

I think there are a number of people at the high end who achieved their net worth through RE speculation. So, they rode a wave of sound investment (90’s) to bubble (00’s). Maybe they had some luck in the 10’s with the right building (e.g., 15 CPW), maybe not. More importantly, they never recognized the 00’s as a bubble and think the 10’s a blip. These people who speculated in RE are more likely to have money they need to put to work.

There’s also a discrepancy between the number of people who have enough money to live in a $10M home vs ones who can invest in one, something that I don’t think exists at lower price points.

To explain what I mean, 300’s link shows there are about 500K people in the US whose investable net worth is between $5M and $30M. All these people can invest $3M as a down payment for a $10M home. They can get an I/O loan on the $7M and pay (say) $20K interest on top of $10K monthlies for an outlay of $30K per month, mostly offset by (say) $25K in rent. They can float the $5K in negative carry cash-flow wise as part of their investment.

On the flip side, let’s look at the renter pool. While minimum qualifying income is 40x, the real pool is 80x (e.g., see Mouse). So $2M income. Only around 100K people at that income level, enough to live in a $10M home (buy or rent, probably).

So there’s a large discrepancy between those who have enough money to invest in expensive home vs those who can actually live there. Add on top of that the fact that most people who can live in a $10M home probably already bought a home and are not renters, and you have an even larger supply / demand issue.

300>> Main issue is that rentals of the type and location you want are not always available. Then you have to move every few years. Think Mouse.

To reiterate what Krolik said, they are always available. Just maybe not at the price you want. Honestly, I’m not sure I could pull off my renting in most of the country. About 10 years back, I briefly considered living in suburbia for a year to see what it was like. After seeing 1 home in 1 town, I had enough. Mostly because I decided suburbia want for me. But also, the rental price sucked relative to the price / quality of the home. Maybe it’s different now, I dunno. But Manhattan is one place where vast numbers of homes across every price point is available for rent.

300>> Main issue is that rentals of the type and location you want are not always available. Then you have to move every few years. Think Mouse.

To reiterate what Krolik said, they are always available. Just maybe not at the price you want. Honestly, I’m not sure I could pull off my renting in most of the country. About 10 years back, I briefly considered living in suburbia for a year to see what it was like. After seeing 1 home in 1 town, I had enough. Mostly because I decided suburbia want for me. But also, the rental price sucked relative to the price / quality of the home. Maybe it’s different now, I dunno. But Manhattan is one place where vast numbers of homes across every price point is available for rent.

I’ve been renting in Manhattan for 18 years now. Not once did I have to move, either because the owner needed me out (to sell, say) or because of a ridiculous price increase. Perhaps I am due for my luck to run out, but even if that occurs, it’ll be a once-in-20+-years event.

Honestly, I think Mouse’s issue is not knowing when/where to pull the trigger.

This is one big reason for ultra-luxury rental discount. Plenty of people in Manhattan who will pay $8-12k for a 2/3 bed room. But not that many once you go above that.

"So there’s a large discrepancy between those who have enough money to invest in expensive home vs those who can actually live there. Add on top of that the fact that most people who can live in a $10M home probably already bought a home and are not renters, and you have an even larger supply / demand issue."

I agree. For whatever reason, lots of people have mental blocks about how much is “too much” to spend on rent in w/o equivalent blocks about “too much” to spend on buying. E.g., by my math, if you are buying a $10M apt with $10K in monthlies, you are spending $35K a month. You might disagree with my number, but my point is that many people of means would not blink at spending the $10M plus $10K monthlies. They would, however, consider (say) spending more than $10K in rent on anything as too much.

I think I’ve mentioned before that through a twist of fate, my old apt from last year was rented by someone I know. He used to be my boss’s boss and is now a friend. My new apt’s value is ~2.5x my old apt’s, but its rent is only ~1.5x. The guy’s RE holdings are on par with my new apt (he’s renting my old one because he’s undertaking a massive reno/combo). Clearly he likes fancy RE and can easily afford my new apt.

When we spoke and he found out what I’m paying for what I got, he was floored. He said he didn’t see the listing because he didn’t even think to look above $X, because he thought that’s just too much to spend on rent in an absolute sense. I’m glad: I don’t need the competition — neither from him, nor others!

To conclude, when I am rich, I will switch back to renting.

You mean at least $10mm net worth rich?

Or $15k plus rental budget.

Or switch to renting when you don’t have to worry about good school districts and moving kids from school to school, something which it would seem Nada doesn’t have to concern himself with.

My point was much simpler. For one, I do not think there is a comparable rental market for most higher-end homes (and I do not necessarily mean only $10mm+ levels referenced above). Two, I do not think renters rent with a view toward remaining in that apartment for 10+ years, and in most cases even 5+ years. When rentals get tired or need to be updated, you move on. While Inonada has never had a forced move in 20 years, if you look at the rental units above $20k/mo most are (a) excess inventory in new developments, (b) units simultaneously for sale, (c) units in coops with limited rental terms, and/or (d) units that suggest to me at least are owners that transferred jobs and expect to return. But I agree with all of the above that there is a very limited market for expensive rentals, which in in my view in part reflects that, if you plan on being some where for 2-3 years, it is logical to say I can suck it up with less ideal living conditions and spend the $300-$400,000 elsewhere. The mental block reflects a tolerance for inferior quality over a short term.

But, even if you could hypothesize that there were comparables, and a crystal investment ball said with 100% certainty over the next 15 years investing in the securities market at the same level of principal risk -- while absorbing the rent risk, inconvenience, and inferior living situation of being a renter with no control over renewals, neighbors, decor, improvements, etc. -- would produce a $300,000 better return, I would not take it. The present value of that $300,000 in exchange for being a renter for the next 15 years isn't remotely worth it to me.

But as much as one tries to control for outside influences in doing this math, it is all funny math. If you tried to do this over a 5-7 year horizon, perhaps some parts of the math is tethered to reality, but I would say no-one buying a house with a 5 year horizon is making a wise financial planning decision. Beyond that, does any ordinary person invest personal capital in securities markets with leverage? Does the math consider that $500,000 of the capital gain on a sale of a home (in other words, for most folks, all or virtually all of any probable gain) already is tax exempt, and will that increase further as capital gain tax rates continue to rise? Is the alternative investment producing annualized taxable income along the way? Will SALT tax relief return? Will the long-threatened NYC property tax reforms ever happen and quadruple the property taxes in prime Brooklyn, and double taxes on much of UES and UWS? But this goes back to the same point: If you have a 10-15-20 year horizon, how much lost opportunity costs would a buyer absorb for the added certainty, convenience and flexibility of ownership? I do not think doing some math that comes up with a value discrepancy answers the question.

@300_mercer I guess 15k+ per month housing budget is the right/relevant measuring stick of being rich

At the low-ish (for Manhattan) end where I am currently, I think buying is more economical.
Sample math. Inputs:
1.1M purchase price (incl. improvements and closing costs), 32% out of pocket and 68% financed
2100 per month maintenance
2.9% interest rate on mortgage
35% marginal tax rate
3% blended opportunity cost of capital (combination of public market stocks, bonds with miserable expected returns based on link ionada shared)

What is costs to own:
Plus: 21,692 – annual interest expense on 748k of debt
Plus: 25,200 – annual maintenance
Plus: 5,000 – annual capital improvements / repairs
Plus: 10,560 – annual opportunity cost on down payment capital (@3%)
Less: 7,592 – annual tax shield (from mortgage interest only)
Total: 54,860 per year / 4,571 per month

Vs. rent for a similar unit: 5,000+ per month

Saving money before accounting for any inflation/appreciation!

Now if opportunity cost on down payment was above 4.5% per month, cost of owning would be closer to rent and the decision might depend on expectation of RE appreciation

@nyc_sport agree this is funny math anyway, but not a useless exercise

I am most interested in the question of why buying might be more economical on lower end, but the opposite is true at the high end.

I think UES is paying a lot of taxes, are you sure these taxes might go up (on condo coops) if reform is passed?

ph41>> Or switch to renting when you don’t have to worry about good school districts and moving kids from school to school, something which it would seem Nada doesn’t have to concern himself with.

True, not something I've had to deal with. Could be a fun additional constraint to juggle, in place of the constraint I currently have, which is to avoid neighborhoods I've lived in before. I also probably deal with uncertainty and neurosis over "good schools" better than most. The way many people raise their children is anathema to how I'd raise mine. I'm not saying they're wrong, just not how I'd do it.

@krolik>> To conclude, when I am rich, I will switch back to renting.

Except by the time you get there, the opportunity may have gone away. That's one thing I've learned: you have to play the hand you are given not the one that once was...

Krolik - On property tax spread, my view on property tax distribution is largely anecdotal. But, by calculating taxes based on "rent equivalents" in arbitrarily defined "neighborhoods," properties in areas with lesser rentals or a greater level of regulated rents, or higher $/sf, generate lower taxes on a dollar per value basis. As one example, this article suggests 740 Park residents pay a lot of taxes, but they amount to about 0.4% of market value in annual property taxes. https://streeteasy.com/blog/nyc-property-taxes/

If so, that is less than half the rate I pay on a loft in Union Square. I be happy to say mine are too high, but that is not the direction any property tax reform is going to head.

@krolik, I think @nyc_sport's post reveals some of the biases that drive the discrepancy:

>> I do not think there is a comparable rental market for most higher-end homes
>> When rentals get tired or need to be updated, you move on.
>> if you plan on being some where for 2-3 years, it is logical to say I can suck it up with less ideal living conditions
>> The mental block reflects a tolerance for inferior quality over a short term.

If I may summarize: "You rent when you have no other choice. But once you grow up, you buy." By the time you get to the high-end market, all the people have other choices and are grown up. So the biases suck the pool of potential renters dry.

I am not trying to say that @nyc_sport's biases don't match his/her reality / experiences, but they really, really do not match mine.

@Ionada "Except by the time you get there, the opportunity may have gone away. That's one thing I've learned: you have to play the hand you are given not the one that once was..."

Are you predicting a RE sales luxury market crash? Or a rise in luxury rents? or a rise in carrying costs (interest rates/taxes)?

@nyc_sport
"...I be happy to say mine are too high, but that is not the direction any property tax reform is going to head."
I think the reform was supposed to be revenue neutral... but I am also skeptical on this front.
I think there is a lot more room to raise taxes on houses, some are way below 0.4%, which might be okay if everyone is paying that amount.

@krolik, I'm a fan of funny math, FWIW. You can see how long I've been posting here. When I ran it (publicly, ad nauseum) a dozen years ago on more reasonably-priced apts, I'd get interest+expenses covering rent with a (say) 35% down payment. (Interest was a point or two higher back then.) My outlook on ~10-year appreciation, after transaction costs, was flat. So zero return on the 35% down payment, in my estimation.

I figured after a dozen years, S&P would have a return in the 3-4x range. (I think if you look at historical predictions from the Vanguard model, that's what you'd see.) So, my funny math said that after a dozen years, I could either:

- buy apt X with 35% down, make payments, end up with nothing more than 35% of apt X and some good memories
- rent apt X, make same payments, end up with 105-140% of apt X and some good memories

Of course, I had no interest in using the 105-140% of apt X to actually buy apt X. Unlike many people, buying a home is not a life goal for me. I'd rather use it to rent apt 2X or whatever.

How did my funny math turn out? I think I was spot on for the buying option more or less. For the rent-and-S&P option, I was wrong: that turned out to be more like 200% of apt X. That's kinda what happened to me. I can literally trace investments I made back to that forgone 35% down payment, investments with no higher risk (IMO) that I wouldn't have make had I bought apt X. The final resting place of that investment now throws off enough cash annually to cover, after-tax, the rent of my apt 10X. A fortunate turn of events, better than I was expecting, especially with the opportunity for its final resting place (one that I would have otherwise missed w/o the 35% down payment money).

I am not suggesting that any of my funny math works now, that anyone else should have followed it then or now, that anyone else would have invested as I did, etc.. Everyone should do / have done whatever they want. I really don't care. I'm just saying that running "funny math" was helpful to me personally for framing my choices, particularly in the face of conventional wisdom, and the outcome has been beneficial to me. I infinitely prefer it to shrugging my shoulders and declaring "anything can happen".

@krolik>> Are you predicting a RE sales luxury market crash? Or a rise in luxury rents? or a rise in carrying costs (interest rates/taxes)?

I wasn't predicting anything specific. Mostly, I was saying that by the time you get rich the landscape may have shifted, so be sure to run your forward-looking "funny math" again. I think you're the type of person that would do so, but many people have a tendency to run backward-looking math blindly.

If I had to guess, I think the gap will narrow over the next decade. The bloom has come off NYC RE as an infinite fountain of investment perfection, and that will work its way through the market. Less demand for high-end condos, less building of high-end condos, etc., etc. The 2010's-ers were chasing the glory of the 2000's, creating a glut. No one thinks they're going to get rich, or have a safe haven, anymore by buying super-expensive NYC apts that few have the means / desire to live in. That lack of demand has trickled back into muted construction of these sorts of apt, and the supply will slowly get taken out w/o similar supply replacing it. My good times will come to an end, and eventually I'll have to pay full fare.

Sucks, but there it is. I've had a good run, don't cry for me....

@ionada at that point maybe you'll have to switch sides and buy one :-)

I’m dreading the day. My stated life goal is no never own a piece of RE, but if the financials switch I’ll be forced to as well.

Come to the dark side, Nada. The force is strong....

> Ino - you’re very glib.
Then again you’re not paying $130k for private school for 2 kids

Ph41, Not really. He has been consistently in favor of renting over buying and investing the downpayment in SPX. And he may change his view when he thinks buying ultra luxury real estate is better value than SPX. Just an investing view without any emotional attachment.
I think the disconnect is created as what he says doesn’t work as well for lower $ price per sq ft (call it $1000-1500 per sq ft 1000-1300 sq ft rental 2/3 bed apartment) as cap rates are higher in that segment at 3 percent or so where as ultra luxury segment is 1-1.5 percent cap rate.

Perhaps — just like I was glib 10 years ago about renting instead of buying & investing elsewhere. You can do it your way, I’ll do it mine.

For me, it’s not the $130K. I just saw too many private school kids freshman year who were overconfident, coddled, and insecure all at the same time. Totally unprepared, academically and emotionally, for the reality that hit them in the form of natural talent & drive from kids who had the actual chops. You can’t buy natural talent, and drive seems to go with the inverse of spending.

But what do I know, people should feel free to obsess over paying $130K for private school for 2 kids. Their kids, their money.

300, I think ph41 was referring to my glibness about kids & schools. At least, that’s how I interpreted it.

FTR, I am making no statement about SPX nowadays.

@Nada - come to the dark side and own some RE, just not in NYC where cap rates are in the toilet. There are far better places to stash cash into real estate, or there were before it all went crazy. Places in Nowhere are being flipped for 75-100% premiums vs. their selling prices in fall of last year.

Nada, On why people send their kids to private schools in NYC. There are a few factors in my opinion. Some of them are:
1. Even good schools districts are not as good as good Suburban schools where as the private school parents expectations are higher than a good Suburban school district.
2. NYC schools go from K-5 (some good schools here), then some mostly not so good 6-8 middle school and they some top rated Public high schools. If you buy in the right suburb, there is no need to worry about whether you kid will get into the right high school.
3. Private schools are all about taking a 90th percentile kid, genuinely making them 95+ percentile and getting them into good college by coaching them what to say and how to say it to bridge another 2-3 percentile gap. Parents know it and pay for it to get their kids an edge. There is an element of cutting edge talent which is innate and private schools can't do anything about it.
4. In relationship oriented professions such as Investment Banking, connections and how you speak matters (essentially politics). And private schools are very good at making little politicians out of the kids.

5. I have found that writing/communication skills of kids in top private schools are really good. Not sure that is because their parents are rich and highly educated or is it school. Perhaps a combination of both.
6. Then some people just want prestige of private school.

Of course, private schools in NYC are really expensive and creates real estate situations like Mouse has.

@George, I have no interest in living in Nowhere or having a second home. Just not something I’m into. My day job pays too well to play real estate tycoon on the side, and I have good investment opportunities elsewhere. So for me, RE is for consumption, and NYC is where I consume.

It's not the private schools, it's the parents.

300, I understand your points. I just feel differently about them. This is not a judgement on others, just how I’d view it for my (hypothetical) kids.

1. Good suburban schools are better than private schools, IMO. Better competition, less warping.

2. If the kid can’t get into a top NYC public school, they’re probably not top academic material. That’s OK, let them focus on who they are.

3. Sounds like insecurity on the parents’ part. In the real world, talent & drive matter. I know plenty of people from second-tier schools who went onto big things, much bigger than most of their first-tier cohort. Getting into a good college for the sake of getting into a good college won’t get you far in life, nor what to say / how to say it. It’s just one point along a lifelong path.

4. If my kid wants to be in such a profession, so be it. But fuck if I’m going to steer them into that crap.

5. Not sure.

6. Oh dear. Freshman dorm-mate: “Well, Jamie went to Exeter.” Me: “What the fuck is Exeter?” By the time all was said & done, turned out to be not a whole lot more than giving kids egos that get unfortunately shattered in the face of the real world / competition. These kids wouldn’t have made the top-10 at my public high school, but they came in thinking they’d be at the top of the college. That’s gotta be tough emotionally at such a fragile age. I’ve had more than one conversation whereby said person so regretted their arrogant freshman selves. I didn’t think they were that bad, but apparently it carried with them.

Having been in Nada's home, perhaps one of the top 3 coolest/insane apartments downtown, he's doing something right.

Buy/rent what's the difference? Do what works for you emotionally and financially. There's no guarantees when you buy real estate or any investment anywhere, other than perhaps we can agree, everything goes up over the long term.

>> everything goes up over the long term

Even that’s in question. If we all abandon the US dollar and start denominating in Bitcoin instead, everything should go down in the long term. ;)

Ah.... If only I would have bought that $10,000 worth of bitcoin 15 years ago. Instead I listen to my smart hedge fund friends, that told me it was worthless scam. Then we would be neighbors, and I would look down at you as a lowly renter.... : )

On 3. We are all familiar with the admission scandal. Speaks volumes to that point.

Keith, the only problem with your plan is that bitcoin hadn't yet been created 15 years ago ;). Putting that aside, top 3 is a tough standard. Where would you look down at me from, perhaps one of these 3?

https://streeteasy.com/building/the-woolworth-tower-residences/pinnaclepenthouse
https://streeteasy.com/building/56-leonard/ph6061
https://streeteasy.com/building/111-murray-street/ph2

If I had the money and three kids, my choice would be Woolworth but at 40% discount.

Maybe it was closer to 10?

We have discussed that Woolworth penthouse. However I was thinking in your building, just maybe one floor higher? I need to keep an eye on you renters.

No to Leonard St & Murray St: Not enough wall space to hang the art collection.

The right floorplan at Woolworth could be pretty amazing. (mostly don't like the concept photos though -- I'm pretty traditional in my floorplan wants).

@keith, 10 years is more like it. Good call on one floor higher, you need to keep a close eye. Too bad I’m just a renter with no control over my neighbors…

Woolworth seems the winner, but I think 300 & Aaron2 are about to start a bidding war…

Ha. I don’t have (and highly unlikely to have unless I win the lottery without buying the ticket) the money or the need for space. It be very interesting to see where it sells. I think it is more like $40-50mm in its current unbuilt state.

I may throw my hat into that bidding war with 300 and Aaron. I just want to see 300 pay more : )!

@nada you need to move into a stuffy co-op then you can really ice me out good

Ha. 300 always wants a deal needing gut reno. May be one day he will be silly and rich enough to build some condo building ground up in NYC.

Keith, I think you should buy this one:

https://streeteasy.com/building/50-west-street-new_york/sale/1554798

At $65M and $30K monthlies, it’d be nothing relative to your crypto-wealth. What is that, 1000 BTC upfront & 0.5 BTC each month? Didn’t you trade some beads for that in 2011?

And you could rub my face in the fact that you could have rented it for no more than $65K / 1 BTC a month but chose not to, lest you lower yourself to my level:

https://streeteasy.com/building/50-west-street-new_york/rental/3626823

Ha! But I don't love the location. Hypothetically, if I would have pulled the trigger on that BTC, I'd buy a townhouse or a condo on 5th avenue UES or one of the park blocks up there. I just find it very peaceful. I spent 30 years living downtown or in Brooklyn, Upper East Side appeals to me.

We should start a thread on crypto. It's trounced equities and real estate and everything else. I sort of understood the appeal of blockchain back then, however, I was trying to be an investor and not a gambler like I had been in the past, very unsuccessfully. I was essentially starting over, and it was the beginning of The Burkhardt Group. I had an interest in crypto early on... Believe it or not it was my doctor, who is also a friend that was twisting my arm to buy Bitcoin!

What sort of life do the tenants of 50 West, PH1 live that they need security cameras in the rooms? I counted 3, and there are probably more. No thanks. Also, all those lot line windows (highly unlikely in my lifetime they'd be blocked, but still...)

Keith: If you don't mind a smaller space (only ~6000 sq. ft), Jayne's Lenox Hill co-op apartment is still available -- and now knocked down to 39m, so you don't have to cash in as many BTC. (Needs some remodel though: I know that the push buttons for summoning staff were sold at auction last year.)

https://streeteasy.com/building/820-5-avenue-new_york/3-fl

There's another building she owned, with smaller apartments, not too far away which I think is also on the market. (can't find my notes on that one).

Aaron2, I certainly appreciate your assistance. But I'm limiting my search to condos and townhomes. These stuffy co-ops don't understand that BTC is the new family trust.

@Keith you are passing up an opportunity to live in "one of the most important residences on Fifth Avenue", according to the listing!

To paraphrase a great American, " I don't want to be part of any club that would accept me"

Thanks for the find, Aaron2.

Come on Keith, be a sport ol’ boy. Sure, it’s not my cup of tea. Middling views, adequate windows though not expansive, and too broken up without a salon grand enough to make a point. But then again, you can’t really pull that off with mere 12’ ceilings. In a word, too much class for my nouveau riche sensibilities.

BUT, I wouldn’t mind being invited by you for a cup of tea every now and then if it were your place. Served by one of the 2-5 staff you have living on-site, to be sure. Perhaps a soirée every now & then, so I could dust off & powder my wig? I haven’t had occasion to use that in ages….

If someone don't know what "Boiseries" is/are but has enough money and income, will the stuffy coop approve them?