why would you not expect prices to drop to where it's cheaper to buy than to rent?

Perhaps rents will triple.

??? lol, in 3 decades from now thanks to inflation?

There are certain price/tax scenarios where the after-tax costs of renting and buying are probably pretty close to parity already. (Example: high earner buying an apartment for $1.25MM with a $1MM mortgage.) For those situations, buying will probably become cheaper than renting, especially if the top marginal tax rate goes up and mortgage interest remains fully deductible up to $1MM and protected from AMT phaseouts.

For buyers in lower tax brackets and properties with higher prices, buying will tend to remain relatively expensive, simply because the government doesn't subsidize those purchases as heavily. Even in those cases, buying can still become cheaper than renting, if the risk of property values declining is widely perceived to be more pronounced than the risk of rents rising.

In short, yes, it could happen - for certain buyers of certain apartments at certain price points; but because of the perversities of our tax code, it's impossible to say that either buying or renting is more expensive in any absolute way at a given point in time. If not for the mortgage interest deduction, this topic would be considerably simpler.

Yes it was so in previous downturns. It was cheaper to buy than it was to rent in 1998.

"There are certain price/tax scenarios where the after-tax costs of renting and buying are probably pretty close to parity already"

Show me one without the tax benefit, since the tax benefit isn't taken into account when you apply for a mortgage (PITI) meaning that if you can rent a property for $X out of pocket per month, you should be able to buy it for $X out of pocket per month, as well. Otherwise, if you need to rely on the tax benefit, the price to buy is higher since you would need more income to buy it.

In 2003, I was able to buy for the cost of rent (granted, it was a cheap place). But, my maint + mortgage was about $950, and rentals for similar units were fetching $900. I haven't found that scenario in the last 5 years with any other apt that I could afford. maybe it happens in the more expensive market, but I'm only familiar with the low-end.

You're right, broadwayron - in 2003 there was equilibrium. Which is why I've been arguing all along that we're going to go back to 2003 prices.

stevejhx: Rightly or wrongly (and I'm not taking sides - both positions have merit), most people use after-tax cost in assessing their options.

To take your position to its logical extreme, are you contending that total repeal of the mortgage interest deduction would have no impact on property prices? If pre-tax cost defines equilibrium, and equilibrium defines prices, then the tax code shouldn't matter at all.

Another part of the equation missed is that rents can change, they can change in either direction, and they change much faster than prices, so the sales will always be playing catch-up.

In 90-92 rents dropped dramatically, which would skew the rent v buy equation. Likewise they went up rather dramatically in 98-2000 (much more so than in the mid-2000's) and it took prices a bit to catch up. Now, when buy is almost always more expensive than rent, that equation might not easily achieve balance as the added supply, drops in jobs, etc, might mean that prices will be chasing down a rent v buy equilibrium.

By the way, Steve, I think it's reasonable to say the tax benefit IS taken into account - albeit implicitly and rather sloppily - in the use of target front-end and back-end ratios. If there were no tax benefit, the caps on those ratios would arguably be lower.

Perhaps rents will triple.

I was just pointing out how relative an equation rent/buy ratios are.
And lets not lose perspective, rents in this city are stunning.

re: stevejhx "You're right, broadwayron - in 2003 there was equilibrium. Which is why I've been arguing all along that we're going to go back to 2003 prices."

Steve, I think that's a fair argument, as long as you assume a return to -- inflation-adjusted -- 2003 prices. Inflation has averaged about 3%-4% per year since 2003, which compounds up to roughly 20% in aggregate. So, a 2003 equilibrium, under that scenario, would be about 20% higher than 2003 prices. (Which would put us at, where?, maybe about late 2004/early 2005 prices?)

I agree with West81st. It is not a complete analysis to not include the tax deduction. It skews the data to support what Steve says, but should be included in the discussion.

The rent buy equation has been and is tremendously out of whack. Just look at the number of places that are available to buy or rent. The numbers do not work.

People seem to think that this corrects by going back into equilibrium. A combination of prices falling and incomes rising creates a new equilibrium.

But just as things over shot in one direction they are just as likely to over shoot in the other direction.

Over the long run prices are a function of income and borrowing rates. In the short run, as we have seen for most of the last 5 years, prices can far exceed this equilibrium. Why can't prices be below this equilibrium? Of course they can.

And right now I can think of a lot of reasons why prices will over correct. Lower incomes, higher income taxes, higher capital gains taxs, return of estate taxes, higher property taxes, tougher underwriting standards, limited jumbo financing, no more foreign buyers......I can go on.

I can't think of any reasons as to why we should under correct. Mccain wins maybe is one? not gonna happen.

so 2 new points to consider are:

* subsidies: a repeal of the mortgage interest deduction, the mansion tax, ... can subsidies to real estate ever go down? it seems politically impossible to me to achieve this.

* inflation: why is it so common to assume that prices need to keep up with (consumer goods) inflation as supposed to "discretionary income" inflation? they are 2 very different things. i would argue that it has to keep up with the second, not the first. if anything, higher consumer goods inflation under an scenario of deteriorating discretionary income brings your housing purchasing power down, not up!

Yes that's right. The politicians in Washington and at Treasury are the jokers in the deck that have the potenial to trump all including common sense.

Most of the proposoals are to INCREASE the subsidies to housing in order to show that we care but mostly to get votes. "We need to keep people in their houses", "Put a moratorium on foreclosures" "have treasury buy mortgages in order to keep rates down."

Yes, yes that's the ticket. Lets find ways to allow people to own and stay in homes that they cannot afford and have no business owning in the first place. But wait a second, isn't that what got us into this mess??

No doubt Barney Frank and Nancy Pelosi can think of far more creative ways to give away the tax dollars of hard working Americans than any of us can.

jake, these moves are full of unintended consequences.

if they go ahead with "Put a moratorium on foreclosures" and letting the judges do mods during bankruptcy you will only have uncle sam giving mtgs. ok, not so different than what the mortgage mkt works right now with the GSEs providing 80% of mtgs.

but if this continues (ie: private mkt of mtgs doesn't come back to life) the long term consequence is much lower home prices, which will anger their middle class "my home equity is my retirement" types that also vote.

Undermining 200 years of contract law is what is truly frightening. That is a very slippery slope. Not a big deal though beacuse with Obama's plan to "spread the wealth around" we will all be taken care of regardless of what we do. Kind of like the way Jack Nicholson was taken care of at the end of One Flew Over the Cuckoo's Nest - you don't care about much after a frontal lobotomy.

"A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over lousy fiscal policy, always followed by a dictatorship. The average of the world?s great civilizations before they decline has been 200 years. These nations have progressed in this sequence: From bondage to spiritual faith; from faith to great courage; from courage to liberty; from liberty to abundance; from abundance to selfishness; from selfishness to Complacency; from complacency to apathy; from apathy to dependency; from dependency back again to bondage."

Alexander Fraser Tyler, Cycle Of Democracy (1770)

you could go thru old NYTimes issues at the NYPLibrary for advertised asking prices, but ACRIS won't go back that far to tell you what actual closing prices were - possible reasons for what happened is that in the areas and price ranges where it was cheaper to buy than to rent, there were no buyers - people who could rent did not have downpayments and/or could not get mortgages - also, "buyer sentiment" was that to buy a coop or condo was stupid, regardless of what the reality was

Admin,

When you factor in all the costs, buying should be cheaper than renting in the short term.
If you buy, you are locking money up, so you should demand a premium for that.

Then, at some time frame (5 years? or maybe average holding time) you start to break even on transaction costs, and beyond that, you should make a profit.
What you see people argue about is what to factor in. If you assume prices stay flat, you pay a lot less than if you assume prices go up 10% every year.

That should have been LONG term. in my first sentence.

"So, a 2003 equilibrium, under that scenario, would be about 20% higher than 2003 prices."

Unless rents go down, which they are and inevitably will.

"It is not a complete analysis to not include the tax deduction."

No one denies the tax deduction. However, you cannot qualify for a mortgage taking it into account. Therefore, if you can't afford a mortgage to purchase an apartment that is virtually identical to one you can afford to rent, then the apartment for sale is more expensive. The logic is irrefutable.

"Undermining 200 years of contract law is what is truly frightening."

If your argument is that mortgages are protected because of "200 years of contract law" you are sorely mistaken. Bankruptcy law is written into the constitution. Moreover, the inability to work out a primary-residence mortgage was written in 1987, I believe, under Ronald Reagan. Before that it was always possible to restructure a mortgage, just as now it's possible to restructure a vacation home mortgage, or a commercial mortgage, or any other debt except a primary-residence mortgage and a student loan, which often charge usurious interest rates. Who, exactly, were these laws meant to protect?

"That is a very slippery slope."

Given history, it is not. It's also not because it would be a huge incentive for lenders not to make irresponsible mortgages. All in all, a good thing.

"Not a big deal though beacuse with Obama's plan to "spread the wealth around" we will all be taken care of regardless of what we do."

If that's a dig at Obama, I'd make the argument that George II's tax cuts "spread the wealth around" - upwards, because that's who benefited from them. Any time you change the tax laws you're "spreading the wealth around." I think given that the two worst financial crises of our time - this and the Depression - occurred during Republican administrations and for essentially the same reasons (asset bubbles), we can safely assume that something is wrong with Republican economic theory. Indeed, if I recall, the 1987 crash also took place under a Republican - Reagan - and the dot.com bust took place under the guidance of Guru Greenspan, who has only recently found a "flaw" in his economic theories. Gives you pause to think, doesn't it?

"The logic is irrefutable."

Your logic is highly refutable steve. Quite simply, for someone that can afford both.

West81st is spot on. A high earner that can easily afford 20% down and a $1.25M apartment will have a much different "equilibrium" than someone who can only afford to rent a place that would sell for $1.25M.

Good to see that you continue to bang your head against the wall on this one steve. Old habits die hard I guess.

Juice, Toast - please be at my place for breakfast about 7AM tomorrow.

Admiral, you seem to have a facination with my name. Do you have a juice fetish?

Not taking sides or making predictions here, but it just occurred to me how talking about equilibrium is ironic in these times when New York magazine had a cover story titled "The Manic/Depressive Economy" or "Market."

"you could go thru old NYTimes issues at the NYPLibrary for advertised asking prices"

thanks lowery, didn't think about that!

All good points steve. But the contract law I refer to is to protect the owners of private property. After entering into an agreement to sell your fire island condo with a qualified buyer at an agreed upon price are you willing to let a third party change the terms of the agreement and force you to accept less money than was agreed?

Most loans are securitized. The lenders no longer own the loan. A securitization trust does. The servicer does not own the loan. There are laws which govern pooling and servicing agreements and the trustees who are responsible for fulfilling the obligations of the trust. Got it. In most cases the lenders cannot "work out" the loan because why? Oh yeah, because they no longer own the loan. The servicers also do not own these loans. Their rights to modify these loans are very clearly spelled out in a what? yes that's right in a contract. Modifying loans in excess of what is allowed in the contract is a taking of private property.

Nancy and Barney's plan to have a moratorium on foreclosures on loans which they do not own also violates the pooling and servicing agreement. The government is inserting itself into a contract between 2 private parties. We can debate the merits of such a plan but there is no denying that such a plan undermines contract law and private property. Without such laws forget about investing in real estate and stocks, buy canned goods and ammo.

Undermining contract law that protects private property is the slippery slope that will take your condo and turn into a public bath house. But I guess as long as it was Barney Frank who showed up to pee you would be ok with that?

Plenty of blame to go around for the depression in the 30s and raising taxes in the midst of a recession is clearly one culprit. Taxes will be higher next year no matter who wins and that is scary.

We might want to think about policies which are more concerned with growing the economy and growing the economic pie and less concerned with how to divide that pie. Pretty soon there ain't gonna be much pie. And you know as well as I that the people who pay most of the taxes have the most flexibility to shelter or defer income or to move to tax havens.

Enact polices that help to grow the economic pie and you will grow tax revenue. Enact policies that tax success and guess what; you will have less success.

jake,
right on - up until your bs tax argument.

OMG Steve, OMG

"Therefore, if you can't afford a mortgage to purchase an apartment that is virtually identical to one you can afford to rent, then the apartment for sale is more expensive. The logic is irrefutable."

Its been refuted here a billion times. The only irrefutable part is something you imply: if someone can't afford a mortgage to purchase an apartment, they have no business doing rent vs. buy comparisons. For the rest of us who can afford the mortgage, taking tax benefits into consideration is the irrefutably logical thing to do.

That assumes that the tax benefits of carrying a mtg are here to stay, ... They might (unlikely i know) end up being deductible for normal prices across the country (up to the median price...). Asking people that pay $150k for a house to subsidize those that pay $1.5M doesn't make sense and it might be politically correct to change that.

I agree that it makes no sense at all. I should not be getting a government incentive to buy. But it would be political suicide to change this. Instead, they'll just keep the cap at 1 mil, and let inflation effectively lower the benefit until eventually (yes, a long time away) the benefit caps at the median.

Even the stimulus package from earlier this year increased conforming rates. That *only* helped buyers in the 500k to ~900k range (again, something I disagree with politically). Politicians aren't showing any indication that they plan to take away benefits from buyers in that range. Can it happen? Sure, but it doesn't seem likely enough to be worth pricing in.

"But it would be political suicide to change this."

how many people in the country buy a $1M home (the median is currently $190k)? probably not more than 5%, hence if my guesstimate is not so off it's not political suicide: 95% happy, 5% unhappy.

Steve - it's not an analysis of "the largest mortgage I can qualify for versus the most expensive rent I can qualify for". It is a cost analysis of buying versus renting, and in that discussion the tax benefits of buying are extremely relevant and must be included.

"Even the stimulus package from earlier this year increased conforming rates. That *only* helped buyers in the 500k to ~900k range (again, something I disagree with politically)."

true! after much lobbying from the home builders, not cause people (the regular voters that don't lobby) were asking for it. i don't think home builders will have $ to lobby in 3 years, but anyway, your points are better than mine, it's a non issue right now.

Rents are still going down...

http://curbed.com/archives/2008/10/28/manhattan_rental_slump_continues_more_drops_coming.php

It's interesting that studios are getting hit a lot harder than 2-bedrooms. I think it kind of makes sense. I am guessing demand for studio rentals is way down because more people who can only afford studios choose to commute in, or live with roommates. On the other hand, demand for 2-bedrooms may even be up a bit as families that were thinking about buying decide to rent, plus the aforementioned roommates.

I think that is a fair hypothesis. I think 1 bedrooms represent more "transients". They also traditionally fare worse in drops because they are "luxury items" for many... whereas 2 bedrooms are shares or families. And another kid can be put in the 2nd bedroom (I remember a LOT of shared rooms as a kid) so you might not even have to upgrade in bad times. But people can easily outgrow 1 beds quickly.