Falling prices in Manhattan

Makes me glad my deal to buy a couple of months ago fell through...

I've been a renter in New York for nearly 20 years.

A little more than half that time in Brooklyn, and the last several years in Manhattan.

I never bought because, during the first few years, I didn't have the means; then when I had the means, there was not much benefit in buying over renting. As time passed, whatever benefit there was has completely disappeared, and gone negative (arguably, even taking into acct the opportunity loss).

NowI think this guy in the cnbc piece, from PropertyShark, is throwing out a reasonable estimate of 20% to 25% drop to come for manhattan prices.

Why? Because from my perspective, those of us who want some measurable benefit before we buy are not going to be enticed by anything less than 25%. We've figured out how to live here without throwing away 3/4's of our income on housing costs, which means we're just too smart to settle for anything less.

I'm sorry, I don't mean to sound obnoxious. I'm not smarter than anyone else, I'm just smarter than the current real estate prices imply.

People like me are not going to pay 50x rent to buy a cramped, shoddily constructed apartment smack next to the BQE, or any of the other ridiculous new developments out there.

People like me will move out of the city, or keep renting, before we take that option. If we haven't bought by now, a 10% price drop from already bubblicious prices will not entice us to become buyers tomorrow.

It will take way more than that. Probably 25% drop isn't enough either. Because prices were too out of whack. Really it would take 40% drop to making buying worthwhile, in many cases.

I think there are many people in this situation. Probably a good chunk of all the renters, and there are what 2 or 3 million renters in NYC?

GG, not all apartments for sale are "cramped, shoddily constructed apartment smack next to the BQE,...".

Maybe renting makes sense for you, but that doesn't mean it's the be-all-end-all for everyone.

If deciding whether to buy vs. rent you have to consider the long term costs/savings and your tax situation. A lot of people continue to rent because they have very good deals and/or are living in rent stabilized apartments. Makes sense.

For me, it made sense to buy my place. My monthly costs (mort & maint) are about what I would pay in rent for a comparable place, plus I get the tax benefit. Plus I'm building equity - sure there's a good chance the value will dip but I'm in it for the long haul. It certainly beats throwing my money away on rent and having nothing to show for it.

And when I'm 90 years old and retired I won't have to worry about moving because some big developer bought my rinky-dink-roach-infested rental building I've been living in for 50 years only to tear it down and build a shopping mall.

awful post gg.

First you make it sound like buying has never been a profitable play, this despite the fact that people have made huge amounts of money on real estate the past 10 years. You know very well that there have been times in the past 20 years where if you had bought, you would have been WAY better off then continuing to rent whatever crappy place you've been living in.

Then you use this 50x number which is ridiculous. Really it makes your post a farce.

The of course there is this "a cramped, shoddily constructed apartment smack next to the BQE, or any of the other ridiculous new developments out there." Again kind of a farce.

GG if you haven't bought in the 20 years you have lived here, why should I believe that you would buy after a 20-25% price correction? Seems pretty silly to me.

"Plus I'm building equity - sure there's a good chance the value will dip but I'm in it for the long haul. It certainly beats throwing my money away on rent and having nothing to show for it. "

Not quite... "nothing to show" beats showing a loss.

Unless you don't know math, it isn't "throwing money away" if the rent you spend is less than the carrying costs plus the loss you avoided.

Hell, even if you spent $50k in rent over the next year, if it allows you to buy in at 20% less, you come out WAAAAAY ahead...

Well said, nyc10022.

It is cheaper to just borrow (rent) the apartment than it is to borrow the money from the bank to buy that apartment.

Yearly rents are about 3-4% of purchase price and mortgage rates are 6.5% so it costs roughly twice as much excluding other costs of ownership. Add in total owner costs including taxes, maintenance, and insurance and you end up at about 9%, which is roughly three times the cost of renting.

It is amazing how those who have been renters all their lives go through all sorts of analytical contortions to conclude that they are better off than those who have owned, even though people who have bought and owned their homes for the long-term have just about always been better off for doing so rather than renting.

"It is amazing how those who have been renters all their lives go through all sorts of analytical contortions to conclude that they are better off than those who have owned, even though people who have bought and owned their homes for the long-term have just about always been better off for doing so rather than renting."

I'm curious to know if long term (not bubble years) if that is better. If money saved renting (from several sources) had been invested otherwise, would they still have come out worse?

"First you make it sound like buying has never been a profitable play, this despite the fact that people have made huge amounts of money on real estate the past 10 years."

ccdevi persists in equating owner-occupied real estate as a "profitable play." When will he learn that over the past 10 years real-estate prices were fueled by excess liquidity, excess risk, excess leverage, and negative interest rates? All of that is gone now.

The article suggests 20-25%? That just can't be right. Steve has said many times that the decline will be 50%, and nyc10022 has shown us that prices are ALREADY at 2005-levels.

The author of the article is a broker shill, and I am putting him on ignore.

Prices down 40% by Dec. 1. Anybody buying now is an idiot.

BGaria - you forgot.... the author is from Chicago and is Palin's uncle. Prices will reach 1929 levels, since this is the worst thing since the Great Depression.

Expect 50% drop in Manhattan by summer 2011. Wait until then for bargains.

@LICComment,
a) If the numbers are not correct, please illustrate.
b) Don't pretend like you know me. I paid cash for my apartment in 1999 and will buy another one when the numbers work out and it makes sense to do so.
c) Yawn.

type3, why are you assuming that renting saves money? On an after-tax basis, over time considering rent increases, I don't think you can just assume that renting saves money over buying.

bhh, I've illustrated the numbers plenty of times. With today's rates (mortgage and tax rates), a $3500 rent would reasonably compare to the after-tax monthly costs of owning an apartment in the $750k-$850k range, depending on particular circumstances and assuming an 80% loan. Now if someone wants to time the market and expects prices and rents to decline, that is a different discussion.

"Expect 50% drop in Manhattan by summer 2011. Wait until then for bargains."

I like the prediction for a 70% drop in nominal prices better. I think will wait for that, even if I have to wait till the fall of 2011 or spring of 2012.

"I'm curious to know if long term (not bubble years) if that is better. If money saved renting (from several sources) had been invested otherwise, would they still have come out worse?"

Based on the stories on this board, renters that are investing this "extra money" are getting killed. Interesting how this doesn't seem to be included in anyone's rent / buy analysis.

"...add in total owner costs including taxes, maintenance, and insurance and you end up at about 9%, which is roughly three times the cost of renting"

bhh, the decision to purchase an apt is based on multiple years, not just one year. Rarely in ANY market would someone buy just to live in a place for a year. And you don't factor in the tax benefits.

Again, do the analysis. Find out how much it would cost you to rent the apt you'd like vs. buying one over a specified time horizon, and consider all costs involved. People who buy do this.

Even if the RE market goes down, renters are still paying rent. So assuming that rental prices don't dip accordingly, you're essentially throwing your money away. And don't think for a minute that landlords don't factor in the same RE taxes & maintenance costs that owners pay into the rent.

Of course we can't predict where RE prices or rentals are going, and renting does make sense for a lot of people, but to poo-poo the idea that anyone who would DARE purchase an apt says more about you than the owner.

"Based on the stories on this board, renters that are investing this "extra money" are getting killed."

It all depends on the renter. If they are a disciplined investor, they'll do just fine. If they throw their money away or bet on stupid, hyped investments, they won't. Buying does force you to buy-and-hold.

Personally, I think anyone who puts a potential cash down payment into stock index funds today will do *very* well 5 years from now.

"type3, why are you assuming that renting saves money? On an after-tax basis, over time considering rent increases, I don't think you can just assume that renting saves money over buying."

Good point, but I think the devil is in the details, and the details in part depend on appreciation and rent increases during the time considered (e.g., http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html). In a bubble RE market, of course buying is better. In a crash, renting. I'm interested in historical values, which I really don't know (and frankly don't have time to work on). I do think the nation as a whole, and perhaps Manhattan, is going to return to historical numbers.

For myself, there is the ownership value of course which is very large. But I was curious about the numbers historically from a purely economic viewpoint.

20-25% does not even put the market at 2002 pricing. 30% would put it there. So that is not a big time drop considering all that has happened. I am going BULL on this market in about 6 months.

2002 pricing? I think you would need a 45-50% drop. Arguably, from lows after Sept 11th to peak levels, most sub $2M units saw a 90%-100% increase in price. The ultra high end went a bit nutz with $7M deals in 2002 selling for like $20M or so on occasion...anyone have data on this ultra high end move from those lows to last year?

"... 2002 pricing."

Markets NEVER correct perfectly and exactly.

The pendulum always overshoots by a material amount before it swings back to equilibrium.

You can thank human nature for that inefficiency, but that is a fact. So if you think 2002 is 'equilibrium', you must accept lower than 2002 before it settles there.

Don't forget when measuring a price change by percentages, the effect of a negative movement is always greater than the effect of a positive movement. For example, an apartment sells for $1 million and goes up 100% in five years so now it sells for $2 million. Then assume, it decreases in price by 30% so now it sells for $1.4 million leaving the total price change as an increase of 40% from the initial $1 million price tag. So as you can see, it takes a much smaller percentage decrease to "correct" an inflated market.

"Based on the stories on this board, renters that are investing this "extra money" are getting killed."

i'm doing very well myself, but of course those with net long exposure are not doing so well lately. that said, if you can go for a stab. rent by all means do so. property taxes and maintenance costs are totally out of control of the "owner" (or "renter from the bank", in general) and will only get higher.

if you are a renter like me, 2012 is a good guesstimate of when prices will come back to normal in real terms at least. waiting till rates are sky high (to fight inflation) while hoarding as much cash as you can is the best bet. a buyer with tons of cash benefits hugely from high IR. the cash will make sure that you qualify for a mtg on an scenario with tightening lending standards. those tight standards plus high IR will help to plunge prices even more.

once IR come back down, you refinance your much smaller mortgage. there you go!

people claiming "it's a good time to buy, IR are low" don't know shit (math at least).

"It is amazing how those who have been renters all their lives go through all sorts of analytical contortions to conclude that they are better off than those who have owned, even though people who have bought and owned their homes for the long-term have just about always been better off for doing so rather than renting."

I don't disagree on the whole.

The problem is the exception is, well, times just about exactly like these... So, even if its just 5% of the time, with the leverage you are talking about, and the relative cheapness of renting in this town, you are talking about some potentially VERY significant losses versus renting.

We're down 12% already since Q1 (corcoran numbers), and thats mostly before the panic set in.... so best case is probably 20% down. The number of "exceptions" to the claim is going to get very big very soon if its that or worse...

> "Based on the stories on this board, renters that are investing this "extra money" are getting
> killed."

Possibly. But if it is a potential down payment you are talking about, which is worse...? A loss of 25% of your stock investment, or even just a 10% RE loss leveraged 5x or 10x?

Second, if this was your down payment money, then it was never a good idea to put that 100% in stocks. But that is another story.

"For me, it made sense to buy my place. My monthly costs (mort & maint) are about what I would pay in rent for a comparable place, plus I get the tax benefit"

uptowngal - when did you buy, and what (if you don't mind sharing)? Also, what percent did you put down? For today's prices, or prices in the last couple years, with a reasonable downpaymen, I've never the situation you describe - i.e. mortgage + maintenance being equal to rent, before even factoring in the tax deduction.

For the record, I actually agree with your conclusion regarding the multiple factors and individual circumstances, but am just curious about your math.

Sorry, but in order for prices to drop 20-25%, the city would have to go back to the way it was in the 1970s, and that will never happen with Bloomberg in charge. Yes, prices will fall, but not by 25%. If we see a massive migration of people moving from the city to the suburbs, then yes, prices will fall 25%. But I do not see this on the horizon.

where are the 20% down corcoran numbers???

Fall baby fall ... make Manhattan affordable for the non-super rich ...

Why will prices fall by 20%? Are foreclosures going to skyrocket? Is the city going to become a carbon copy of Detroit? Is the DOW going to lose 1,500 points in a single day? Will interest rates be 18% like they were back in the 80s?

Sorry - where are the numbers saying prices have fallen 12%?

And it's tough to say with certainty how much they are going to fall - none of us know what will happen exactly, but a 20% decline is not crazy when prices have doubled in the last 6 years, Manhattan was nice in 2002 as well. Who knows? But it's certainly defensible to argue this.

Where are the 12% numbers? Looked at the Corcoran report - don't think they're there. Are they QoQ? Wouldn't that still include a fair amount of Plaza and 15CPW closings?

Two reasons why we will eventually see a decline over the next couple of months. First, Unemployment within the financials will continue to rise as Wachovia, Merrill Lynch, Citi, Goldman Sachs, Morgan Stanley, and JP Morgan continue to do layoffs to preserve capital. Second, we are in a recession other industries will be forced to cut cost such as the retail industry Saks, Neiman Marcus, Macys, Bloomingdales etc . We will see flat or negative sales figures this upcoming holidays. With less people with money to buy apartments inventory will continue to go up as inventory goes up competition between sellers will go up. Sellers will compete and lower their prices to entice buyers. There are already apartments now which have decreased their prices dramatically. A 20-25% price correction is very realistic. Obviously not every apartment in NYC will drop in value if you dont have to sell your apartment then it should not be up for sale in the biggest downturn since 9/11.

You dont sell in distress especially if you feel the investment is sound you hold and ride out the storm.

Check out this read
http://blogs.moneycentral.msn.com/topstocks/archive/2008/10/03/manhattan-real-estate-market-is-doomed.aspx

newbuyer99, I purchased a 1br UES coop and closed in Q107. I put 20% down and financed with a 30-yr fixed. The building financials are solid and the maintenance is reasonable.

I think a lot had to do with timing of the rental vs. sales markets.

Without giving away too many details, at the time I was looking, comparable rentals that included the features I wanted were in $2800-3200 range. At the same time there were a number of 1BR's on the market for sale because buyers began getting skittish; therefore I had wiggle room and managed to snag something at a good price.

Could I have found a rental that was cheaper per month? Probably, but I was looking at the long term and didn't want to be beholden to a landlord who might raise my rent by huge amounts (which was the case in recent years), or be forced to move for some other reason.

Yes, coops raise mentenance, but I lucked out on finding a well-managed bulding that has a large cash reserve and has rarely increased fees.

Will comparable rentals go down? Perhaps.

Will prices of 1 br coops drop? Likely, but mine has already increased in value. Sure it may dip but I'm prepared for that as I don't see myself going anywhere for a while. Meanwhile I haven't seen too many comparable 1br's listed or selling for anywhere near what I paid.

Many people why buy know that their monthly outlays would be higher in the early years of ownership vs. renting, and that it's a long-term decision. The fact that my monthly costs have been comparable is icing on the cake. I guess I just hit the market at the right time.

Um, whatever it takes to get you through the night, uptowngal...

yeah, i know - things will be fine in the "long run" .. (whatever that means)

uptowngal, using the $3200 rental and a 5.5% interest rate with 20% down (and assuming $1,000 maintenance for a 1-bedroom), simple math tells me your apartment must have been under $500K to have a lower monthly outlay than rent. I am not as familiar with 1BRs, but am surprised that you could get one for under $500K on the upper east. If you got a great deal, good for you.