Trouble in paradise? (Well, Brooklyn that is)

For sure. My condo is basically completely frozen. From a pandemic peak of 10 sales/year.. 1 sale in 2023, a full year from the last closing in 2022. Most recent other units to go into contract both appear to have fallen out of contract.

Interesting to see the brokers quoted extensively there. One of them sends me very frequent earnest emails about her great Brooklyn listings..

Re: Queens isn't so bad.
Depends on what you moved to BK for right. WB for example seems to have skipped a few steps of gentrification and gone straight to junior oligarch shopping district. Chanel, Hermes, etc.

You might have moved here for more space, less crowds, and the food scene and now find most of that to be no longer true in a few short years.

Sales at the top end in Manhattan seem very frozen too. I’m a spectator in the sales market, but I see/hear a fair amount from my rental interests. There just seems to be a lot of people who have moved on from their old homes and are therefore looking to sell, but few people are showing up on the other side. It doesn’t even seem to be a matter of unrealistic expectations on price, the sellers seem reasonable and soft on asking prices that are at or below acquisition costs. Just very few people show up on the opposite side.

I’ve sorta concluded I’m a renter at heart, I just get bored after a few years and want to try something different, so it’s not even a matter of price anymore. I guess at some price, I would bite. But I wasn’t willing to bite at current-ish prices when mortgages were 2.x%, it just didn’t make sense to me financially on its face, to say nothing of long-term outlook once the Fed stopped pumping money. Now, it’s the same price with mortgages at 7.x%. Why would I bite now, when I can basically still find places whose cap rate is 2% (or 3% if I’m not even trying)? I do empathize with those trying to sell, it’s a tough situation, but it also serves as a reminder for why I shouldn’t be buying anything. Who wants to be stuck trying to sell for 2 years without success?

Ultimately the price has to come down. In helping my friend look at how to invest his $5m inheritance, I'm not seeing anything even remotely interesting relative to, say, private credit.

>> Ultimately the price has to come down.

How do you think that plays out over the next (say) 10 years?

Minimal nominal appreciation, inflation in the 4% range eating away at appreciation, more renters, continued movement outside the city, higher taxes. In the mid range of course. Not at the $25m range

Interesting. I’m seeing it similarly, except some nominal depreciation (1-2%/yr, more upfront less later) further eaten away by more measured inflation (2-3%/yr). So the same 4%/yr differential, just in a different way.

10 yrs is a long time, I’m sure we’ll both be wrong either to the upside or downside.

@George - that's exactly my thought
When inflation runs high & long enough that sellers selling "at break even" or "hey I still made some money" in nominal dollars = market clearing price in real dollars for the buyers. 3 years, 5 years, 10 years.. tbd.

Other commentary I've seen was looking more from the interest rate differential / monthlies basis and.. it's not a pretty picture for people holding sub-3% mortgages if they expect any price appreciation.

Even with a 20% down payment, higher interest rates make monthlies 60% higher for a condo buyer than for the current low interest rate mortgage holding seller. Let's say mortgages fall back to 5% rates in 12-18 months, then the monthlies are "only" ~25% higher. At say 5% inflation, that's still 5 years for our nominal/real dollars formula to work out to clear prices. Yikes.

Oh and presumably there's a recession in there somewhere, which would extend the break even longer as people don't bid up RE in a recession.

In the meanwhile the only people transacting are sellers who HAVE TO (divorce / too many more kids / whatever) presumably selling to non-picky (not much inventory choice) cash rich buyers? Probably not a lot of those.

Steve>> Even with a 20% down payment, higher interest rates make monthlies 60% higher for a condo buyer than for the current low interest rate mortgage holding seller. Let's say mortgages fall back to 5% rates in 12-18 months, then the monthlies are "only" ~25% higher. At say 5% inflation, that's still 5 years for our nominal/real dollars formula to work out to clear prices. Yikes.

I’m sure you’re aware, but even that is a very optimistic scenario given what markets say. Interest rates are just as likely heading up as down, and inflation is priced at 2.5%. Paint the picture with that baseline case, and you get something much uglier. To say nothing of a pessimistic scenario.

Trouble in mortgage origination paradise too:

https://www.wsj.com/finance/banking/the-mortgage-market-is-so-bad-lenders-want-ex-employees-to-give-back-their-bonuses-52e96080

@inonada Maybe those who in a position to do so are better off just selling stocks and bonds and paying captial gains to buy a place?

Maybe. But they can just as easily sell and collect 5.x% in cash-equivalents too. It depends on one’s outlook and priorities, I guess.

I have some cash on the sidelines, am renting, and have been looking at places. I share Nada's view.

If a place costs $1.5 million and has $3k monthlies, as a cash buyer I think that you look at it as that $1.5 million 1.5 million can generate easily at least $6.5k per month in interest payments, plus the $3k get you to that apartment costing about $9k in total monthly opportunity costs. Those interest payments are taxable, but I do tend to look at it as "do the effective monthlies of this apartment compare to what I think this would rent for" and right now a lot of places which have $10k opportunity costs seem like they would rent for $7,500.

@inonada thanks - Was thinking of wealth preservation - how big would you lose buying cash and paying tax on cap gains vs taking out a mortgage and staying in the s&p 500 or money markets - is it just a no-brainer? Assuming the person wants to own for the reason most people do: having shelter in a vibrant city where you won't have worry about moving late in life. Right now, it seems like a wash between cashing out, paying cap gains vs paying 7.x% interest. A mortgage broker says anyone would be nuts not to take out a mortgage. But he - and anyone in finance, probably - has got a dog in that fight.

Woodside,
What will you make post tax? 4.8% 5y treasury less 25% federal + 9 % city and state (plus 3.8% medicare tax potentially). Call it 3.2% post tax risk free. T Bills will give you another 50bps to 3.7% ($55k per year on $1.5mm; $4600 per month).
---
"1.5 million can generate easily at least $6.5k per month in interest payments".

For high-end, this calc is not going to work as the cap rates are much lower in that segment.

The cult of "It's always a good time to buy" has a big book of excuses.

>> Was thinking of wealth preservation - how big would you lose buying cash and paying tax on cap gains vs taking out a mortgage and staying in the s&p 500 or money markets - is it just a no-brainer?

Taxes can certainly put an interesting twist on things. However, is it really a choice is between “pay taxes now” and “pay taxes never”? Sometimes it can be, but in more typical situations it’s more “pay taxes tomorrow”. Deferring taxes / compounding in the interim certainly provides a boost on after-tax returns, but that boost depends on high rates of return. So maybe what you’re proposing makes sense, but I’m guessing if you run the numbers, it’d require assumptions well beyond ones I’d personally feel would be sound.

Also, money market funds do not sit on capital gains. And virtually every bond holding right now is sitting on capital losses, which should on the margin encourage one to sell rather than hold, to take the capital loss.

The notion of essentially using mortgages at 7.5% to leverage into stocks/bonds/RE is also interesting.

I remember discussions from a couple of years ago where the “plan” by some people was to leverage by: (a) buying RE; (b) taking a cheap mortgage; and (c) keeping the proceeds in stocks/bonds. With (say) $1M in each leg, after 2 years their “plan” should have netted something like +$120K: (a) +60K RE appreciation; (b) -$60K interest payments; and (c) +120K stock/bond gains. The reality has been more like -$240K: (a) -60K RE depreciation; (b) -$60K interest payments; and (c) -$120K stock/bond losses.

While I was not a fan, I could see why the “plan” could hold sway for some in 2021 with 3% mortgages. In 2023 with 7.5% mortgages, it stretches my imagination.

>> For high-end, this calc is not going to work as the cap rates are much lower in that segment.

Working through Woodside’s example, he’s showing s cap rate of 3.2%. The high end is 2-3%.

On the other hand, a $1.5M buyer is probably in the blessed land of 24% federal tax rate with no NII. Treasuries pay no state/local taxes, so such a person can clear 4% after-tax in T-bills. Against 3.2% cap rate.

The high end counterpart is looking at 3.2% after-tax in T-bills against 2.x% cap rates. So not that different, really.

More interesting, to me anyways, is that we’re now comparing risk-free, after-tax yields against a risky asset in a manner whereby yield is maximally tax-advantaged, and we still cannot make it work out!!!

At least over the 2009-2022 era, one could make a case for 2-3% cash in RE being better than 0% cash in bank. It wasn’t a compelling case, IMO, a bit straw man for my tastes given the pairing of risky against risk-free. But now, we don’t even have that anymore! Yikes…

You always have to believe price appreciation to make Manhattan resi real estate work, else prices would be a fraction of what they are. (And apparently now prime BK resi too).

One thing I learned studying real estate as a youngster is that submarkets can remain depressed for multiple decades). The SE price index for Manhattan peaked somewhere between 1.0m and 1.1m in 2008. It's around 1.1m today, 15 years later. Inflation alone should bring it to 1.5m. That's an enormous amount of failure to keep up with prices for owning NY real estate. Obviously many properties have done well, and it has been possible to time the cycle, but ask any owner of a Park Ave coop (or their patiently waiting heirs) how they've done - if they know or care.

A generation ago, people all thought NYC RE always goes up and got worried they could never afford the island. This generation is learning that actually Manhattan resi has been a terrible class to own for financial purposes. The gradual deflation may have a long way to go.

@nada
>> More interesting, to me anyways, is that we’re now comparing risk-free, after-tax yields against a risky asset in a manner whereby yield is maximally tax-advantaged, and we still cannot make it work out!!!

AND don't forget ILLIQUID!

@George - agreed, the only way it ever pencilled out was optimistic price appreciation estimates.
A few "black swan" events like capping SALT, covid, remote work, etc have also not helped.

I always found NYT rent vs buy calculator to be funny because the default settings is 2.5% rent increases if you rent, but 3.0% home price appreciation if you buy... not to mention a paltry 4.0% investment return rate. Talk about tipping the scale..

>> AND don't forget ILLIQUID!

Indeed, forgot about that one. Of course, in the topsy turvy world of RE logic, some may argue that's an advantage, because it makes it difficult for you to sell in a panic.

>> I always found NYT rent vs buy calculator to be funny because the default settings is 2.5% rent increases if you rent, but 3.0% home price appreciation if you buy... not to mention a paltry 4.0% investment return rate. Talk about tipping the scale.

I hadn't looked in at least a decade. Those defaults also have inflation at 2.0%. Even funnier, the mortgage rate is at 3.67%.

Nada,

Thank you for correcting me about state and local taxes.

On the other hand, a $1.5M buyer is probably in the blessed land of 24% federal tax rate with no NII. Treasuries pay no state/local taxes, so such a person can clear 4% after-tax in T-bills. Against 3.2% cap rate.

We are indeed comparing risk free t-bills/Tnotes vs risky real estate investment which does theoretically provide partial inflation protection.

NY metro area condo index is at 300ish, vs pre-GFC high of 230
https://fred.stlouisfed.org/series/NYXRCSA

The numbers quantitatively show what a lot of us have observed qualitatively - mid90s to GFC was an incredible run, and since then it's been pretty blah.

Essentially 1995-2006/2008, you got a 200% return.
2009-2023, 50% return in similar amount of time.

For Manhattan specific data it's not terrible different - https://www.castle-avenue.com/new-york-flat-trends.html
If anything theres a sharper 1995-2008 run-up and flatter 2015-2023.

A lot of people still buying based on that magic 10-15 years run up that will likely never be replicated again.
These charts aren't even inflation adjusted, which would remove any upwards trend since GFC.

Steve, You will get better data if you use Street Easy Price index.

Note you only got that 50% 2009->2023 return if you picked the bottom right after GFC.. when nothing was transacting but somehow you still had money on the sidelines which was not decimated in RE nor in stocks.

More likely you bought in 2006-2008 like substantially every GenXer I knew did, at a higher cost basis. At that point you'd get a 2006->2023 return of ~30-35%. Manhattan specific chart seems to be more like 25%. So ~1.5-2.0%/year return?

You could also be a true RE bag holder like me and bought the 2016-2017 peak and be +12% or -12% depending on metro area vs Manhattan chart.

I can't even find the streeteasy condo index anymore, so presumably the chart doesn't go up & to the right anymore, otherwise they'd still publish it. https://streeteasy.com/nyc/market/condo_index

From 1995 to 2006 when NY condos appreciated 200%, the dollar inflated 30%. From 2002 to today when NY condos appreciated 50%, the dollar inflated 55%. Condos in 2006 sold at zero or negative cap rates, so renting was as good as owning. Now if you want to sell that 2006 condo, you're paying 10+% transaction costs (brokerage, RETT, flip taxes, plus whatever you paid to buy like mansion tax, mortgage tax, sponsor's RETT) plus 36% capital gains tax on even that part of the gain that just kept up with inflation. Ugh.

*From 2006 to today, not 2002

Scroll down to bottom left.

https://streeteasy.com/blog/data-dashboard/[object%20Object]?agg=Total&metric=Inventory&type=Sales&bedrooms=Any%20Bedrooms&property=Any%20Property%20Type&minDate=2010-01-01&maxDate=2023-09-01&area=Flatiron,Brooklyn%20Heights

Under 8 reports: "Price Index"

@300 - thx, the links resolve in errors

Seems you have to go to main landing page https://streeteasy.com/blog/data-dashboard/
And then navigate to whatever chart you want to make

If you select "Streeteasy Price Index" (which only goes back to 2005 in the CSV download at bottom)
You get for Manhattan-
2005 - $820k
2010- $880k
2023 - $1.1M
So 25% return in last 13 years, which is less than inflation... similarly bad to other charts linked above.

Rent inflation from jan 2007, 2.5% for annualized.

Using street easy rental index for Manhattan.

>> We are indeed comparing risk free t-bills/Tnotes vs risky real estate investment which does theoretically provide partial inflation protection.

It does indeed, theoretically. But if I were placing a friendly wager, I’d go with nominal prices being flat (or even down 15%) in a decade over being up 30%.

I also feel in the “theoretical” model, you lose 1% of the 2.5% inflationary gains to transaction costs, and another 1% to upkeep. So just not that much on the margins, perhaps 0.5% according to my measure. Could be something higher according to yours.

>> More likely you bought in 2006-2008 like substantially every GenXer I knew did, at a higher cost basis. At that point you'd get a 2006->2023 return of ~30-35%. Manhattan specific chart seems to be more like 25%. So ~1.5-2.0%/year return?

Yeah, I remember “missing my chance” in 2006-2008. SE index has Manhattan up 14% 2006-2023 and 4% 2008-2023. I could have been “up”. Oh well…

>> You could also be a true RE bag holder like me and bought the 2016-2017 peak

Honestly, I don’t feel 2016-2017 was the worst, even without the benefit of hindsight. I personally think anywhere between 2005-2015 was worse. Or 2022-2023. 2018-2019 was less worse, and 2020-2021 was least worse.

So I feel your performance was in the top-third of bag-holders. Something to be proud of!

> Honestly, I don’t feel 2016-2017 was the worst, even without the benefit of hindsight. I personally think anywhere between 2005-2015 was worse. Or 2022-2023. 2018-2019 was less worse, and 2020-2021 was least worse.

I’m trying to digest this statement. Is the statement made based on the cost of housing (combination of price and mortgage interest rate) is compared with other investments (t-bills, or S&P 500)?

Another infrequently discussed home purchase risk over renting - what if it’s haunted?

https://apple.news/AWW3qDxQBRHq1lhi6Ist8cA

Nada, What is your 1 year Street Easy Manhattan index prediction? First available data. Time to make another bet.

>> I’m trying to digest this statement. Is the statement made based on the cost of housing (combination of price and mortgage interest rate) is compared with other investments (t-bills, or S&P 500)?

Yes, and restricted to Manhattan. Some combination of RE prices / mortgage rates / taxes & common charges / rents / other investment opportunities. My personal assessment, all in real-time as opposed to knowing the outcomes.

What is your take?

>> Nada, What is your 1 year Street Easy Manhattan index prediction? First available data. Time to make another bet.

I think we made one earlier this year that is due. Do you remember that one? I’m sure I lost it.

I’ll go with perhaps -4%? Where do you see it?

I have to dig it out.
"I think we made one earlier this year that is due. Do you remember that one? I’m sure I lost it."

I was thinking around -2% to -4% (-1% could already be in due to recorded vs contract lag) but a lot of uncertainty due to interest rates. Manhattan forecast of course.

I’ll go with perhaps -4%? Where do you see it?

@woodside - a datapoint from that era from me

In 2010 the guy I was renting a 1bed condo for under $3k from in UWS decided to sell and got $800k (he had bought for $500k in 2003, so nice return for him). He was paying $1.5k monthlies at the time. So cost to buyer was ~$160k down / $25k closing costs, and then ~$4600/month for something I was renting for under $3k. Plus on the hook for all the repairs & replacements that are inherent in homeownership.

Equivalent units have sold in 2021-2023 era in building for about $850-900k.

I moved within the building to an equivalent unit, lived there another 8 years and never paid more than $3500 rent. Now, 13 years later, you can rent a unit in building for about $4000.

So for 13 years buyer paid more than equivalent rent, and ends up with the unit up, maybe 12%.
Most of that gain could be seen as being wiped out buy the transaction costs on the way in & out.
During that time they inevitably had to do maintenance work major & minor to the tune of easily $10-30k.

And finally they had $160k invested up front which in the SPY would have almost quadrupled from 2010 to now. Even being conservative and putting $80k in a CD, $80k in SPY you'd be +$240k instead of flat/down on condo ownership. Also they've been locked into an illiquid investment they cannot partially sell / take wins off the table / cut losses / etc on.

Note I'm not even factoring in the extra $500-1500/mo the owner was putting into the condo that could have gone into market over 13 years. Easily another $150k of investment or simply savings.

In this scenario you could estimate the buyer lit $500k on fire for the pleasure of owning an $800k condo for 13 years.

Also there's many entry points post GFC that would have still made stocks the winner. Arguably 2010 should have been your best RE entry point post GFC.

Nada,

While this is non-NYC real estate, what do you think of slow down in the pace of decline in this chart despite mortgage rates having increase significantly in the last six months.

https://www.zillow.com/home-values/10221/austin-tx/

>> And finally they had $160k invested up front which in the SPY would have almost quadrupled from 2010 to now.

It would have actually been anywhere between 4.2x and 5.0x, depending on the precise entry point in 2010. Dividends. Something lower post-tax.

@300 - one point I saw raised somewhere is that there is a non-linear relationship between changes in rates and changes in "out of the moneyness" of homeowners in existing mortgages. Sort of like convexity.

The point raised was that the earlier moves from 3->4->5->6->7 had incrementally decreasing amounts of homeowners who were put "out of the money" with each move.

The sharpest move on your Austin chart looks like summer 2022 when rates were around 5%. I'd imagine the inflection point varies by region and is related to how much prices had run up (and how much owners are "in the money").

>> Note I'm not even factoring in the extra $500-1500/mo the owner was putting into the condo that could have gone into market over 13 years. Easily another $150k of investment or simply savings.

On $640K of downpayment at 3.5% (which seems optimistic for 2010, but whatever), principal payments would have been $200K after 13 years.

This actually relates to one of the reasons I wasn’t biting in 2020-2021, despite it being (in my opinion) the “least worse” time.

The 5-year ARM-ers were sorta betting that 2.x% rates would be available forever, so much so that they weren’t willing to pay the marginal 25-50bps, for 5 years, in exchange for 30yr protection. Given the forward curve 5 years out, asymmetry of possible outcomes, and what it was taking to achieve it (Fed buying 10-20%/yr of all bonds out there), it didn’t seem like a winning risk/reward scenario to me against 2-3% cap rates.

But what about fixed 30yr at 3%? The argument in favor was that it would you are essentially leveraging your 2-3% cap rate, plus perhaps 1% in (inflation - upkeep), for 30 years using other people’s money (OPM).

The issue here is that it isn’t really OPM for 100% of the value for 30 years. First, you had to put 33% or whatever down yourself. Second, the loan amortizes. So really, even if you stay and keep the mortgage for the full 30 years, only half of it is OPM for 30 years. The other half is your money, paid in dribbles, for 30 years. And then it becomes 100% your money, earning a cap rate of 2-3%/yr. You’ve not only tied up your own 33% at 3%/yr for the next 30 years, but also your future income/savings/investment capital slowly in the form of principal payments.

Giving up optionality on future money, in exchange for 2-3%/yr, didn’t sound good to me. To say nothing of illiquidity, what would happen if one wanted to sell in a mortgage environment that might easily become 6% one day (impossible!), etc.

>> While this is non-NYC real estate, what do you think of slow down in the pace of decline in this chart despite mortgage rates having increase significantly in the last six months.

Mostly, it seems like a datapoint confirming my thinking about the persistence of inflationary pressures that require high rates to keep under control. I have no clue about cap rates there, so I cannot comment on whether I’d be a buyer if I were a resident. Or a seller. Probably a fine time to be a developer, however.

@nada - exactly
Current datapoint having moved to BK and a bigger newer nicer unit.. in 2016ish for $1.5Mish.
$360k in DP and closing costs.
All-in $8k/mo 2016 -> $9k/mo now to own.
I could rent in same building 2016-2020 ~$6-6.5k / 2021-2023 $7-8k.
So $1500/mo premium, or $125k premium in 7 years.
I've also spent about $30k on maintenance and improvements.

My $360k purchase costs could have doubled in the SPY to $720k.
+Another $155k over 7 years I could have invested into market and say been +50% on, bringing me to $235k. So thats $935k on "just rent" side.

On the ownership side, I now have maybe $500-600k in equity but I need to eat $100k in transaction costs to unlock it. So $450k estimate.

Renting was $500K better on a $1.5M unit in 7 years.

The "real" situation would have likely been even better for renting bc I bought nicer than I rented, like a lot of people I know.

>> The point raised was that the earlier moves from 3->4->5->6->7 had incrementally decreasing amounts of homeowners who were put "out of the money" with each move.

That’s an interesting point, one I hadn’t seen before. I also found the following an interesting point I had not thought about before:

https://www.wsj.com/economy/consumers/5-things-us-economy-8a588781

>> Jessika and Dylan Amaral bought their 1,400-square-foot starter home in 2019 thinking that they would have moved by now. They are still there. After refinancing their 30-year, 4.13% mortgage down to a 20-year one at 2.7%, they have realized they are stuck with the deal they’ve got. “Yeah, we’ll get our house sold, but the process to get something new will be so much more difficult and the rate will be gone,” said 31-year-old Dylan Amaral, who works in higher education. Meanwhile, the couple’s household income roughly doubled through a combination of job changes and promotions. The Amarals are now turning their 1910s home into one that suits them long term.

They are going to keep themselves “stuck” in 1400 sq ft long after it would otherwise make sense were it not for the incentive of the cheap mortgage. This story, I understood. But what’s the corollary? Well, all that extra money they are and will be earning as their career progresses will have to go somewhere. Had it gone into home purchases, that would not be inflation per CPI. But now it will go into trips, dinners, toys, renovations, iPhones, etc. for the foreseeable future.

Another example of how higher rates have limited capability in controlling inflation.

>> Renting was $500K better on a $1.5M unit in 7 years.

Yeah. Or in alternate terms, I think your $515K of capital has been tied up for 6 years on average and you have -13% to show for it, or -2.25%/yr. The rent+SPY scenario would have had you up 82%, or +10%/yr. Those are pretty outsized returns to have missed, for the same-ish risk, for 6 years of average duration.

I think if you run the same sort of calc had you purchased the other place in 2010, it’d have been even worse. Something like -2%/yr vs +12%/yr for 12 full years. The buy option would have had you losing essentially half the 20% downpayment while the rent+SPY option would have you being able to purchase the apartment outright with simply the gains, atop keeping the 20% down and 25% in incremental principal payments.

Of course I couldn’t have predicted this precisely in 2010 or 2016, but my expectations certainly pointed in these directions (with error bars, of course). That’s why I said “could have been worse times” than your pulling the trigger in 2016. It was, IMO, the best opportunity for entry in a decade. So if you felt like you had to pull the trigger at some point, I can see why it would have been attractive then.

>> The "real" situation would have likely been even better for renting bc I bought nicer than I rented, like a lot of people I know.

Meh. In my experience, buyers should over-house at the beginning so that they are left under-housed by the end and therefore right-housed on average. As a renter, you get to be right-housed continuously. Better than being over- and under-housed at various times from a personal utility standpoint, but probably neutral financially from my POV.

@inonada @steve123

I'm basically innumerate and can't follow most of this discussion. The bits I (think I) can are interesting though. The jist seems to be rent don't buy.

You mentioned the NYT's rent vs buy app. Is there a reliable one out there to compare renting vs buying with a mortgage vs opportunity costs when selling stock to buy RE outright?

This unit sold in August for $2 million
https://streeteasy.com/sale/1650114

Listed for rent 9/18/2023 for $8k and just reduced to $7k.
https://streeteasy.com/building/511-east-11-street-new_york/a2?context%5Bcontroller%5D=%23%3CBuildingController%3A0x00007fb973083480%3E&context%5Bcurrent_user%5D=1040784&hide_if_empty=true&section=rentals

Can someone tell me what they were/are thinking?

I mean, are they really renting the unit for about half whan it's costing them?

Wow blast from the past. I lived on that block in a similar unit for a summer during college. Sublet from a buddy while I worked an internship.
The idea that those units could be worth $2M is incredible. Think someone overpaid. Nearly $2k/sq ft for ground floor..

Also funny how bizarre the rental yields are, as again, you could rent my North BK doorman condo unit worth $1.5M for $7k.

Talk about a sick pre-GFC run-up return though. $200k 1999 cost basis, sold for $2M in 2023.
10x in 24 years is pretty respectable stuff.

Of course these were trading at $1-1.3M in 2007, so the majority (~6x in 8 years) of the return was in the pre-GFC period as highlighted up thread, with the rest of the return being much smaller/slower (~1.5 in 16 subsequent years).

So in this building, annualized return pre-GFC you have 25%/year and post-GFC you have ~2.5%/year?
Ouch.

>> Can someone tell me what they were/are thinking?

Good lord…

For those playing along at home, this is a $2M purchased recently with $2K monthlies attempting to collect $7K rent. 3% cap rate if successful, whatever, we’ve heard this story before…

The kicker is that $1.5M was financed with a 9% 7-year ARM that is interest-only for the first 10 years. That’s WTF #1. In 7 years, rate floats at SOFR + 4.5%. That’s WTF #2. Once rate starts floating, the maximum rate is capped at 14% (oh, goodie) while the _minimum_ is 9%. That’s WTF #3. Prepayment option? Sure, but it’ll cost 5% for any prepayment done in the first year.

I cannot even begin to explain this one without getting into abject speculation involving nefarious actors.

@nada Math on this is pretty wild then
$500k down
$1.5M IO 9% for 7 years = $11.25k/mo + $2k/mo monthlies
= $13.25k outgoing per month
+ forego 7% gain on $500k investment = $3k/mo
= $16.25k monthly, offset by $7k rent?

If the IO rate ever resets to 14%, mortgage hits $17.5k/mo
so then we are looking at $22.5k monthly offset by $7k rent?

Apparently some on the block think $2M is the new number as you have listings like this now https://streeteasy.com/building/615-east-11-street-new_york/b1
Apparently paid $1.8M in 2016 and trying to collect a 25% 7 year return .. good luck.

> I cannot even begin to explain this one without getting into abject speculation involving nefarious actors.

I initial thought the apartment was bought 100% cash, not realizing they had to borrow money.

The only two possibilities I can think why the two people from the South Carolina did the purchase are:

1. Betting that Manhattan condo price is going to fly within the next seven years. The reason is probably that Manhattan price has been flat for about 10 years while the housing price in the rest of country increased a lot during the same period (especially during the pandemic)

2. They are betting that the interest will come down to 3% within the next seven years. They think a recession has to come during this time period and the government has to go back to the zero interest rate policy.

Since they are betting on the housing price movement or interest rate movement, so the simple math of rent vs buy is less relevant for them.

We will see in seven years if the buyers made the right bet.

@woodside
> 1. Betting that Manhattan condo price is going to fly within the next seven years. The reason is probably that Manhattan price has been flat for about 10 years while the housing price in the rest of country increased a lot during the same period (especially during the pandemic)

This glosses over the full GFC bubble history to now.
The rest of the country had a strong 10 year RE performance because they had a huge GFC crash.
NYC mostly avoided the true crash and then traded sideways.
Roughly ended up in the same place.

That is - there were really places all over the country where you could have bought for 40% off 2007 peak prices, just not NYC. And if you happened to have bought in 2007 peak there, you may have been underwater until quite recently.

S&P CoreLogic Case Shiller US National Resale Value Index:
184.55 peak in June 2006 / 123 trough in Dec 2011 / 184 level not reached again until 2017
https://fred.stlouisfed.org/series/CSUSHPINSA

NYC area condo index peaked 230, only dropped to 195 and was setting new all time highs by Feb 2014
https://fred.stlouisfed.org/series/NYXRCSA

Note what is interesting is that BOTH indices baseline at year 2000 = 100 level.
And both indices have ended up at about 300 currently.
This reflects that NYC had a sharper 2000->GFC runup, as well as less of a drawdown before its sideways trade.

steve123,
I wonder why the listing details from 2016 states 1,135 SF?

@30 - White paints adds 10% sq ft.
Also take a look at those taxes.. were they previously abated?
Otherwise more than 2x in 7 years while commons only went up 10%.

Actually even if they get their price, +$295k for a unit they clearly did some work inside & out.. is not amazing, especially after giving up $125k of that to brokers. They probably end up flat at the end ..

324 State Street, Brooklyn

You can buy it for $6.5 million, and if you tie up $1.5 million in cash you can carry it for almost $40k per month.
https://streeteasy.com/sale/1681285?card=1

Or you can rent it for $18,500
https://streeteasy.com/rental/4220806?card=1

I'll add that you had to be a sucker to buy when mortgage rates were sub 3%. It was obvious that prices were totally overinflated as a result of ZIRP, and you had to be a moron to think those rates were going to stay at that artificially depressed level long term.

If the buyers at 2020-2021 prices with 2-3% rates were suckers/morons as you put it, what are buyers at those same-ish prices in 2022 with 7-8% rates?

>> 2. They are betting that the interest will come down to 3% within the next seven years. They think a recession has to come during this time period and the government has to go back to the zero interest rate policy.

I like the other one better, this one seems too coherent a thesis to not take it onto the next logical step. When rates go to 3%, congrats — your carry will cover the mortgage interest and you get to collect 3% on your equity too! Isn’t it easier to buy TLT and just let it double as we go back to ZIRP?

>> You mentioned the NYT's rent vs buy app. Is there a reliable one out there to compare renting vs buying with a mortgage vs opportunity costs when selling stock to buy RE outright?

The NY Times calculator may be fine to first order, although it certainly didn’t seem to be getting the details of taxes correct. I’m guessing if I poked at it some more, I’d find other issues. Putting those details aside, the trickier part is setting the assumptions. Even the numerate folks around here have spent the better part of 15 years debating over them.

Assume prices will go up. Then the model predicts prices will go up.

"If the buyers at 2020-2021 prices with 2-3% rates were suckers/morons as you put it, what are buyers at those same-ish prices in 2022 with 7-8% rates?"

In denial of reality.

But let's take a look at what's going on:
811 Contracts Signed in Manhattan October 2023.
The average is well over 900.

@Inonada Using that NYT formula in a builidng I like I'm being conservative about home price growth rate (1%), rent growth rate (2.5%), investment return rate (4%) and posit 3% inflation, and dividing monthly maintenace for the property in half: 50% goes to taxes, 50% to building charges. All with no mortgage. It doesn't allow for tax on capital gains for selling securities. Even with that super conservative return rate on investment and no cap gains tax, opportunity costs when buying dwarf those for renting. Recurring costs (which matter for retirment = peace of mind) are much less when buying. I wonder how local law 97 will affect recurring costs - are related upgrades going to be added to maintenance (forever) or assessments (finite)?

Anyway, it's not as if there's anything on the market anyway. Looking at listings on SE is a bit like waiting for your bag in arrivals, watching everyone elses luggage appear and reappear on the carousel while yours just doesn't.

>> I'll add that you had to be a sucker to buy when mortgage rates were sub 3%. It was obvious that prices were totally overinflated as a result of ZIRP, and you had to be a moron to think those rates were going to stay at that artificially depressed level long term.

But in Manhattan the prices in 2020 and 2021 were actually below 2019 levels, so not sure I agree.

>>> "If the buyers at 2020-2021 prices with 2-3% rates were suckers/morons as you put it, what are buyers at those same-ish prices in 2022 with 7-8% rates?"
In denial of reality.

Market can remain irrational for a very long time. That is the reality.

I asked in another thread, why are NYC sellers so unrealistic. Not sure we got to any good reason why, other than the fact that they can afford to hold out if they don’t like the price.

@MTH
Could you please remind of your criteria? In case I see you bag on the carousel. :-)

@Krolik

Hi - just to give you an idea:

https://streeteasy.com/building/master-building/408 - low floor, nice view, low maintenance, UWS

https://streeteasy.com/building/clifton-house/12h Square dimensions and south facing

Cheers

3 more and then I'll stop :)

https://streeteasy.com/property/8486699-the-broadmoor-235-west-102-street-12q open western view and open kitchen

https://streeteasy.com/property/1622382-160-east-91-street-8o view + low maint + open kitchen, squareish

https://streeteasy.com/property/8321471-140-east-95-street-2c low floor with a nice view - there might be steps up to the lobby which could be a problem down the road (you never know)

UWS/UES studios is a pretty specific (though large) market. Question is - why do you want to own a studio over renting? I think the rental-ownership spread is tighter than some of the awful rental yields we've seen in this thread, but it's not really saving money to own.

Let's take the first one that caught my eye I could pull data on SE for- 161E91 #80

Rent in 2023 for $2100. If you had bought in 2014 at prevailing mortgage rates.. you'd have mortgage+maintenance of $1900/mo. Add homeowners insurance & upkeep of the unit, that's easily about $2100.

10 years ago the rent would have been lower, using 6G as a proxy, it had rents of 2014-$2150, 2017-$1735, 2020-$1950, 2022-$2200.

But wait, there's more. Maintenance/tax have gone up over 10 years!
Using 4N as a proxy, 2013-2023 its maintenance went +17%. Estimate 8O maintenance is now +$100, so ownership cost is $2200+, which maybe the rent will reach in 1-2 years assuming no recession. So again, 12 years overpay before break eve, and you had to lock up $70k for that time, which could have generated say $300/mo in returns elsewhere.

And finally - what about price appreciation some will say?
Well it looks like 8O has depreciated! 2014 traded at $340k, tried to sell for 2022 for $308k (-10%) before taking off market. After closing costs would have walked away with $290k, so probably lost 2/3 of your downpayment.. or -$400/mo. The market clearing price probably wipes out your equity to zero right now.. on a ~10 year hold.

To put this more directly, had you put the $70k down payment into SPY in 2014, you'd have $140k today. Had you put it into the apartment, you'd have $0.. all while paying more than just renting the thing.

@steve123 let me play devil’s advocate

1) apartments have depreciated over time and now are a better deal than they were several years ago. Cap rates in manhattan are abysmally low, but they are best on studio units (~4.5-5%) - could be better than treasury yields after taxes

2) MTH is looking to retire in the city, so he is less concerned about making capital gains on his unit, and more concerned about making sure his housing costs don’t go up

3) he is looking to pick a unit that fits his long-term criteria (location, no steps, square shape) and avoid moving. If he rents coops, he is likely going to have to move every two years

If I remember correctly MTH isn't looking to occupy the unit in the short term future. So perhaps one financial possibility being ignored is don't buy YET and wait for prices to go down. I'm not saying that's a certainty, but if we're listing options it should at least be in the running for consideration.

Agreed, 30yrs: solid option.

@steve123 in that particular case it depreciated because it lost its view - a neighborhood church put up a bulding right next to it so it now (or will) look at a brick wall and get no natural light. Even without that, though, I concede your point - you have to stay in a place a long time for this to work out...if it works out (bc of opportunity costs). So basically I'm paying a premium so I don't have to move in old age which, by all accounts, is rough

@Krolik +1 - you got it - I'm more worried about maintenance and ongoing costs and not tying too much wealth up in RE (they say 30-40% of your net worth)

@30yrs - ha :D you're paying attn. I'm guessing a lot depends on how long these high rates go on (they aren't that high by historical standards, are they?). Right now, people can afford to wait it out but I'm guessing there'll be some attrition. Still, I'm more focused on nabbing a place I like in my price range and not worried (as) much about opportunity costs. I'll have less left over for travelling and nice dinners, but so be it. My needs are modest and I'll still have a 401K and some captial left in the market

Are there rent stabilized places in desired locations MTH could apply for? As an alternative to buying or market rate rentals?

@Krolik - Good thinking although then I'd have to wait bc I'm pretty sure they can't used as pieds a terre :) Plus I imagine there on income or asset restrictions on rent stabilized apts

Don’t believe there’s income limits on rent stabilized units - https://www.brickunderground.com/blog/2015/01/rent_stabilization_misconceptions

Plus they come with extra protections for elderly

Don’t believe there’s income limits on rent stabilized units - https://www.brickunderground.com/blog/2015/01/rent_stabilization_misconceptions

Plus they come with extra protections for elderly

Check out this website in case there is anything of interest. There are income limits for when you apply on most units.
https://housingconnect.nyc.gov/PublicWeb/search-lotteries

omg - just checked in to SE, and this thread hurts my head with all the math and references to charts and statistics. Do you all apply the same analysis to every purchase you make across the board? Is there no consumption component in the mix that justifies the a premium one pays for owning vs renting?

@Krolik @steve123- Interesting - and very informative thank you! I'm kind of shocked it's not by income. It's also surprising landlords agree to making their apartments rent stabilized since it sounds like they would lose money but what do I know.

@multiciyresident - Maybe it seems Pooterish but I will be taking a steep step down in spending power to move back home so it's worth thinking through. I'd never apply this kind of analysis to an everyday pruchase, no, but this is an apt in one of if not the most expensive city in the world.

@30yrs It seems to me Manhattan RE always goes up but apparently not relative to the S&P esp when taking inflation, taxes and maintenance into consideration. Still if the market is frozen right now it's not fair to assume it will stay that way.

steve123>> Let's take the first one that caught my eye I could pull data on SE for- 161E91 #80…

No one likes pointing out how crappy NYC RE was relative to pretty anything else over the past couple of decades more than me, looking backwards now or in real-time. As the only (?) person active here who explicitly had zero RE holdings over those years in favor of other investments, I actually lived those dollars gained and then some.

However, the analysis you present to MTH is awfully conflated.

First, you’ve mixed up past performance with future expectations, which is what would matter to MTH. While SPY returned ~10%/yr over the past decade, why should that be the expectation going forward. And while NYC RE was flat over the next decade, why should that occur going forward?

Second, you’re ignoring principal payments in your analysis, which would have added up to 22% of the mortgage.

Third, MTH is looking to pay cash. Leveraged purchases of RE and outright SPY buys are not the same risk category.

Fourth, MTH is looking at securing his/her later years with what appears to be a modest sum. Letting it all ride is a game for those with more time and money.

At its core, 160 E 91st #8O rented in 4 days with an ask of $2100 and $660 of monthlies. At its asking sale price of $308K, that’d have been a 5.6% cap rate. There probably would have been a deal to close at $270K, making it a 6.4% cap rate.

Is a 6.4% cap rate economically “right” in a 7.x% mortgage rate world? I dunno, but it seems on the margins. MTH has neither the time nor means to sit it out indefinitely while prices adjust by the increment it’d take to make things “financially right”. But this ain’t my world of 2% cap rates. It’s on the margins. And given MTH’s self-professed innumeracy and nest egg, he/she probably doesn’t have the capability for achieving decades-long double-digit investment rates of return. This is a CPI+6.4% after-tax yield with modest risk, as a cash purchase. With MBS yielding 6.x% pre-tax, the combination of CPI increases and after-tax-ness seem decently compensating the incremental risk. Financially, this decision point is on the margins, so I wouldn’t be fazed by pulling the trigger.

All that said, I’m with 30yrs. Even if it makes sense now, why buy now when you can do so in a couple of years when you will actually occupy the apt. Prices don’t seem like they’ll be going up, although anything could happen. But what’s sure to happen is that you’d be losing 3% per year on your money (in the form of maintenance wasted on an unoccupied apt) rather than gaining 5.3%/yr (in the form of t-bills in lieu of capital wasted on an unoccupied apartment). Why throw away that 8.3%/yr spread?

@inonada - you are way ahead of me. I should take a workshop or something. Am clearly out of my depth in figuring this out. This is what happens when you study humanities. No regrets but that leaves you ill equipped to make a basic financial decision - one most Americans make early in life.

It's possible to overestimate how fast UWS studios will appreciate in value over the next few years. Maybe I have.

Right I mentioned that rental yields for studios seemed less bad than the typical yields we discuss.
All cash certainly changes the calculations.

Using NYT rent-v-buy calculator its certainly close.
$308k purchase
20 year planned residence
plug in variables:
2% rent growth/home appreciation/inflation
6% investment return
comes to about a $1950-2050 break-even rent depending on if you have 0 to 90% mortgage

This can move up/down a few 100s per month depending on assumptions of expected unit maintenance, etc.

Ex - in my new condo, I had a bunch of stuff I needed to customize like electrical for lighting fixtures to make it comfortable, but nothing really broke for a few years.
In my 50 year old home with a 10-20 year old reno, we immediately had $1000s in repairs in first few months plus an unexpected water damage related reno/repair that cost 5% of our home price in the first year.

A stodgy old co-op unit that hasn't been updated in a while (or only cosmetically, leaving all appliance/mechanicals out of date) will fall somewhere in between.

Just to point out: a studio should have a higher yield bc it's more management intensive relative to the income. A 3-BR means one tenant, one rent check, one P&L, one closing, one mortgage. I'm not convinced that 3 studios provides better risk diversification if they're all similar units in a similar area. I'm sure that 3 studios means more work.

@steve123

That's what I kept on coming up with with similar inputs - between a cash purchase and renting pretty much a wash although I don't think it accounts for cap gains taxes in liquidating mutual funds

A stodgy old co-op unit that hasn't been updated in a while (or only cosmetically, leaving all appliance/mechanicals out of date) will fall somewhere in between.... Along those lines: I was looking at the timeline for LL97. It looks like we won't know the true cost of those for coop buildings until long after I have moved to NY.

@George Those were just examples of studios with appeal. I'm in the market for one only as a primary residence in 5 yrs. (Funny how that date has moved)

@George - agreed, but that maybe makes it a better buy for owner occupied right?

@MTH -
I think my general point is don't get caught up in FOMO, the market isn't going to get away from you right now. These are not screaming deals. They just aren't the awful yields you see in high end 2-3BR $2M condos. So don't buy prematurely because you feel forced, buy when the prices & your needs mean it works.

How do you factor in higher vacancy rate / longer time taken to rent a 3 bed vs a studio and far more demanding 3BR tenants vs a typical single resident studio tenant? Studio and 1 bed cap rate is higher as fewer of them were built them in the last 20 years in NYC and renters for these units are typically less likely to buy. Just look at our favorite PRISM rent per sq ft for larger apartments vs smaller apartments.

--------
Just to point out: a studio should have a higher yield bc it's more management intensive relative to the income. A 3-BR means one tenant, one rent check, one P&L, one closing, one mortgage. I'm not convinced that 3 studios provides better risk diversification if they're all similar units in a similar area. I'm sure that 3 studios means more work.

@steve123 that makes sense, yes - it is partly FOMO

I wonder if there's a tool to filter historic median prices for (1) rent and (2) sale for studios. I'd be curious. All I see on SE is 1BRs.

Going down another rabbit hole went to NYS's Rent Regulated Building Search app

https://apps.hcr.ny.gov/BuildingSearch/

Entered data for a favorite building and got the following result:

MULTIPLE DWELLING A
NON-EVICT COOP/CONDO (EFFECTIVE 04/01/1989)

Described as

Non-Evict Coop/Condo Plan:
A building that has become a cooperative or a condominium without the right to evict any non-purchasing tenants.

That's a sweeping regulation. Why would any coop sign up for that? It sounds like a recipe for a lot of disgruntled shareholders

>> That's what I kept on coming up with with similar inputs - between a cash purchase and renting pretty much a wash although I don't think it accounts for cap gains taxes in liquidating mutual funds

Accounting for cap gains taxes is a pretty detailed affair.

- How much basis vs. gain are you sitting on?
- Is this your lowest-gain tax lots?
- What is your tax bracket now?
- What will it be later, when you are residing in NY?
- Can you sell before becoming a NY resident, to avoid state & local taxes?
- If you don’t sell now, when will you be selling, and what income bracket will that push you into for the duration of the selling?

If you can answer those questions, then one can model the specifics.