A low-end crazy listing!

Also, as a current denizen of a high-floor walkup, there is NO SUCH THING as a "short" four-flight of stairs.

flights, sorry.

Wait a minute....let's look at this again with the understanding that I am not sure of some of your numbers.

Let's say you buy it for $435k, since it has been lowered and they realize market conditions. That means $87k down and a $348k mortgage at 6.25%.

Mortgage - $2,143 per month
Maintenance/Tax - $650 per month
Total gross outlay per month = $2,793
Monthly outlay with tax benefits = estimated at $2,167

This is $1,000 less than your scenario and I think a much more reasonable one. I would imagine there is a market for this apartment at that price point and monthly cost. Could you rent a similar 1 BR apartment in Chelsea for less than $2,167 per month? I am not so sure. I wouldn't buy this for a variety of reasons, but this doesn't sound so far off-base.

Waverly: could ya get a mtg for 6.25%?

Also, could I get a jumbo at the rate of 6.25%?

thanks.

Who said anything about a jumbo? This mortgage is below even the previous jumbo limits!

Yes you absolutely can get a 1-bedroom in a new building in Chelsea for less than $3,000 per month:

$2,200 1-Bedroom at 112-116 Seventh Avenue
$2,500 1-Bedroom at The Carteret
$2,625 1-Bedroom at The Carteret
$2,800 1-Bedroom at Chelsea Court
$2,825 1-Bedroom at Chelsea Court
$2,975 1-Bedroom at 21 Chelsea
$2,995 1-Bedroom at Chelsea Court
$2,995 1-Bedroom at Chelsea Court

That's first - from nybits.com. Second - and I repeat - if you can afford $3,000 a month to rent, you need an income of $120,000. IF you buy the apartment for $435,000 - which is 20% less than the original list price - at 6.25%, THEN the apartment is comparable in price to a 1-bedroom IN A BRAND NEW BUILDING WITH A DOORMAN AND ELEVATOR: Chelsea Court and 21 Chelsea. Both of which are in a much better neighborhood.

So - even with your new and improved price and happy-go-lucky mortgage rate, you're still overpaying (out-of-pocket) for a 4th floor tenement walk-up.

Forget the tax benefit - it's not included in PITI.

BTW the 7th Avenue apartment to rent for $2,200 - just to humor you from a tax-benefit perspective - is approximately equivalent to your 4th floor walk-up.

dwell: the amount in question is conforming. Vanilla conforming even, not temporarily increased conforming.

waverly: your analysis doesn't include the opportunity cost on the down payment, which can be $300/month in the most conservative returns, more if the buyer would take a little risk. I think its a bad deal, rent vs. buy.

techguy - It's not what I would do, but I don't think it's terribly off-base. You have the opportunity costs which could be $300/month and they could also be losses. Plus, since I don't think it's that far off on price you can make the argument that you have a shot at decent gains on it and there seem to be some inexpensive ways to improve this particular property as well. I wasn't trying to advocate for buying the apartment, as much as pointing out that I don't think it's as far off as Steve tried to make it sound.

Steve - I know you feel strongly about this, but you MUST include the tax benefits when looking a rent vs buy because, uh, well, YOU ACTUALLY GET THE TAX BENEFITS. You seem to operate in some sort of bubble on this topic and you are just not on solid ground on this.

I am sure you disagree with me, but you're a smart guy, and you don't need to resort to "fuzzy math" to try to prove your points. Tax benefits don't matter if you are talking about how much you can QUALIFY to buy or rent, but they most certainly belong in the discussion of a rent vs buy cost analysis.

would i buy this apartment at $449 or $435 or whatever? no way. but that's in part because i think i could buy this for under $400 by next spring. But i'm in waverly's camp here, this place doesn't look THAT overpriced. Especially when you compare it to a lot of the ridiculous listings out there.

Special_K - that was the other reason I posted what I posted. I think there are a bunch of greatly overpriced apartments out there and I am just not sure this one is in that far off.

I am not trying to suggest that anyone should run out and buy this apartment. Just my 2 cents...

I'm muddying the waters w/ my jumbo question. I know this is vanilla conforming, but, I'm on a quest to ascertain jumbo rates, so I interject the question in sundry discussions. Sorry.

"but you MUST include the tax benefits when looking a rent vs buy because, uh, well, YOU ACTUALLY GET THE TAX BENEFITS. You seem to operate in some sort of bubble on this topic and you are just not on solid ground on this."

You show me ONE BANK that takes the mortgage interest deduction into account as part of PITI, and I'll take it into account.

I don't deny that the benefit exists. Simply that it's not taken into account. Therefore, if you can afford to rent an apartment based on 40x monthly rent, but can't afford to buy it at 30% PITI, then it is overpriced. This because 40x monthly rent = 30% PITI:

Rent = $3,000 x 40 = $120,000 income.

$120,000 income x 30% PITI = $3,000 monthly payments.

That is the equation.

"this place doesn't look THAT overpriced."

Based on the equation, which would you prefer: to live in a luxury rental for $3,000 a month, or a 4th floor tenement walk-up for $3,000 a month. Remember - you can't get stuck with a rental; you can with a purchase.

"Forget the tax benefit - it's not included in PITI."

Will the IRS audit my tax return and say "you owe us an extra $700/month for the 2009 tax year because the tax benefit isn't included in PITI"?

"Therefore, if you can afford to rent an apartment based on 40x monthly rent, but can't afford to buy it at 30% PITI, then it is overpriced. This because 40x monthly rent = 30% PITI:"

You're very fixated on this topic. Again and again rational people tell you that if someone can't qualify for a mortgage, rent vs. buy analysis is a moot point. That most people don't try to rent or buy the absolute maximum they can afford, so maximum qualifications are again a moot point.

Why are you so fixated on this? Did you have a loan application fall through on related grounds?

dwell - a quick Google search should help you out with that. If you have 20% to put down I don't think you would have too much of a problem in NYC for a $348k mortgage.

Steve - you either have an open mind to what other people say on this subject or you don't. It is clear that have a real difficulty accepting ideas/thoughts from other people that are not exactly in-line with what you say. That's all well and good, but your refusal to be more open-minded on this particular topic (in the face of a tremendous amount of evidence, logic and testimony) just dillutes the other very good points that you make.

Should have been..."takes away from", rather than "dillutes".

" Again and again rational people" = someone who agrees with you.

"tell you that if someone can't qualify for a mortgage, rent vs. buy analysis is a moot point."

Absolutely NOT. What we're comparing here is the carrying cost to buy and rent a good that provides the same output: a place to live. It should cost the same whether you rent or buy - fundamental economic theory.

"That most people don't try to rent or buy the absolute maximum they can afford"

Not true. Most do.

"so maximum qualifications are again a moot point."

Again, even if what you say were true the point remains: Let's say you can afford to pay $4,000 a month but only choose to pay $3,000. The math above remains valid: for that money the apartment you buy is not as good as the one you rent. Period.

"Did you have a loan application fall through on related grounds?"

No.

"your refusal to be more open-minded on this particular topic (in the face of a tremendous amount of evidence, logic and testimony) just dillutes the other very good points that you make."

When I'm proved wrong - and it has happened - agree. But in this case I am not. How a good is paid for does not matter - what matters is the price. Moreover, it has been statistically proved that the correlation between purchase prices and rental prices is nearly 100% over time - very few people will pay more to buy someplace to live than they would pay to rent it. The result of that is that the price of a dwelling takes the tax benefits - and all other costs and benefits - into account IMPLICITLY. That is why the price-to-rent ratio is so constant over time: prices take all the costs and benefits into account, as do rents.

Which is why you are wrong. It is basic economic theory.

Why are you so fixated on this? Did you have a loan application fall through on related grounds?

Steve's views on rent vs buy = Rufus' views on Chicago.

"Again, even if what you say were true the point remains: Let's say you can afford to pay $4,000 a month but only choose to pay $3,000. The math above remains valid: for that money the apartment you buy is not as good as the one you rent. Period."

If I pay $3000 nominally to rent, I'm out $3000. If I pay $3000 nominally for mortgage+maintenance+taxes, I get some of that back at the end of the year in the form of a tax break. What happens to that money in your "basic economic theory"? Where does it go? Clearly it doesn't go into my pocket, since you insist it doesn't affect my cost of ownership. Where, then, does my IRS tax refund check go?

"Steve's views on rent vs buy = Rufus' views on Chicago."

Wrong again. The price-to-rent ratio is extremely consistent over long periods of time:

"The strong historic relationship between rents and home prices is also validated in a recent academic paper on historic price to rent ratios, which shows that on a national basis, the same pattern has existed – with the price:rent ratio averaging about 20x - over the past ~45 years."

http://seattlebubble.com/blog/tag/price-to-rent/

Note: the price-to-rent ratio (20x) they are discussing is a somewhat different measure: "owner's equivalent rent." The one I refer to is somewhat simpler, the /pe ratio:

http://money.cnn.com/2005/08/19/real_estate/investment_prop/cuckoo_condos3_0509/

But the correlation remains the same.

"I get some of that back at the end of the year in the form of a tax break."

No one doubts that. It's offset by the opportunity cost of not investing your leveraged down payment in another asset class. That's where it goes. If instead of investing your $500,000 in an apartment you invested it in stocks or bonds, you would receive a yield on them approximately equivalent over time to the tax benefit of your mortgage interest deduction (which is amortized, whereas you opportunity-cost yield accretes). This because over time all assets yield the same.

That said, owner-occupied residential real estate is not an "investment." Strictly speaking, it is amortized rent. Investment real estate is, however, an investment.

Sorry, but your theory is indefensible.

steve, would u at least accept the premise that if you can qualify for BOTH 40x rent and 30% PITI (not taking into account tax benefit), that you should then include tax deductibility when comparing buy vs. rent?

your point of view that they are not comparable seems premised on the fact that since banks don't take tax benefit into account with PITI, under certain circumstances you can qualify for 40x rent but not 30% PITI or vice versa. in those situations, for those people, it is not that a potential buyer shouldn't factor tax deductibility into their personal economic decision of buying vs. renting but rather that they can't qualify for a mortage with 30% PITI so it's a moot point. i.e., in this case, the option to buy is not available (because of financing) so there's nothing to compare renting to.

but the reality is that there are many criteria upon lenders will give you a loan. it does not all center around PITI income constraints (e.g., guarantors, other assets, etc.). so as soon as someone is able to qualify (for whatever reason) for that loan, it stands to reason that they should then compare the after-tax cost of buying vs. renting because those are real options that are available to them.

"It's offset by the opportunity cost of not investing your leveraged down payment in another asset class. That's where it goes. If instead of investing your $500,000 in an apartment you invested it in stocks or bonds, you would receive a yield on them approximately equivalent over time to the tax benefit of your mortgage interest deduction (which is amortized, whereas you opportunity-cost yield accretes)."

Ah ha, now we've come to the fundamental misunderstanding. As you see above, I calculate the opportunity cost of my down payment in more exact figures. To also write off the tax benefit as being equal to the opportunity cost is wrong on 2 levels: it double counts, since I'm already accounting for that, and your way is nothing more than an estimate.

Its a bad estimate: the larger the down payment percentage, the larger the opportunity cost, and the *smaller* the tax benefit. By claiming the tax benefit equals the down payment opportunity cost, you're saying that choosing to increase my down payment will *decrease* my opportunity cost - which is completely untrue.

"This because over time all assets yield the same."

100% wrong. Where did you learn basic economics? Stocks and bonds have known, accepted, textbook differences in their yields over the past 100+ years. Riskier investments demand higher average yields to account for the variance.

Indefensible? That's pretty harsh.

See, being open to other people's views and ideas is not the same as "I am right until you prove me wrong."

You engage in conversation with a preconceived belief in your omniscience, instead of taking part in an exchange of ideas with an ultimate goal to learn more about a topic.

By the way, further followup: most buy vs. rent calculators that take into account *both* tax benefits and opportunity costs show a very interesting relationship. Buying is never profitable if your time horizon is less than 5 years or so, since even modest appreciation won't account for transaction costs. Even if buying is profitable at 10 years, it will again *not* be profitable around 20 or 25 years.

Why? You accumulate a huge principal - well above the initial down payment amount. That's your opportunity cost - the entire principal, not the original down payment. At the same time, you're paying less towards interest and more towards the remaining principal, which means your tax deduction is lower.

At the 20-25 year mark, you hit an inflection point where the opportunity cost wins out, and you *lose* money by continuing to own for the full 30 year mortgage horizon or beyond. This is because stocks and bonds historically beat real estate appreciation.

"That said, owner-occupied residential real estate is not an "investment." Strictly speaking, it is amortized rent. Investment real estate is, however, an investment."

Amortized rent? Not sure what that term means. The place you live or an investment property or any residential real estate is simply an NPV of expected rents. A short hand DCF proxy will result in a price-rent multiple as you well know. Just like stocks are valued on PE multiples. As you point out, over time rents increase with inflation and given a relatively stable P/R ratio, your home should appreciate, also with inflation. But your primary residence is absolutely an investment. In fact, it is usually the largest financial asset of the ave household. And it's a better investment than investment property for the primary reason that it is generally tax advantaged - the $250/$500k cap gain exemption (assuming you didn't live 2 out the last 5 years in your investment property).

tech-guy - That is interesting. Are you saying that you feel that a larger percentage put down is less desirable for you becasue of the tax benefits of a larger mortgage? Or am I wrong in what you said?

waverly, the way i read tech_guy's comment is that real estate is less attractive when u pay down substantially all of your mortgage because your principal is just sitting there appreciating at the roughly the appreciation of your home. And that LT appreciation of home values approximates inflation which is historically lower than returns in the equity markets or a blend of equity/bond. Put another way, if you had $500 today and there was a house that cost $500 - it's generally not advantageous to buy the house outright but rather to put 20% down and invest the rest in the markets. If u assume houses appreciate at 5% LT and stocks at 10% LT. you can see how (assuming you have a favorable after tax mortgage rate), that putting 20% down and investing the rest in equities is better than putting all your money in your home and having that appreciate at 5%/year.

waverly: Exactly right. Consider it at the margin: $1 in principal at 6% interest costs me $0.06 a year nominally, $0.036 after tax benefits. Can I get 3.6% returns on a *long term* investment with relatively little risk? Absolutely - a 50/50 stock/bond portfolio has a historical yield of about 8%. Sure, I have to pay tax on those gains, but certainly not enough to bring it down to 3.6% after-tax gains.

I say long term because: if I buy with a 10 year horizon, I won't see my down payment again for 10 years. Therefore, the opportunity cost should take into account an investment with a 10 year time horizon as well.

Problem with this is while you have increased expected return, you also just increased risk substantially. There is no free ride here.

Start with the simple scenario of you owning a home free and clear. You can take out a mortgage and then invest that in the stock market. If your mortgage is 6% and you get a tax deduction, say your cost of capital is 4-5%. Going into the stock market will likely pay off on average.

BUT, if you hit a recession, you basically have double exposure. Its not that different from taking out equity to buy a second apartment.

Sure, the "return" might look better, but you just exponentially increased your risk of losing everything... that is what you are being compensated for.

tech_guy and Special_K - Thanks for that. Very interesting and that seems to make a lot of sense.

tech_guy: the return on that $1 of principal is not the return on that principal. it's the return you get on $1 in your savings account if you decide to pay down that principal. i think the primary reason returns diminish as you pay down your mortgage is that ROE starts to approximate ROA which is less than stocks, etc.

"steve, would u at least accept the premise that if you can qualify for BOTH 40x rent and 30% PITI (not taking into account tax benefit), that you should then include tax deductibility when comparing buy vs. rent?"

No. The out-of-pocket expense must be the same.

"there are many criteria upon lenders will give you a loan"

Perhaps. PITI is the principal one, however.

"most buy vs. rent calculators that take into account *both* tax benefits and opportunity costs show a very interesting relationship."

Except they take into account the unleveraged opportunity cost (of the down payment alone) while taking into account the fully leveraged price appreciation / depreciation of buying a home. If you put down $100,000 on a $500,000 home, your opportunity cost is on $500,000, not on $100,000, because that is what you invested, regardless of the source of the funds.

Therefore, the models are biased.

"I calculate the opportunity cost of my down payment in more exact figures."

That is exactly your error. The opportunity cost is of the total amount invested.

"the larger the down payment percentage, the larger the opportunity cost"

Absolutely not. The opportunity cost is on the ENTIRE amount invested.

"Amortized rent? Not sure what that term means."

If you're not sure what that means then I shouldn't even bother having a conversation with you. When you buy an apartment you are prepaying a future stream of rent payments. Your PITI is in lieu of future rent. In accounting terms you capitalize the full amount of the property and amortize it over the life of the property. If that amortized cost exceeds what you would pay to rent an apartment, then you are overpaying. If it is less, then it's a deal.

"your primary residence is absolutely an investment."

It is not an investment. It is a capitalized expense, because you would have to live somewhere, whether you rent the place or buy it.

"In fact, it is usually the largest financial asset of the ave household."

It is not a financial asset. First, it's not "financial" at all. Second, it is a liability to the extent that you owe money on it, and most people owe more money than they have invested in the property.

It must be a liability to you, since your loan is an asset to the bank.

"And it's a better investment than investment property for the primary reason that it is generally tax advantaged - the $250/$500k cap gain exemption (assuming you didn't live 2 out the last 5 years in your investment property)."

Actually, you're wrong on all accounts. With an investment property a tenant is paying all of your costs. Then, if you own an investment property and sell it, as long as you reinvest in another investment property, the capital gains tax is deferred without limit. Furthermore, all interest is deductible on an investment property mortgage; it is not subject to the $1 million limit for owner-occupied real estate.

Then, investment property is protected by bankruptcy law; owner-occupied residential real estate is not. So, it is perhaps the worst investment you can make - it appreciates over time at about the real rate of income growth: 1% per year.

"No. The out-of-pocket expense must be the same."

You mean out-of-pocket expense during that month you make the payment? Ignoring the refund?

"If you're not sure what that means then I shouldn't even bother having a conversation with you. When you buy an apartment you are prepaying a future stream of rent payments. Your PITI is in lieu of future rent. In accounting terms you capitalize the full amount of the property and amortize it over the life of the property. If that amortized cost exceeds what you would pay to rent an apartment, then you are overpaying. If it is less, then it's a deal."

I think we are saying the same thing in principal. Maybe we are talking semantics here, but I'm calling you out on it. There's no such thing as amortized rent. It's amortization of a capitalized asset. Rent is the payment.

"It is not a financial asset."

What's your definition of financial? You can buy it, you can sell it. You can make money off of it or lose it. Come on man, that is just ridiculous. I agree with your capitalized expense concept. Its the same as saying its the NPV of future rent payments. But isn't a stock the NPV of future cash flows? I guess a stock is capitalized cash flows and therefore not an investment either. And a bond is capitalized interest payments, again not a financial asset.

"Then, investment property is protected by bankruptcy law; owner-occupied residential real estate is not."

What does that mean? Bankruptcy law is federally governed. Foreclosure laws are regulated by states. If you default on your primary mortgage (securitized debt), depending on whether a state is either recourse or non-recourse, banks can potentially come after you with a separate claim to recoup any losses. In practice, this almost never happens because someone going through foreclosure doesn't typically have any real assets to go after. Even if they did, you can still declare bankruptcy and get federal protection if the situations warrant.

That apt is actually a good deal when you run the numbers!!!

"There's no such thing as amortized rent."

Of course there is - every monthly PITI payment is an amortized capitalized expense in lieu of rent. Does that make it clearer to you?

"Rent is the payment."

What?

"What's your definition of financial? You can buy it, you can sell it. You can make money off of it or lose it. Come on man, that is just ridiculous."

Financial asset = An asset that derives value because of a contractual claim. Stocks, bonds, bank deposits, and the like are all examples of financial assets. Unlike land and property--which are tangible, physical assets--financial assets do not necessarily have physical worth."

http://www.investopedia.com/terms/f/financialasset.asp

Sorry.

"Its the same as saying its the NPV of future rent payments."

Yes.

"But isn't a stock the NPV of future cash flows?"

No, because if it were then stocks without dividends would have no price. Stock prices are a function of estimates of future corporate income.

"I guess a stock is capitalized cash flows and therefore not an investment either."

What?

"And a bond is capitalized interest payments, again not a financial asset."

What? A bond most certainly is a financial asset.

Here are 2 easy definitions of "investment":

"In finance, the purchase of a financial product or other item of value with an expectation of favorable future returns. In general terms, investment means the use money in the hope of making more money."

Under this definition owner-occupied residential real estate is not an "investment" because its purpose is to capitalize rent, not to make more money. That is only a recent misconception of what real estate is.

"In business, the purchase by a producer of a physical good, such as durable equipment or inventory, in the hope of improving future business."

Owner-occupied residential real estate is not a "business." Under this definition, investment real estate is a business, and therefore it is an investment.

"That apt is actually a good deal when you run the numbers!!!"

Then why don't you buy it and get back to us in a year?

Have you considered that part of your mortgage payment is principal and therefore should not be categorized as an "expense" but rather as an investment? These kinds of comparisons always come back to your expected time horizon. If it's 5 years or more, you are usually better off owning, plus you get the benefit of being able to customize your home and having neighbors who actually care about the building they are in. There is a different atmosphere in buildings that are owner-occupied versus rentals. Anyone who owns knows that, but no one seems to think there's a difference other than dollars. There is.

Yog - you are getting into the "value" of owning vs renting and there is much to see in that. Something is worth whatever someone is willing to pay for it, but people want to buy for more than just a pure dollar to dollar calculation....unless you are Steve.

I am just being snarky on that last part....mostly.

Steve there are technical definitions and there's reality. I bought mine because it fit your rent to own ratio though I have to admit that I didn't know that. Just knew that the sale price plus maintenance would pay for itself in about five years

Something happened between the time I bought and sold and real estate became an "investment," not simply a place that a person both loves and lives in

I sold it because I fell out of love with it and saw that I could make a good profit--and I did 300% By your definition it became an investment. It was affordable so I paid cash. I'm very glad that I put the money into the apartment now. Just when I lost a considerable amount of money I could replenish and add

My tax breaks came from the building's underlying mortgage which is an argument for one

Yog most owners think about the difference between owning and renting.

I would never try to talk Steve into believing that an apartment's intrinsic worth is important though it is

does the elliman site now say it's 399?

Price: $399,000
Maint/CC: $650
Percent Down: 20%

http://www.prudentialelliman.com/965192

"Strictly speaking, it is amortized rent. "

Again, let me repeat. There is no such thing as amortized rent. You amortize an asset. You do NOT amortize an expense. Rent is an expense. This is operating vs capital leases 101.

"every monthly PITI payment is an amortized capitalized expense in lieu of rent."

that i can agree with but was not what you said initially. What you said instead is "If you're not sure what that means then I shouldn't even bother having a conversation with you."

"No, because if it were then stocks without dividends would have no price. Stock prices are a function of estimates of future corporate income."

I said cash flows, not dividends. And by the way, a dividend discount model is an equally valid tool for analyzing NPV. Just because a company isn't paying dividends now is meaningless. For an equity to have value, there must be a belief that at some point (could be very distant future with a high-growth company), dividend distributions MUST be made.

I'm not even going to debate with you that a home is not a financial asset. You have your opinion, I have mine. I'm going to just leave it at that.

"that i can agree with but was not what you said initially."

That is what I said originally. You take something I wrote quickly and claim that I don't know what I'm talking about. When you purchase an apartment you are capitalizing the rent and then amortizing it over time. Clear enough?

"I said cash flows, not dividends." Well, dividends are cash flows - you are discussing the dividend discount model, which counts dividends as cash flows returned to investors.

"for an equity to have value, there must be a belief that at some point (could be very distant future with a high-growth company), dividend distributions MUST be made."

There is no reason why a company MUST make a dividend payment, nor must there be such a belief. It could, instead, repurchase stock, or reinvest in the business, and it will still have a p/e ratio. You are discussing the much discredited dividend discount model, and I don't know why. I don't even know why I'm discussing it.

"a home is not a financial asset. You have your opinion, I have mine."

I don't know what else to tell you - I quoted you the definition of a financial asset. A real asset is not a financial asset, and vice versa. Real estate is just that - real.

"By your definition it became an investment"

No. Things don't "become" investments - investment is an intention. It is true that in recent years owner-occupied real estate has yielded very high "returns." We are seeing, however, that that was an aberration - a bubble.

"I would never try to talk Steve into believing that an apartment's intrinsic worth is important though it is"

It can be, but so can rental property. I know people who have rented for decades - they are as attached to their apartments as an owner. There are also many people who don't want to or can't be tied down long-term by real estate and its very high transaction costs. To them, renting has an intrinsic value.

Even if the rent for the apartment equals the cost of ownership, I would not buy it. In the near future, as inventory piles up, walk up apartments are going to be HARDER and HARDER to sell. WIth tons of inventory, buyers are going to demand elevators. Check out the inventory box on urbandigs.com. Unlike the stock market, the inventory box goes UP EVERYDAY!

Price: $399,000

Yes, the price was dropped from $540,000 to $399,000 in just 6 months. Streeteasy has not yet captured the 26% decline in the asking price. Still vastly overpriced for a 4th floor tenement walk-up.

Do look at urbandigs.com, land prices and how they soared since 2003. Guess what's coming for dinner?

Crash.

Sorry guys, the stock market went down 50% but it will be up 50% in a few months. This Manhattan bubble is going to take years to unwind, and I think it will overshoot on the way down. It is a catastrophe.

When you leave out "must have address" (which is closer to streeteasy's reports) the figure is:

Sales in Manhattan
We found 9,037 listings
Median price: $1,195,500 Median size: 1,146 ft² Median price per ft²: $1,141

"Sorry guys, the stock market went down 50% but it will be up 50% in a few months."

LMAO. I thought you declared the US market dead. Or are you talking about China? Just don't be going out, starting an e-mail campaign to the Chinise government to re-inflate the stock prices. Or, if you do, give me heads-up first so that I can buy all I can before I am priced out FOREVERRRRRR.

"I thought you declared the US market dead."

Nope. Never. I said it would fall to 8,000, and it did. Up 50% after down 50% still means 25% down, in case you didn't realize. So let's say we were at 14,000, fell to 7,800, it would still only bring us to about 11,700, which is where we were in May. Which is where I think we'll be in a few months.

Sorry you can't do math, or spell "Chinise." "to re-inflate the stock prices" - they've already said they were going to do that. Pay no attention - makes no difference to me. Invest in real estate: I know a good 4th floor walk-up reduced from $540,000 to $399,000, you might want to dip your toe into the property market.

"Nope. Never."

LMAO.

"So let's say we were at 14,000, fell to 7,800, it would still only bring us to about 11,700, which is where we were in May. Which is where I think we'll be in a few months."

LMAO.

"Sorry you can't do math, or spell "Chinise"

Coming from a guy who said: "take something I wrote quickly and claim that I don't know what I'm talking about." in the very same thread...

"Pay no attention "

Oh, don't you worry, I won't.

"Invest in real estate."

Again, don't worry. Happy owner since 2001. Was buying in 2001 a bad decision?

"Nope. Never."

Show me where I said it.

"it would still only bring us to about 11,700"

My opinion - feel free to disagree.

"take something I wrote quickly and claim that I don't know what I'm talking about."

Right - I said the correct thing, then said something that meant the same thing but wasn't entirely clear. Doesn't change what I initially said.

"Was buying in 2001 a bad decision?"

It's never a bad idea if you plan on living there over the long-term. If you needed to sell today - even if you had made a paper "profit" - it could have been a bad decision if your property languishes on the market while you don't have a job. So I don't know whether it was a bad idea or not.

I also own, BTW.

"Show me where I said it."

I guess it would be easier to find it if you didn't post a few dozen times a day.

"My opinion - feel free to disagree."

I disagree.

"It's never a bad idea if you plan on living there over the long-term."

It's NEVER a bad idea, people! Steve just endorsed buying today, if you plan on living there for a long time.

"If you needed to sell today"

I don't. Thank you for your concern though.

"even if you had made a paper 'profit'"

My profit is big enough that it doesn't deserve quatation marks, thank you. And, believe it or not, it still very much exists, even if it's only on paper. Unlike all your "profits" from being long China last 18 months...

"I guess it would be easier to find it if you didn't post a few dozen times a day."

Because I never said it.

"I disagree."

Mazel.

"Steve just endorsed buying today, if you plan on living there for a long time."

Did I? I think I said that if you plan on living there for a long time - 30 years or so - it's not a bad idea. Does that mean it's a good idea? Who can say for certain how long they will live somewhere?

"My profit is big enough that it doesn't deserve quatation marks, thank you."

Unrealized profit is just that.

"And, believe it or not, it still very much exists, even if it's only on paper."

Not until you realize it; not until there is a price. Which there isn't right now.

"Unlike all your "profits" from being long China last 18 months...""

Actually, I bailed from China in January - I just reinvested recently.

> Nope. Never. I said it would fall to 8,000, and it did.

Actually, if I remember correctly, you said that then amended it when the government stepped in... and you told us at that point you were buying. I think it dropped 2,000 points after that...

"Except they take into account the unleveraged opportunity cost (of the down payment alone) while taking into account the fully leveraged price appreciation / depreciation of buying a home. If you put down $100,000 on a $500,000 home, your opportunity cost is on $500,000, not on $100,000, because that is what you invested, regardless of the source of the funds."

This would be true *if* I could get a loan of equal terms where the bank would be ok with me putting the money into investments, instead of owning a home that they have a lien over (well, the coop equivalent of a lien). The bank would *NOT* let me do that, which is why you can't look at the opportunity cost of the 500k.

I don't do margin accounts, but I hear you do. Tell me what kind of leverage I can get today for 6% fixed over 30 years with no right for the lender to make margin calls. I expect your answer to be "such a product does not exist".

"Did I? I think I said that if you plan on living there for a long time - 30 years or so - it's not a bad idea. Does that mean it's a good idea? Who can say for certain how long they will live somewhere?"

OK, I stand corrected. People, Steve just said it's not a bad idea to go out and buy today if you plan on living there for a long time!!

"Unrealized profit is just that."

When did I say that I have no realzied profit? I sold 2 properties in October 2006, so I have a fair bit of realized profit, thank you. I have unrealized profit on 2 more properties, one of which is my home. And that I am never selling. Not ever.

"Not until you realize it; not until there is a price. Which there isn't right now."

There is no price right now??? Oh my God, I should go ahead and panic!! All this time I have been paying a mortgage and all for nothing!! There is no price, so the apartment must be worthless!!

"Actually, I bailed from China in January - I just reinvested recently."

By recently, do you mean this summer? A few months and 50% ago? And you didn't buy FXI right after the bailout, near 38-39?

By the way, here is what you said 2 week ago:

"The only thing I have is cash and 2x long China, which has been painful recently. But the Chinese have said on multiple occasions that they plan on buying stock directly to prop up the market. I think you saw some of that yesterday when the Hang Seng recovered.

With this volatility I won't mind missing an upswing, because with a trading range of 30% in a day, it's just too nerve-wracking. I will add to the China position, and that's it. They are the next economic superpower. The US is dead. We don't produce anything, all we seem to know how to do is create money by trading in nonexistent things, selling it and letting it crash. Let's see: dot.com, housing, CDS's...."

You said that the US is dead, and that you don't own any US stocks. But you didn't declare the US stock market dead?

"It's never a bad idea if you plan on living there over the long-term."

It's NEVER a bad idea, people! Steve just endorsed buying today, if you plan on living there for a long time.

stevejhx has gone from it is ALWAYS better to rent than own, to it is most often better to rent than own, to it depends on the market.

stevejhx is the most flexible person on streeteasy

steve: very early in the thread, you said this, quoting me:

[" Again and again rational people" = someone who agrees with you.]

This thread should be pretty conclusive proof - not a single person agreed with your garbage PITI argument. People who don't agree with me on real issues still agree with me on my arguments against your PITI point. Now will you drop it already? I have this thread bookmarked - I plan to link it any time I see you bring it up again in the future :) I don't want to continually retype this argument, which is obvious to anyone not pushing an agenda (and even some people who are pushing an agenda).

"The US is dead."

I didn't say the stock market. I said the economy. Sorry to disappoint you.

I remain 2x long China. I never planned to invest at the very bottom, just close to it.

"Steve just endorsed buying today, if you plan on living there for a long time."

No I didn't, ootin, sorry. Sorrier that you feel the need for me to validate you.

"stevejhx has gone from it is ALWAYS better to rent than own, to it is most often better to rent than own, to it depends on the market."

I said not such thing. I said it is better to rent than to own IF you consider owner-occupied residential real estate to be an investment - it is not. I also never endorsed buying today. I said that if you plan on staying there for 30 years, then it's not a bad thing. I didn't say it's a good thing.

"not a single person agreed with your garbage PITI argument."

You seem to think that I care what other people think. The facts are the facts, and over time out-of-pocket rental expenses have a direct correlation to purchasing prices. In New York that ratio is 12x. I've proved to you why it is so - 30% PITI = 40x monthly rent. Now the ratio is about 24x, and rents are falling.

If you can afford to rent someplace but can't afford to buy it on the same income, or it is more expensive to buy it than it is to rent it, then it is overpriced. Period, case closed.

"I didn't say the stock market. I said the economy. Sorry to disappoint you."

Where did you say "the economy"?

"I remain 2x long China. I never planned to invest at the very bottom, just close to it."

I don't think it's a bad idea to short FXI here and cover when it gets cut in half (again). Around 12-13 bucks.

"I said it is better to rent than to own IF you consider owner-occupied residential real estate to be an investment - it is not."

Correction: you have said that that it is ALWAYS better to rent than to own. No but's, no if's, no timetables.

"then it's not a bad thing. I didn't say it's a good thing."

LMAO.

"If you can afford to rent someplace but can't afford to buy it on the same income, or it is more expensive to buy it than it is to rent it, then it is overpriced. Period, case closed."

LMAO.

"You seem to think that I care what other people think."

That's ironic, given that your *entire* argument is founded in what bankers think. My argument is founded in the number of dollars in my pocket.

"The facts are the facts, and over time out-of-pocket rental expenses have a direct correlation to purchasing prices."

Agreed. Nobody disputes you here, so you should stop repeating it.

"In New York that ratio is 12x. I've proved to you why it is so - 30% PITI = 40x monthly rent."

Hardly proof. Have a link to real numbers that prove that this number is 12 historically in NY?

"If you can afford to rent someplace but can't afford to buy it on the same income, or it is more expensive to buy it than it is to rent it, then it is overpriced. Period, case closed."

Agreed. We argue in how we define "afford". I use dollars in someone's pocket. You use what bankers think about your finances. Which one of those methods do you think more closely matches "afford"?

> Hardly proof. Have a link to real numbers that prove that this number is 12 historically in NY?

Anecdotally, stats in the last year or so have measured 20-25x. Lots of that on this thread.

Over the bubble, I think the stats show 3x. Rents in that span seemed to have gone 1.5-2x per my watching similar apartments (larger complexes with fairly decent inventory). Just from that, you can infer that the ratio was much closer to 15 pre-bubble.

Separately, "common wisdom" seemed to be that the ratio was about 15 20-25 years ago (my family was in the RE business since the 50s).

Why do I answer you people?

"Where did you say "the economy"?"

"They are the next economic superpower. The US is dead. We don't produce anything, all we seem to know how to do is create money by trading in nonexistent things, selling it and letting it crash."

There.

"you have said that that it is ALWAYS better to rent than to own. No but's, no if's, no timetables."

Read the ENTIRE thread. It's very clear.

"Have a link to real numbers that prove that this number is 12 historically in NY?"

Yes.

http://money.cnn.com/2008/07/07/real_estate/price_to_rent.moneymag/index.htm?postversion=2008071604

12.1

"You use what bankers think about your finances."

No. I use industry standards, long-term financing for a long-term asset, approximately equivalent to the depreciation rate. That is, a 30-year 80%-20% mortgage approximates the depreciation of real estate (27.5 years) less the land portion (which can't be depreciated).

"I don't do margin accounts, but I hear you do. Tell me what kind of leverage I can get today for 6% fixed over 30 years with no right for the lender to make margin calls."

I have no margin now - too volatile. You can get 2:1 leverage for about 2% over $500,000. When the market stabilizes, I will re-margin.

I thought you put me on ignore, nyc10022? :)

If 15x is historical, that means stevejhx's PITI argument has no historical support. Do you agree with steve's PITI argument, or also disagree?

There are a lot of 20-25's. A lot of unrealistic sellers. A lot of new-construction buyers who are buying stupidly overpriced crap. But there are good deals too. I bought at 18 to 19, using a few rental comps. Might it go down to 15? Perhaps, but that's hardly the 40% drop you describe.

steve: your link shows 12.1 for New York State. Have any data for Manhattan?

"I have no margin now - too volatile. You can get 2:1 leverage for about 2% over $500,000. When the market stabilizes, I will re-margin."

In other words, nothing like 30 year fixed mortgages at 5:1. That 2% number you quote is certainly a variable rate. That disproves your latest argument - I'm pretty sure I've disproven them all, even though you carefully choose to cherrypick quotes that hide the points you can't refute (at this point, all of them).

"They are the next economic superpower. The US is dead. We don't produce anything, all we seem to know how to do is create money by trading in nonexistent things, selling it and letting it crash."

You still don't see where you said "the economy," and I know how you hate when we, the "people," put words in your mouth.

But anyway, so you are long the Chinese stock market because China is the next superpower... So, the economy and the stock market are correlated? Then how can a dead economy support a strong and "alive" stock market?

> If 15x is historical, that means stevejhx's PITI argument has no historical support. Do you agree
> with steve's PITI argument, or also disagree?

I don't know if 15x is "historical"... I'm just giving a point in time, like the one from last year. Could have been more or less before, not sure... I'd like to see the data myself.

As for Steve's PITI argument, I'm somewhere in the middle. You have to factor in tax savings, but many people way overcalculate it when doing so...

But, remember my bigger point... rent/buy calculations go out the window when you factor in major price declines. The calculations blow up when you put that in... When the price loss is more than the rent itself, the calculations become meaningless.

"If 15x is historical, that means stevejhx's PITI argument has no historical support."

Actually, quite the opposite. First 12x is the ratio not 15x, though the actual ratio at any one time depends on interest rates.

Nonetheless, you make $100,000. You can afford 30% PITI = $2,500 a month. You can afford 40x monthly rent = $100,000 / 40 = $2,500. 12x this annual rent would be $360,000. An 80%-20% mortgage would be $288,000. A $288,000 mortgage at 6.5% gives you PI of $1,820.36. Add in taxes and insurance of $700 a month, and voilà, you have $2,500 a month, which is the maximum you can afford.

This is the maximum based on industry standards (40x / 30% - not my figures). Nonetheless you should be able to afford both apartments on the same income, and they should be virtually identical. If one is a 4th floor tenement walk-up and the other is in a modern elevator / doorman building, they are obviously NOT identical apartments. But since they cost the same one of them must be overpriced - the one for sale.

It is accepted economic theory that the price of any good is the price of its marginal utility - the marginal utility of an identical goods is identical, therefore their prices should be identical. Based on that, there should be no difference in the actual price to buy or rent an apartment; all inputs are taken into account implicitly and the price is discounted accordingly. Which is why the p/e ratio for housing works so well.

BGaria: be on the reverse end of steve's trades. He was long Brazil before it crashed (on margin too, right?). He called a huge short position on the US the day before we had our huge 1-day increase a few weeks ago. He called Dow to 8k if the bailout *didn't* pass, and reversed that prediction before the Dow actually hit 8k.

This thread shows he doesn't understand very simple economics. Opportunity cost is the entire purchase price, not my down payment? My tax benefit of my mortgage equals my opportunity cost? His statements aren't even internally consistent. The 2 of those together imply that prepaying my mortgage lowers my opportunity cost, despite keeping the total value of my apartment the same!

"As for Steve's PITI argument, I'm somewhere in the middle. You have to factor in tax savings, but many people way overcalculate it when doing so..."

People making mistakes is a problem in any analysis. That's not a fault of the analysis itself.

"But, remember my bigger point... rent/buy calculations go out the window when you factor in major price declines. The calculations blow up when you put that in... When the price loss is more than the rent itself, the calculations become meaningless."

Absolutely. Nobody disagrees with you there. The issue is that you see major price declines as a foregone conclusion. Others are more skeptical.

"It is accepted economic theory that the price of any good is the price of its marginal utility - the marginal utility of an identical goods is identical, therefore their prices should be identical."

As a renter, do you have the same rights and obligations as your landlord? Note that I am not asking which is "better," owning or renting.

Can you stay in the apartment as long as you want? Did you have to put down 20% of the value of the apartment as a "deposit" before you moved in? Who has more flexibility to move, you or the owner? Do you get a check when "your" place appreciates? Do you risk anything should the place depreciate?

If the landlord and the tenant don't have the same rights and obligations, then owning and renting are not identical goods. Different rights, different risks, different "returns" (if any), payments are accounted for differently... Even the very occupancy of the unit is not identical when it comes to owning and renting. Can you change the floors in your apartment, for example? Change the kitchen appliances to your liking?

Once and for all, who is arguing your point that you can only afford 30% PITI, which is equal to 40x monthly rent? Name one person who disputes that, please.

"This thread shows he doesn't understand very simple economics."

That's not what the degree on my wall says. I think that you're a computer programmer, right?

"He called a huge short position on the US the day before we had our huge 1-day increase a few weeks ago."

First, untrue - I have no short positions. Second, I am not clairvoyant in the short-term. Can you tell me what stocks will do tomorrow?

Then, I bailed on Brazil approximately 50% ago. Sorry to disappoint you.

That, however, does not mean the price is rational - no prices in today's stock market seem rational.

"Opportunity cost is the entire purchase price, not my down payment?"

The opportunity cost is calculated on the full amount that you invest, regardless of the source of funds.

"My tax benefit of my mortgage equals my opportunity cost?"

Who ever said that?

"The 2 of those together imply that prepaying my mortgage lowers my opportunity cost, despite keeping the total value of my apartment the same!"

Actually, no, and that's my point: if you pay in cash or if you borrow 90%, you are still investing the same amount. No?

You're the one who's arguing that if you have a mortgage your opportunity cost is less. I'm saying it's not. Just look at any leveraged corporate balance sheet - the money they have is the money they have, whether it is a capital contribution, preferred stock, common stock, subordinated debentures, etc. Debt and equity fall on the same side of the balance sheet.

"As a renter, do you have the same rights and obligations as your landlord?"

What is the purpose of that question? Some tenants (rent-stabilized) have more rights than their landlord.

"If the landlord and the tenant don't have the same rights and obligations, then owning and renting are not identical goods."

Fundamentally incorrect. The output of a rental or purchase is the same: a place to live. Therefore, the price should be the same. Each modality has its costs and benefits, but the result is the same: shelter.

You are discussing the inputs, which are irrelevant to the output value.

"who is arguing your point that you can only afford 30% PITI, which is equal to 40x monthly rent?"

tech_guy.

BGarcia - I think that you brought up some interesting points, which seem to go towards the "value" of owning versus the "value" of renting. There are plusses and minuses with each, but they do make a difference in the decision to buy or rent, so they must have some value in the discussion, even if it is not an exact dollar amount.

I am not suggesting this means one is better or worse, just that they do factor into the decision-making process. I disagree with Steve that renting or buying are just shelter. In some ways yes, but in many others, not so much.

Steve - no one is disagreeing with you about that point. The disagreement comes when you refuse to include the tax benefits to a rent vs buy calculation....and you know this.

"That's not what the degree on my wall says. I think that you're a computer programmer, right?"

Yep. Which makes it even sadder that I know more about economics than you.

["My tax benefit of my mortgage equals my opportunity cost?" - tech_guy

Who ever said that?]

You did:

["I get some of that back at the end of the year in the form of a tax break." - tech_guy

No one doubts that. It's offset by the opportunity cost of not investing your leveraged down payment in another asset class. That's where it goes.]

["who is arguing your point that you can only afford 30% PITI, which is equal to 40x monthly rent?"

tech_guy.]

You can't *possibly* be so stupid as to think that's true. The rest of the world acknowledges that its easier to qualify for a rental than an equivalent purchase. Its just that the rest of the world thinks that's a stupid way to define how expensive each of them are.

"The disagreement comes when you refuse to include the tax benefits to a rent vs buy calculation....and you know this."

I don't "refuse" at all. Simply, it doesn't enter into the 12x ratio, and it is not included when applying for a mortgage. Therefore, if you include it implicitly (as it is in the 12x ratio) and then include it explicitly - which is what you're trying to do - then you're counting it twice.

Pick a different formula, one that explicitly includes the tax benefit, such as imputed rent, and I will agree. I will also agree that the ratio will be different - about 20x rent.

"Which makes it even sadder that I know more about economics than you."

No. It makes it even sadder that you think you know more about economics than I do.

"Who ever said that?. You did."

"No one doubts that. It's offset by the opportunity cost of not investing your leveraged down payment in another asset class. That's where it goes."

Unfortunately, tech_guy, you misunderstood what I said. I said that what offsets your mortgage interest tax benefit is the opportunity of not investing (the full amount of the investment) in another asset class. It doesn't "equal" it - it offsets it.

In a different way, as I also mentioned: your tax benefit amortizes over time, your opportunity cost accretes over time. That is what I said.

"You can't *possibly* be so stupid as to think that's true."

Apparently bgaria is that stupid as well. "Once and for all, who is arguing your point that you can only afford 30% PITI, which is equal to 40x monthly rent? Name one person who disputes that, please."

"The rest of the world acknowledges that its easier to qualify for a rental than an equivalent purchase."

Who ever denied that, and what relevance does it have?

"Its just that the rest of the world thinks that's a stupid way to define how expensive each of them are."

Actually, no. That is the way that Case-Shiller thinks about it, and do a little Googling, since you're a tech_guy, find a few articles about property prices falling until they align with incomes and rents. Really, it's all the rage today in the press.

> Absolutely. Nobody disagrees with you there. The issue is that you see major price declines as a
> foregone conclusion. Others are more skeptical.

Given that we've already logged declines, I think we are talking about a foregone conclusion now...

One can be skeptical that 1+1 = 2, but it doesn't change the math...

"Given that we've already logged declines, I think we are talking about a foregone conclusion now...

One can be skeptical that 1+1 = 2, but it doesn't change the math..."

You claim 15. Which is wrong, but I'll humor you. 15 + ?? = 40? You spout 40 non-stop, and lately say it'll be more than that even.

No, I've said 12% Manhattan, and thats off the miller samuel numbers. I've said that many times.

I've also said that if I had to guess, we're down 15% already... and said separately that I used to think 15-20%, but now closer to 25-35% at the end of this.

Your claim that I "spout 40 non-stop" is, like your other assessments, just wrong.

"Pick a different formula, one that explicitly includes the tax benefit, such as imputed rent, and I will agree. I will also agree that the ratio will be different - about 20x rent."

What do you think we've been doing this whole time? You're only *now* figuring out that we're picking a different formula that explicitly includes all the benefits and costs?

"Actually, no. That is the way that Case-Shiller thinks about it, and do a little Googling, since you're a tech_guy, find a few articles about property prices falling until they align with incomes and rents. Really, it's all the rage today in the press."

This is why arguing with you is meaningless. You latch on to something obvious, and claim that obvious topic proves your real point. Obviously purchase prices, incomes, and rents are very closely correlated. Your method for comparing purchase prices and rentals is wrong. It was wrong 10 years ago, 20 years ago, 40 years ago, and it will still be wrong 40 years from now. That doesn't in any way contradict the fact that purchases and rentals are highly correlated - if anything, it further supports that!

"Your method for comparing purchase prices and rentals is wrong."

Really? What I'm using is called the price/earnings ratio for housing, and it is well established:

http://www.forbes.com/forbes/2006/0605/142sidebara.html

http://www.globalpropertyguide.com/real-estate-school/Is-there-a-housing-market-bubble

http://money.cnn.com/2003/06/12/pf/yourhome/money_july_/index.htm

http://en.wikipedia.org/wiki/Case-Shiller_index

Need I go on?

tech_guy, you don't know what you're talking about, which is why you're a computer programmer.

"What do you think we've been doing this whole time? You're only *now* figuring out that we're picking a different formula that explicitly includes all the benefits and costs?"

What formula are you "exactly" using? Price-to-rent, imputed rent, or owner's equivalent rent?

You're not using anything. I showed you where the historical p/e ratio in New York is 12.1:

http://money.cnn.com/2008/07/07/real_estate/price_to_rent.moneymag/index.htm?postversion=2008071604

That ratio DOES NOT add the tax benefit back in explicitly; it is discounted into the prices.

And as I said, if you do add it back in, you need to use a different formula. Show me yours.

[split because of the links]

Is this another case of you linking something obvious-but-unrelated, and claiming that proves your point? Or do you really not understand how the math in those links is different from your math? They take the purchase price and divide the annual rent for an equivalent place. Those articles don't mention, hint at, or use anything even remotely related to PITI.

Here's the formula I use: http://housemath.us

Oh, tech_guy, you tire me.

"They take the purchase price and divide the annual rent for an equivalent place."

I know, and they come up with the 12x ratio, which is the ratio of home prices to rents. If you do the math - as I did above - you will see that, depending on the interest rate, it is the same as the PITI calculation:

"You make $100,000. You can afford 30% PITI = $2,500 a month. You can afford 40x monthly rent = $100,000 / 40 = $2,500. 12x this annual rent would be $360,000. An 80%-20% mortgage would be $288,000. A $288,000 mortgage at 6.5% gives you PI of $1,820.36. Add in taxes and insurance of $700 a month, and voilà, you have $2,500 a month, which is the maximum you can afford."

It's the exact same thing. Out-of-pocket rent = out-of-pocket PITI.

Do you see where in those calculations they include the tax benefit? Or anything else? "They take the purchase price and divide the annual rent for an equivalent place."

And what is the purchase price for most people? PITI.

housemath.us: do you know EXACTLY how they calculate their figures? Because when I press the link, it doesn't work. Here's a specific way to do it:

www.ny.frb.org/research/staff_reports/sr218.pdf

Run the math, when you do you'll see that no one would ever buy a place to live if they expect a negative return on equity.

"You're not using anything. I showed you where the historical p/e ratio in New York is 12.1"

Thanks for the link, it's good to finally see the source of your data. Not that you have not presented that before, but i just never saw it. A few thoughts.

1) definition of new york. if it's as defined by the NAR, its probably broader than new york city and likely includes surrounding areas of ny state and northern nj(and consequently far greater than manhattan). this is relevant because if we are at a blended 12x LT average, my guess is that manhattan on average has a higher P/R ratio and the outskirts of the defined metropolitan area have a lower ratio. why? i am simply assuming that more desirable areas trade at higher P/R ratios, similar to stocks for instance. Low P/R in marginal areas also would explain why nyc (one of the most desirable cities in the country) trades at 12x, about the same as the national average of 11.5x.

2) data range. the average 12x is based on 15 year average. thats 1993-2008. hardly THAT long term to base an average off of. real estate cycles are long and i would need to see at least 30-40 years (through a few cycles) in my mind to establish a true LT average. in fact, the city has gone through significant improvements which increases desirability in that time frame. remember time square, LES, harlem, williamsburg, and even tribeca 15 years ago? improved quality of life would also justify a higher structural P/R ratio today than in 1993 - all else equal.

3) 1Q08 15x doesn't seem all that high relative to 12.5x national average. if i was an investor using this metric only, it certainly would not indicate nyc is overpriced. san fran is at 33x! i mean, THAT looks overpriced relative to 12.5x national average and 15x for nyc.

my conclusion is that for manhattan, long term PR could be higher than 12x and further that based on a PR analysis alone, nyc as a whole doesn't look expensive relative the the national average and many other cities.

As a caveat to my post, if you look at NAR housing affordability indexes you will see the sharp decline in affordability of housing in the nyc metropolitan area. from what i remember it asks the question of what % of families can afford the median priced house in an area. around 50% would be close to equilibrium. i haven't seen the data in a bit, but from what i remember, that clearly points to prices here being way too high.

"I know, and they come up with the 12x ratio, which is the ratio of home prices to rents. If you do the math - as I did above - you will see that, depending on the interest rate, it is the same as the PITI calculation:"

"depending on the interest rate" is the key phrase there. Because they coincidentally arrive to the same conclusion given today's interest rates doesn't make it at all accurate. Even a stopped clock is right twice a day. Remember, mortgage rates are at historic lows:

http://mortgage-x.com/trends.htm

Which means historically, your formula has been wrong a heck of a long more often than its been right.

"housemath.us: do you know EXACTLY how they calculate their figures? Because when I press the link, it doesn't work."

Yep. Its very straightforward. Try it out and read the detailed explanation it gives you for your numbers.

"The output of a rental or purchase is the same: a place to live."

Really? So, a 100% tax on any profit from a RE deal would have no bearing on the price of the property? In other words, if you weren't allowed to sell at a profit, you would still pay the same amount for the place as you would without the provision? Because the place is just that, a place to live...

Or would you pay the same amount for a place without knowing how long you could stay there? Let's say the building reserved the right to make you move out at the end of any calendar year, for any reason, and give you back whatever you paid for the place. Nothing changes, correct? You got your shelter so that provision in the contract shouldn't have any bearing on the purchase price...

Or how about the building GUARANTEEING you not to lose money on the purchase when it comes down to selling it, but allowing you to keep all the profits, if any. That would have no effect on the purchase price, of course.