You are an idiot if you buy right now

anon3- You must be out of your mind, didn't you get the memo, NYC never decreases. It wasn't Wall Street or foreigners that were buying, all these beautiful coops and condos, clearly it was the over paid NYC civil servants. I mean really, get your facts straight.

NYC police, fire and teachers, all have secured jobs and it was them that were buying the $1M+ condos all over the city. It's just sad that most can't see that. I suggest that sellers just wait, I'm sure the next civil servant, is just around the corner and will be giving you full asking price. If you're lucky, perhaps you will have a cop and firemen get caught in a bidding war. You know how they hate to lose to one another. Stand strong sellers and remember everyone wants to live in NYC.

Is there no room in the middle between each of these extreme positions?

No, there isn't much room between Tweedle Dumb and Tweedle Dumber. They travel together all the time.

So how would you handle this one?
Two or three weeks ago, we agreed to buy a 2 bedroom apartment and on Friday, our attorneys got the contract. Obviously, the world has changed.

How would you recommend handling this?

Would you walk away from the deal or would you re-negotiate the price............and if so, how much down without really being silly

dco is being facetious.

I don't know about 70%, but the 50% that I've always been calling for will certainly occur. You will see 2-bedroom apartments currently going for $1.2 million worth $500,000 to $600,000, which will bring them exactly into line with what it currently costs to rent them. Because THERE ARE NO MORE INVESTMENT BANKS:

Goldman - now a bank holding company
Morgan Stanley - now a bank holding company
Lehman - RIP
Bear Stearns - part of JPMorgan
Merrill Lynch - part of Bank of America

For those who have never worked at a bank - and I worked at BofA and was a bank auditor for Price Waterhouse - they do not give huge bonuses to everybody under the sun. They are regulated by the Fed, the FDIC, the Comptroller of the Currency, and state banking supervisors, among others. Their risk is controlled by law; capital requirements are international. The bankers on the commercial side (who are in control since it's their money) are not going to stand by while the bankers on the investment side make obscene salaries.

Ken Lewis of BofA made $21 million in 2007. Lloyd Blankfein made $71 million. Who has the bigger bank?

dca1125, if you haven't given them any money - BACK OUT.

I saw this with my friend's house in San Diego - he had a buyer, they wanted to reduce the price, he said yes, yes, yes, no - and he still owns the house.

Same thing in South Beach - the people who wouldn't take the $1 million offer I took still have their apartment on the market.

steve, which one is it? You are on the record for 25%, 30-40%, and 50%.

^^^ That's your call. You may not get anywhere trying to renegotiate unless your sellers are desperate. If you do decide to go through with the purchase, insist on a mortgage contingency; this will give you an out if the property doesn't appraise.

miami, las vegas, etc. are very different than nyc - these places had more condos than people and most of the ivestment was speculative. people were also much more levered - putting 0% down. nyc is a little different, most people are residents (except some of the foreign buyers but many of these people are using them as pied a tiers). so it's hard to say if it will come down that much ...

i do think there will be a price decline but how much remains to be seen. i agree manhattan is not recession proof.

Above message directed to dca1125

"You are on the record for 25%, 30-40%, and 50%."

For the market as a whole I said 50%, and you know that JuiceMan. What I said was that I wasn't sure if that would be nominal or inflation-adjusted. I never said 25%. I never said 30%. I may have said 40% in the above context.

"these places had more condos than people and most of the ivestment was speculative."

And so do we. They have rapidly growing populations; Manhattan's grows by 10,000 per year.

"people were also much more levered - putting 0% down."

Same with new dev condos here.

"nyc is a little different, most people are residents (except some of the foreign buyers but many of these people are using them as pied a tiers)."

Really? Look at the flips in new dev.

JM- I believe said between 40-50%, perhaps you were thinking of my prediction of 30-40%. I'm curious what you think? By the way where have you been. Did you close yet? And no I'm not trying to be a jerk. Just curious how the new place is? I'm not confusing you with someone else? If I remember correctly, you were waiting to take delivery.

steve, you again like to wade into a topic which you know nothing about. the commercial bank/investment bank thing doesn't matter. I used to work for the investment banking division of a commerical bank. the managing directors and heads of groups were compensated very, very well. this will continue to be the case, since banks will always pay the guys who have the clients and bring in the business - they have to, or someone else will hire them away, and they bring in far more in fees than they are paid.

now, I'm not saying that comp won't be way, way down for the next couple years - it most certainly will. but that is a function of a decline in their business - less underwriting and m&a advisory to generate fees. less fees, less comp.

again, just to be clear, comp will be down and that will most likely have an impact on nyc real estate. but the conversion of bank holding cos is irrelevant to that discussion.

Everyone who is not familiar with steve and dco, please don't get worked up. steve has a proven history of making things up and using flawed and misleading analyses for his opinions and arguments. It is almost as if he has some serious personality complexes that cloud his judgement and ethics.

dco is not devious like steve, he is just a complete pessimist.

Things are bad right now and the markets certainly will subject to serious downward pressures, but these two were waiting for bad news to start predicting the real estate crash of all crashes. They have no more insight than anyone else.

steve, I remember a post based on a charity bet in the 25% range. I can't find it but I think it was one of EddieWilson's threads. Doesn't matter.

dco, I think you have me confused with someone else. I've been living in my current place for a while and will be for the foreseeable future.

Really, evillager? I don't know what I'm talking about?

"Morgan and Goldman will continue to have investment banks, very much the way JP Morgan and Bank of America do. The big difference is that the investment bank in such a situation, has access to unsecured lending (subject to certain regulations) from the commercial bank and will be more strictly regulated by the Fed. If the two banks can grow their deposit base quickly, it will mean a "sticky" or reliable source of financing not available to investment banks.

"The new configuration likely means lower profitability for both investment banks, but at least it allows for their survival."

http://www.cnbc.com/id/26828495

"It also is a turning point for the high-rolling culture of Wall Street, with its seven-figure bonuses and lavish perks for even midlevel executives. It effectively returns Wall Street to the way it was structured before Congress passed a law during the Great Depression separating investment banking from commercial banking, known as the Glass-Steagall Act."

http://www.nytimes.com/2008/09/22/business/22bank.html?hp

I could go on, but it's not necessary.

"someone else will hire them away"

Or the Europeans will come in and save Manhattan real estate. There is not an endless supply of jobs for these people. Get real.

Seems like yet again, you're the one who doesn't know what he's talking about.

It's now official: "Ignoring comment by LICComment."

wow, if the ny times said it, it must be true

JuiceMan- Sorry, I wasn't sure.

LICComment- Hey what's going on? Did you get to the restaurant? Also did you Lahaus's website and prices are posted for several floor plans, any thoughts. At least the have the nerve to post prices. EC3 won't post prices at all. Do you have any updates on sales in LIC. Seriously, I'm not trying to be an A$$. We all know that NYC is in the beginning stages of perhaps a large downturn and I'm curious how LIC is doing?

hey steve, can you give me some more investing advice? you bought the S&P and BRIC indexes at the beginning of the year, and then abandoned that to short the market on thursday, only to reverse course on friday.

not that you would invest in RE like this, but if you bought a place in manhattan at the beginning of the year and sold today, would you have done better or worse than your investment performance in the market?

also, are you updating your rent vs buy formulas to use treasury returns as your opportunity cost of your down payment (instead of 10-12% or whatever you were assuming you would get from the s&p)?

please let me know, since you seem to have all the answers.

(oh, and by the way, I continue to hope you are right and RE goes down 50%. really. I can then upgrade - maybe even change my name to "westvillager")

evil and the rest of you permabulls - be careful. Steve is one of the only people here who actually knows what is going on with NYC real estate. None of the "bulls" would ever look at the numbers, would never run a simple rent/buy analysis to see if real estate was overpriced. If they did and it showed (as it always did) that real estate was AT LEAST 50% overvalued in Manhattan, they would yell and scream and claim fuzzy math. People - the market is crashing. Accept it. Get out if you own a home and can find someone stupid enough to take it off your hands, but don't be stupid sellers. Lower your prices now. You will be thanking me, Steve, dco, MMafia and the rest VERY SHORTLY if you can get out of this money pit of real estate before it completely craters.

anon, sorry but I am no "permabull" and have never said that nyc real estate was going way up or anything of the sort. I have questioned the rent vs buy math and used examples from my neighborhood where they did not seem out of whack. Not sure why that makes me a bull.

anon3, what makes you say 70%? Let's see some reasoning behind the number.

"you bought the S&P and BRIC indexes at the beginning of the year"

Never bought an S&P Index, and bought BRIC 18 months ago. I was fine until the Lehman bankruptcy - the market gyrations were too much, led to margin calls, so I had to liquidate partially.

"then abandoned that to short the market on thursday, only to reverse course on friday."

If you held a short position the day before the government announces the biggest bailout in the history of the world, and don't get out of the position immediately, you are a fool.

You're right - I lost my last year's gains, but I still have a net worth greater than Dick Fuld's.

evillager - I agree with you that the I-Banks will continue to pay good bonuses for their good performers. The change in structure is not the end of the world. Also, please remember that very few people make those large bonuses ($10 million+). The other people will continue chugging along with their 30, 40, 50% bonuses in decent years and there are A LOT of these people in the I-Banking firms/divisions. These are the people who get the $60k, $80k, 120k bonuses and save for a few years and then buy a property. It is not like there are tens of thousands of people getting $20 million bonuses in these firms.

Steve - just because you say that 50% declines will certainly occur doesn't mean at all that it will happen. The whole 12x rent formula hasn't been relevant to NYC for 15 years and it is just not going to happen. I am not saying prices won't decline because they will, but you are taking the prediction of the decline to the extreme the same way the brokers pumped-up the rise. They had little facts backing them up and you do as well.

It is interesting, you have called out people for so long about being wrong on the increase of prices that you are now doing th EXACT same thing about the decline of prices. I know that people like to see their views on the screen and to have people agree with them...it makes them feel important. But, the truth of the matter is, things are almost always somewhere in the middle. The rise was abit overblown and the decline will happen, but you are blowing it into more than it will be.

Middle of the road tends to be right much more often. I am sure you disagree. That's okay. Disagreement is good. It makes people think and question and learn.

JM - I wish you all of the best with your situation. I believe that things will work out for you.

waverly - I think the issue in the near term is that there are a lot of people who got sevetral hundred thousand dollar bonuses which will be way, way down. but again, that's a function of the business, not the structure.

by the way, since everyone is throwing out hypothetical examples of what the "market" will do, maybe I could point to something more concrete. I like this one building, 140 charles in the west village. in the last year two 1100 sq ft 2 brs sold for $1.35 and $1.45 million. so those saying we will be down 50%, you think I can pick up something there next year for $675-725k? I really hope so, I would buy at those prices in a heartbeat. ditto for looking at a place in prime UES - I could have both uptown and downtown digs.

This is what I mean when I say that I would welcome the 50% correction even though I own. I could keep my current place and rent it out, or hell, even just hold onto it.

Unfortunately, this is exactly why I doubt that prices will go down this much. I think there are still too many people like me (or wealthier than me) who would buy at prices well above a 50% decline, which would prevent us from ever getting there.

Correct, I don't think the structure will matter much. What will matter is that the largest source of income for them is now gone, and all the traditional big money makers - like M&A - have been smacked down. Add that together, and you're talking a lot less money for bankers.

There have been lean years before. Were the bankers any less talented in those years? Were the rainmakers not there yet, working in some other industry? Of course not. The market defines their success more than they do... and we all know where the market is.

Hey dco. I haven't gotten to the restaurant yet, but I plan on checking it out as soon as I can. I'll let you know what I think.

LHaus' price points are interesting. That may be a good test of the market, to see if they get those prices. I've heard Star Tower is still selling very well. My friend didn't have too much info on 5SL when I spoke to her. I'll let you know if I hear anything.

anon3, that was a misstatement. I often ran the rent/buy analysis and showed that steve's numbers were misleading and incorrect. If you want to say that problems in the financial markets will bring rents and prices down, that is one thing, but to say that prices have been out of line with rents is just wrong.

I will add my 2 cents fwiw. I believe the buy/rent math has generally been out of whack for some time. The problem is that steve and others would exaggerate it. Steve's favorite trick is to compare 2 apts that aren't comparable.

LICC - I think you need to show me this with an accurate rent/buy calculator. Almost every time I've run the numbers (and I've run them quite a lot as I almost bought an apt. 2 years ago and even then they were so far removed from the cost of owning it was ridiculous so decided to forget about buying and just rented for a while before leaving NYC and I'm not coming back so no self interest here) and they almost always show RE prices AT LEAST 50% overpriced. Factor in ZERO or NEGATIVE appreciation on RE investment, plus now you should probably factor in increased taxes (b/c the city needs to make up for lost income tax revenue))now and see what they do. Prices will be down 70%.

Why not down 95%?

so there are ZERO deals today that will make any profit? I would think that there would be quite a few fire sales that you could pick up at a price that makes money.

I put in an offer on a Jersey Shore house that was listed at $1mill beginning of year, currently listed at $850K. My offer is $550K and they are seriously considering it because I have cash and close quickly.

I see this as a deal that becomes profitable as soon as the market stabilizes.

There are opportunities in every market.

70%? Not going to happen. I agree with evillager again that someone has some cash and will step-in and buy a nice apartment in a good neighborhood WAY before it approaches anywhere near a 50% decline in prices. It just won't happen. The people who MUST sell ASAP are at a minimum in NYC. I am not suggesting they don't exist, just that they are a much smaller piece of the market than in other locations.

Even with the flips in new construction. 70% of the market is coop, leaving 30% condo and a percentga eof that is "new construction" and only a fraction of that is people who MUST sell today. I know these numbers have been thrown around here before and I am not suggesting there will be no pain....just that 50% or 70% declines is just such an ourageous off-the-cuff remark that it needs to be called out for being what it is....total and complete c***.

a little bit of history, several of today's big developers were guys who stepped in to buy in the 80's when the market last tanked, they doubled down in the 90's, and now they are sitting on hundreds of millions.

Paul Stallings started buying in the LES in the 80's when the overall market tanked, and the LES was a heroin den.

In times of turmoil, the guys who make moves and take risks have huge upside potential, much more so than guys who take risks in healthy markets.

"that's a function of the business, not the structure."

Wrong again. The regulator depends on the structure. The regulator of the investment banks was the SEC. The regulators of commercial banks are the Fed, Comptroller, FDIC, states. The rules on leverage and risk and capital requirements are entirely different. Without the leverage it's impossible to make those huge returns. Simply impossible. Without the huge returns, there are no huge bonuses. Bonuses yes, but nowhere near what they used to be like.

It seems that you guys have never sat in on a big-ass bank audit, around a table with Fed, Comptroller, FDIC inspectors, internal and external auditors. Guess you've never worked for a bank where the Fed told them to get rid of their CEO as they did with Sam Armacost of BofA in the 80's.

You also seem to be ignoring what the Democrats are going to do next year, when they re-regulate all of this. If the government is going to be on the hook for a catastrophic systemic failure of the financial system as it is, then they are going to set rules to make sure it doesn't happen. And those rules consist in capital adequacy, balance-sheet transparency, country, counterparty, interest-rate, business sector, etc., risk management, and slow, steady growth in income.

If you didn't notice, commercial banks tend to trade at a p/e ratio of 12-15, lower than the market as a whole. Why? Because they're not growth players; they're cash generators. It's a commodity business, and they like it that way.

Stevejhx wrote: "For the market as a whole I said 50%, and you know that JuiceMan. What I said was that I wasn't sure if that would be nominal or inflation-adjusted."

Given current levels of inflation, the nominal vs. real comparison could be quite wide. Prices could just hold steady for a few years and you'd be close to right.

The changes to Morgan Stanley and Goldman will certainly change the way they run their businesses, but it will probably have very little effect in terms of how investment bankers are compensated. What will happen is businesses that require lots of capital and / or leverage to generate returns will be pared back or eliminated (like sales and trading, much of the proprietary trading that both firms do, equity research, etc.)

Traditional investment banking (providing merger advice and underwriting) is a very high-margin business that requires little capital, so logic would say that in this environment that those business will be emphasized and further invested in. M&A requires no capital, and equity underwriting requires a salesforce infrastructure, but financial capital. These are business that nobody does better than Morgan Stanley and Goldman Sachs, and that will continue to be the case.

What I am suggesting is that this is clearly a massive dislocation in the capital markets, and business models will move away from doing things that require a lot of capital and toward things that require little capital and high margins, and that this will, not surprisingly, benefit places like Morgan Stanley, Goldman, and the investment banking boutiques. The stocks hanging in best today are exactly as you would expect - Goldman, Lazard, Evercore (the latter two only focused on high margin merger advice businesses that require no capital).

The price/rent ratios *are* in line for those in a high tax bracket. If that's your argument, you're way off. You should take the "rents are dropping" angle - that one carries more weight (and does worry me, as a recent buyer who's extremely happy about his price/rent ratio, given current rents).

unnamed says "business models will move away from doing things that require a lot of capital and toward things that require little capital and high margins" as a digital entrepeneur I like hearing that. However, Wall sTreet became whorish recently in the financing of new media companies. I think that you can look toward entrepeneurs who know what they are doing to push back and make the street take a lot less.

It is already happening with many digital companies being bookstrapped and not taking money from the street. I know more companies being started now that are bookstrapped than those who took early money. The ones who took money are all now collapsing because their shareholders are calling in thier bets.

petrfitz, I think you mean "bootstrapped" not "bookstrapped"

sorry phat fingering on my iPhone

> The price/rent ratios *are* in line for those in a high tax bracket

Not anywhere I've looked. My rent is half of what the interest alone would cost on the mortgage. No tax deduction is going to close the gap.

Steve, true, commercial banks have to meet add'l regulatory guidelines that cut into their capital/proits, but that won't stop large bonuses from being paid out in the future.

Bankers at Citi and JPMC have still been paid large bonuses. Even if GS & MS become banks, they'll still make sure their employees are well compensated.

And there will also be unregulated entities, i.e. private equity firms/hedge funds, that will probabaly pay bonuses that will dwarf those from the banks.

With every regulation there's another group that pops up to take advantage of opportunities.

Unless you are in a rent-stabilized apartment, there is no way you are renting for half the after-tax cost of a comparable apartment.

Willkie said, "While it is clear that there will be an effect, it would be irresponsible to provide a market forecast and we reamin confident in the fundamental strength and resiliency of our market over time."

Click Here for the Investigative Homepage. This post has been updated.

OVER TIME NOT A FLIP IN 1-3 YEARS OVER TIME

steve, I'm going to repeat part of my post from above, curious if you have an opinion:

by the way, since everyone is throwing out hypothetical examples of what the "market" will do, maybe I could point to something more concrete. I like this one building, 140 charles in the west village. in the last year two 1100 sq ft 2 brs sold for $1.35 and $1.45 million. so those saying we will be down 50%, you think I can pick up something there next year for $675-725k?

FWIW, Hedge Funds are going to come under increasing pressure over the next year or so and will likely have to cave-in to the pressure and have much more transparency and function in an environment that will be significantly more regulated. They will more than likely have to have an internal audit fuction and additional compliance/back-office functions in-house.

If Hedge Funds are shown to have been profiting from people by questionable investment tactics the hammer will come down harder on them, so they will not like it, but they will fall in-line as well. The funds that have been operating as nothing more then Ponzi schemes will be decimated and they will have nowhere to run and hide. This may be the final hurdle for the financial services industry to cross before they can start moving forward as an industry.

Just my 2 cents.

Maybe - wouldn't be at all surprised if they started going for under $1 mill in the next few years anyway....

nyc10022: where is that zipcode, lower part of UES? I haven't looked in that neighborhood. You may very well be right, though I suspect you're either not comparing equivalent properties (are you looking to buy something better than your current rental? Then of course the costs will be higher...) or you're rent stabilized.

For me, the interest aspect of my mortgage is marginally lower (10% or so) than comparable rentals. Before tax benefits, that is. And I've done a ton of research before buying, and had that research confirmed by seeing insider numbers on past sponsor-rentals in my new building. For comparison I use 8% nominal stock market returns on the down payment. The "perma-bulls" who suggest using treasuries are wrong - for a long term investment like a home, you should use long term investment comparisons like the stock market.

tech guy, you can use whatever you want, but what matters is if you do not buy, what you actually do with your money and what it returns. if your alternative (like for steve) is cash/treasuries, then you should use returns for treasuries. if you are investing in stocks, I have no problem using a 6-7% long term rate (I think 8% is pushing it), but note that if you did that at the beginning of the year you are already down close to 20%. and if you invested in BRIC indicies, which steve was such a big fan of, you lost your shirt.

"And there will also be unregulated entities, i.e. private equity firms/hedge funds, that will probabaly pay bonuses that will dwarf those from the banks."

They will shortly be regulated, too. Remember Long-Term Capital Management? If there is a chance that their positions will cause a systemic failure, they will be regulated.

evillager: I'd do the same thing I do currently with my liquid assets (and what I partially drew down from to cover the down payment). 50% total (including int'l) stock index, 50% short term bond index. I'm not down that far from beginning of the year - while US stocks tanked, international held its own (purely due to the currency conversion). That, and thanks to my short term bond index staying stable (no toxic mortgage crap, no Lehman, etc) I'm only down 5% for the year.

Here's where I get my data:
https://personal.vanguard.com/us/planningeducation/general/PEdGPCreateTheRightMixContent.jsp

50/50 returned 8.4% over the last 80 years.

"My rent is half of what the interest alone would cost on the mortgage."

nah, not even close, not on comparable places. not to say the rent buy math works, but this is a serious exaggeration (in general of course, if you have some kind of sweet rent controlled type deal, well sure, might be a lot worse).

tech guy - good for you. by the way, the s&p returned 0% from 1968-1982, while purchasing power declined by 80% due to inflation.

Who is saying rent ratios have not been relevant for 15 years? In the late 90s they were very favorable here in Manhattan (condo studios selling for $135,000 that rented for $1,100 a month = 10x). After tax, owning may be cheaper right now at a high bracket, but you ignore the risk of owning levered equity in real estate in this market, as well as the interest income foregone on your downpayment. There is nothing crazy about the $6,000 2 bed rental selling for 12x annual rent, or $865k...Or $720k at 10x annual rent. Check history. No one thinks this is a mild recession coming and its epicenter is NYC.

Sure, there are disaster scenarios. I never claimed my purchase wasn't very risky (unlike the perma-bulls who seem to think its an incredibly safe choice). I just think I'll come out ahead average-case, and to come out behind, things would have to go quite a bit worse than average. Slightly worse still results in a good decision to buy.

The interesting thing about inflation is that it actually *helps* the buy decision. It makes my mortgage worth less in real terms - inflation helps debtors.

And, if you're going to cherrypick disaster scenario numbers, you don't need to go that far back. If you bought the S&P in 1999, you're also seeing 0% gains.

"US stocks tanked, international held its own (purely due to the currency conversion)"

That doesn't sound right. I'm seeing EAFE funds down hugely, emerging market funds even more so.

> If you bought the S&P in 1999, you're also seeing 0% gains.

Only if you ignore dividends...

steve, even if hedge funds et al face more regulatory scrutiny, that wouldn't automatically mean they would pay lower bonuses.

If private equity/hedge funds et al become more regulated, I suspect this would either push more investment boutiques offshore or cause the creation of new ownership structures for these groups. And new products will be invented. Just like CDS', that were unregulated.

Like the saying goes, when one door closes, another opens up.

"that wouldn't automatically mean they would pay lower bonuses."

As soon as you take away 30x leverage, your potential to make money dries up, as do the bonuses.

Simple math.

> steve, even if hedge funds et al face more regulatory scrutiny, that wouldn't automatically mean
> they would pay lower bonuses.

I have a funny feeling regulation isn't needed to cut back some major $$$ there.

Crain's said 600 hedge funds already closed shop this year. I'm sure some distressed stuff will do well, but when average returns for all funds overall have been decimated, the performance component takes a hit, too. There were just way too many of 'em for there not to have been a lot of crappy ones.

The problem with a huge correction is where can people put there investment income if they leave stocks? People may move to commodities if they can afford it. Otherwise, they will put their money in real estate. The reality is that cash is not a good position in an inflationary environment. With that said, it would be interesting to see US investors come back to the dollar because maybe we can protect the dollar as well. The only candidate talkng strong dollar is McCain.

> Otherwise, they will put their money in real estate.

People 'aint gonna be touching RE for quite some time after this...

"The only candidate talkng strong dollar is McCain."

If he had more than talk, maybe more people would care.

Just weighing in on the rent vs. buy math. I've done it a fair amount too, and (unsurprisingly) find myself squarely in the middle of the debate.

As I recall from the relevant string, tech_guy's assertion that in his case buying is cheaper is based partially on an assumption of rent increases as well as positive real returns on the RE investment. While those assumptions may be right, they aren't really relevant for comparing whether it's cheaper to rent or buy today.

On the other hand, Steve's 2x assertion gives zero credit to the tax deductibility of mortgages, since apparently banks don't take that into account when they qualify. Again, may be true, but completely irrelevant for calculating the actual cost of buying vs. renting.

My calculations on most comparable Manhattan apts generally show anywhere between 10% and 50% more expensive to buy.

"but completely irrelevant for calculating the actual cost of buying vs. renting."

But not irrelevant for calculating what you can actually expect to buy.

"My calculations on most comparable Manhattan apts generally show anywhere between 10% and 50% more expensive to buy."

newbuyer99, I'm generally in your camp on this issue. There are a few instances where the swings are a bit more dramatic, but (and this is very unscientific, so take it for what it's worth) I believe most apartments are in the range you cite. I see Steve's point on the tax deduction for mortgages, but this is most relevant when you're really stretching your assets to get the most apartment you can possible buy.

newbuyer99: I do 2 calculations. One is http://housemath.us, which assumes rent prices go up with inflation, which is 4%, and that housing prices appreciate at 0.5% above inflation. Both of those numbers have a multi-decade nationwide history behind them. Though both can also be tweaked, if you want to see how bad a disaster (or just mildly bad) situation affects the rent vs. buy math.

The other is straight cash flow. I do better than renting if you ignore the down payment. I do worse than renting if you take 8% of the down payment as potential cash flow - which is admittedly unrealistic, as any 8% investment is long term so it doesn't generate reliable monthly cash flow. But, I don't need that cash flow and would just be reinvesting any dividends / bond yields anyway, so the point is moot.

Steve is 100% right that banks don't take tax deductions on mortgage interest into account when approving you. Its entirely possible that your income could qualify you to rent a place, but a bank wouldn't approve you for a mortgage on that same place, even if the rent vs. buy math works out nicely for you on that unit. But like you say, that doesn't have any bearing on the rent vs. buy financial analysis.

> which assumes rent prices go up with inflation, which is 4%, and that housing prices appreciate at
> 0.5% above inflation.

I guess therein lies the crux. A reversion to historical means will bring about negative real and nominal price appreciation... and rents are in fact declining...

I think the calculations sort of go out the window in a crash.

nyc10022, you never answered me from an older thread (forget which right now) - did you want me to out you as EddieWilson, or did you want to do the honors? ;)

No, apparently I am Steve.

The calculations don't go out the window in a crash. The calculations quite definitely conclude that you should rent if there's a crash :)

As for mean reversion, this article sums up my views nicely:
http://www.fool.com/personal-finance/retirement/2008/09/05/why-stocks-will-rise-again.aspx

In particular, "As Keynes put it, the market can stay irrational longer than you can stay solvent -- and if you're wrong about when a market will revert to the mean, you can rack up bigger losses than you can handle."

I don't try to time markets. I invest in index funds. I use historical averages for determining what a good decision will be regardless of current market conditions. Do I think Manhattan prices are irrationally high? Yes. I thought that in 2001 as well, and either I was wrong, or the market is staying irrational longer than I can stay "solvent" ;) I also think Manhattan rents are irrationally high, yet I have to live somewhere!

More details, before I turn some fence-sitters into buyers without fully understanding my situation: This is the first year I could have bought comfortably. I bought less than I qualified for, and I have a diversified portfolio besides. The last 2 years I could have bought, but it would have been a stretch. Before that, I was in no position to buy at all.

I never advocate stretching to buy. Much too risky.

Prices are going to fall 70%? Well then, not only should you guys get out of real estate, but you should also get out of NYC because a decline that big will turn this place into the next DETROIT.

"http://housemath.us, which assumes rent prices go up with inflation, which is 4%, and that housing prices appreciate at 0.5% above inflation. Both of those numbers have a multi-decade nationwide history behind them."

I recall being taught that real estate, on avg, appreciated 2-3% over inflation, historically, not 0.5%. I agree w/ your overall point, tho' - right now, renting makes WAY more sense.

"...a decline that big will turn this place into the next DETROIT."

Cool! Maybe we can get a hip-hop mayor who shoves people, boffs the hot chicks on his staff, and resigns.

why would real estate appreciate 2 - 3 % over inflation?

Steve: "Never bought an S&P Index, and bought BRIC 18 months ago. I was fine until the Lehman bankruptcy - the market gyrations were too much, led to margin calls, so I had to liquidate partially."

You were "fine"? You have been long 2x BRIC funds this whole year (on margin too), and you were "fine"? You were forced to sell the bottom early last week? Then you bought after the "bailout" which means you got Friday's closing prices?

LOL

By the way, stop using BRIC. Cramer says it all the time, people might get the wrong idea and think you are a fan...

"You're right - I lost my last year's gains"

Well, sounds like at least you were smart about staying out of real estate and really put that downpayment money to use...

"If you held a short position the day before the government announces the biggest bailout in the history of the world, and don't get out of the position immediately, you are a fool."

Prediction: you will be getting new margin calls before the end of October...

Soemthing to be learned here though... Even when dead wrong, Steve comes out ahead: his losses are so big that he wouldn't be paying taxes "for some time to come." I wish I were in that enviable position...

blah blah blah blah

Steve will not be getting a margin call. He will be out of the position the minute it turns against him. Steve is a day trader. He spends days translating words for 12c and is seeing business decline. He has lots of time on his hands to day trade.

Rightly so, he doesn't stick by losing positions or arguments.

Take his position that renting is always better than buying. That changed pretty quickly, especially after 300 posts against him, and now Steve tells everyone that he has always said that when prices are in his range he'll be a buyer as opposed to renting.

Steve isn't stupid.

eric_cartman wrote: "why would real estate appreciate 2 - 3 % over inflation? "

Because population grows faster than land? (Note that I have no idea whether this is true or not since it's obviously somewhat more complicated than this, but if demand increased faster than supply you'd expect prices to increase in real terms.)

"Steve is a day trader."

Nope.

"He spends days translating words for 12c and is seeing business decline."

Nope.

"He has lots of time on his hands to day trade."

Nope.

"you will be getting new margin calls before the end of October..."

Maybe, maybe not. But I don't own Manhattan real estate, of which I'm glad.

"Prices are going to fall 70%? Well then, not only should you guys get out of real estate, but you should also get out of NYC because a decline that big will turn this place into the next DETROIT."

Not true at all. 70% down would still leave Manhattan at $300-400 psf, which I think is where it was in the late 90's, and which is still higher than most of the country. Not saying it'll happen, just that if it does, I don't see a lot of negatives except for short-term owners who bought at the peak.

BG - "Prediction: you will be getting new margin calls before the end of October..."

Wait a minute... are you saying that Mr. Investment Prudence himself buys on margin?

SO.........LET ME ASK ONE LAST TIME:

I have a contract to buy a 2 bedroom apartment on my desk at a price I negotiated 3 weeks ago. I haven't paid a thing and one of you suggested that I walk away.

That said, it's a nice apartment and it's in mint condition (really..........according to my wife) so I just have to move our stuff in.

We live in Palm Beach during the winter and we have happily lived in a rental apartment here during the summer. There is absolutely no urgency to this transaction from our point of view.

ON THE THEORY THAT WE WOULD LIKE TO BUY THIS APARTMENT but don't want to be the last guys to buy at the old prices, by what percentage would you discount the price and say TAKE IT OR LEAVE IT?

Broker says 10%. Wife says 20%. Me, not sure.

HELP.

HAVE TO MAKE A DECISION TOMORROW

dca, I really hope you aren't basing a decision like this based on postings on an anonymous message board

but I would say that it all depends on the apartment, the location and the price

my take - unless you are getting a very good price on a unique apartment (very good location, nice outdoor space, something that is in a little more scarce supply than your average 2 bed in murray hill) then you should probably punt for now and continue renting

I own, but am baffled by people who take such a big decision as buying a place so lightly

newbuyer - please. $3-400 psf is absurd. if that happened I would become "5th avenue-er" or maybe "cpw-er"

A couple of points for people. One is, long term returns on anything is all dependent upon your entry point. Now is an awful entry point for Manhattan real estate. The only argument is how bad it is. The cost of owning is barely below the cost of renting, the cost of renting should be headed down. Also, no one is talking about interest rates, the single most important factor in valuation of real estate. The Feds just bailed out the global banking system. Chances are banks going forward will require higher down payments, more conservative appraisals, and likely higher rates. DO NOT BUY UNLESS YOU MUST....and it's not clear why anyone MUST BUY. I guess if you have someone over a barrel for an apartment adjacent to yours and you can create a very accretive combination...that's the only reason I could think of...and you will be a lifetime owner of that combination and you are very sound financially.

dca--

It is impossible to answer your question without more info on the apartment. Is the asking price already discounted? What type of apartment is it? Location? Light/views? How's the building? How long has it been on the market?

Your broker suggests 10%, your wife thinks 20%. If you go 10 and the seller eagerly accepts, will you kick yourself for not going lower? Then again, will 20 just piss them off and kill the deal? It's difficult to say. Perhaps they're eager to sell (has the property been on the market for a long time? Have they recently had a child? Job been relocated?) By the way, I'm often wary about brokers' advice on these things, as they tend to be looking out for their commissions and would prefer the sale price to be as high as possible... then again, they'd also rather make the deal than lose it altogether.

If you do go through with the deal, do you have a mortgage contingency in place in case the property doesn't appraise? If not, now is the time to add one.

dca--If you don't know how much something (very expensive) is worth, and you don't really need it, why would you buy it?

There will be plenty more mint 2BRs on the market in the coming months and years. At some point the market will stabilize a bit and you'll be able to get a better sense of what sort of prices are "reasonable". Right now everyone is just guessing. Since it sounds like you really have no urgency about buying this place, I'd just walk.

If you do *really* want to go ahead despite the uncertainty, keep in mind that the broker's primary incentive is to make a deal, not to make a good deal for you. And you have to live with your wife. So, because we're all just guessing about actual value, I'd go with 20% off rather than 10%. My guess is that it will spoil the deal, but at least your wife will be happy with you.

"I recall being taught that real estate, on avg, appreciated 2-3% over inflation, historically, not 0.5%. I agree w/ your overall point, tho' - right now, renting makes WAY more sense."

"Shiller shows that inflation-adjusted U.S. home prices increased 0.4% per year from 1890–2004, and 0.7% per year from 1940–2004"
http://en.wikipedia.org/wiki/United_States_housing_bubble

You also completely missed my overall point. Though I suppose you're sort of right - if you're not reading this carefully enough to get my point, you're not serious/prepared enough, and so you should certainly be renting.

Your wife seems to want it more than you, and even she is only willing offer 80% of ask. Why would you feel compelled to offer more?

Thanks all for your comments. It's always helpful to get a sense of "the crowd". I'll let you know how it turned out.

I think Manhattan prices will drop 150%. In fact, people will be handing keys on the street in short order. Then, wildlife will roam the streets, public executions will take place and bread will be $35 per loaf.

The reactions by idiots seem to suggest that a 30%+ drop is in order. You still can't talk about a genuine real estate correction, as we have seen many times in history, without being mocked.

"In fact, people will be handing keys on the street in short order. Then, wildlife will roam the streets, public executions will take place and bread will be $35 per loaf."

But isn't that life in Queens, Bronx and most of Brooklyn already? Should I liquidate all my investments and buy bread?

If you think selling your stock and real estate down 15% from the recent peak is folly, open a history book. If you think a 30% real estate correction is equivalent to some sci fi horror film, again open a history book.

"If you think selling your stock and real estate down 15% from the recent peak is folly, open a history book"

Or the newspaper. We hit over 25% down...

first its 10%, then 30%, then 50%, now its 70%. Newsflash. Prices have already come off a good 10%-20%+ off initial asks, in some cases more. you guys are not nostradamuses sorry to break it to you.

And many called that over a year (or more) ago, while others laughed...

evillager - what's so absurd about $300-$400 psf?

Again, not saying it's going to happen, just don't see why the possibility is "absurd".