Since the stock market is at 2003 levels

Real Estate prices are defined at the margins. I have a feeling we're going past 2003....

QUICK! EVERYONE! Start a letter-writing campaign against the feverish paranoia of Stevejhx! He's going to make the market drop with his insane 'Is Your Real Estate Money Safe?"

I have written a letter. Join me, all!

Actually, I think Steve is sort of right about the real estate market and sort of wrong about the stock market. Steve doesn't have his money in real estate.

What are those p/e ratios? What kind of earnings can we expect over the next year or so? Where was the market 10/05 (10500, I think), and where are we compared to that now in a macro sense?

Stocks are at 1998 levels.

But this is interesting, stevejhx you said that renting is better than buying and you suggested that one of the assumptions is that the would-be buyer invest in the stock market.

How's that working out in the past 10 years? If you bought real estate 10 years ago and bought stocks 10 years ago, in which situation would you be better?

Also, you've made statements that one is better than the other, therefore, not linked 1 for 1, but yet somehow the statement above "Since the stock market is at 2003 levels, Doesn't it mean that property prices will have to fall to 2003 levels" makes the assumption that that they are linked 1 for 1.

Please explain.

Here is what you said:

stevejhx
about 5 months ago
ignore this person
report abuse No matter how you slice it, renting is ALWAYS financially more beneficial over time than owning.

Let's make some financial assumptions that are borne out by decades of empirical evidence:

1) Real property prices and rents increase at the rate of income, or 0.7% per year adjusted for inflation.

2) The S&P 500 increases at a real rate of 8.0% per annum.

These being true, it is ALWAYS better to rent property than to buy, if you invest the down payment in the S&P 500. Watch:

Say you make $100,000. This implies that you can spend up to $2,333.33 per month in total housing expenses (28%).

An 80/20, 30-year fixed $375,000 mortgage at 6% gives you monthly mortgage payments of $2,248.31.

Assume that taxes and common charges amount to a VERY CONSERVATIVE 10% of total mortgage payments, or $224.83 per month.

A $375,000 mortgage implies a purchase price of $468,750, and a down payment of $93,750.

If rented an apartment for the amount of the mortgage payment, you will have paid $903,455.33 in rent over 30 years if it increases 0.7% per year.

If you invest the down payment in the S&P 500 for 30 years, $943,374.08 at the end of 30 years, for a total net profit of
$39,918.75. To that, however, add your yearly maintenance and tax payments $2,697.96, increasing 0.7% per year and accruing 8.0% per year over 30 years, and you will have earned an additional $330,084.36, making your total profit $370,003.11.

Now do the same thing for your house. If your $468,750 home appreciates at a real annual rate of 0.7%, at the end of 30 years you will have a home worth $577,863.68, for a profit of $109,113.68. Add to that the original loan of $375,000 - the rest of the equity you will have built - and you get a gross profit of $484,113.68. But you would have paid $434,393.21 in interest, so your real profit is $49,720.47. In addition, you will have spent $90,343.15 in tax and maintenance, making your GRAND TOTAL PROFIT a whopping NEGATIVE $40,622.68.

That's right! You rent for the amount of your mortgage, all values go up linearly in line with historic data over time, and you will wind up with a total profit of $370,003.11. Whereas if you buy a home you will wind up with a loss of $40,622.68.

This of course excludes special assessments and all the transaction costs associated with owning real estate: brokers' fees, conveyance tax, etc. It also ignores the tax effect on dividends. But dividends and capital gains tax rates are currently the same (and can't be predicted in the future). The only further benefit from owning is the $250,000/$500,000 tax exemption. But it is doubtful that $410,625.79, which is the absolute value of the difference between the owner's loss and the renter's gain.

Guys, it's indisputable: renting is FAR better in the long-term than buying. All the figures and assumptions I used are real and verifiable. Do your own calculations: rent for the price of your mortgage payment, invest the down payment and maintenance and property taxes in the S&P 500 at the real rate of increase of 8.0%, increase your property value, rent, taxes and maintenance payments at the real rate of 0.7%, deduct the mortgage interest paid, and you will see IT IS ALWAYS MORE BENEFICIAL TO RENT.

Do your own calcs, or criticize the model. I'm waiting....

And this is the link to the discussion for proof.

http://www.streeteasy.com/nyc/talk/discussion/3410-real-estate-is-a-bad-investment

"Doesn't it mean that property prices will have to fall to 2003 levels? Which is what I predicted."

You also predicted a stock market bounce to 11,000 ("a more reasobale level") in a few weeks, which will take us to early 2006. So, I guess that's where RE prices are going? Early 2006?

"But too many people in Manhattan have seen too much of their wealth evaporate to go rushing in to buying overpriced real estate."

Yep. For sure.

"since the foolish collapse of Lehman Brothers"

Yep, "the man" is out to get you. You have always been right, you are still right, but the god damn GOP screwed everything up. By the way, you have said that we need some serious regulation to get the credit market going again. We need that in order to get the stock market going... Yet, you are relying on the "most incompetent administration in history" (your words) to come up with the regulation. So, yeah, good luck with your stock market positions...

"But too many people in Manhattan have seen too much of their wealth evaporate to go rushing in to buying overpriced real estate."

Not me. My business is booming, so is all small business and that's the real economy, remember?

"and sort of wrong about the stock market."

Sort of? Way to step up with the euphemisms, aboutready.

oh now, BGarcia, Bee, Bee, Bee, BeeGarcia, don't be nasty, stevejhx actually made Jim Cramer take the day off from tv the other day and not eat for a full 24 hours. stevejhx knows all, and is all powerful. His predictions are always correct because he controls the outcome (in the long run) so be fearful. BEEEE Fearful BeeGarcia

"No matter how you slice it, renting is ALWAYS financially more beneficial over time than owning."

Yep. Definitely. Couldn't have said it better myself.

What a joke

I don't think renting is always more beneficial than owning. I don't think renting is usually more beneficial than owning. But anyone who could see we had a nasty real estate bubble starting about 6 yrs ago could tell you, renting from about 2005 on was CERTAINLY better than owning.

Agree Steve; we are headed to at least 2003 prices.

itseemstome: to be fair you have to give real estate in Ny a chance to come down...if you were using any other market I think Steve would be proven correct right now. It hasn't happened in NY yet, but it will

steve: enough of your incessant whining about the "unnecessary bankruptcy of Lehman"...you sound like a baby...everyone knows you're saying it b/c "you"lost money. this is a bear market where everyone loses money ...yes you too Steve.

You of all people should know that if it wasn't lehman it would have been something else...this downturn HAD TO HAPPEN...IF IT DIDN'T HAPPEN WE WOULD HAVE HAD AN EVEN BIGGER CRASH THAT WOULD HAVE RESULTED IN THE COMPLETE DESTRUCTION OF OUR CAPITALIST SYSTEM. This is painful but it is what our country needed. Instead of the end of life as we know it we will just have to deal with a severe 2 year recession.

As for the market...I believe it will have short spike up but then go down from these levels (We will retest the bottoms we reached on friday morning). Don't be a hero folks, this bear still has some bite left. I do think the worst is over. People with long term time horizons should think about investing in muni bonds and companies with great dividends and good balance sheets (Verizon with dividend yielding 7%)

"Steve doesn't have his money in real estate."

I own both. And also have cash. Sorry to burst one more bubble.

Yes, yes, yes - the incompetence of the Bush Administration causes the stock market to fall the most since 1933, and I didn't predict it. Did you?

No. Because it's not 1933, or 1929, or even 1987 (though I remember only the last), and p/e ratios are ridiculously low, and we're not going into a 25% fall in GDP as we did in the Great Depression. Which is why what's happened in the past week in the stock market will reverse itself, and I.

Now, for housing. It is going to fall far and fast in Manhattan - 50% in real terms - because recent price increases were fueled by obscene bonuses paid to investment bankers who were creating bubbles: dot.com, commodities, real estate. They are now gone. Leverage is gone. Bonuses have dried up and will never be paid like that again. The entire banking industry is being nationalized, and re-regulated.

"Instead of the end of life as we know it we will just have to deal with a severe 2 year recession."

In Manhattan real estate, yes, but the world economy isn't what it was like even in 2002: there are growth engines outside the United States with large populations, high growth rates, high savings rates, and low levels of credit outstanding. There are people, believe it or not, who do not spend 110% of what they make like Americans.

I want to elaborate on flmd's point. I began building positions in BAC, WFC starting last week. I bought some stock in those companies, and as the market came down, I bought more and I will continue doing so until I purchase the desired amount. Starting on Friday of this week, I began building positions in GE, and I am seriously considering purchasing some CB, and perhaps adding to my msft. I am looking very closely at other companies, but I am waiting for them to report earnings hoping for a drop in their price. My goal is to purchase these, and other equities, during what may well be a one to three year downturn with the expectation that I will find myself in an attractive position in 5-10 years. The fact is that no one can time a bottom, but when you see equities being sold out of fear and need, having nothing whatsoever to do with fundamentals, that to me presents an opportunity to purchase companies at attractive prices.
So long as you have a solid cash position, and you have the patience and liquidity to expand your time horizon for holding by a year or more if need be, then I believe now is the beginning of a great time to start building a portfolio of quality equities.
The way NOT to invest is to buy equities at a high price, following the her, ride those equities down through a crash, and then sell at a bottom. Unfortunately, that is what many uninformed people have done because they were over leveraged, or they were decent people that got bad advie from bad "investment professionals."
I believe we are definitely in a recession, so earnings will be weak for several quarters. I believe this has been somewhat priced in, but not fully, so I am adding to my positions and adding to my companies with deliberate caution but with absolute confidence that noew is a great time to be an investor.
There are some on this board who think they can outsmart the markets and commodities by "trading"/betting. I am not one of those people. Buy low, sell high...it works every time.

back to R/E and why R/E will go down, according to you, steve, I'll say it one more time - the reason R/E goes down is that no one has money to buy R/E - if you think you will be immune and be one of the smart ones who still have the cash reserves, the access to credit and the steady employment to be one of the smart ones who buy R/E at the bottom, well ..... your posts about equities and other factors in the past few weeks do not sound like someone who is immune

Individuals took a record $72 B out of stock & bond mutual funds in August and $43.5 B in just the first week of October. Bloomberg.

My investment philsophy includes:

- Wait for the fat pitch.

- Investors overpay for comfort. Do what feels uncomfortable.

- Mean reversion happens – but requires patience.

- Scale in, scale out.

- Use low-cost implementation strategies.

Largely agree with mh23 and Steve. Have to admit, though, that NY residential real estate is trying my patience!

"Yes, yes, yes - the incompetence of the Bush Administration causes the stock market to fall the most since 1933, and I didn't predict it. Did you?"

Hummmm, let me think... Yes. I covered my last shorts yesterday and I am fairly sure I will be sorry I did it in a couple of weeks.

"It is going to fall far and fast in Manhattan - 50% in real terms"

Yup. For sure.

"but the world economy isn't what it was like even in 2002: there are growth engines outside the United States with large populations, high growth rates, high savings rates, and low levels of credit outstanding."

"Buy, buy, buy!!! The foreigners will save us!!!" Oh, you, sweet irony! How do you do it? How can you always make me smile?

Now is a time to be confident, but deliberate. What investors, such as myself, are looking for, are equities at tremendous value. What makes this market challenging is the following; while there has certainly been an enormous amount of forced liquidations, creating opportunities, we are just at the beginning of what may be a prolonged and steep recession, which makes it difficult to value the equities, even at the low prices. The reason why I have begun building positions in GE, WFC and BAC is because, regardless of what happens over the next few years, I have no doubt that these companies will crush 5-10 years out. Since I can't time a bottom, I have no choice but to start building positions now. Clearly, from a trading standpoint, I was early on BAC, but from a fundamental standpoint, I was correct that this company has tremendous upside in the future. As for Chubb, it is a great company selling for a great price, but I need to wait until later this months after earnings because of the high probablility that there will be a sell-off. If I am wrong, I will still begin adding to my position, because I am not a greedy market timer itching for a 3% bounce, but neither am I over zealous in this market. The way I see it, the market has undeniably punished a great deal of great companies,so if you miss a dip or a rally, who cares if you are a long term player. Build your positions over time and deliberately with a patient mindset. Let time be your friend, not your enemy. Gamblers turn time into their enemy looking for a quick buck, investors use time as their ally by allowing assets the time to fall to attractive prices and the time to achieve their hidden value.

"The foreigners will save us!!!" Oh, you, sweet irony! How do you do it? How can you always make me smile?"

Yes I'm sure I do, BGaria - when did I say that the foreigners will save us? Never - though the Chinese are by buying all our debt.

What I said is that they have their own economies largely - especially China - sealed off from the credit crisis. Their economies continue to grow and can continue to grow without us. No I don't think they'll swoop in and save the US economy or buy up all our overpriced assets. What I said was that their assets are underpriced.

My, my, my you always make me smile.

"It is going to fall far and fast in Manhattan - 50% in real terms"

Yes indeedy. Tell me who's left in the city to buy these apartments. Or maybe you didn't read this:

http://www.nytimes.com/2008/10/12/realestate/12cov.html?ref=realestate

Telling signs.

And MMAfia, just FYI - it appears that central banks are selling gold to finance the financial bailout.

steve, you need to re-read BGaria's post - it is you who have ridiculed the R/E mantra "the foreigners will save us," yet conveniently store that in a separate part of your memory from your happy talk about China's economy and emerging markets in general, failing to see that what you are saying is in fact "the foreigners will save us," just as you ridicule NYC realtors presumably saying.

But I forgot. That orange stuff that came out of the water that I eat for dinner is not salmon; it's actually fish. Right. Gotcha.

You called this one perfectly, Steve. I am grateful that I am a thinking man that is capable of being persuaded by the superior argument, it made me a great deal of money.
What are your thoughts regarding the meeting this weekend and it short-medium term affect on equities, particularly financials? My sense is that we are testing a bottom, but I wonder if there is not perhaps another bottom out there next year as we start to truly feel the recession. In either case, it is still a great time to buy at attractive prices, but I would appreciate your thoughts.

"My, my, my you always make me smile."

I am glad. Although I wasn't referring to you, I wasn't saying that you make me smile. I was referring to the irony of the statement.

"Their economies continue to grow and can continue to grow without us."

Yes, the all-powerfull communist Chiunist goverment (which is about to reflate the stock market ANY DAY now, mind you), has defeated economic cycles. They just grabbed those cycles, humped them into submission and made them cry "uncle."

But anyway, back to RE... I was reading your post from 5 months ago (above in this thread). And now I have to say that you make me smile...

stevejhx: give up the ghost already...the WHOLE DAMN WORLD was in a credit bubble. It was not just the US that overspent. You are right that China did not overspend but China they need GLOBAL CONSUMERS to purchase their products...there are no consumers now or in the forseeable future. They are just as fucked as everyone else. you have gained a lot of credibility as it relates to NY real estate ...don't lost it all now.

As to those venturing into the market...we have not reached bottom yet...expect a small rally that could last as long as 2-3 months (it could also be extremely short like 1-2 days) but then another sharp downturn that will likely blow past friday mornings lows (we could see S&P 600-700).

That will be the one where a lot of people will swear off stocks for good and that will be bottom. Be very careful mh23. Those who cannot handle another 15%-20% down from here should stay away.

As to real estate in manhattan, I agree with Steve eventualy 50% down.

mh23: the G7 meeting did nothing. they essentially came out and said we are committed to getting our countries out of trouble thats it. No step by step plan came out of the meeting. Everyone was hoping that they would all endorse the UK plan but that did not happen.

Essentially each country is on their own.

It does seem that Paulson will use his initial 250 billion to purchase some equity in companies...he clearly does not want to..but may not have a choice in the matter.

In the end ...anything the government does will not avoid the inevitable...they can only stop a global depression from happening , which I think they have done.

By the way, the only way GM & Ford can survive is if they are bailed out by the government which is likely to happen (they have over 1 trillion in credit default swaps between them that would have to be paid by financial institutions if they declared bankruptcy)

For those who complain "that we are not talking real estate" I argue that I am. All that I mentioned above is why I think Manhattan real estate will go down 50% in the next few years.

Nice NYT article, Steve. Interesting to see the lengths to which people will go to avoid "explicit" price cuts. But I guess that's just the way it works in residential real estate. Eventually, though, those cuts will be explicit - and presumably substantial.

"has defeated economic cycles. They just grabbed those cycles, humped them into submission and made them cry "uncle."

Did I say that? What I said is that they have their own domestic economies that are not in lockstep with the US's.

"But anyway, back to RE... I was reading your post from 5 months ago (above in this thread). And now I have to say that you make me smile..."

Well I'm glad, Bgaria - pick your start and stop dates and you can get any answer you want. If you had taken the cutoff date one year earlier, when the Dow hit its peak, the answer would be quite different.

On a moving average basis stocks always outperform owner-occupied residential real estate, which doesn't "perform" at all. Stocks are far more volatile, but the risk of real estate is its illiquidity. They are equally risky assets, just behave differently.

"Eventually, though, those cuts will be explicit - and presumably substantial."

Agreed. I just checked for 2-bedroom apartments comparable to what I rent, and to the last they are still twice as expensive to own. So why own?

I don't need to pick any dates. Just a quick look at your post tells me that your conclusions can't be right. Let's start with the most obvious mistake:

You say: "Real property prices and rents increase at the rate of income, or 0.7% per year adjusted for inflation." It's in line with what I have read, so I don't need to go out and verify it. I agree.

Then you go on to say: "Now do the same thing for your house. If your $468,750 home appreciates at a real annual rate of 0.7%, at the end of 30 years you will have a home worth $577,863.68, for a profit of $109,113.68."

and

"If rented an apartment for the amount of the mortgage payment, you will have paid $903,455.33 in rent over 30 years if it increases 0.7% per year."

Here is where we part ways. Property doesn't appreciate 0.7%/year on average and rent doesn't go up 0.7% on average. Those are real increases, the nominal ones are a lot higher. Your argument is 100% correct if you assume no inflation. But in your argument, I see nothing about inflation.

Let's assume that the Fed keeps inflation around its target rate of about 2.5% (a generous assumption, given what has to happen in the next few years). That means that property will be appreciating at about 3.2%/year. Same for rent. Even with that assumption, your numbers don't make sense.

That said, your argument is surprising given some of your other assertions. Like the 12X ratio, for example. You have always argued that the equilibrium point for RE is when owning is equivalent to renting on a monthly cash-flow basis. But in the post above, you prove that even even than, renting is better. So, how is that an equilibrium?

"But in your argument, I see nothing about inflation."

It shouldn't matter, as in inflationary times, incomes go up as well as prices. Rents go up in line with incomes.

I've proved how the 12x ratio works many times: it is a function of 30% PITI and 40x monthly rent in income. If I pay $4,500 a month for an apartment, I need to make $180,000 a year. If I make $180,000 a year, my maximum PITI is 30% of that, or $4,500 a month.

If we assume a 6.5% 30-year amortizing mortgage, I could afford an apartment that costs about $700,000, giving a monthly mortgage payment of $3,539.58, plus tax and maintenance of about $1,000 a month. Yes there is a tax deduction involved, but that is not included in the PITI calculation and so can't be included in what you can afford. Therefore, the apartment I can rent for $4,500 a month should cost no more than $700,000.

Find me a 1,000 square foot 2-bedroom apartment in Chelsea for $700,000. The cheapest currently listed is $900,000, most are in the $1.2 million range. A few months ago most were in the $1.4 million range.

One of the challenges no one has focused on will be the lack of smart investors buying until prices have fallen dramatically (50%?). In this market you can buy senior bonds of very high quality companies that yield upwards of 10%. I would think that rental yields would have to be at least 10% and more like 12-15% to entice investors to buy illiquid housing over liquid, senior debt and other blue-chip assets. We are very far from that point. Cash-rich value investors typically form the bottom in markets as prices just get too cheap and create outsized cash-flow yields (more reckless investors have lost most of their purchasing power by that point). NYC real estate would probably be dead last in a ranking of asset classes right now.

I agree with you fmld. There is a distinct possibility of another 15-20% drop. However, I have been almost entirely in treasuries since last August, so I now feel comfortable putting a little bit of cash to work. With the possible exception of GE, I can't see adding to any positions or building any new positions until we at least test and hold today's bottom a few time. I won't sell on any rallies unless they are 20-30% because I am not a trader. That being said, any time I can make 20-30% on my money in a few months, I take it reload, and wait for the next opportunity for value.

Great job with predictions. You've been wrong.
Great job also telling everyone what to do. People would have lost money in the last decade by renting and not buying and instead putting money in equities.

I don't care about your PITIS and 12x that has been "proven". So has the long-term return on equities been proven.

Except that in the past 10 years, someone coming to NYC would have been best off buying a property and not putting the money in the market.

The facts are against you.

Your theories are unproven.

Unproven.

No matter how scientific you want to be. No matter how much you can cite CNBC and talk about mark to market accounting and tell us Cramer is right or wrong and how banks are right or wrong and how developers and brokers are evil and how you shorted but now you are long and now you are short again and now you are long again.

You are wrong.

You repeatedly cite evidence of being wrong: "Find me a 1,000 square foot 2-bedroom apartment in Chelsea for $700,000. The cheapest currently listed is $900,000, most are in the $1.2 million range. A few months ago most were in the $1.4 million range. "

That is proof that you are wrong.

How about making your once and final prediction and then GO AWAY and only come back when you have been PROVEN (i.e. FACT) correct, not that some math formula and professor from Yale says that THEORETICALLY you SHOULD BE correct. No more "It shouldn't matter" or "If we assume"

Make your final prediction and then shut up until you are shown correct. Just once.

DanShorock, are you going to post the same thing on every thread?

Yawn.

"Except that in the past 10 years, someone coming to NYC would have been best off buying a property and not putting the money in the market."

Right. Pick your start point and you end point and you will construe any answer that you want.

Your assumption is that those prices will hold. However, as in the rest of the country, they will not.

Sorry I drive you crazy.

Real estate drives you crazy. The fact that you have no evidence of ever being correct drives you crazy.

The fact that you actually personally believe you were responsible for Jim Cramer not appearing on CNBC on Thursday proves you are crazy. He was off for a Jewish holiday. Not for you.

Show us ONCE where you have been right. Show us

Steve, I am sorry to say, is almost certainly right about the RE market. I am sorry to say it for many reasons, although I have stayed out of same the last 4 years so I'm OK if not ahead of inflation (cash is a bitch (got out of market at around 13,000), but so far a relatively safe one).

The amount of real wealth created from 2003 to present is probably negative. Real estate can't sustain increases (even on the Isle of Manhattan) without real wealth increasing or at least staying stable. Maybe during the next bubble they'll overcome that pesky problem, the one where the division of wealth just makes some wealthier and wealthier but doesn't give those who are wealthier any produciton-based investment opportunities. So, it makes absolute sense, given the global (oligarchs are dropping like flies, people) recession that Manhattan will tank (we may see a slight uptick briefly next year if the dollar falls as flat as it should, but it will be short lived). There are no safe investments right now, maybe gold.

Steve, what say you about the p/e issue? There's no real bubble, just a temporary Federal we'll buy your kitchen sink and your foul septic tank too plan, to take us boldly into 2009. On Big Picture there seemed to be some charts indicating an increase in money supply. Helicopter Ben has started the presses, God bless him. Maybe they'll prevent another depression, but they won't be able to get the consumer to spend money that no one will lend (now THERE's a good plan for Bernake/Paulson, get into the direct lending business to consumers. CREDIT CARDS, boys!!!! Get to it.)

Alright, so let Steve put his stake in the ground. Just once, then go away until it is correct.

If he has something definitive and clear to say, and if he has the conviction of his beliefs to be out in public with his statements, let him say it and then not cloud the next months or years with repeated posting about the same thing which would really just be noise.

Actually, I have many issues with Steve, but he seems to put his stake in the ground (repeatedly). No one quite like Steve in terms of posting negative news, but it IS often news. Got to give the Devil his due.

Ignoring comment by DanShorock.

He has gotten increasingly creepy,

Since the stock market is at 2003 levels, how about that proposal bubbling up over the years to private Social Security? When the stock market is up and Wall Street is making money, you hear all kinds of happy talk about privatizing Social Securiy, and elected officials begin to buy in on it. It gets mentioned on the TV "news" shows. Everybody and his dog says that would be a great idea.

Then, when the stock market tanks, not only do people lick their wounds over their losses, but everyone having anything to do with Wall Street is reviled as a liar and a thief, and those same people talking about why not privatize Social Security are saying why don't we put all those Wall Street guys in prison. If I had to make a prediction, I'd guess within a few years today will be forgotten, just as 2002 was forgotten, and 1987, and.......

sorry, "privatize" not "private"

"privatize social security."

They tried that in Chile & had to backpedal precisely for that reason.

"just as 2002 was forgotten, and 1987, and......."

Not this time. This is going to be the single most expensive bailout ever in the history of the world. We are going back to the regulated environment of the 50's and 60's and 90's. This administration will go down as the worst administration ever in the history of the country. Cowboy deregulation is over. Neo-conservatism is dead. We are embarking on another tidal switch like the one that occurred after the Civil War and the Great Depression. There seems to be nothing left of the Republican party and its low tax / deregulation mantra. The great shift sought by Carolus Rovus worked the other way around.

Funny - all of it was avoidable. The stock market crash was avoidable. Why is it that every country in the world is now guaranteeing interbank loans EXCEPT the United States, and this is where the problem started?

Ideology.

Steve, if you think Manhattan's 1 million dollar apts are going to be worth $400k, what's your prediction for other US cities? Are you saying an apt in SF will therefore be worth $200k? God, you're retarded.

I have no idea what's happening in other cities. I know that we have already gotten down to 2005-2006 prices, and that the demise of Wall Street hasn't even started yet.

Glad you think I'm retarded. Did you think the stock market would fall 40% in a year?

steve, "I know that we have already gotten down to 2005-2006 prices," I'm not sure I would be categorical about that statement. We have a ways to go before you can say that across the board. I think your blaming the entire stock market crash on interbank loans is going out on a limb too, but if you want to take on every finance expert in the world, be my guest.

"We have a ways to go before you can say that across the board."

Agreed - across the board.

"I think your blaming the entire stock market crash on interbank loans is going out on a limb too, but if you want to take on every finance expert in the world, be my guest."

I'm not blaming the entire stock market crash on interbank loans, just the last 25% or so that we've seen over the past 2 weeks. Insufficient equity in banks is also part of the problem, and they're interrelated. Liquidity is what's at issue here, and I don't know of any finance expert in the world who disagrees with me.

The catalyst was letting Lehman go under, which caused banks not to want to lend to each other or to anyone for that matter. The financial markets work on trust. Trust cannot exist under these conditions. And in a deflationary environment, banks won't even make collateralized loans for fear the collateral will lose value.

Fortunately the entire world is (finally) reacting properly. Unfortunately, it took a catastrophic loss of wealth to get them to do it.

I understand what you're saying, steve, but from my perspective, numbed by week after week of dramatic news, the lehman failure was only one of so many other dominos falling that I think it's not entirely accurate to obsess over only that one disaster. I presume you mean because on that particular day the Treasury's and Fed's strategy was to draw a line in the sand and say "We will not bail anyone else out," and then changed their mind a few days later when they saw that the failures were accelerating and it would be better to prevent failures?

I find it interesting that years ago a policy was instituted of halting trading when markets fell a certain percent in one day, in order to prevent market crashes. And now when the market crashes, it crashes in a much more orderly fashion, with 5% or 7% drops in one day, then the sell orders coming in the following day....

Getting back to NYC real estate, at this point I'm persuaded by the argument that job losses will be severe enough in the immediate future to make a quick enough change in buyers/sellers ratios, i.e. inventory, and that this will start to have a self-fulfilling effect on market psychology. Should be interesting.

98% of people have totally missed this crisis, failed to see it coming. And it's hard to admit missing such a big iceberg.

"I presume you mean because on that particular day the Treasury's and Fed's strategy was to draw a line in the sand and say "We will not bail anyone else out," and then changed their mind a few days later when they saw that the failures were accelerating and it would be better to prevent failures?"

It has always been a fundamental tenet of free market economies that large banks can't be allowed to go bankrupt because the counterparty risk is too great and a run will ensue. This is even written into our bankruptcy law, which doesn't allow for financial companies to reorganize: they are immediately liquidated.

It was the most foolish thing on the face of the earth to do.

"I find it interesting that years ago a policy was instituted of halting trading when markets fell a certain percent in one day, in order to prevent market crashes."

There still is - I believe threshold is 20%.

"I'm persuaded by the argument that job losses will be severe enough in the immediate future to make a quick enough change in buyers/sellers ratios, i.e. inventory, and that this will start to have a self-fulfilling effect on market psychology."

I'm not so convinced that it will be fast.

type3: "98% of people have totally missed this crisis, failed to see it coming."

I am one of the 98% of people who have difficulty understanding just what "credit crisis" means. I picked up on the vibes in about August 2007 that people in banking and finance were shaking in their boots, having difficulty even keeping their composure in public, because they knew how things work and that things had stopped working. I had several conversations with people I met at work, asking them to explain to me just what was going on. One of them stopped in the middle and said, you know, you know a lot more than your questions imply that you know.... I told him that despite reading NYTimes finance/business pages all the time and having worked in a major bank and having worked all my life around people involved in finance in one way or another, I was still utterly clueless. My questions were things like, "Just how does the Fed 'inject cash into the system'?" The reason 98% of people didn't see this coming is that they didn't know what ***it*** is/was.

steve, "I'm not so convinced that it will be fast." What I think will be fast is job loss, a steady stream of pink slips, net job loss concentrated in finance and law and real estate. The questions for the R/E market are how much cash do many laid off people have, how many laid off people own their apartments, and how well positioned the sideliners are to jump on opportunities. The worst case scenario would be if there are no sideliners to snatch up great properties when slight discounts are dangled before them, because those sideliners too suffer job loss, wealth erosion, can't get a mortgage, etc. There are many unknowns, which is why many people take offense at blanket assertions of "fact" here in relation to the future.

"The reason 98% of people didn't see this coming is that they didn't know what ***it*** is/was."

I believe that. And I think that some who called it didn't have a firm idea about "it," but saw that a lot of things were out of whack. I just find it odd that many still have problems acknowledging that some saw a storm coming and warned about it.

The Financial Accounting Standards Board just relaxed the rules for mark-to-market accounting for assets without an active market.

Wow. Too late for millions. Trillions (of dollars).

You think they'll bring back the uptick rule?

You think that they'll guarantee interbank lending?

What morons.

However, if they do these things the stock market will rebound quickly, I think.

"many still have problems acknowledging that some saw a storm coming and warned about it."

Yes, I do remember posts (don't remember who from) warning that this situation (credit) is far worse than people are grasping, unlike anything before. I did pay attention to that, but have to confess once again that the actual mechanics of finance are a foreign language to 98% of the public.

Contrast that with, for instance, how everyone and his dog opens up the paper and looks at "how the market's doin'," by which they mean to say what the DJIA is, as if that magic number encapsulates the fiscal health of the world. I know very intelligent people, basically sophisticated about investments, who during this entire 15-18-month period have remained nonplussed. UNTIL, that is, "the market went down," meaning that the DJIA is, say, 8,200 or "broke 9,000."

Several times I have said to friends of mine, do you not understand what I'm telling you? Fortune 500 companies cannot sell their commercial paper!

Collective shrug of shoulders.

In the same category of vague incompehension as "As usual, we taxpayers will have to pay for it."

I don't think there's any way you can keep the credit crisis simple, so 98% of us will not grasp it. I'm all ears, though.

Actually, Lowery, I (sort of) hate to admit it, but I was an early naysayer. Since 2004 I've felt that this market went out of control. You'd have to look back in the records, but aboutready was very, very negative (for many macro and micro reasons).

Alas, I do not support the FASB's relaxation of mark-to-market rules.

Back to mark-to-make-believe which helped us to get into this jam in the first place.

Hopefully, it will be just temporary.

Yes, I have heard all the reasons in favor the relaxation. I just don't buy them.

The higher our confidence in the reality of financial statements the better.

"Back to mark-to-make-believe which helped us to get into this jam in the first place."

Wrong. I was a bank auditor when they instituted the first mark-to-market rules, for securities held for trading. Makes absolute sense. Imagine, though, that you buy a house for $100,000 and the market tanks & all of a sudden it's only worth $75,000 but you have no intention of selling for years. Did you lose $25,000?

No.

The entire difference is what your intention is. If you intend to sell then you need to mark to market. If you don't, or if there is no market, you don't lose anything until you do sell.

Following this methodology will make earnings unpredictably erratic.

aboutready, "I was an early naysayer." do you mean the R/E market, or this meltdown of the financial institutions? Because you were not alone to have called NYC R/E for being sheer out of control craziness, but being four years too early isn't necessarily a good thing. I thought in 2001 that it was urgently necessary to get out of real estate because it would all crash. The part I was wrong about, the when, is what wipes out what I was "right" about. About the "mortgage mess" someone's blog/web site has long had a frightening bar graph showing the number of ARM resets due to come online when, and a scarey finger or something pointing to "we are here," i.e. only just begun.

Yes, lowery you make a good point. But I think that if any one had any real understanding (and I'm continually amazed that so many in positions of power claim to have been blind sided by this), that one would have realized (and I did but my understanding was limited, I didn't realize the extent) that the wealth creation needed for the expansion wasn't there. No, I'm not brilliant, but this was awful and just wrong. I've been declaring the r/e boom a bust for four or five years (btw this seems to me and always has seemed to me to be part and parcel of our economy, I just didn't realize the extent) but like Roubini, I was called a fool more times than I care to note. I would love to go back and pull up a couple of the comments from this board (one trenchant one I recall vividly is someone telling me that "smart" developers would prevent the meltdown from happening in NY. Also, that "really smart guys" would essentially insure that what had happened in Miami, etc., couldn't happen here.) No I had no clue what methods the shitheads had used to tank us, but it was obvious to me that tanked we had been. If you've been calling it since 2001, I think you were a bit early but perhaps prescient. From everything I've read, late 2003 is exactly when you could time our ountry's decision to become one of the most fiscally mismanaged in history. I wasn't particularly bright, but for some reason my apartment sold at over asking in two days in 2004, after sitting on the market for a few months in 2003. It made me think, a lot.

aboutready, you probably had a better understanding of why the r/e boom was bs than I. I just assumed that after the dotcom and Dow busts of 2000 or whenever (dotcom crash followed by bad Dow news later, but even before 9/11 panic) that wealth had been wiped out and we would go through the post-1987 crash cycle. I was very, very wrong. The interest rate cuts were very aggressive. And no one saw 9/11 coming (how could they?), and by the time that happened, it's like all the steroids had already been prescribed, so the Fed ordered a new species of supersteroids. Then that didn't work in early 2002, so ..... more superduperdupersteroids. But the reasons I was thinking r/e would tanke were completely different from why things are messed up now. I thought the interest rate cuts would come much later, after everyone was broke and we had had a recession. Oops. I remember reading this forum the first time and my only response was, just what makes you people think is so different about Manhattan? I was actually open to the possbility it IS different. Manhattan is wealthier than the US in general. So the question is how leveraged is Manhattan. I still don't know. And I do think it's holding up quite well considering. If it were a real crash, you'd have completely empty new buildings. Unless that's what 25 Broad St is?