proof prices are dropping

julia: Welcome to the dark side of the Force.

88 Bleecker Street #3C at 499K..hopefully this is just the beginning.

yeah

Congrats Julia - aren't you glad you waited?

btw- that 1 BR at 33 RSD sold for $497K.

This is the one I'm talking about:

http://www.streeteasy.com/nyc/sale/192159-coop-33-riverside-drive-upper-west-side-new-york

And at $497,500, it's getting close to what 12x annual rent would be: $3,500 vs. what I would say would rent for $3,000 in the open market.

Which open market is collapsing, if for no reason other than the fact that Paulson keeps on changing his mind about the right thing to do.

They inspire confidence, don't they?

Quite the steal. housemath.us calls it as:

Assuming rent increases with inflation at 4.0%, you could pay an equivalent rent of $1,599.44 a month starting today, live there, and be in exactly the same financial situation when you sell.

Now of course this includes 0.5% real appreciation (4.5% nominal, 4% inflation). Keep inflation at 4%, call appreciation at 0% (prices flat nominally over 10 years, but real loss due to inflation) and you get:

Assuming rent increases with inflation at 4.0%, you could pay an equivalent rent of $2,702.30 a month starting today, live there, and be in exactly the same financial situation when you sell.

Still attractive.

Riv_Drive...I saw that apartment..I liked it a lot and made an offer but it was too low for them.

Ignoring comment by tech_guy.

tech_guy: plug in the returns from borrowing at 2% (current margin rate) and investing in the S&P 500 with a ~8% cash-flow yield. Yup, infinite return. That should give you some sense for how relevant such calcuations are. They completely ignore principal risk. Renting SHOULD be cheaper than owning b/c you do not have massive principal risk.

I remember you mentioned that - what was your offer?

I think (not sure) it was something like $460k but the apartment was nice.

"Renting SHOULD be cheaper than owning b/c you do not have massive principal risk."

Actually, the opposite is true: owning should be cheaper than renting precisely because there is a risk. There is very little risk in renting.

Your right, we should include principal risk into a buy vs. rent calculation. What number should we use? 100? -10,000? A bajillion? How do I add a number to the buy side to capture principal risk?

You can't measure principal risk in dollar terms. Of course buying is risky. Of course you risk losing a lot due to having a leveraged investment. However, those concerns are outside the scope of rent vs. buy math.

Stevejhx, as the king of all bears, where would you buy if you had to express it as a ratio to annual rent? My wife and I currently pay $5500 a month for a 2 bed 2 bath in Carnegie Hill. In my rough estimation, if this apartment was available to purchase in the mid $700's it would 'feel' cheap at 11x annual rent. But then I consider how low we got on ratios in the mid 1990s, and think, might it get even lower? Also this analysis doesn't consider inevitable declines in rent. So maybe this rent could go to $4,500, for a $54,000 annual basis. For context, we live on 86th b/t Madison and 5th. If this went coop tomorrow, the outside price of this apartment would probably be at least $1.1mm. It seems too greedy for me, even as a celebratory bear, to expect apartments like this to get into the $500s or $600s.

PS: The market pays for the right to own in the upmarket and expects to be paid for the risk in the down. Which kind of market we are in is no longer at issue!

Rhino, I don't know all your details but I'd look on nybits for comparable rentals. I would wait till prices stop falling and start rising, but I think we're a long way from there.

That said, if you can buy something that out-of-pocket costs the same or less as what you pay to rent, and you have a longish-term time frame, I might consider it.

BTW: Ignoring comment by tech_guy.

Steve, I am just conceptualizing. I had considered buying before the second wave of shit (Lehman, AIG, market down another 20%+) hit the fan. What I was curious about getting your take on is where you think the market would be too cheap to pass on. For instance, if the S&P traded under 600, if I could find my sanity, I would have to buy it. In terms of real estate, tell me what annual rent ratio you would deem too cheap to pass up. I ask YOU, because you are the patron saint of bears of this site, so you're answer in some sense brackets the downside conceptualization. I know in the 1990s there were condo studios selling for $100k that were $1,200 rentals... So that is 7x. There were Hamptons houses selling for 8x the summer rental cost alone. It's hard for me to conceptualize 7x $5000 in rent x 12 months as the price of the equivalent apartment to what I rent now, but maybe its possible.

if it were not cheaper to own than it is to rent, the entire class of individuals known as landlords would not exist. the new york phenomenon of owning being more expensive than renting is completely out of whack.

Happyrenter I am not sure that is true. Suburban houses are often more expensive to own than rent in upcycles. New York City gets more out of whack than many places admittedly. Owning allows you to lock in your payment (at least if you have a fixed mortgage), in a world where over time, rents do increase. And if you buy right, you have a reasonable expectation of appreciation. It's when you buy wrong (let's call it after 2004 in Manhattan), then you have a problem IF you need to sale. But even a 2004 purchase could still be puked at cost now (maybe), and definitely represented a substantial monthly savings after tax over the last four years.

"In terms of real estate, tell me what annual rent ratio you would deem too cheap to pass up."

It depends on interest rates and a lot of other things, but if I could get 10x today's annual rent...

That would mean my 2-bedroom 2-bathroom would go for about $550,000. That would be 12x annual rent from about 5 years ago. That's about right.

rhino,

the problem with your analysis is the opportunity cost of locking up your capital in residential real estate. even if real estate appreciates over time, the relevant question for a rent v. buy analysis is whether that investment compares favorably to other investment options. historically, as i am sure you know, residential real estate has not been a good investment as compared with, say equities.

that being said, i agree with you that certain types of residential real estate lend themselves more to owning, and others to renting--for lifestyle reasons rather than investment ones. it is a more or less iron rule that no one should ever, ever own a studio apartment. on the other hand, i can see why a family with a bunch of kids would want the permanence of a house.

even so, in general we should expect to be paid something to put our capital at risk.

Jesus...so what is that if it were a coop at peak? About $1.2mm? So for round numbers sake you would not be compelled by anything less than a 50% decline. I am not saying you are wrong in that. I bet this $5.5k rental I am in now would have sold as a coop at $600k, in 2003 and rented five years ago, in the $4,000 range. So your same $4k * 12 * 12 = $550k. Maybe this apartment I am in would have been more than $4k even 5 years ago. Call it $4500 * 12 * 12... Getting into the mid $600s. Again, sort of like a 2003 level price. So your opinion is basically 12x 'normalized' rents, adjusted for the 2004-2006 rental price explosion.

Lets see. In 2003 I was paying $1,900 for a luxury alcove studio on 54th & 10th. This apartment which may have fetched over $550k as a condo would come into about $275,000 at 12 x 12....which is what they were asking for a condo alcove in 2003 in my prior rental in 2002 (95th & Broadway - the Princeton House). 2003 prices....this is a good rule of thumb.

I disagree happy renter. Bought well, with leverage and tax advantage, I think real estate compares very favorably with equities. It's when bought badly, its a disaster... But the same could be said for any stock purchased after 2004, for example, or between 1998 and 2000. It a matter of multiple, which is why I have tried to compare apples to apples by steering this thread to rental ratios.

"if it were not cheaper to own than it is to rent, the entire class of individuals known as landlords would not exist. the new york phenomenon of owning being more expensive than renting is completely out of whack."

Landlords have to pay taxes on the rent they collect. I don't have to pay taxes on the imputed rent (steve's favorite phrase - look for it, even though he doesn't understand it). The "rent" I'm "paying" myself to live there as my own tenant doesn't get taxed. So naturally, its more beneficial for an owner-occupied apartment, compared to a landlord owning it as an investment property.

That said, this explains *some* of the difference. Many properties are so out of whack that this doesn't explain it.

rhino-

of course, anything can be a great investment. real estate purchased cheaply can make you rich just as easily as stock purchased easily, or anything else (the royalties to song lyrics, cans of paint, mining rights). the point is that in general, residential real estate performs poorly. why? several obvious reasons:

1. It is capital intensive (renovation)
2. It is heavily taxed (with equities you only pay capital gains; with residential real estate you pay real estate every year).
3. It has incredibly high transaction costs (brokers, flip taxes, moving, etc).

To put things in perspective, when I bought my first NYC apartment in 1998, I paid $218,000 for an 800 square foot 2-br 1-ba co-op at 350 Bleecker. I had been paying $1675 for a 600 square foot 1-br 1-ba at 9 Barrow Street, just a few blocks away.

12x the annual rent would be $241,200. Considering that what I bought was 33% bigger, if it cost the same, at 12x annual rent it would have cost $320,796. Interest rates were about the same then as now (I think my rate was 7.5%) but taxes and common charges were lower. Therefore, I paid about 8x annual rent adjusting for the size difference between the two apartments.

Don't think that it won't happen again, because what we're going through is far worse than what happened in 1988-1998.

8x annual rent, versus today's 24x. If it happens again....

Happyrenter this is all well and good. Equities appreciate 8% on average. If you buy real estate, your downpayment will usually be levered anywhere from 2 to 10 to 1. When you consider the leverage, equities have no chance of keeping pace. None whatsoever if you stop and think about it that way. Keep in mind I am comparing equity to real estate equity, which is the appropriate comparison.

So Steve that said, why was your answer 12x and not 8x? Not being sarcastic.

rhino,

you think leverage only works for residential real estate? you can pile on debt for any type of investment, and it can get you into the same sort of trouble in any type of investment. that's just not a reasonable way to compare. if you want to compare apples to apples, you need to compare leveraged equity investing to leveraged real estate, or un-leveraged versions of both.

so just so I'm clear we're now down to 8x and a 66% reduction from 12 and 50?

"if you want to compare apples to apples, you need to compare leveraged equity investing to leveraged real estate, or un-leveraged versions of both."

You can't get 30 year fixed rates with no margin calls on equity. Thats why the best comparison is to figure out the best percentage return you can get on equity (margins, no margins, whatever you prefer - I'm in the no margins camp myself). Then use that comparison as the cost of tying up your down payment.

Hey everyone,

I'm a bit mathematically challenged, so am I doing this right?

1. Figure out how much a unit would rent for

2. Take that hypothetical monthly rent & multiple by 12 months

3. Then take the sum derived, compare it to the purchase price & figure out the difference

4. This shows that the purchase price is "X" times the annualized rent?

Want to make sure I'm doing this right. Thanks

"figure out the best percentage return." that surely can't be the way to make the comparison. i mean, the best possible return in the equity market would be pretty damn good. For instance, Ruane, Cunniff, and Goldfarb, the managers of the Sequoia Fund, have earned returns, on average, of 15% a year since 1972 investing in domestic equities with no leverage. If we used that as a benchmark, clearly no one would ever buy real estate at all.

Rhino86, I'm not saying it will happen. I'm saying it DID happen. It seems extreme now - but it wasn't then.

dwell, if you're talking about my math, take $1,675 a month, multiply it by 1.33% to account for the size difference in apartment, you get $2,227.75. That's how much it should have cost me to rent the apartment I bought.

It cost me $218,000 to buy. $218,000 / $2,227.75 / 12 = 8.1x annual rent.

That's the math. That's what the property market looked like in 1998. Will it do that again? I don't know. But it did.

["figure out the best percentage return."]

Make that "reasonable" return. I use 8%, which is the long term (75 year) historical return on a 50/50 stocks/bonds portfolio. And that's exactly what I have - Vanguard total stock, Vanguard total bond.

that's not bad, tech_guy. right now i think you'd do well to move to a higher risk profile--distressed debt, perhaps, and a higher percentage in equities. but i think index funds are a very smart way to go for the casual or do-it-yourself investor. smart.

stevejhx,

Thank you so much for the calculation. I always enjoy your posts, smart, thought provoking.

got a follow up q: How do I do this calculation if I don't know the purchase price. Let's say equivalent monthly rent is $5,000 & I want to pay 10 times annual rent. Could you please set the equation up for me?

Thank you.

Monthly rent 5,000 x 12 months x 10 = $600,000.

I can't say that will or won't happen. Rents are falling, rather quickly. If they fall very quickly, perhaps the ratio will be higher. In 1998 it had taken 10 year for property prices to fall. Rents fall faster but rise slower. I don't know what will, I know what did.

"Ignoring comment by tech_guy."

I would be very suspicious of anyone who uses housemath.us, or who claims that he makes 8% on a 50%/50% bond/equity portfolio, as bonds currently yield 2%, meaning that his equities would need to yield 16%, when, in fact, they are currently yielding about -50%. Or who claims a 75-year return on portfolios that haven't existed for 75 years, which would start in 1933, which would be the nadir of the stock market, historically speaking.

Charlatan is as charlatan does.

Sorry, 14%. Same deal, though.

This is getting old. You quite clearly read all of my posts. Stop acting like a little kid who's ignoring another kid at recess.

https://personal.vanguard.com/us/planningeducation/general/PEdGPCreateTheRightMixContent.jsp

50/50 earned 8.4% from 1926 to 2007.

stevejhx,

Thank you again. Much appreciated.

Ok listen techie...you are measuring returns during America's rise. I caution you using them at what might be the turning point to it's decline!

Whoever didn't understand that equity returns need to be compared to return on down payments...and didn't appreciate that the lack of margin calls, marks, and tax advantage doesn't create serious skew in favor of real estate just doesn't get it. America wants you to own your home...TO A FAULT, AS WE HAVE SEEN PAINFULLY.

Stevie - way back when I asked you for your best guess. I value your opinion, seriously... at least as a reference point. If you were forced to bet today, and God would deliver the winnings, are you calling for 8x or 12x? Alternatively, are you calling for a 50% decline or a 65% decline? This is a pretty big swing. I see your quandary, in this sense that this is worse than the 1987 downturn. However, lopping 65% off anything is mentally difficult. If you buy at -50%, a 30% loss from there is a big deal! Maybe it should not be as difficult as it seems. Emerging markets stocks are after all down 65%+.

Rhino, if I could buy the apartment I currently rent for $4,500 a month for $3,500 a month with 20% down, 80/20 mortgage, I would take it. I'm 48, I don't plan to move ever again. Next year I believe I will be able to get my $4,500 apartment for $4,000. If that's true, then maybe my $3,500 would turn to $3,000. I don't know.

I don't know. I will just feel it's right compared to what I'm renting for. Just like 4 years ago when I DIDN'T buy, I felt it was wrong. If I EVER see a line around the block for an open house that's not a foreclosure, I won't buy. If I can EVER rent a place out of pocket cheaper than I can buy it for, I'll save my down payment and rent. I already own a vacation home - if I never own another piece of property again, I won't care. As what seems to be happening with America, I'm done with the Kool-Aid.

I do foresee a 50% drop in real-estate prices. But if rents fall 50% as well, why buy? I can't predict all variables - god knows I was wrong about the stock market outside the US. My first mistake. A big one, but hopefully my last one. I would say, don't look at the numbers, feel what it feels like. Therein lies the truth.

As for tech_guy, "Ignoring comment by tech_guy."

I give my sources, I don't quote hypothetical portfolios from 1927. I ignore anything before 1945. I agree that what happened in the 50's (I don't remember) and the 60's (I do) was an aberration. I don't think we are what we were. But we may be again. I was NOT an Obama supporter, but I am more than impressed with his willingness to forgive Joe Lieberman (whom I would lynch) and to think about things. We may be faced with another Lincoln, FDR, JFK - a once in a lifetime or two prophet who can heal what divides us.

And if that's the case, buy.

Well thought out Steve. I guess the rent multiples are a little too simple. Ideally, we'd have interest rates spike high enough to get us to 8x, which in my view would be a no brainer. Is your rental a coop, or is this just theory? If its theory, if you assume maintenance at $1.50 a foot, and interest rates are what they are...what price gets you to a payment of $3,500 (pretax I assume). I will try to guess. You have about 1100 sqft which before the correction as a coop would have sold for $1.1mm. In order to have a pre-tax payment of $3,500, assuming a 6.5% mortgage on 80% of the price and a 50% deductible $1800 maintenance... You need it to cost like $400,000. Am I off on the $1.1mm starting coop value? Is it more like $1mm at peak? It sounds like it order to be attractive to you, you really are talking about a 60% decline. $4,000 * 12 * 8 = $384,000. So I think I have my answer... you are looking for a 65% decline. You basically do need 8x annual rent to get there, not the 12x.

> Now of course this includes 0.5% real appreciation (4.5% nominal, 4% inflation).

Yes, brilliant... assume a 4.5% nominal return.

Of course things work out in that scenario. Thats why they call it a FANTASY.

Jeez, 4.5% appreciations. Uh, yeah.

An apartment purchased in 2007...not sure someone could live enough years for the return to average 4.5%. That said... so you purchase in 1986, you break even in 1996, then you have a 10-bag over the next years. I guess you'd have to believe some way some how that the 1996-2007 run can repeat itself of 10 years of doldrums.

An apartment purchased in 2007...not sure someone could live enough years for the return to average 4.5%. That said... so you purchase in 1986, you break even in 1996, then you have a 10-bag over the next years. I guess you'd have to believe some way some how that the 1996-2007 run can repeat itself of 10 years of doldrums.

An average return of 4.5% seems pushy to me, given the medium term outlook.

It might be ok for an 80-year holding period. No but seriously, 20-years minimum. When did a buy at the 1987 peak average itself into a 4.5% return... That's the best answer / shortest hold period you can hope to have to re-achieve a 4.5% annual return. But that requires Greenspan to be Fed Chairman again in 2025.

Ignoring comment by tech_guy.

I have never said to look at property prices by using a single gauge. I say look at multiple gauges, which DO NOT include calculators devised by real estate companies (housemath.us) or by their shills (New York Times real estate section). Here are the ways I look at it:

1) Imputed rent. Out-of-pocket it should not cost you more to rent than to buy on the theory that if you wouldn't buy it to rent to a third party, it makes no sense to buy it to rent it to yourself. This is an accepted economic principle, borne out by historical data on the close correlation between property prices and rents.

2) Price-to-rent ratio (p/e ratio). Historically in New York this has been 12x annual rents. Currently around 24x, as with the 99 Jane example I give, and the myriad other examples others have given. As it has risen above the mean, it has also fallen below it. This is also accepted economic theory - all costs and benefits are discounted into home prices and rents over time - which is borne out by years of data.

3) 40x monthly rent = 30% PITI. This is the market constraint imposed by banks and landlords: you need to make 40x the monthly rent to qualify for an apartment, and PITI can be no more than 30% of your gross income to qualify for a loan. If you do the math, it is an equation.

Note that this market constraint does NOT include any tax benefits or opportunity costs. If you would like to include them specifically, use:

4) Owners' equivalent rent. Sometimes erroneously called the price-to-rent ratio, and it is similar to the oft-quoted Fed paper. It specifically includes tax benefits, opportunity costs, and expectations of future appreciation/depreciation. It is a one-year calculation, the theory being that the market is dynamic and prices fluctuate constantly.

5) Price-to-income ratio. Here I have no specific data, but this is a global calculation based on all disposable income in a market as a function of property prices. Although I don't have the specific data, if we assume that Wall Street's excessive bonuses are what led to the astronomical increase in prices over the past 5 years, then its demise can only have the opposite effect. And I don't think that even LICC = tech_guy would argue that Wall Street is in a mess. (Actually, they probably would.)

6) Inventories. This is one-half of the supply/demand story, the other half being 5), above. Without arguing over semantics, equilibrium between supply and demand occurs at a certain price. If inventories rise then prices have not yet fallen enough to meet demand. We are seeing huge increases in inventories at the same time that demand has been choked off. I reckon that at current absorption levels with all the new inventory coming online, we have a 3-year supply of apartments on the market. The only way to clear that supply is to lower prices, drastically, but real estate prices are sticky on the downside. Ergo I expect inventories to continue to rise, until desperation hits.

Now then, I am not entertaining questions/comments from LICC = tech_guy or any of his other pseudonyms. There are 6 well thought out ways of looking at property prices, all supported by theory and data.

If your rental was on sale today, what would your bid be...Assuming a market maintenance...of say $1.5/ft. What is that on a rent ratio. I tried to calc, and I think I found it to be about 10x.

"Yes, brilliant... assume a 4.5% nominal return.

Of course things work out in that scenario. Thats why they call it a FANTASY.

Jeez, 4.5% appreciations. Uh, yeah."

You're really not bright enough to read 2 lines lower where I set that to 0 and reran the calculation? If the best you can do is strawman arguments like this, you're clearly coming from a very weak position.

Tech_guy, getting back to zero may take 10 years.

If my rental were on sale today I wouldn't buy it. But if I were to price it at as you say, with common charges / taxes at $1,500 a month, I couldn't pay more than $3,000 in mortgage costs, which would be a $500,000 mortgage at 6%, which would be a $625,000 purchase price and $125,000 down.

And that is approximately what it would have sold for in 2003. At least until recently the asking price for this place would have been in the $1.2 - $1.3 million department, which is obscenely expensive.

Ignoring comment by tech_guy, but I suspect he's getting to be as nasty as his outed alter-ego LICC: whenever someone disagrees with his absurd assumptions, he goes off the deep end.

Got it... which would be 11.5x your current rent. I think if anything our exchange suggests that while 8x annual rent is theoretically possible to see to the downside... there may be too many reasonable bears who will step up sooner to support the market... but not till we are down 50% from the 24x seen at peak pricing. I must say I am numbered among those bears, because the pricing you suggest is not only savings on a pre-tax basis but big savings post-tax. The flip side is post-tax requires a job than many people in finance don't have right now.

PS: I almost bought something this summer (boo, hiss), that was probably a $4500 rental. Price was just cut to under $1mm. Probably going to $600s in a hurry by mid next year.

I'm bringing back this 10 year old discussion just to give some perspective on what people consider "appropriate" ratios when the market is no longer skyrocketing.

I miss Julia...wonder if she ever purchased that studio she was looking for.

One thing to keep in mind about historical price ratios and caps rates is that they do not factor in the mortgage rates and relative asset valuation. People buy when they have money and jobs not when there is a recession.

Thanks for reposting 30. I rode out most of the recession in China and kept my coop vacant the entire time so never spent much time looking at that market closely.

So we went from 8x annual rents to 12x to 24x? Today I think it's closer to 30x. If the question is whether we will ever go back to 8-12x, I doubt it. That would mean a market correction of -60% or more? As bearish as I am, I don't see that kind of drop. But the next few years will be interesting to watch.

Reminds me of the commercial real estate market back in the 1980's when I appraised property using terminal cap rates of 11-12%. Today, the commercial market is much more liquid, professionally operated and institutionally sponsored. Also, interest rates are way lower now. The result is a bigger market of buyers with deep pockets and long-term outlooks.

The resi market today is similar to commercial in some respects but still lacks much of the discipline that would keep the market in relative balance.

Where do people think the resi market settles in terms of ratios or yields? 30x annual rents equates to less than 2% gross yields. I will take a guess and say we will stop out at 20x and 3%.

Ximon,
This is why I have been screaming for a while now that rising interest rates will affect the market a lot more than most people think and I am calling for the market to tank from 35 to 50% off peak. Most people counter with the numbers/fundamentals still being strong, but my point is that even if the "numbers" don't change a lick, people's simply changing their belief in buying on close to zero return because of assumed appreciation to a model where they don't assume much appreciation so the assets need to actually produce a return that exceeds relatively safe other options could result in valuations 50% lower than current market as interest rates continue to rise (and based on current inflation reports, it appears the Fed is preparing to raise interest rates every quarter for the immediate future). Add the fact that Trump campaigned on the claim interest rates had been kept artificially low under Obama (ok, Trump making a campaign promise might be a better indicator than something won't actually happen, but he does have a history of vulture capitalism and tanking the RE market so that he could pick stuff up on the cheap now that he has unloaded a lot of stuff that he couldn't get rid of for a long time wouldn't be an unusual position).

Fundamentals are still pretty healthy with household dscr's, default rates and consumer credit ratings very strong. But things are starting to get a little worse bit by bit. Total household debt is at an all-time high, interest rates near an all-time low, and consumer confidence a mixed bag. There is certainly a possible recipe for disaster if interest rates spike.

As for residential real estate in NYC, as I have said numerous times I believe that there are more negative trends than positive ones and that perceptions of value are more important than static numbers. If you just assume that the only buyers in NYC are long-term owner-occupants and that all investors including foreign buyers exit the market, that reality alone would be scary.

Our current market is in rarified air by most historic measures and it could be most anything that could collapse it - rising interest rates, lower rental yields, higher unemployment or just general economic trends that could erode consumer confidence.

It's almost as if the market is just waiting for a reason to to say "no mas".

The market does seem to have turned and is downward - and we haven't even had "an event" yet. Wait until someone assassinates Archduke Ferdinand and see what happens.

A few things :

1. Almost every single metric from UrbanDig's charts for Manhattan is negative for the market - supply, pending sales, days on market, price / sq ft, median discount, absorption rate., etc. It's kind of astonishing that there isn't more chatter about this.

2. Because I don't think many people are aware of #1, there's a potential panic factor once price drops become more visible or you get a major negative shock that wakes people up - it's the reverse of a bubble situation. "This time is different", until it isn't.

3. NYC's fiscal situation. Looking at it always gives me pause about buying anything in this city (or even state) - can't imagine all taxes, including RE, going anywhere but up soon.

thoth, very sage words. Not that a handful of opinions can change the market but if everyone thought more carefully about it, prices would not have gotten so out of hand in the first place.

Interesting thing about this thread is it documents the extreme High Times brought on by policies of very easy money and poor judgement. And that it documents the demise of that market, and at the time as you can see by the comments, many thought it was the end of New York real estate for many many years. And that even in 2009 we had a long way to fall.

But a funny thing happened, buyers stepped in and began purchasing real estate and what ensued was one of the greatest bull markets in New York City history, that for all intents and purposes continues.

I think we've come too far to see the kind of price destruction some people are calling for, 30 years predicts 50%+ declines. I respect 30s great knowledge and experience but I think he's got this one way wrong. Many things have changed in New York City (the world) since I moved here in 1981 and many things have changed in the greater macroeconomic picture of the world at large.

For one thing, people are making more money than anyone would have ever dreamed possible even 20 years ago. I remember in the 1990s, if you were making a $100k a year, you were well within the 1% of Americans. And I rarely met anyone making 7 figures, other than at cocktail parties and fundraisers that I accompanied my in-laws to. Today I'd say 50% of my clients make $1m+ per year. And to some degree these are pretty regular folks (other than there incomes (;

It's such a different city and it's a much different world. And whether the Chinese, Russians, South Americans continue to buy real estate in New York, the great wealth of these folks is not going away, neither is all the real estate that they own and won't be dumping because of a market cycle.

Now I'm not saying the market won't cycle down 10-15 maybe even 20% for some properties (and I'm not talking about declines from irrationally priced properties). However it will be like every other down Market, it will rebound and it will create opportunities. And I think because of all the wealth that continues to be generated, buyers will step back up to the plate just as they did in 2009 and push the market to new places. And what's interesting is in 2008-2009, job security and many jobs on Wall Street had been obliterated!

I think this conversation calls for more of a round table approach! obviously none of us actually knows what will happen and when, I know if I did I would be typing this from my organic coffee Farm on Kauai! But it certainly makes for an interesting conversation.

"Markets go up, markets go down"

J.P. Morgan

Keith Burkhardt
The Burkhardt Group

There has been a lot of rates going up scare for the last 5 years and that has been a widow maker trade. 10y rate is still below 3 percent despite Fed raising rates and every one expecting Fed to raise rates at least another 50bps. Could 10y go up 50bps from here to 3.25 but would not happen without continued 3 percentish growth? People in NY make a killing when economy is growing fast. Only reason the prices are stagnant is the new development overhang which will clear in time as developers price ultra luxury at more than 4K per sq ft more appropriately - say another 15 percent down on top of 15 percent haircuts they have take already. Mere luxury new development at $2500 per sq ft may just need 10 percent haircut - barring the likes of 1 Manhattan Square. Townhouse are already down 15- 25 percent from the silly peak which is much in line with ultra luxury.

I'm coming into this as a recent seller of an apartment I bought over 10 years ago. Paid $700K, sold for $1.45K, comparable apartments in the building are renting for $4500/month. Returning to a 12x ratio for annual rents would mean that unit would sell for less than what I originally paid, and I just don't think it's going to happen. I do think the market is slowing, but find it hard to believe prices would fall to even $1M for that same unit in the next couple of years - that level of correction would cause widespread panic. Falling by $100-200K, maybe even $250K, is however very within the realm of possibility in my book and would be a significant correction of 15%+ that will certainly be a real downer.

I do think residential buyers won't be that impacted by a correction like this now that a lot of the crazy interest only mortgage, miniscule downpayment, home equity funding a whole lifestyle etc. stuff is gone. If most people are anything like me - looking to trade their primary residence for a new one for a specific reason (trading up with a new kid on the way, moving for a new job, downsizing due to an empty nest or divorce, etc.), anything new they buy will also cost less so it minimizes the hit from the decline. But of course it's a different story for investors, agents and lots of other folks.

Keith, I tend to agree with your analysis. However, as you implied, a "correction" of 10-20% is just a guess. When does a correction become a crash?

I hope the same reasoning that has supported housing prices in NYC over the last 20 years will be true today but I fear we are now in rarefied air and buyers may react strongly to any more negative news. That is what happened in the early 1980's when there was a major correction/crash based on little more than declining buyer sentiment. Of course, interest rates then were 17-18% but isn't better to buy in a high interest rate environment so that when rates decline, your property will increase in value?

The problem with low mortgage rates is that they helped cause significant housing appreciation both in the pre-2008 market and perhaps today. Never mind 17-18%, if mortgage interest rates only increase to 8-9%, we could indeed see many people in dire financial straits which could cause a market crash.

Affordability is just part of the issue. i agree that today there is little default risk and there are many buyers using low leverage and have excess wealth to stave off default regardless. But whether rich or poor, most people care about managing their investments well and prefer not to overpay or sell at a loss.

Let's face facts. It's not just luxury and super-luxury that are hurting, it's mid-tier as well. Talk to any Manhattan broker and they will tell you the market is soft.

Keith,
If the Federal Government throws another $800 billion at the housing market again once it to crash and follows that up with another couple of hundred billion to continue HARP and other programs, then I agree. But based on recent tax cuts they don't have that money to spend so I don't know how they are going to put the brakes on it like they did then.

30, $800bn was TARP to bail out banks, who were over-leveraged, which has been repaid. Given the much higher levels of capital at the banks, such a bailout is not needed.

Fed purchasing long dated treasuries was a real help to 10y rates and estimates are around 50 -100 bps lowering including the impact of other central banks buying. Fed is already unwinding the portfolio and can always sell short dated securities in its portfolio to buy longer dated securities. Fed's balance sheet only need to shrink to $2.5 trillion as the banks have to hold a lot more reserve with Fed which has to be deployed in bills and notes. Every one was betting that the rates will spike when fed starts selling but they are still below 3% for 10y. What gives?

Could it be the case that market does not see much inflation in the long run and current low 10y rates reflect that? After all, we have had many rate hikes too and every one believes that the Fed will go at least 50 bps more.

Much higher level of capitalization at the banks doesn't mean as much when the majority of mortgage originations are from non-bank entities these days.

So you saying that there is a lot of risky lending? In Manhattan, I do not see any in resi. Nationally, the standards are far tighter than they were before 2008. I thought your bearish view is based on mainly rates going up?

Certainly in Brooklyn there's tons of lending that's so risky that it's been labeled as predatory, and while you could say those are commercial loans rather than residential, a lot of them are in the 4 to 8 family segment with the eye towards getting them vacant and turning them into owner occupied multi-family.

In Manhattan I would call any investor condo loan risky, and there has been plenty of that over the past decade. The reason being that for an investor the second a property is under water they are prone to walk away (as opposed to owner occupant who have more of an emotional attachment).

Don't forget all the shadow bank lending from Chinese, Middle East, Russia etc. We don't see it in the records but it exists in big numbers IMO. For commercial, Chinese investors are putting a lot of properties on the market and will probably take more than a few losses.

30,

BK townhouse / 4-8 family segment has certainly gone up a lot. I am not sure that underwriting standards are that loose. Most multifamily have to meet DSCR requirements. Can it correct 20% for multi-family? Sure.

Investor condo down payment is fairly large. In most cases, over 25% and most, if not all, have a personal guarantee even if they are buying under LLC. I do not think there is any risk from this segment at all. In fact, these buyers tend be rather wealthy and can easily afford to take the loss.

In high-end >$3k per sq ft and >$5mm absolute price in non-fringe areas, supply is a big issue and that is what most of the media stories are about.

So that mostly leaves your rates going up argument for being bearish. See my comments above about financial system being much stronger now, which means Govt bailout is not needed, and FED still having a lot of bullets to lower the rates (they can just stop raising). Imagine what happens in a disaster scenario, rates go lower.

Last point: Wage driven inflation is very good for real estate. Commodity driven and import prices driven not so good, and America has a lot of oil, natgas.

25% down goes away faster than you might think. With transaction costs bordering on 10% you only need prices to dip 15% to be under water. We're practically there already.
And take an investor who bought 5 years ago and wasn't too knowledgeable about tax abatements: they could find themselves facing much higher Real Estate tax payments (with both the abatement expiring and higher taxes in general), paying the brokers fee to rent the unit (which they didn't have to when they first bought and start the renting the unit out

An interest rate reset, giving 1 months rent concessions, the first time they had to do more to the unit than just paint, etc. It's not had to see how this all could turn it from slightly cas positive to cash negative.
Also, NY being a single action state tends to negate a lot of the effects of those personal guarantees. Just ask Gary Burnett.

Barnett.

We are far from those price drop except for >$10mm condos bought in the last 3 years. Tax abatement condos were purchased when the prices were much lower than today. Hardly a driver of market down.

The article below does not say NY is a single action state. Also, believe single action may only apply to primary homes and may not apply to refis.

https://www.nolo.com/legal-encyclopedia/deficiency-judgments-after-foreclosure-new-york.html

https://www.forbes.com/sites/jayadkisson/2012/06/24/foreclosure-deficiency-judgments-and-the-perils-of-anti-deficient-statutes/#5baf085319cc

https://www.ottenjohnson.com/news-events-resources/otten-johnson-alerts/2013%20Otten%20Johnson%20Alerts/New-York-Court-Enforces-Springing-Recourse-Guaranty-Despite-One-Action-Rule

The case you posted is for a non-recourse commercial mortgage with a tag on guarantee. It is further complicated by bankruptcy filing for an llc. Not sure what the rules are for residential mortgages. Believe the lender has recourse to the borrower.

The case you posted is for a non-recourse commercial mortgage with a tag on guarantee. It is further complicated by bankruptcy filing for an llc. Not sure what the rules are for residential mortgages. Believe the lender has recourse to the borrower.

Here is something most of these articles leave out: in most cases a deficiency judgement isn't based on the difference between the sales price and the debt, but the difference between "market" price and debt. Most lenders get a "Broker's Opinion of Value" before sale. The vast majority of Brokers don't know how to complete these to protect their clients, so what the do is the same thing they do when the are trying to buy listings - come up with the highest number possible. But in doing so they make it extremely difficult for banks to show difficiency because when during discovery these documents get turned over they get used to prove the lender was aware value was higher than they sold for.

The point of posting the case was to show NY is a single action state which is clearly stated.

NY is a recourse but single action state. You just have to do judicial foreclosure to have a claim for deficiency.

https://www.arklawgroup.com/blog/how-do-i-know-whether-my-mortgage-loan-is-a-recourse-or-non-recourse-loan

You must do a judicial foreclosure to have a CLAIM for deficiency. Only then, after the foreclosure is completed and the property is sold and closed, could you start an entirely new lawsuit to attempt to recover the deficiency (i.e. it doesn't trigger an automatic deficiency judgement - or any other type of judgement). I am unaware of one single case in NY where a lender was able to procure such a deficiency judgement on a coop or condo unit where there was not fraud in the inducement. I am also unaware - even when things were at their worst - of lenders even attempting to recover deficiency judgements under those same circumstances. This is why there was so much talk of "strategic default".

Thank you. Good to know the reality.

30, 300, I am back from the beach and just introduced the two of you by email.

ali

Thank you.