Madoff teaches us

I think others have done a good job of batting away nonsense like this but...

a) You are using a very low return on CDs. You can get much higher than the average because this is your nestegg and you are investing for the longterm. Especially for a long-term investment, ala, like you would be when putting it into your home.
2) You are forgetting compounding
tres) Rents are going down not up now. Brokerage fees - ha
finally) If prices were fair, then why are prices accelerating to the downside?
p.s.) You are forgetting the other costs of homeowning - repairs, insurance

Your tactic of shilling for home-owning by using Madoff is shameless. Does buying Walmart stock have the risk of a ponzi-scream? Are you trying this out for your clients?

Are people shilling for rental companies?

Jgr, you must be quite the money guru if you have found a vehicle for making no/ultra-low risk investments. Why don't you enlighten us on how you invest. The S&P index? That is down to 2002 levels!

1) I am using the national average for CD rates which is higher than my other AAA example. There are higher CD rates out there, but since only $100,000 of a CD is guaranteed, I would have to go to a lot of banks -- the average is fair to use.
2) There is no compounding when you spend the interest/dividends every month for rent
3) There are brokerge fees for renting and for selling. Also consider that there are substantial moving and apartment set up (paiting, window treatments, etc.) costs. A smart Landlord recognizes this and will increase your rent just below the cost of moving everytime your lease rolls.
4) Renters pay renters insurance. To your point as an owner, if something breaks (A/C, refrigerator, etc.) I would have to pay for that. I will happily concede that point, but would point out that capital upgrades likely increase the value of the unit if done well. As a renter you have no ability to value-add, you are purely renting and in passive investments.

I believe that CD's are now FDIC insured up to 250k, but I could be wrong.

mh23, you are correct about the FDIC insured max.

Sorry, you are currently right on the $250K, but let me further clarify per the FDIC website: "On January 1, 2010, the standard coverage limit will return to $100,000 for all deposit categories except IRAs and Certain Retirement Accounts, which will continue to be insured up to $250,000 per owner."

nycfund is actually very correct. If you are wealthy enough to own outright without applying a mortgage, his calculations are absolutely perfect. The TREMENDOUS flaw in the argument he makes is that even if one is lucky enough to be in that position and even if one can be satisfied with a residual stream of money that is so incredibly low (20,000 on approximately $1M), the failure of that person to realize that even though they have been admitted membership to a very very selective country club, for that country club to survive and operate efficiently, it will require a tremendous number of members. Simply put there are not enough members that will qualify, so the bar has to be lowered.

In my example (the country club represents the housing supply, the members are the buyers, and the bar the falling prices.

Sorry your logic simply does not work.

Different asset classes have different risk and return profiles. CDs or AAA bonds are intended for low/no risk / principal preservation. Real estate is an entirely different asset class having more risk and a higher return profile. Borrowing for home ownership, in a highly liquid market supported by US Govt, is at 5% for a 30 year fixed mortgage for a prime borrower conforming loan characteristics incl. 20% equity down, translating to about 3.5% after taxes. Assume the equity would require some premium (it gets wiped out first and is therefore more at risk). ... put it at 7%, and so your weighted required return is ... 4.2%, or a multiple (inverse) of 23.8x. Your 1.14MM apartment should rent for $47,880 per year plus the maintenance, or $3990 per month plus the maintenance: take your 830 sq. ft. at $1.50 psf and you calculated $14,940 per year, or $1245 per month, totaling $5235 per month or $62820 per year. So, if you are seeing these 830 sq. ft. apartments renting right now at $50 - $55 psf, or $41500 to $45650 per year ($3458 - $3804 per month), you are getting a better deal by renting. As borrowing rates go higher, the multiple will be lower (they are inverses) and either rents will increase in relation to the purchase price or purchase prices will decline in relation to the rents (same thing said opposite ways). In any case, right now the disequilibrium of $41500 to $45650 (renting) vs. $62820 (owning) means right now that either rents have room for increase or apartments have room for decreasing... by 27% to 34%.
Note: all above is based on the numbers provided by nycfund.

By the way, comparing real estate returns to a CD is as equally flawed to comparing it to investing in the S&P or in equities - they are different asset classes and have different return and risk profiles. That doesn't mean they have nothing to do with each other - there are relationships among asset classes.

Gleeclub, your logic is built off of your own assumptions not mine - "equity premium" of "7%", etc.??? Where did I write that? Right, you inserted that.

This would be the correct math: $1,140,000 x 80% = a max mortgage of $912,000. I have heard a range of mortgage rates, but let's use gleeclub's after tax effective rate of 3.5%. $912,000 x 3.5% = $31,920. Taking that $912,000 and putting it in 5 year CD's at the 1.8% after tax rate = $16,416. Now, I could break off on a tangent and say that the reason for getting the mortgage is to keep the $912,000 liquid and then point out that 5 year CD's are NOT liquid. Let's all remember that short term treasury yields are basically zero and have actually gone negative. Suffice it to say, 1.8% is in fact an aggressively high rate. Anyway, $31,920 - $16,416 = $15,504. Add in the maintence cost, $15,504 + $14,940 = $30,444 ($36.68 psf) or $2,537 a month.

I will always need a place to live just as I will need food to eat. Therefore, I view ownership of my primary residence the same as a AAA security -- IT NEEDS TO BE THERE! If someone who is reading this can shack up with a family member or friend any time they are in a financial bind, and/or generally speaking has a much higher risk tolerance, then my example probably does not apply to your situation.

> 2) my primary(only) residence

Why would you put your nest egg into an asset at the top of its bubble?

Jeez, comparing AAA bonds to an assset that is down 20% and has not stopped declining...

> often include a 3%-5% rent bump for the second year.

Yes, and rents are cratering, and this guy is factoring in increases.

WOW, denial is sure strong.

nyc10022, you say that we are at the top of the bubble? Rather than "jeez" and "wow", why don't you offer up some kind of real logic rather than venting? How much are rents going to fall and for how long? Do you disagree that there are costs to moving between apartments? For example, if a person were renting at $2,700, renewable at $2,800 a month, it might not be worth the brokerage, moving company, set-up costs, etc. to move to a comparable apartment that is $2,600 a month?

NYC10022. In which parts of NYC are rents cratering? I don't see rents cratering AT ALL in my area. You act like NY real estate is like Miami real estate. It's NOT. Prices at the TOP were inflated but normal 1 beds in doorman buildings have not come down in price that much.

nycfund, I think your logic has at least some merit if (1) you have a very long time horizon for owning the particular apartment you would buy today and (2) you are neither willing nor interested in investing your cash in anything (other than RE) with any sort of risk. However, I think there are very, very few people on this board fit those criteria.

As for rents, we just finished a pretty intensive rental search. We were looking for 1200sf 2-3 bedroom, but saw at least some of the market for most other rental units. I saw rental costs dropping significantly almost without exception. It's not always the headline price, sometimes it's free month(s), owner paying broker's fee, other incentives, etc., but the effective rent is meaningfully lower than a year ago or a few months ago.

"NYC10022. In which parts of NYC are rents cratering? I don't see rents cratering AT ALL in my area. You act like NY real estate is like Miami real estate. It's NOT. Prices at the TOP were inflated but normal 1 beds in doorman buildings have not come down in price that much."

A roommate and I rented a decent sized one-bedroom for $2400 in 2003. Those types of apartments were well north of $3000 in 2007 and into 2008. Not anymore.

The junior 4 that family and I are moving out of (do you count that as a 1-bed?) in a doorman building in midtown is asking exactly what we rented it for 2 years ago. Except it's very negotiable, and I'm pretty sure they're offering a month free rent.

You're right, the market is all over the place, and there will be exceptions to any rule. But by and large, rents are coming down.

> nyc10022, you say that we are at the top of the bubble?

No, we're 20% off the top of the bubble, per Miller Samuel / Fed Beige Book Manhattan Median.. Bubble peak was Q2.

> Rather than "jeez" and "wow", why don't you offer up some kind of real logic rather than venting?

Buying later will save you money. How much more logic than that do you need?

> How much are rents going to fall and for how long?

They've apparently fallen so far.... not sure how much farther they were fall, but assuming an increase over the next few years is ludicrous.

> Do you disagree that there are costs to moving between apartments?

There are certainly moving costs, and transaction costs... for sure, you have to factor those in. But, buying closing costs are MUCH more significant, so that actually pushes the logic further.

But, I'm not sure how you can use moving costs to justify losing HUNDREDS OF THOUSANDS.... to save a few hundred bucks. Makes absolutely no sense.

Again, I'm not quite sure how folks are using a few thousand in closing costs or a few hundred a month in extra rent to rationalizing losing hundreds of thousands in equity... particularly when levered.

> It strikes me that current market prices are fair or better than fair and that it is a good time to
> buy.

Given that the entire argument rests on the above assumption, that is a pretty shaky argument.

Is this a guess of yours?

We're 3 months into the crash of probably the biggest RE bubble in history, and you think its the bottom already? I bet you are one of the folks who said we wouldn't decline in the first place...

BTW, how did Madoff teach us this?

Madoff shows what happens with FRAUD.

There is tons of fraud in every market. RE fraud seems to be the biggest...

Wouldn't learning from madoff be being careful about the honesty of whom you are buying from? As in, time to wake up and see that RE brokers have been lying to you?

A Bubble, where?

If you keep your eyes closed, it doesn't exist.

He was promising 10% interest to people. Just like if a guy on the street offers to sell you a flat screen tv for $100, if it sounds too good to be true, it usually is.

In case anyone thought that the nycfund might have a bit of a brain, dissect this:

"This would be the correct math: $1,140,000 x 80% = a max mortgage of $912,000. I have heard a range of mortgage rates, but let's use gleeclub's after tax effective rate of 3.5%. $912,000 x 3.5% = $31,920. Taking that $912,000 and putting it in 5 year CD's at the 1.8% after tax rate = $16,416."

So this guy is going to get a mortgage, and then put the mortgage money into CDs. Hmm. And the economic loss on this stupidity is evident right within his post: he's going to PAY $31920 and RECEIVE BACK $16416. okay

lol gleeclub.

nycfund -- why are those two options your only choices?

1) you can live someplace without owning it for less right now

2) You can keep your money in many investments, not just a low yielding security. Buy foreign currency to offset the inflation impact on a US Dollar?

Be careful... logic and rationality will scare nycfund.

nycfund, how come no update from you on your thought process? Please don't be like stevejhx and take months and months of berating before you admit that you were wrong - admit it early, shake hands, and move on.

A primary residence can easily go to $0. I could come up with various reasons why that might be the case. By sinking any significant portion of your nest egg into your home you are making a massive mistake by not diversifying your assets. I personally feel like it would be infinitely safer to own a cross-section of the world economy through stocks and bonds than one illiquid asset. You are one natural disaster, act of war, or economic collapse from experiencing Madoff-like returns when you own a residence. I'm not saying don't buy a house, but certainly don't pretend it's safe.

Little frustrating here, reading other postings that nyc10022 and jgr are two screen names from one person. (ref: posting jgr=nyc10022) Within this thread along, 10 of 30 messages are from this jgr/nyc10022 person. Is this same person also writing for gleeclub? The tone suggests it is, but the level of thought process says no.

In any event, don%u2019t ask me for a response after you bombard a thread with generic, non-specific drivel. Make a real effort to be HELPFUL. Imagine I am a friend, advise me with specifics: 1) tell me the name of a bond, mutual fund, etc. to invest my money and what the actual returns will be or have been, or 2) show me example of 830 /- sf one-bedroom that makes that $1.14 million price look silly.

To reiterate, the practice of ganging up -- particularly by buying multiple screenames -- makes an arguement no more valid. If I am as wrong as some of these postings suggest, there should be ample specifics to demonstrate that.

first, I'm not nyc10022 or jgr.
I might sometimes be an asshole like them
but actually in this instance, I don't need to be an asshole to take apart your logic and math
I mean you literally had someone taking out a mortgage at one rate and then investing that mortgage money at a lower rate and losing money on that transaction. How does that make sense to you?
I've also been pretty clear that returns and risk profile need to be in sync. You can not say that you have an alternative to real estate of a bond or stock. Otherwise there'd always be arbitrage to higher yielding asset classes and a complete ignoring of risk. In your case you arbed negatively.
So there's nothing drivel about my statements or my math. And just to be clear, and I acknowledge that my language could allow for interpretation two different ways but my subsequent calculation wouldn't have been - I intended that the equity premium for real estate was 2% over the pre-tax cost of borrowing, or a total of 7%, NOT a premium of 7%. You could argue for a higher premium, but my math works at the lower rate so it'll continue to work at higher rates.

I have demonstrated, both by calculation and in logic, that you are wrong. And on this discussion I am no one other than gleeclub.

Gleeclub, your use of profanity, quick response, and lack of insight suggest that you either i) did not read what I have written, and/or 2) are simply incapable of answering a question. If you want to start a different thread with a different scenario and different assumptions, be my guest, I will not critize you. The context of this thread is me, and people with my level of means and mindset -- a person with more than $1.14 in cash and a disposition to either buy a home now or keep the capital safe to buy another day. Where is a good place to rent? You imply that the rental market is extremely weak -- where are these deals? Where should I invest my money while renting so I know that my principal will be safe? If I buy now, should I get a mortgage, if so, where would you suggest I put that money?

To refute an argument, you can challenge the end result, or the assumptions built into the argument. I've challenged your assumptions. And successfully I believe.

I'm neither gleeclub nor jgr.

Sounds like somebody just doesn't have a logical argument, and is coming up with excuses for it.

The original post makes little sense.

This is the 10th thread in the past week where after being presented with solid arguments by multiple people the original poster goes back to the ole multiple screenname attack. You must be a real winner in life.

Yes, if multiple people disagree with you, its only because you are right and there is a conspiracy...