Another unrealistic listing.

You know, I'm beginning to get the impression, that the "NYC RE Marketing Machine" is conspiring to keep asking price up, in order to give the illusion, that conditions are not as bad. Look around and you will see a large amount of stupid asking prices. Any thoughts?

Hey dco. I wonder if it sold for the $1.2+ million earlier this year.

LICComment- Possibly, if that was the price, they are going to take a beating. Just think about it, I wouldn't pay a penny over $800,000 in this environment or any other. Another example of just how silly this mess has become.

How much do you think they would be able to rent that apartment for?

Let's say you loved it and really wanted to make an offer. What would you start the bidding at??? (I agree that these asking prices are insane, just trying to get a sense of how low your first offer can be while still standing a chance of getting the apartment)

09/02/2008 Listed with Elliman at $1,404,000
09/13/2008 Price increased to $1,480,000

Must be because of the multiple offers.

"How much do you think they would be able to rent that apartment for?"

No more than $3,500.

http://www.nybits.com/apartmentlistings/0dd7f96a25f343b32599ffd0e3fa996a.html

And that one has a nice layout.

Versus buying it for:

Total Monthly Payment: $9,481

No - I never provide concrete examples of overpriced apartments, do I, LICC aka mosquito.

It would rent for more than $3,500. Close to $4,000.

"It would rent for more than $3,500. Close to $4,000"

I'll meet you halfway: $3,750. vs. $9,481 to buy.

I know: THE TAX BENEFIT!

"What would you start the bidding at???"

Nothing, until the psychology comes back into line with reality.

At $4000 rent, $850k-$1mil is a reasonable price range. I agree this one seems overpriced on the face of it if what is said above is accurate.

Thanks for picking a comparison in a different building steve. I'm still waiting for that example.

I don't think that apt is 975 sf either. My apt at Windsor - oddly enough is about the same size minus the extra half bath. It's around 700 sf.

LICC, I don't care what you're waiting for. I've given enough examples, enough math, enough links, enough documentation. Your mosquito-like comments do not warrant answers.

12 x 12 x $4,000 = $560,000. The price from 2003. That is where we are headed.

this silliness is a product of broker's desperation to get the listing (by quoting high price) and the seller's greed mixed in with the five joints they smoked between them before posting the listing.

It's a very high floor with great views and windowed kitchen & bath.
They're counting on someone falling for the views. Steve, $3,850,
my final offer ;) And based on the current news (Lehman, Fannie &
Freddie, WaMu, AIG, etc.) I'm almost ready to capitulate to Steve's
lowball prediction of its eventual value ($560,000). However, we're
not there yet.

steve, you have given nothing but out-of-context, misleading and incorrect information. If a mosquito can expose your constant mistakes and make you look so foolish so often, that doesn't say much for you now does it?

Well I'm glad, LICC, that you admit that you're a mosquito. That puts everything into context.

12x annual price-to-rent = 40x monthly rent = 30% PITI. It's an equation.

12 x 12 x $4,000 = $560,000.

"3,850, my final offer."

Accepted.

"we're not there yet."

Not yet.

The 12x number is wholly unrealistic and doesn't take into account the tax benefit to owning, meaning your analysis using it is worthless in practical terms steve.

I'd say high priced. But where does this 12x number come from? Seems kind of low, silly, and worst of all, rigid.

Isn't 12x around the long-term average? I see no reason why that would change going forward.

mbz has it right - it's been proved over and over. LICC - demoted from mosquito to gnat - if he had graduated high school, would know that the 12x ratio implicitly takes the tax benefit into account, based on the rediscount assumption that the price of any property reflects all inputs into it - including the tax benefit.

Read all about it:

http://money.cnn.com/magazines/fortune/price_rent_ratios/

The actual ratio depends on factors such as interest rates, but all in all, using this ratio, that's the long-term average.

Right now in Manhattan, the ratio is 24x - 30x. The only ones who disagree are the long-term bulls - LICC, petrfitz, JuiceMan, etc. - who are hoping against hope that they can offload their units before the hit shits the fan.

If it's any consolation, what I feel Manhattan is today is what I felt Miami was 3+ years ago, when I sold for $1 million & could buy back today at $600k.

How do you "PROVE" 12x?

What is 12x?

And if NY isn't 12x, isn't that sufficient evidence enough against it, given how active and watched this market is?

Also, long-term averages do change. And they are also just averages.

12x is a law of physics applied to real estate. Its for people who know property deteriorates over time and requires large continual sums of money to reverse the entropy (physically depreciation) evident even in your local universe. Even though its Manhattan, the same universal constants still apply and are at work there as they are everywhere else, no matter how much you delude yourselves into thinking you are somehow divorced from all the universal forces that apply to everyone, everywhere else. You can fight it all you want and invest huge sums of energy (or foolish amounts of money) to try to boost into the stratosphere but eventually gravity will bring you right back down to 12x. Gravity theory applied to real estate translates to 12x rent roll.

very funny Bozo.

"long-term averages do change"

Not when they're an equation: 12x annual rent = 40x monthly rent = 30% PITI. An equation.

Everything always reverts to the mean.

Bonzo's right.

Just run actual numbers and it is obvious that 12x ratio does not work in the real world. Maybe in steve's bizarro world where he makes inaccurate or irrelevant claims to feel better about his bad decisions, but in reality, the 12x doesn't work.

When an apt next to mine was for sale at the bottom of the last trough (early '90s), a broker told me she knew the sponsor would accept $40,000 for it. It sold much later, but I don't know the price. $40K/12/12 = $277 per month rent. The investor rented it for a little under $1,000/mo., then raised it by 2001 to $1,100 or $1,200. s/b $172,800, but actual sales prices for comps in 2001 were around $110,00. Comps today rent for around $1,600-$1,700, and asking sales prices are not $230K, but are $310K. In 2000 a comp in the building sold for $65,000 (s/b $451/month); in 2000 comps rented for $1,000-$1,200. When you could by for $40K interest rates were high. When people asked for $310K interest rates were low. $230,000 would represent the 12x average and is probably spot on for today's resale value, representing the only time since 1987 when resale value = 12 X annual market rent. In 1987 the original purchase price was over that 12x ratio. It not only did not revert to the mean, but it plunged far below that supposed 12x mean. Even at the market's peak it never reached above 15x annual rent. This example is in Queens. You can argue that all the above "averages" out to prove the 12x equation, with a discount for buying in crummy Queens.

2002 - a studio condo at 57th b/w Park and Lex asked $400,000. The 12x equation yields a hypothetical 2002 rent of $2,777/month. That is within $200 either way of the 2002 market rent for a highrise doorman studio at 57th and Lex. In 2002 the resale market was red hot. Maybe the reason was that the prices were right. I'm not convinced whether 12x applies in the real world or not.

Now you see how Gnatster - aka LICC - supports his arguments: "bizarro," "inaccurate," "irrelevant," yet when asked how to disprove what every economist in the world knows, he comes up blank.

It's very simply. Gnatster makes $100,000 a year (doubt it, but hell, it's just an example). On a PITI basis he can afford 30% of that in housing costs: $30,000 a year, or $2,500 a month. We he to rent he would need to make 40x the monthly rent in income. So to rent an apartment for $2,500, he would have to make - YIKES! $100,000.

Those are the market constraints. 30% PITI = 40x monthly rent. Now we move on to the next part of the argument: housing price = 12x annual rent. If the annual rent in this case equals $30,000 - which it does - then 12x that = $360,000. If you take out a standard 80/20 mortgage at 6.5%, your monthly mortgage payments = $1,820.36. That's principal and interest. Add in property taxes and insurance of a few hundred dollars a month, and VOILA, you have your maximum $2,500.

The 12x will be higher - maybe 13x - when interest rates are low, and lower - maybe 11x - when interest rates are higher, but on average, that's what it comes out to be.

Gnatster is now going to claim that I don't include the tax benefit at the maximum marginal rate. I would agree with Gnatster if he could please identify which part of "PITI" contains the term "tax benefit." None. That is why - in this formula - it is not included explicitly. The tax benefit is implicitly discounted into the price.

Steve, I'm not commenting on your arguments with LICC. He is taking a long view on a community being built from scratch which is closer to Midtown than Williamsburg, Hoboken or Jersey City. I don't think he's any dummy.

I am thinking aloud with you on the 12x equation rather than to dissect posts by other people here. The numbers I'm thinking aloud with are numbers of actual apartments I have firsthand experience with. I just thought of another one: Some coops on E.57th St. in 2002 had studios I looked at. Prices I remember were $255K and $265K, traffic was busy at OHs, and at one of them the listing broker saw that the same sized unit in the same building was asking for more, so she took her preprinted handouts, crossed out the price and scribbled in the new, higher price. These were large alcove studios, no renovations, no views, but good space in financially solid buildings. $265,000 / 12 / 12 = $1,840. I think the market rents for those places were around $2,200 per month.

The question is whether the market was so hot for those units and that the reason prices shot up so high so quickly was that the prices were so perfect, or whether the hot market occurred because of other factors. I vote for the conflation of several factors, not only your 12x equation being more or less reached, but the perception that NYC rents were climbing, prime Manhattan housing was scarce, the stock market was a bad investment, and anyone could borrow money to buy. What made prices go up was overbidding. What made overbidding happen was more people wanting to buy apartments than there were apartments for sale. At some point the momentum and speculative greed ("I'll make a killing!") and fear ("If I don't buy this I'll never be able to buy again!") took over.

Back to the sad Queens coop in the early '90s: At the bottom of the market those large prewar one-brms rented for as much as $725. So a $40,000 purchase price represented not 11x annual rent, but, rather, 4.5977 x annual rent. This does not average out to 12x by taking the bottom and comparing it to the top, presuming that the same one-brms fetch $1,700/mo. rent and sell for $310,000, which yields a figure of 15.1961 times annual rent, because those two factors average out to a factor of 9.8969. No matter how hot the NYC market gets, Queens never reaches the fever pitch of prime Manhattan.

At any rate, $558,000 seems like a terribly bearish sticker price for that 425 Fifth condo, because in 2002/2003 I looked at a one-bedroom condo asking $565,000 that lasted a few weeks on the market. It was at 55th and 2nd, had a small terrace, no windowed kitchen, no windowed bath, a powder room, no views to speak of. The same unit at that same period on that building's top floor was asking somewhere between $650K and $700K, so if we were to revert to 2002 prices, the 425 Fifth condo would easily fetch $700,000 and then some. I agree its current price is optimistic, but not for reasons having anything to do with 12x rent.

Let's assume a $600,000 mortgage with maintenance or common charges and property taxes at $1200 per month. Your monthly after-tax cost to own will be in the $3500-$4000 range. Assuming an 80% loan-to-value, the apartment's price is $750,000. A $4000 rent at 12x is only $576k. This does not work in reality. A person renting at $4000 can buy an apartment at $750k and have approximately the same monthly cost. Using a 17x-19x ratio brings you closer to comparable costs. You should then account for the premium for owning. A person paying $3500-$4000 to rent will in most cases be willing to pay some premium above that in order to own.
I have gone through many time before, but of course steve decides to ignore information that shows he is wrong and just keep repeating his incorrect conclusions and flawed analysis, because of some insecure complex he has in which he can't admit he is mistaken and knows less than others. Next he will try to support his wrong conclusions with the bad assumption that everyone rents to their maximum allowable limit and thus no one can affort to buy a place with the same costs as their current rent. We'll all get a good laugh at that one. The greatest part is that the more steve tries to defend himself with his unreasonable assumptions, the more foolish he looks.

btw, I think lowery's comments are quite reasonable.

LICC, I've given real-life examples of the market rents to actual sale prices in NYC being far below 12x. Is that reverting to the mean? I think the argument people are making with 12x is that this bubble will revert to the mean. That means not that prices must go back to a certain level, but that one charts the asset values over a long period of time to show where the bubble began, then draw on top of that bubble a continuation of the rising asset value according to the presumably steady rate of increase other than that bubble. Charting out where that historically "normal" rate of increase would lead should give you what the bottom will be after the bubble crashes. That leads us back to the argument over what do you use to measure price increases historically.

In real life, a crash can lead a lot further down than back to 12x, but what in real life would cause the apartment in this thread to sell for $560,000? 425 Fifth never had a one-brm sell for $560K, and did not exist at all before this boom/bubble. To get this unit down to $560K someone has to sell not only for less than they paid, but for less than the amount of their mortgage, in all likelihood. In real life, that only happens in a foreclosure auction. Not only that, the holder of the mortgage has to be so desperate that they accept bids below the face amount of the debt. This has happened in auctions in California since this debacle began, but we all know that the dead Manhattan condo market is nowhere near the point where a foreclosure auction could only recover half of a mortgage's face amount. First the market needs to be flooded with foreclosures and distress sales.

"Your monthly after-tax cost to own will be in the $3500-$4000 range."

It's a PITI that you can't qualify for that mortgage to get that tax benefit, isn't it, Gnatster?

It's a PITI that "tax benefit" isn't calculated into PITI.

It's a PITI that "tax benefit" is not included in the 12x ratio.

It's a PITI that Gnatster keeps on going on, but that's what gnats do.

Till they drop.

"Next he will try to support his wrong conclusions with the bad assumption that everyone rents to their maximum allowable limit and thus no one can affort to buy a place with the same costs as their current rent. We'll all get a good laugh at that one."

No. I will say what I've always said: owning and renting are just two different modalities of tenancy. Therefore, the output being the same - a place to live - the same dwelling should be available to the same person under either scenario. But it is not.