Past Recession trends

here we go

I think the same economist has said that the worst was over.
The yearly earning report in new year will drag things further down.
Leading to Presidential inauguration, there will be some rally but falter as things are not changing quickly.
There are good 20-30% reduction right now so its close to 40% by early next year
7 month recovery? I think trickle down takes a lot longer - at least 12 months to 18 months.
By 2010, the prices will be same as today (20-30% discount) with 2009 winter being the most harsh 45% dip.

Most recession does last 13-18 months. Considering Japan and Europe recently declared recession it would be another 13-18 months for them. For us, since we originated all this shenanigan, we could recover about same rate considering Japan has stronger economy.

Your_Landlord....are you kidding? You are clearly not in touch with reality.

None of us know exactly what is going to happen, but the economists forecasting we will be back in growth mode by 2H2009 are the same ones who did not see this coming (there was an article in the times about this last week). I do not think we are headed for the Great Depression (simply because there are more controls now), but I can't see what is going to prevent this from being a U shaped recession in the BEST case scenario: what is going to pull us out this time .. technology boom? real estate? I see an L-shaped recession as more likely than a V-shaped .... the American consumer is tapped out, we have a massive budget defecit.

What I think MAY prevent this from being L-shaped and not V-shaped is the growth in emerging markets. They will get out of this quicker than we will (they too are in pain right now) and there is the hope that they buy the few things we actually still make, but this rests upon innovation in American industry and is not guaranteed.

If I was forced to make a guess right now, I would say that the bottom is somewhere around June to September of next year. The jobs situation will likely pick-up a touch more positive momentum in the last few months of '09 and 2010 would be a good step forward. I think the banks have a rough '09 and bonuses for '09 will be as bad as for '08 and maybe worse....at least most of the firms made good money for the first 6-8 months of '08.

Of course, this is just a guess and many things could happen to make it worse, but I don't think much can happen to make it significantly better than this timeframe.

Simmer on this:

http://www.leap2020.eu/photo/grande-1111239-1418809.jpg?ibox

Your_Landlord, a bit of understanding of consumer psychology will allow you to see the relationship between the job/stock market and the real estate market. Expect a long period of flatlining before RE starts to appreciate from the not-yet arrived bottom. It's hard to dip one's feet in RE, except maybe through REITs.

By actual definition, a 12 month recession is a depression. Most recessions do not turn into depressions. Wrong again, petrfitz.

It takes two quarters of negative growth to be considered a recession, so I doubt 2x the minimum is a depression ... Most articles I have seen have said there is not an "official" description of a depression but most economists consider a 10% GDP to equal a recession

A quick Google search....

A good rule of thumb for determining the difference between a recession and a depression is to look at the changes in GNP. A depression is any economic downturn where real GDP declines by more than 10 percent. A recession is an economic downturn that is less severe.
By this yardstick, the last depression in the United States was from May 1937 to June 1938, where real GDP declined by 18.2 percent. If we use this method then the Great Depression of the 1930s can be seen as two separate events: an incredibly severe depression lasting from August 1929 to March 1933 where real GDP declined by almost 33 percent, a period of recovery, then another less severe depression of 1937-38. The United States hasn’t had anything even close to a depression in the post-war period. The worst recession in the last 60 years was from November 1973 to March 1975, where real GDP fell by 4.9 percent.

Hmmm, you guys are right, I'm wrong. I heard somewhere that depression was 4 consecutive quarters of negative GDP growth, but I can't find a link to back that up.

The other part of my statement still holds true though. petrfitz is wrong. 10% YOY? Hilarious.

I like that Your_Landlord...i kind of viualize a guy on a pedastel pointing his finger at frightened renters lookin up. Anyhow, hmm 10% yoy? well who knows what can happen when all these wait and see buyers try to exit the building all at once. I can guarantee one thing though, the first sign of good news picked up by the media and all these wannabee owners waiting 2+ years to buy will be stampeding to own.

While I hope the media does spin things positively (I am an owner), I don't think that's likely. Media tends to go in cycles - you're loved for a while, then you're hated for a while. Media trumps up the underdog, then is happy to bash him back down again.

For the past year or two, all the reports were about how Manhattan is different, Manhattan prices stayed strong while the rest of the country's real estate tanked. That phase is over and done. Next will be negative media reports spinning about how even the almighty Manhattan is seeing real estate downfalls.

Plaza and 15CPW numbers won't be in the next few reports. Smart people didn't include them on the way up, but the media isn't known to be smart. Smart people also won't include them on the way down, but the media will when spinning news stories.

real estate in nyc is going to go down by much more than anyone is considering... like i'm starting to think that 50% might be very naive. Clinging to historical data is wishful thinking.

Adam - This is a typical prediction on SE, so what do you base that number on?

AdamM..manhattan real estate is more likely to go up 50% than down 50%. Supply is just not there and is going down with this credit crunch stifling new development.

remember i said 10% increase YOY over year by Oct 2010. That means a 10% increase in prices over the price of Oct 2009.

My basis is that we have been wacked, and by other recession standards we should be starting to come out of it around Oct/Nov 2009. So if there has been a 20% or 30% decrease as of Oct 2009 it seems fairly reasonable for a 10% YOY by 2010. It would essentially put us back to 2005 pricing.

Tech Guy - please replace my Blackberry battery!!!

Wait and see buyers? How many are these folks really that are qualified? Isn't this the bigger problem? People are forfeiting their deposits because most of them now don't qualify. So good luck with the buyers you've been hoping for.

I don't believe it - petrfitz is calling for a 20-30% decline in Manhattan real estate? I don't know if this is a terrible sign for real estate, or an actual light at the end of the tunnel (capitulation by the stupidest of the super-bulls).

As cautious as I am, I agree with steveF. I don't think 50% up or down is likely at all in the short term. 10 years from now though, I think 50% up is more likely than 50% down. To keep this in perspective, 50% up over 10 years is barely keeping with inflation, even trailing it slightly.

Actually tech_guy you're not entirely incorrect. There is no universally accepted definition of depression.

A recession is generally thought of as two consecutive quarters of negative growth, but even this is not universally acknowledged to be a true definition. The US government defines a recession as a "significant" and widespread decline. Unfortunately significant is a fairly ambiguous term.

The US government has no formal definition of a depression and will never declare that we are in one, no matter how bad things get.

1. is there a higher markets/US economy beta place on earth?
2. finance business is changing secularly and has to be
directly responsible for an appreciable % of nyc RE.
3. government finances crumbling. taxes are going to rise
significantly and quickly.
4. layer the whole credit availability situation and propensity
for banks to lend in the US (let alone to a wall st emplyee)
5. momentum is a funny thing. the plot of the uptrade in NY RE
was parabolic for example.

bardamu - are you suggesting that the US government is being purposely ambiguous? They would never do that, would they?

I really don't understand the argument that a 50% decline from peak prices is not believable. I sold my apartment in 2007; a close comp is now asking 28% less than I got, and it hasn't sold. Is it really impossible to expect it will end up 50% down? My dad, who has owned in NYC since the 1970s ( and still owns) expects a 60-75% decline from peak prices. He may be right, he may be wrong, but you really think that real estate is more likely to be 50% higher than 2007 prices than 50% lower within the next few years? Crazy.

10 years, who knows? But as you point out, a 50% increase over 10 years is a very poor return.

happyrenter - I think there will be some properties that sell for more than 50% down, but the entire market...no I don't. 50% is so severe that there would be people jumping in to buy properties in good neighborhoods before it got down that far on the whole. There will definitely be some that go way down. I just don't think it will be that much.

"50% is so severe that there would be people jumping in to buy properties in good neighborhoods before it got down that far on the whole."

Why, if they thought they would continue to fall?

How, if their wealth has been wiped away?

Who, since that would require a huge influx of people (unlikely given the economy) or renters to give up renting, and why would they do that if renting is still 50% cheaper?

Your argument is sort of like we have to continue to pay investment bankers a fortune because if we don't they'll go somewhere else.

Where, but Charlotte?

you never know...I can't believe some of the garbage apts I saw last weekend (2 beds, UWS) for 1.5 million...I would have to think the real value of these places is $1,000,000, and that number is due for a 20-30% cut, so 50% might be the correct number for the way things are priced now (which is WAY above true value)

Waverly, if that were true then why would ultra-quality apartments be down between 35% and 40% and still not selling? How come no one has jumped in to buy:
http://www.streeteasy.com/nyc/sale/315922-coop-300-west-end-avenue-upper-west-side-new-york
Down 37%
or
http://www.streeteasy.com/nyc/sale/231290-condo-45-christopher-street-west-village-new-york
Down 35%
or
http://www.streeteasy.com/nyc/sale/342694-condo-39-east-20th-street-flatiron-new-york
Down 33%

These are just the sort of prime, easy-to-sell, perfectly located apartments that, according to your theory, people would be jumping in to buy. It isn't happening.

Because the same people that can buy have lost money in the stock market...and are still smarting.

DING DING DING. Right answer. People don't have the money or the inclination to "step in" and buy great apartments in prime areas even at these steeply discounted prices. Watch for a lot of deep cuts to come.

Actually it is a very tough question to be asking at this moment to be predicting the next 12 months but, using some of the skills of economic reasoning it can be tried.

We are in time where the Fed can’t raise interest rates under present conditions with economic growth and asset prices falling everywhere, but it can talk with resolve about wringing the economy of the undesirably high inflation rates that have done significant harm to the economy. Energy prices I believe have been the key ingredient to a majority of inflation fears. The world is on a path of cooling down in terms of growth, demand for energy at these levels is proving to be unsustainable. This is also one of the few times in history where the banks and the capital markets at the same time are in a credit/liquidly crisis creating a situation where specifically for real estate the low interest rate environment is not creating any kind of growth because there is not willing to underwrite because of higher inherit risk at previous levels, increasing financing costs which creates generally a negative/unsure outlook for the mid-term future. I think because of where the financing markets stand and the outlook interest rates will remain the same for the next 12 months.
Nonetheless I think we are going to see a negative impact on residential real estate markets in the coming 12 months. The combination of lack of consumer of confidence, bankruptcy filings, higher unemployment, and low economic growth outlook, lack of foreign buyers/i-bankers, I see a lot of owners who bought properties in 2006-2007 at height of the market suffering and losing i This will surely with combination of needing more cash to close will create new values.

In the office market demand for space will go down creating a downward pressure on rents. This in turn will lower the price of office buildings, Cap rates are going to be very tough to judge because decreasing rents typically means decreasing cap rates but I think during this downturn those rules may not apply because of the atrocity of over leverage in the last cycle. Construction will completely halt for any kind of office development, which over time will put us back in path for rent increases and stability in the office market.

I hear both side of this argument.

The argument for 50%+ declines is a combination of the ones happyrenter and stevejhx have made: some listings are already slashed 35% and have not sold, incomes skyrocketed over the last 10 years and have plummetted all of the sudden, credit market conditions, price to rent ratios, prices have doubled since 2003 and tripled to quadrupled since 1998. All of these are extremely compelling arguments. To play devil's advocate, the holes you could poke would be as follows:

- 1) Price cuts: were they fairly priced to begin with relative to comps? I don't know: it would be useful to compare them to "true" (sold) comps.

- 2) Price cuts: the financing markets are shut so nobody can buy, but it doesn't mean they wouldn't if they could.

- 3) The argument that NY real estate was undervalued until recentely and/or that demand to live in NYC is permanantely higher. this argument points to other big cities and says NY is cheaper (though having spent time in London not sure I agree). It basically argues that NY real estate was undervalued in the late 1990s on an absolute basis, and that the fundamentals of the city (safety, schools, etc.) have also improved so it's the combination of "improved fundamentals" and "undervalued in the 1990s" that resulted in this run up.

- 4) Wall Street will "find its way back." The argument is that it always does.

- 5) Price/rents. The argument is that the equivalent cost of of renting vs. buying is not 2x but somewhere in between. Thus, prices may fall, but not 50%, because this would be buying cheaper than renting. Bulls argue that buying in NYC should not be cheaper than renting because it is super-desirable and people will pay for the inflation hedge.

In my opinion - 2) is the most compelling argument: the buyers want to be there but can't be. The credit markets WILL recover again, although they won't go back to 2006 levels either where you could put 0% down. I think 3) has some validity (NY real estate was undervalued in the 1990s and the city has changed and demand has increased) but not anywhere NEAR enough to justify this kind of appreciation. The "uber-bears" of course argue that demand is gone now because people are losing jobs, but remember: many many more people commute into Manhattan than actually work there.

As for price-rent ratios - I think it's reasonable to assume that renting and owning cost equivalent amounts. This means prices should go down, but not necessarily by 50% across the board. It's certainly possible that it over-corrects the other way (as markets so often do), but I think it is at very least defensible to say they should be equivalent.

Wall Street and it's future are the big question mark. If you really believe that Wall Street is dead, it's hard not to say your way to way more than 50% price declines. You simply need these incomes to pay those prices - foreign/family money/celebrities aren't enough. My view is somewhat more moderate- I don't think there is a lot left in Wall Street's "bag of tricks" left, and regulation is on its way.
On the other hand, people forget what Wall Street used to do: M&A, capital raising, etc. These things used to be the "bread and butter" rather than derivatives and prop trading. Stevehjx has said "M&A is dead" - but it's only on hiatus. I would argue that globalization and increasingly loud shareholders (some of this is hedge-fund driven and will fade, but shareholders have learned to use their power), combined with the quicker flow of information/speed of life, will make M&A markets quite healthy over the next decade. The credit markets do need to recover first. But this will happen, although it's not going to be 2006 again either. Further, I see private equity firms doing quite well by buying some companies at such low prices (prices that are only going to get lower and make the opportunities even better). So while I don't think Wall Street goes back to 2007 levels soon or even really ever, and regulations will prevent people from making the obscene amounts of money they used to, I think Wall Street is still going to be a place to make more money than most jobs eventually. I would look at what a managing director in M&A got paid in 1997 as a reasonable basis for the future for what top performers will do. That guy wasn't making $20 million a year though - the best may have been making $3-$5 million.

All in all, I can see my way to a 50% decline, mostly on the basis of where price/rent ratios have gone and the fact that Wall Street - while it will recover - will likely be permanantely different. But I can't say with conviction that 50% WILL happen. It might.

"Waverly, if that were true then why would ultra-quality apartments be down between 35% and 40% and still not selling? How come no one has jumped in to buy: "

2 responses: Ultra-quality shot up *way* more than bread-and-butter during the runup, so you're right - its entirely possible it will go down more. Plus, I only follow what I can afford (1 and 2 bedrooms), so any comments I made above about 50% down being incredibly unlikely only apply to that bracket.

"10 years, who knows? But as you point out, a 50% increase over 10 years is a very poor return."

Its all I expected. Historical returns on real estate are 0.5% above inflation nationwide. If I get such equally poor returns, the rent vs. buy math on my purchase makes it a very smart buy. There are incredible tax benefits that make up for the historically piss-poor performance.

kspeak: its posts like yours that keep me on these boards. Thanks for the very well written analysis!

To go more into the rent vs. buy analysis: a lot of coops on the market today *are* reasonably priced in a rent == buying cost basis, if you include tax benefits of those in the upper tax brackets. Some are ridiculously over priced, but that's always the case (just in a bull market, eventually the market will catch up to their fantasy - in a bear market, not so much).

I know some finance, but math / formulas are my bread and butter, and I'm 100% positive that today's prices are sustainable by rent vs. buy analysis.

The big question is: will rents decrease? If so, the calculations change drastically, and clearly purchase prices will go down with them. Will rents decrease by 50%? I think that's ridiculous, which is why I say 50% price decreases are also ridiculous.

Then again, I don't have a crystal ball.

happyrenter - because some of those nice properties in good neighborhoods were still ridiculously overpriced to begin with. Look, I am not saying that I think there will be no decline and I am not so far off from what you say. I think that it will be in the 30-35% range, with some overcorrection when the pendulum swings to 35-40% down. That said, you can't just point to every apartment and say that it should be selling for 50% less than it's on the market for. There are going be some apartments that go down less and some that go down MUCH more and there will always be examples of the extreme reductions because some people were/are asking insane prices.

kspeak - very interesting post. Thanks for putting that together.

One of the main factors in why I believe what I do is that I am of the mind that the banks will be different, but not dead. In my opinion, there will be less people making $20 million a year, but there will be many people making $1-8 or 10 million. The uber-expensive properties will be hit hard, but I think that most of the market will come back and that the banks will still provide jobs where a large number of people will make a lot of money....more than they could make anywhere else, but certainly not at the level of 2006/2007.

This is not necessarily a bad thing. I think there will be more regulation. Jobs will be created by the regulation and people will be able to (hopefully) have more confidence in a slow/steady growth phase instead of the rapid blow-up and out model that has been the norm for the past 10 years.

I could easily be wrong, but I am interested to see how it plays out. NYC really is a great city.

"i'm 100% positive that today's prices are sustainable by rent vs. buy analysis."
please, tech_guy, share your analysis so we know what you are talking about. my experience is exactly the opposite: I am 100% positive that today's prices are NOT sustainable by rent vs. buy analysis. this has been borne out by experience: i sold an apartment in 2007 and now rent a very similar, slightly larger apartment with a better view one block away from my old place and pay half the monthly cost of the guy who bought my old place. rents don't have to decline for today's asking prices to be way, way off.

Techguy: I don't quite get there on rent/buy analysis - although there are exceptions. Buying seems to be more expensive than renting in general - anywhere from 0%-60% (I know that is a big range, but it's one of I've seen). But there are exceptions. Hard to say what the average premium to rental but I would argue that on average buying seems to cost more than renting. Of course specific to the individual (tax bracked) and listing. But I don't think the average premium to buy is 50% ... seems more like 30%. But if you believe rents fall as well, it's easy to get to the 50% decline across Manhattan. Hard to say ... I don't think either argument is stupid. I do agree rents are unlikely to fall 50% though ...

happyrenter: Without specific numbers, of course I can't do a rent vs. buy analysis for your situation. However, if we're taking the 30,000 foot view, your situation points to a slight correction downward.

The typical Manhattan buyer is in at least the 28% federal tax bracket, and pays roughly 6% to NYS, and another 6% to NYC. That's a 40% tax benefit. Plus, some of their monthly payments pay down principal, which is money in their own pockets later. That already accounts for roughly the 2x rent vs. buy nominal cost difference.

All that's left is the opportunity cost on the down payment. That is a significant amount of money to consider, and an important factor that many people leave out, but still nowhere near 50%.

"that's a 40% tax benefit" on WHAT? dude, you need to study up on your tax law, that just isn't how it works. i'm in the highest tax bracket there is and i certainly never got anywhere CLOSE to a full deduction on my entire monthly payment.

kspeak: Keep in mind that a 0% to 60% range doesn't matter. I can list my 1 bedroom as FSBO for 5M and increase the top end of that range to 500% - unrealistic asking prices don't factor into market movement discussions. They are unrealistic, don't close, and don't change the market.

Show me coop comps (condos are a different story, and I agree most of those are overpriced and due for a correction, on a rent vs. buy analysis). I'll show you the analysis.

The bottom is Q1 2012. See you on the other side.

"on WHAT? dude, you need to study up on your tax law, that just isn't how it works. i'm in the highest tax bracket there is and i certainly never got anywhere CLOSE to a full deduction on my entire monthly payment."

Remember my caveat: I only know 1 and 2 bedroom properties in my price range. If you're buying 4M homes, the yes, the 1M maximum on mortgage tax deduction will greatly change things. Is that what you're referring to?

Or do you mean for your comment to apply to $1M properties also?

I walked past a real-estate agency today offering "no fee" apartments. Meaning that landlords are paying the fees as a way to try to prop up prices.

nybits shows a lot of market-rate rentals with "effective monthly rent" meaning they're offering free rent in lieu of reducing rent.

All signs indicating the rental market is dead and dying.

Which is bad news for the purchase market and the traditional 12x annual rent p/e ratio. We may see it go down to 8x again, as it was in 1998.

Buying should actually be cheaper than renting since there's a greater risk.

Forget the "tax benefit" - it's already baked into the price, isn't guaranteed (if you lose your job, for instance, or if tax laws change), doesn't count the significantly greater downside risk of losing an enormous amount of principal (how many years worth of "tax benefits" would it take you to recover all of your principal if you put down 20% and prices slide 30%?), you can't use it to qualify for a mortgage, it's only counted at your effective tax rate anyway not your marginal tax rate, you lose the benefit for a mortgage over $1 million or for property / state / city tax under AMT (up to a limit), and even if it were calculated at your marginal tax rate no one in the world has a 40% marginal tax rate as tech_guy has claimed elsewhere because the taxes offset each other. 33% would be amazingly high, even for NYC.

So, facts are facts, history is history. 50% decline in property prices.

OK, here's one for you:
Rental listing from 300 West End Avenue:
07/31/2007 $24,500 ↓ 4 beds 4.5 baths 3,800 ft²
This apartment actually rented for $21,000

And a recent sale price on an equivalent unit (actually worse, since it was in estate condition):
10/23/2006 #5B $5,562,500

Also, the rental is for the 12th floor, the sale the 5th. But anyway, use those numbers.

Also, the tax benefit should hugely be ignored after you make over 200k+ due to AMT. The tax benefit is largely of no impact from 850k+ range assuming the debt to gross income levels for most lenders to oblige is 35%. Under 5mm range where AMT phases out back to the high income bracket is a majority of 1,2,3 bd places are in NYC. Rents are already 1/2 of buying range and with AMT on renters side, a well needed discount has yet to take place to match rents from the buy side.

"$5,562,500"

I said twice already that I don't know the super-luxury market. I'm not disputing your claim that the super-lux market will go down 50% - I have no clue. I'm talking 1 and 2 bedrooms. If you're not studying the lower end of the market, then our comments aren't even mutually exclusive. We may both be right!

(I hope we are - in 10 years I'll be in the super-lux market, and would love for prices to be down significantly)

AMT does not affect the mortgage interest deduction.

so tech_guy, if you are only studying units below $1 million, show me one of the comps that you have used to come to "100% certainty" that current rents justify current sale prices. please, show me.

Steve - and what happens to your rent/buy if the economy stabilizes and rents increase significantly year after year? Also, wouldn;t some of the rent stabilization laws in NYC throw the numbers off because thos eapartments are being rented below market value?

The only comp I still have saved is where I live right now, and no way in hell am I going to share that publicly :) If you do the work to find me a comp, I'll do the work to explain all the details of the math to you.

Alternatively we can come up with generic numbers. $1000/sqft purchase price, $50/sqft annual rent, $1.25/sqft monthly maintenance, coop, 50% of maintenance is tax deductable? Sound reasonable for 2 quarters ago to you?

waverly,

rents would have to rise REALLY fast REALLY quickly to justify current apartment prices. if you think that is going to happen in this economy, by all means go out and buy as much as you can.

read REALLY far REALLY quickly

steve i stand corrected! thanks! I think I confused the home equity debt with mortgage interest. I haven't owned in years... lol. The 1mm cap however is a limiting factor.

happyrenter - I am not comparing that to the current prices. That's one of the problems here at SE. If you disagree with 50% down or disagree with the 12X rent formula people immediately twist what you are saying into you think prices are accurate at the current level.

My point is that rents can and will go up. You look at a comparable apartment and do your rent/buy at the 12X rent formula but it is never considered that the rent could be raised significantly once the market stablizes. Once an apartment loses its rent stabilized/rent controlled status the landlords are going to charge as much as they can. Rents have gone up quite a bit over the past few years and they will again, once the market is stabilized.

I don't subscribe to the 12X rent formula for NYC. I also think that 24X rent is ridiculous. Maybe the "magic number" is 16X rent. I'm just not as inflexible on this as some people. It doesn't have to be an all-or-nothing conversation.

This is why I think it's really difficult to argue what the "correct" price to rent ratio is. You can argue Steve's side (works well in a downturn) or the inflation protection side (works well in an upturn). At the end of the day I am in the middle - it just needs to be equal, when all costs (tax deduction, maintence, opportunity cost on downpayment conservatively stated - I would not invest money for a downpayment in risky assets). This is not just a financial decision: to me, there is peace of mind in buying if you find a great place. You never have to worry about rent increases, and in fact in an inflationary environment (which generally is the environment over modern history) you will find the real cost of your mortgage payments declining over time.

But every buyer is different- there are many not like me. Who really knows where most buyers shake out.
I'd also note that this becomes less true for smaller places, because how many of these buyers are really long-term holders?

My view is generally that rents will decline a bit - not plummet, but soften - and that it does cost more to buy than to rent as a general rule in today's market. That is why I am not buying right now. If somebody finds an exception, god bless'em.

Every buyer is different ...

"I don't subscribe to the 12X rent formula for NYC. I also think that 24X rent is ridiculous. Maybe the "magic number" is 16X rent. I'm just not as inflexible on this as some people. It doesn't have to be an all-or-nothing conversation."

The number isn't fixed - its hugely dependent on mortgage interest rates. Back when mortgage rates were 15% or even 20%, 12x itself was probably too expensive. At today's rather low mortgage rates, a higher ratio is justified.

Corollary: If mortgage rates go up, purchase prices will be pushed down in response.

tech_guy - Yes and thanks for explaining that better than I did. There are a lot of factors that go into the numbers (mortgage rate, tax bracket, apartment cost, % deductibily of maintenance, is it a conformaing, jumbo or super-jumbo loan).

I just don't think this is a black or white / I am completely right and you are completely wrong situation.

"it is never considered that the rent could be raised significantly once the market stablizes."

Rent never goes up more than incomes. If I move out and this apartment lies fallow, it makes no sense for them to raise prices too high.

"Once an apartment loses its rent stabilized/rent controlled status the landlords are going to charge as much as they can."

They can. My rent went up far less than rent stabilization over the past 3 years, however.

"Rents have gone up quite a bit over the past few years and they will again, once the market is stabilized."

Actually, another incorrection. Rents have remained fairly stable over the past 10 years.

"I don't subscribe to the 12X rent formula for NYC."

It's not a magazine, it's not a subscription. It is a proven ratio.

"I also think that 24X rent is ridiculous. Maybe the "magic number" is 16X rent."

Not even close. The ratio was 8x in 1998.

"You never have to worry about rent increases"

But you do have to worry about losing your principal, and paying an enormous amount more per month than a rental would cost, for the exact same product: someplace to live.

Steve - I know dozens of people who had solid rent increases from 2002 to 2008.

Some landlords no longer require 40x in income what the rent is...a friend, without a job but with good credit applied for an apartment recently and was given the ok in an hour. No additional security.

"I know dozens of people who had solid rent increases from 2002 to 2008."

Really? Solid? Good for you. Because my rent - market rent - has gone up less than rent-stabilized.

Their rent couldn't go up faster than their incomes, though.

"a friend, without a job but with good credit applied for an apartment recently and was given the ok in an hour."

"without a job"?

That IS desperate.

Think housing prices can't be far behind?

Waverly - I agree. I would say rents have easily gone up 25%-30% since 2000 ... not saying this is faster than inflation but it's silly to argue that rents are not going to go up with inflation. If you are rent stablized, different story.

kspeak - thanks again for your analysis. It was well thought-out and quite thought-provoking.

"The number isn't fixed - its hugely dependent on mortgage interest rates. Back when mortgage rates were 15% or even 20%, 12x itself was probably too expensive. At today's rather low mortgage rates, a higher ratio is justified.

Corollary: If mortgage rates go up, purchase prices will be pushed down in response."

This makes a lot of sense.

Discussions on hisorical RE price/rent ratios are worthless without long term interest levels in corresponding periods. The same thing applies for average P/E ratio for stocks.

"I would say rents have easily gone up 25%-30% since 2000"

Show your evidence.

"It was well thought-out and quite thought-provoking."

Really? What evidence? "I would say..."?

Well damn! I'm convinced.

"Back when mortgage rates were 15% or even 20%, 12x itself was probably too expensive."

In 1998 mortgage rates were slightly higher than they are today - just under 8% - and the ratio was 8x. Today it's 24x.

Wishful thinking, again.

"Discussions on hisorical RE price/rent ratios are worthless without long term interest levels in corresponding periods."

Sure. Add in credit (non)availability, taxes, common charges, incomes, and see what you come up with.

Waiting....

kspeak: rent stabilized rents DO go up with inflation. market rents have not gone up that much in the past ten years--if 25 or 30%, sure, that's not that much over ten years! rent stabilized apartments have certainly gone up that much as well.

Stevehjx, this is getting ridiculous. I don't have exact figure. But neither do you other than "my rent ..." Are you really claiming rents have not gone up 25% since 2000? So rents didn't increase during an 8 year boom (save a brief recession at the end of 2000) at the pace of inflation?

It's funny because you are also claiming rents are going to plummet during this downturn. So, it sounds like you are arguing rents only go down over time. So they stay flat when the economy is booming, but go down when there is a recession. Long term, they only go down. Make sense.

I grant there is a serious risk of deflation right now - and you could argue on this basis rents will probably decrease over the next few years - but to claim rents didn't increase at all since 2000 is ridiculous.

Happyrenter - I am not making the statement that 25%-30% is "that much." I am saying this is equal to inflation. I realize rent-stabilized places also go up with inflation, but was giving the benefit of the doubt.

"Sure. Add in credit (non)availability, taxes, common charges, incomes, and see what you come up with.

Waiting...."

Don't hold your breath Steve. I have a life and try to spend no more than 30 seconds per day giving free advice on an anonymous boards.

Just trying to point out a factor that many seem to overlook. Why waste time re-iterating obvious factors that are all over the headlines?

OK Steve, I moved out of 300 East 34th st in December 1997 where I was paying $1750 per month for a 1 BR apt. In 1996 it was $1700, in 1995 I was in a studio in the same building that cost 1250.

Today on your beloved nybits there is a 1BR advertised at $3950 and two studios at $2450 and $2700.
http://www.nybits.com/apartments/300_east_34.html
On the 1BR that's 125% increase in just over 10 years or about 8% CAGR. So here is my evidence that rents have gone up 125% since the end of 1997. Sorry I do not have numbers from 2000 because I was not a renter then but 25%-30% since 2000 does not seem out of wack given the numbers I just provided.

Additionally, lets say my rent would have gone up to 1800 in 1998. 8X 21600 = 172,800 purchase price.
However if you go to the data page on millersamuel.com and plug in ave median price of 1BR apts in 1998 in midtown east you get $180K for coops, $226K for coops and condos and $299K for condos which give you annual rent multiples of 8.3, 10.4, 13.8 respectively.
So you are close on coops but pretty far off on coops and condos combined and condos on their own.

"I don't have exact figure."

You made a claim, you need a figure.

"But neither do you other than "my rent ...""

I didn't make a claim.

"Are you really claiming rents have not gone up 25% since 2000?"

Yes.

"So rents didn't increase during an 8 year boom (save a brief recession at the end of 2000) at the pace of inflation?"

Yes. During the property boom, rents fell.

BTW steve, where did you get your 8X annual rent number from?

So pathetic...Your_Landlord is so SteveF. What a putz.

"Are you really claiming rents have not gone up 25% since 2000?"

I am. Thats complete bs. They went up for a bit, and then declined. I've seen tons of inventory at 2000 prices (same buildings with multiple apartments for rent)

"The last several recessions lasted from 13-18 months.
Most showed bottom in October or November.
By most economists we are 7 months into a 14 month recession.
Still no 40% reduction in NY RE.
Most owners can hold on for 2-3 years or more.
What happens if we start to see the stock market and job market recover in 7 months?
I see a 10 % YOY increase in mid range 2-3 bedrooms in NY prime by Oct 2010. "

It can all be true, and RE is still in for a major correction. 1987 crash took YEARS to see a recovery in RE.

That being said, its not true. "Most owners can hold on for 2-3 years or more." is an incredible case of wishful thinking.

Not to mention, once the bad numbers start coming in (and they basically have already), there is a difference between CAN hold on and WILL hold on. People panic. Its a fact of life. You'll see tons of people leaving the market.

["But neither do you other than "my rent ...""

I didn't make a claim.

"Are you really claiming rents have not gone up 25% since 2000?"

Yes.]

I literally laughed out loud

Rents have softened a bit recentely but are still on average significantly above 2000 levels. Can you find a few places that rent for what they would have in 2000? Sure. Will they soften more? Highly likely. The only point I am making here is as a GENERAL rule it's reasonable to assume rents will increase with inflation (although not faster). The issue is we are more likely in a deflationary environment right now.

For DOORMAN 1-bedrooms:

Rents now:

2007: $3,787
2008: $3,665
http://www.tregny.com/manhattan-apt-rental-report.jsp

Rents in 2000:
June 2000: $2,967
January 2000: $2,697
http://query.nytimes.com/gst/fullpage.html?res=9D02E4DE1438F933A25752C1A9669C8B63

"BTW steve, where did you get your 8X annual rent number from?"

From doing an analysis of what I rented my apartment for in 1998 to what I paid to purchase it. Adjusted for the size difference, it came out to be 8x annual rent.

That was the bottom of the housing market.

If it isn't obvious already, stevejhx has an agenda. He heavily manipulates numbers, facts, articles, and links to promote that agenda. Take what he has to say with a grain of salt.

""BTW steve, where did you get your 8X annual rent number from?"

From doing an analysis of what I rented my apartment for in 1998 to what I paid to purchase it. Adjusted for the size difference, it came out to be 8x annual rent."

A single data sample? And adjusted by you? Well done Steve.

A sample size of 1 is enough for an analysis to be used for the entire market....nice

By that standard, there are thousands of other samples of 1 that we could use.

Hey let's use my data sample to come to 13X annual rent in 1998.

BTW, thanks Steve for reply. Very revealing.

You don't have to believe me, I don't care. I rented a 600-square foot 1-br 1-ba apartment in the West Village for $1675 a month. I bought an 800-square foot 1-br 1-ba apartment in the West Village for $218,000, right down the block. Do the math yourself - it's what the market looked like back then.

But you use that metric as an all encompassing cudgel with which to beat people who don't agree with you.

I do believe you. Well done, you got yourself a bargain, even in 1998, but it does not represent the general market.

Look at my numbers again and see which numbers we should use for all future discussion on this forum when discussing historical rent multiples.

steve - 350 bleecker is a dump. it looks like a 60s housing project, no wonder it was so cheap. the building is GROSS. the fact that you lived there saya a lot about your taste, standards, and where you were financially. aren't gays supposed to have good taste, some style, and solid income...

I actually do believe you. Buying was way cheaper than renting back then; apartments were undepriced. I think it is generally now more expensive to buy than to rent, which suggests NY condos and coops are overpriced (and significantly overpriced if you also believe rents will fall).

Also, in fairness to stevejhx 12x is the historic average.

http://money.cnn.com/magazines/fortune/price_rent_ratios/

I would also make this observation: NY's 15 year historic average is LOWER than other cities. I have to say that I don't think is rational either - why should NY have a lower P/E ratio than other cities. Because it is a boom-bust town and inherently volatile? Because a lot of the places are smaller and therefore people don't usually hold as long, meaning they need to be compensated for transaction costs if they have to sell after 5 years by very favorable buying-vs-rental arguments? These are compelling. Momentum is also compelling - that markets will always over-correct the other way. But one could also argue that there is no reason one of the most desirable cities in this country should have a lower P/E ratio than other places. On this basis, one could argue 16x or 15x is fair.

But it's clear rents have risen too - as I showed above by finding data from 2000 and today. Are you still paying $1,675 a month in rent? I'm jealous if you are - that is a great deal. But the data suggests that market rates rents have in fact risen 25% on the whole ...

"Well done, you got yourself a bargain, even in 1998, but it does not represent the general market."

The truth is, 3 similar apartments sold in my building at the same time all for the same price, and none of the buyers knew each other. Therefore, it would seem pretty representative.

"However if you go to the data page on millersamuel.com and plug in ave median price of 1BR apts in 1998 in midtown east you get $180K for coops, $226K for coops and condos and $299K for condos which give you annual rent multiples of 8.3, 10.4, 13.8 respectively."

The median price is not the correct measure because it does not correct for differences in the universe. It would, for instance, compare new development in Harlem to Gold Coast Greenwich Village. You really need at least to keep your comparison to the same neighborhood.

"NY's 15 year historic average is LOWER than other cities. I have to say that I don't think is rational either - why should NY have a lower P/E ratio than other cities."

Because rental prices could be higher here, or housing prices lower there, or some combination of the two. I suspect it's some combination of the two, and I suspect it's because NY's real estate market was severely depressed for 10 years, from 1988 through 1998, making it significantly cheaper to own than to rent.

As it will be again.

"By most economists we are 7 months into a 14 month recession."

Even if that is right, what happened to RE prices during the last big drop in the 1990's? How long did it take for prices to bottom out, how long until they began to rise significantly (let's take your 10%).

Anyone have those numbers?

10 years from peak to trough - 1988 through 1998. Manhattan correction 25% nominal, 40% real.

This time, however, I think it will be deeper, and faster.

"The median price is not the correct measure because it does not correct for differences in the
universe. It would, for instance, compare new development in Harlem to Gold Coast Greenwich Village. You really need at least to keep your comparison to the same neighborhood."

Did you go to the page?
Did you read my post?

You can select neighbourhood so you can absolutely separate Harlem from GV. I stated the hood that I selected.

>Even if that is right, what happened to RE prices during the last big drop in the 1990's? How long did it take for prices to bottom out, how long until they began to rise significantly (let's take your 10%).<

No numbers but I was there. Peak was in 1988 and bottomed in 1993 or 1994 depending on who you ask. There was absolutely no rush to buy for the couple of years or so after the bottom & financing remained difficult to obtain even as the market began to stabilize & turn.

RE cycles are long in their nature and we recently completed a very long 12 year boom. The corrective process should easily last several years.

Fair enough, but still does not correct for the often significant differences in sample from quarter to quarter. Also, East 34th Street is a very unusual part of Manhattan in that it has a lot of rentals and a lot of condos, and fewer co-ops than most places. You would also need to take into account property tax abatements for condos, if any, as they will raise the price.

The best gauge (unfortunately not available for that time frame) is the same unit both for sale and for rent.

Same unit for sale and rent is a pretty terrible indicator actually. You should use closed deals only, not asking prices. If the same unit is available for both, one won't be signed. Worse, the owner could be using one as a way to prop up demand for the other (unrealistic asking rent to make a purchase price sound better).

2 units, same line, one rent, one purchase, both signed, is the ideal comparison.

"The median price is not the correct measure because it does not correct for differences in the
universe. It would, for instance, compare new development in Harlem to Gold Coast Greenwich Village. You really need at least to keep your comparison to the same neighborhood."

Except that we're talking about a MEDIAN.

It comes up with the middle property in the entire universe. We're talking about the best way of seeing where a city is moving.

NYC from 1988 to 1998 was a much different city than it is today. I think it is reasonable to assume that there was also less demand to buy then due to the umm...crappiness of the city (or crackiness, depending on where you lived). I am not suggesting this was the biggest reason, but rather that it did have some effect on prices and people WANTING to live in NYC.

People rent because they need a place to live. People buy because they want to live in a particular location and these are very different things. There is a much larger percentage of people who really do want to live in NYC and if the price is right they are open to buying an apartment.

"People buy because they want to live in a particular location and these are very different things."

No. Statistically, people buy or rent depending on which is cheaper.

"There is a much larger percentage of people who really do want to live in NYC"

Making a living at what? Finance?

"and if the price is right they are open to buying an apartment."

Sure. So would I. At 2000 prices, because this looks far worse than anything I would have ever predicted.

Steve - this may be shocking to you, but you are not right. Your ability to read actual living people is so far off, and that is not uncommon in sole-proprietors. They become immersed in their business and lose all ability to interact with living, breathing people.

People most certainly do buy because they want to live in a particular location. The cost, while important, is not the overriding factor. For example, it might be cheaper to buy something, but I want the freedom to change jobs, move to a different city or not have the responsibility of ownership...therefore I rent. Cost is only part of the equation for most people.

There are a whole lot more jobs in NYC than finance, and most of the finance jobs are going to still be here.

Predict whatever you want. We've already established that your data sample of 1 is grossly inadequate and ineffective. Spout off whatever theories you want, but you grasp only a tiny piece of the picture because your big head and big mouth are in the way.

waverly: Keep in mind you're not going to phase him. I had a LONG thread where I tried to explain to steve how the mortgage deduction on interest works. I figured this is factual information, not a prediction, so it should be fairly easy. He refused to listen and just kept talking around in circles.

I think deep down inside, he does know better, but knowingly pushes incorrect data in order to further his agenda. Here's why: At one point he came up with specific numbers - numbers that had the property that they coincidentally resulted in the same tax deduction under his incorrect method, and the way the IRS really does it. They were heavily cherrypicked - if I changed *any* of the numbers by 1% up or down, they would no longer prove his point.

Either he got that through blind luck, or not only does he know better, but he's smart enough to come up with examples that superficially prove his known-incorrect point. I readily admit that I don't know finance or real estate as well as many others on these boards, but when it comes to math and formulas, I can run circles around most. Cherrypicked numbers won't fool me.

tech-guy - thanks. I do think Steve is very smart and has a ton of good ideas. I just wish he would be a bit more open to what other people say instead of just clamping down and digging his heels in. Once of the best things about sites like SE is what you can learn from all of the different experiences and points of view. The old "two heads are better than one" adage. More ideas form more people leads to better information for everyone.