How will the "doom and gloom" effect new dev's compared to resales?

munckee, go to the source and ask them. In the neighborhood you did not mention, they would love to see you and work a deal that will be beneficial to you and too them. A friend of mine, recently, brought property out of NYS and he is very happy with the decision he made and you will feel the same way too. I know I get doomy & gloomy on this board but you should do what is best for you and yours.

If these new developments can't sale at inflated prices they will not rent at inflated prices. At some point, old and new developments will have to adhere to the majority, we are not paying these ridiculous prices and drop 10, 20, 30 etc. percent until they are occupied. Right now these new developments are losing money.

Best to you in finding a home.

@mutombonyc Thanks, I'm frankly shocked by (and greatly appreciative of) a comment that's genuine from you...

I will certainly go to the source to find out, but my question was more of a theoretical one from a RE/Economic standpoint. High supply and low demand should enforce price drops, however, that doesn't take into account their bottom line (lose money below a certain price) or their willingness to go rental to avoid losing money.

Going rental may not be an option. New York doesn't have an abundance of rentals, but it certainly seems to have an abundance of expensive ones right now. Plus, even if they can you wouldn't want to buy in a building that may go rental. If they have to go rental, you can bet you will get some great rental terms (the Yoo building downtown, not entirely analogous because it started as a rental, is offering three months free rent). Why not rent in that neighborhood?

Be very, very careful. I hesitate to condemn the idea of buying altogether. Although economically I can't see how it would hurt to wait (even if interest rates go up prices should go down at least enough to offset any gain, and refi in the future would then be probable), I understand that for some there are enough compelling reasons to buy. However, if you're not already in a contract for a new development unit (and quite likely even if you are) I can't envision a scenario that could be compelling to buy in a building that is not almost sold out (and I mean closings, not contracts). Some of these buildings may very well wind up being owned by the lender, not a place you want to go.

@aboutready I'm definitely trying to avoid buildings that appear they may go rental or have a lot of trouble selling out. I have two in particular in mind, one of which is half occupied already (and not too big to boot) and the other is supposed to get CofO in april. Both are small (20 units or less).

As I said, I don't HAVE to buy now, but if I don't, I will have to move twice. Not the end of the world, but certainly a pain in the butt...

Not sure how the laws between Chicago and NYC would differ, but this is instructive in the event of new construction defaults.

http://searchchicago.suntimes.com/homes/news/condos/1380753,HOF-News-mack16.article

Munckee, I think you raise some legitimate concerns. If buying a new dev in today's environment, I would be 1) aggressive on price negotiation and 2) very aggressive with contract terms. Gone are the days were developers can lock you in to a one sided contract that puts all the risk on you. Crafting terms that allow you to get out of the deal if the building goes rental, not finished in time, you are dissatisfied with the space of the unit etc, will alleviate a good deal of risk from you personally. If the developers are not willing to ease their terms, I would not lock into something now.

Developers have to ease their terms requirements to move product, there is just too much risk for buyers not to demand this.

@JuiceMan That's another really interesting point (the contract terms). What would be some things to include that might be considered favorable or "aggressive"? The two units I have in mind are completed (or enough that space isn't going to change; 1 is DONE and the other is just lacking appliances).

-getting out if the building goes rental in any way
-not finished by a certain date (again, not an issue on one of the units)
-price adjustment if any other unit sells at a lower ppsf (I read an article on this, but it might be tought to negotiate)
...?

Sounds like price is your main concern here, i.e., save more on price by waiting, but have to rent and move again. Something you should consider is that the developer(s) could hit the wall financially, not even finish the development, perhaps go bankrupt. It's a worst-case scenario, for sure, but not farfetched.

lowery is correct. Is there a way you can test the financial viability of the project? I would add a financing contingency to your list above. As for additional items, I would consult a good lawyer that focuses on new devs. Also, there are a couple good threads on this site that deal with folks walking away from their new dev contracts, could be a good resource for things to include in terms. Good luck, let us know how it all ends up.

JuiceMan makes a crucial point - if you make any move to buy, insist on not waiving the mortgage contingency. It's crazy to waive it, but they somehow get people to do it. As I've said before, price is the very last thing they'll budge on, but if you come in aggressively and are willing to wait the negotiations out, you're increasing your chances of their acquiescing once they feel you're serious.

@bjw "Mortgage Contingency" being loss of deposit if I'm unable to get a mortgage? Would that be mitigated by pre-approval (which I'm planning)?

Yes - the mortgage contingency means you get your deposit back if you can't get financing, so I would not waive it, especially in this climate. That is not mitigated by pre-approval.

@bjw2103 Thanks!

munckee, I'm not a brut until bjw2103, brings it out of me. Even when I'm being silly there's plenty of truth in what I say but some folks can't get beyond the sillyness. I can give you theoretical advice from a RE/Economic standpoint. If you are having doubts, we all understand why.

As President Obama said it will get worse before it gets better. You have to include yourself in that equation, will I have my job tomorrow if I mortgage this property today, if self-employed will my clients scale back as other clients are scaling back from a multitude of industries in the USA and overseas? How long will it take for these new and old developments to realize the ballon is deflating? They realize but once shit reaches its plateau they will never see that kind of money again in their lifetime so they are trying to get it while its cooling off. Not trying to be funny, all properties especially new properties have lost value and will continue too lose value. In the neighborhood you did not mention they're in for a rude awakening, they defied the laws of supply and demand. Ten years ago, prime was not a word to describe that neighborhood. It was never a bad neigborhood it always had potential but prices became and are unrealistic and this is where the problems come in.

How long can new developments remain occupied at the rate they are without forclosing or government intervention ? I've personally seen the lack of lights on during primetime hours in these new buildings and there are blogs to support the lack of lights. Steelworks Loft is the reality of all of these new developments. When these developers were developing they did not have in mind one to three months free rent, paying down payments, paying closing cost and etc. what does this mean to us as buyers? Part of understanding this deflating ballon is knowing NYC history. Its funny how many people are looking for deals today, during the peak it was about the getting, the tables have turned drastically.

Either way you live it you will lose money. If you mortgage, the property will lose value and if you sell in five years or more it won't be worth what you mortgaged it for. If you rent you feel you are giving away money because there is no return. This is where I said do what will make you and yours happy. My friend, who just purchased out of NYS said they only negotiated so much with him on the contract in other words the contract was favorable to them a contract will never be totally favorable to you as a buyer. A lot of developers are waiting for a quick economic turn around, we are all wishing for a quick turn around but its not going to happen. Sorry for the doom and gloom.

You will not be able to live in the neighborhood not mentioned and avoid living in a building that will be some sort of rental or being near sold its not reality. Did you consider renewing your lease at your current place? Did you consider if you rent else where you could pay cheaper rent then what you are paying now? Just some food for thought. munckee, are you from NYS? Please do what is beneficial for you and yours across the board. If you are having doubt, maybe you should not go with it.

Developers are going to need to pay back loans at some point. Renting is just a band-aid right now. And not a very good one.... there is more and more inventory entering the market there.

A number of sources have already noted that this is the first time in recent history that both prices AND rents have fallen at the same time nationwide... and we now have that in Manhattan as well.

@mutombonyc Interesting thoughts. Some of them seem a little overboard in my (admittedly untrained) opinion though...

"will I have my job tomorrow if I mortgage this property today, if self-employed will my clients scale back as other clients are scaling back from a multitude of industries in the USA and overseas?"
•I'm certainly giving due consideration to these questions. But my question in this thread is how the fact that I'm specifically looking at new dev's will be effected by the changing market (since most discussion seems to be centered around both Manhattan and resales). I'll worry about the other issues on my own.

"How long will it take for these new and old developments to realize the ballon is deflating?"
•I dunno. That's part of what I'm trying to understand so I can make an educated decision.

"all properties especially new properties have lost value and will continue too lose value"
•...for how long. Or is the world just going to end, but not before anyone who owns property goes broke? (obviously, if someone had an exact answer, they'd be rich, but theoretically speaking...)

"Either way you live it you will lose money. If you mortgage, the property will lose value and if you sell in five years or more it won't be worth what you mortgaged it for. If you rent you feel you are giving away money because there is no return."
•So you're damned if you do, and damned if ya don't? One has to be better than the other... And this is NYC. You're telling me that buying low will never have a payoff? Or specifically in that neighborhood?

"...prices became and are unrealistic and this is where the problems come in."
•Well, that's part of what I'm asking. If they're unrealistic now, how far will they drop? If I wait 6 months to buy, will I get a 2BR for what I'm looking at picking up a 1BR for? What if I wait 12 months?
•How does the fact that these are new dev's effect that?

"Steelworks Loft is the reality of all of these new developments."
•Steelworks is a good demonstration of a dev that stopped mid-way. And may well end up being the reality for a number of devs that are a long way from being finished. But what about those that are already done or are VERY close to it? What about the ones that already have sold units?

"You will not be able to live in the neighborhood not mentioned and avoid living in a building that will be some sort of rental or being near sold"
•So buying in a building that's already half-sold doesn't solve that? I'm specifically avoiding the high-rises, larger dev's, and significantly unfinished dev's for this exact reason, but you're claiming that NOTHING will sell out?

"Did you consider renewing your lease at your current place?"
•Unfortunately not an option for me. Long story, but suffice it to say, I have to move sometime in the next few months.

"Did you consider if you rent else where you could pay cheaper rent then what you are paying now?"
•That'd be a long shot given that I'm paying less than $1k now. Of course, I currently have 2 roommates and would prefer to end up in a place of my own.

"Just some food for thought. munckee, are you from NYS?"
•No, been in the city for about 4 years...why?

"If you are having doubt, maybe you should not go with it. "
•Maybe I shouldn't. And I'm more than willing to accept that possibility. But ONLY because I understand the whole story and have made an educated decision on the best course for me.

"Either way you live it you will lose money. If you mortgage, the property will lose value and if you sell in five years or more it won't be worth what you mortgaged it for. If you rent you feel you are giving away money because there is no return."

The return is you get to live there. If I buy a meal, I didn't "lose" it. There is value in the shelter.

Difference is, the math shows it is cheaper to rent the shelter right now than buy it... and, if it saves you the capital loss as well, its a double benefit...

"Difference is, the math shows it is cheaper to rent the shelter right now than buy it... and, if it saves you the capital loss as well, its a double benefit..."

Not entirely sure where you're getting your math. Or rents just haven't dropped in the area I'm looking in. I did that calculation though, and as far as I can tell, I COULD rent a studio/1BR for less than the cost of buying, but it wouldn't be anywhere near the same type of place. I'd be in a possibly renovated, older walkup instead of a new, quality place built the way I'd prefer...

> Not entirely sure where you're getting your math.

Well-rehearsed on this board. There are debates as to what the correct ratio is, but generally it is thought to be between 15x and 20x rent/buy for breakeven. Numerous 25-30x examples have been given on this board. I personally pointed out a lot of 30+x, 20 pine was a good example of such.

Now, the price declines have clearly shifted that ratio, but rents have come down as well... ESPECIALLY on new construction it seems, so there are definitely efficiencies to take advantage of.

> Or rents just haven't dropped in the area I'm
> looking in.

What areas is that? Observer said 8% down citywide, other surveys have said 3-5%, and countless examples have been given on this board. Where are you looking?

"Well-rehearsed on this board. There are debates as to what the correct ratio is, but generally it is thought to be between 15x and 20x rent/buy for breakeven. Numerous 25-30x examples have been given on this board. I personally pointed out a lot of 30+x, 20 pine was a good example of such."

•Could you explain that ratio? Have a link that might help me understand?

I'm not claiming its wrong, but it's certainly a bit off from the math I did. As I said, I figured that I could rent a 1BR in a similar area for what it would cost to buy, but the primary difference would be the type of place I'd get. To get into a similar rental (to what I'd buy) would bring the cost up by another $750-1k/mo. which is a substantial difference. Don't know if your ratio takes that into account, or simply figures what one could rent something for.

I'm interested in Williamsburg for a variety of reasons - hopefully we can avoid the neighborhood bashing that seems to go along with any mention of the area.

I wrote a rebuttal for almost 2 hours and lost it. I'm not rewriting it sorry. Best to you munckee.

A rebuttal? What were you rebutting exactly?

"As I said, I figured that I could rent a 1BR in a similar area for what it would cost to buy, but the primary difference would be the type of place I'd get. To get into a similar rental (to what I'd buy) would bring the cost up by another $750-1k/mo. which is a substantial difference. Don't know if your ratio takes that into account, or simply figures what one could rent something for."

The ratio is highly subjective and does not take this into account. There are many folks on this board who will justify renting through the comparison of a $3000/mo crap job to a brand new 1.2M apartment. The only one that can do this comparison with any confidence is you. If you feel comfortable that the monthly costs to buy are close to the costs to rent based on similar apartments, then you are in pretty good shape. Be prepared however, for some volatility in the short term that could change the calculation.

"munckee, I'm not a brut until bjw2103, brings it out of me. Even when I'm being silly there's plenty of truth in what I say but some folks can't get beyond the sillyness."

Please, you're the one making the unprompted crass comments. I too was stunned to see a somewhat reasonable post by your name. I hope that continues.

"Either way you live it you will lose money. If you mortgage, the property will lose value and if you sell in five years or more it won't be worth what you mortgaged it for."

Pretty narrow-minded comment - this totally depends on how much financing you get.

"You will not be able to live in the neighborhood not mentioned and avoid living in a building that will be some sort of rental or being near sold its not reality."

Just patently untrue. There are buildings that are nearly sold out and there are buildings that won't go rental. Will there be rental conversions? Sure, but to say you can't avoid it is wrong. Steelworks Lofts is NOT the reality of all these developments - it is the reality for Steelworks Lofts. That's what you have to realize - yes, everyone is dealing with the same economy, but you're not buying into the collective market; you're buying into one building, and you need to assess that building's status and potential on its own terms.

nyc10022, do you remember when Mayor Dinkins was selling abandoned properties in Bed Stuy, Harlem, etc for one dollar? Do you think we can see a similiar program (paybe one thousand dollars) but instead of abandoned properties new properties. I'm interested in logic as to yes or no and why. Theres no correct or incorrect answer.

bjw2103, good day I have grown to like you.

I was answering your questions, either way I lost my reply.

bjw2103, many of backhand compliments from you.

Either way you live it you will lose money. If you mortgage, the property will lose value and if you sell in five years or more it won't be worth what you mortgaged it for."

seems like you know something I don't explain the below comment. LOL.
Pretty narrow-minded comment - (this totally depends on how much financing you get.)

WillyB is not Gramercy Park, UES, UWS, Tudor City, Carnegie Hill, Park Slope, Forest Hills and other well established neighborhoods. But again, you are known for pulling stories out of your anal cavity.

"you're not buying into the collective market; you're buying into one building"

BULLSHIT the comps and data you live by does not come from one building it comes from the collective market. I have to remember you are the same person that said you don't know if your property lost, gained or maintained value because you have not tried to sell LMBBAO. If CPW lost value so has your prime WillyB condo or what has it. I don't need to assess one building I'm assessing the entire market because momma taught me don't put all of your eggs in one basket. And when you were looking to mortgage you went to more then one building and brought there for whatever your reasons are so don't give me that shit about onesies Vs. twosies.

If a building don't have any buyers and is vacant and refuses to go rental in WillyB what will the future of that building be? Are they really making a prudent business plan? Answer me that one.

munckee, I asked were you from NYS to get a personal consensus of those who live in NYC for a short period of time.

nyc10022, The return is you get to live there. You and I (we LOL) know this but I think munckee return regards to flipping if this is his strategy so let it be, I'm not passing judgement.

mutombonyc, your English is pretty bad, but I think I understood what you wrote.

"this totally depends on how much financing you get" - that's pretty easy to explain. If you put a good amount of money down, it is quite unlikely that the property value dips to below the mortgage value. Take an extreme example: you put 90% down on a $750k unit - if you really think the property will be worth less than $75k (or whatever you haven't paid in 5 years, therefore even less), then I think you really need to make a case for that. NO ONE is making those kinds of projections here.

"WillyB is not Gramercy Park, UES, UWS, Tudor City, Carnegie Hill, Park Slope, Forest Hills and other well established neighborhoods. But again, you are known for pulling stories out of your anal cavity."

Your ridiculous crass comments aside, weird that you stuck Tudor City and Forest Hills in there, but while you're right that Williamsburg is not those neighborhoods. But it is fairly established. It's also changing, but so is the vast majority of neighborhoods.

"the comps and data you live by does not come from one building it comes from the collective market. I have to remember you are the same person that said you don't know if your property lost, gained or maintained value because you have not tried to sell LMBBAO. If CPW lost value so has your prime WillyB condo or what has it. I don't need to assess one building I'm assessing the entire market because momma taught me don't put all of your eggs in one basket. And when you were looking to mortgage you went to more then one building and brought there for whatever your reasons are so don't give me that shit about onesies Vs. twosies."

The last half is complete gibberish, so you might want to explain that in real English. As for comps, smart buyers know that the best and most reliable comps are those within the same building. From there you go outward to similar, neighboring buildings. But to compare CPW to Brooklyn is pretty fruitless. Might as well talk about New Haven, CT. It may help you get some sense of the general direction of things, but when you're serious about buying, it's not really helpful. Aside from that, you completely missed my point that munckee should look at each individual building's situation and determine how it's doing. They ARE different, and if you think otherwise, I can only conclude you have no idea what you're talking about. You can't say someone buying right now in, say, Sophia Lofts (which has been done for over a year now and is ~fully occupied) is looking at the same situation as someone buying in a yet-to-be-completed Edge tower. Get real.

"If a building don't have any buyers and is vacant and refuses to go rental in WillyB what will the future of that building be? Are they really making a prudent business plan? Answer me that one."

Again, each building is different, and each developer/sponsor is different. Some are facing tougher times than others, financially speaking, and that will influence their decision to go to rentals or lower prices. You can't generalize about the whole market because there are so many variables at work here.

munckee, bjw2103 and all of SE knows munckee in no situation to put 90% down on a new condo in WillyB LOL munckee no pun intended. If he were in a situation to put 90% down he would not be looking for a coupon in WillyB. If someone mortgaged in WillyB during the peak for $750k and put down 90% then 5 years later decided to sale, in 2012, they will take a lost of over $200k. You won't sell shit on a sliver platter.

bjw2103, you are a big ass where did I compare CPW to WillyB? Your reading or vision is bad. Are you dyslexic? Are you high right now? Forest Hills and Tudor City are not filled with a sea of new developments that are empty and hold their own. If majority of new developments in WillyB are offering one to three months free rent, no brokers fee, paying closing cost and other practices unheard of to rid their properties what is the difference from development to development? Is it the address? The building name? Again, what is the difference? I got you in that pressure cooker.

A lot of developers know their properties are going to hell in a handbasket and are going to be underwater they want a government bail out. WillyB is changing you are right, high supply little to no demand. RE prices and value going down by the nano second yours included. I can generalize about the market in WillyB, I have data and comps that supports my generalization. The market in WillyB a sensitive subject for you as you hold a mortgage that is falling with sharp edges. If you believe, in one year of completion, The Edge will be 100% occupied you belong in the G Building and we are not in The Great Depression II LOL.

Vacancies, will influence price drops, supply outweighing demand will influence price drops, this sluggish economy will influence price drops, the exodus out of NYC will influence price drops LOL, crime will influence price drops, salary reductions will influence price drops, the projects across the street from expensive condos will influence price drops, layoffs will influence price drops, the laws of nature will influence price drops.

mutombonyc, it's clear you have no idea what you're talking about and are only looking to pick a fight with insults. I gave an extreme example of 90% down to explain what you couldn't understand - you asked for the explanation!

"If majority of new developments in WillyB are offering one to three months free rent, no brokers fee, paying closing cost and other practices unheard of to rid their properties what is the difference from development to development?"

Please demonstrate this!

"I have data and comps that supports my generalization"

You should post them to back up your arguments. Right now, your arguments are shallow ("the laws of nature" - ha!) and full of ad-hominem junk. I really hope no one takes you seriously. At least petrfitz is entertaining.

bjw2103, your 90% extreme example was fruitless and did not prove a damn thing. Shit, 100% down including the same exact scenario don't mean anything, the outcome will be the same. I allowed you to make an ass of yourself, you played right into it.

You want a demonstration, go to www.craigslist.org

create a thread about my question(s) asked to you too make a bigger ass of yourself.

All of my generalized statements are supported by facts and common sense. Let me put this bug in your ear figures change common sense don't. Don't allow those textbooks to sway* your thinking textbooks change to. Ask yourself, what formulas did the powers that be use to allow us to have high supply and little to no demand when "That was the time to buy because RE only appreciates" LOL.

Want to hear one better, there was a time when you could only move in on the first of the month why has this changed? Like I said you are a big loser who has lost forever you will never flip your condo or what has it in WillyB thats fact and supported by so.

Craigslist? Really? That's the best you could do? "Big loser who has lost forever"? Yikes. Ok, mutombo, this has been fun. Good luck on your farewell tour with the Rockets.

guys, really... grow up.

nyc10022, I'm sorry bjw2103 started messing with me.

nyc10022 did you see my question to you?

"all of SE knows munckee in no situation to put 90% down on a new condo in WillyB LOL munckee no pun intended. If he were in a situation to put 90% down he would not be looking for a coupon in WillyB."

•Well, welcome back to the exact kind of discussion I've grown to expect around here. Frankly, you (or anyone else on SE) doesn't know squat about me. And there's no "pun" in your statement, rather just an insult. I'm certainly not looking for a "coupon" as you put it. I happen to like Williamsburg. For MY needs, it works well and is comfortable.

"Well-rehearsed on this board. There are debates as to what the correct ratio is, but generally it is thought to be between 15x and 20x rent/buy for breakeven. Numerous 25-30x examples have been given on this board. I personally pointed out a lot of 30+x, 20 pine was a good example of such."

> •Could you explain that ratio? Have a link that might help me understand?

Check the 20 pine thread. You might have to dig a hair.

It is simply sales price / yearly rent. Thats it. The "breakeven" is debatable, it seems to be 15-20x in most analysis... and there have been many apartments shown to be more than that on this board.

"I'm not claiming its wrong, but it's certainly a bit off from the math I did. As I said, I figured that I could rent a 1BR in a similar area for what it would cost to buy, but the primary difference would be the type of place I'd get. To get into a similar rental (to what I'd buy) would bring the cost up by another $750-1k/mo. which is a substantial difference. Don't know if your ratio takes that into account, or simply figures what one could rent something for."

The analysis generally looks at similar apartments. 20 pine, they're pretty much the exact same apartments, some literally, some the same layouts just on different floors.

The other examples have also been apartments offered for sale or rent - this comes out a lot with brokerages. I saw a 32x on my block just last week. And I did the comps with my apartment. I'm sure my rent could be higher, but I'm at a 40x right now with my latest renewal.

Now, prices are moving all over the place - both sales and rentals - so its tought to get a "market" assessment, but there are definitely specific examples of cheap relative rents in a lot of places.

> I'm interested in Williamsburg for a variety of reasons - hopefully we can avoid the neighborhood
> bashing that seems to go along with any mention of the area.

With all the new construction, and talk of developers renting, I can't imagine you not being able to find a rental deal. The best deals might be from owners who don't live there and can't sell, and are willing to take losses just to help with the mortgage. Lot of that at 20 pine, would not be surprised to see much of it in Williamsburg.

Personally, I like WB, but its a little young for me... I'm there probably once a month. Actually, its less sheer age, more attitude. Its the old fart hipsters I want to punch the most.

"It is simply sales price / yearly rent. Thats it. The "breakeven" is debatable, it seems to be 15-20x in most analysis... and there have been many apartments shown to be more than that on this board."

munckee, nyc10022 is right. If you're looking at something that's well over that threshhold, that would be a major concern to me. This doesn't factor in outdoor spaces, etc., but it's one of those general rules of thumb that serves as a decent guide to pricing. 20 Pine is a crazy example, but a real one nonetheless. Obviously, avoid a building in a similar sitch.

"With all the new construction, and talk of developers renting, I can't imagine you not being able to find a rental deal. The best deals might be from owners who don't live there and can't sell, and are willing to take losses just to help with the mortgage. Lot of that at 20 pine, would not be surprised to see much of it in Williamsburg."

This hasn't happened on a widespread basis yet, at least not in the northside. There are a few examples (Northside Piers has that rent-to-own thing going), but you'll see a LOT more of it in Greenpoint, esp that block of condos north of McCarren (Manhattan Ave Condos, Northpoint, New Condos). I'd imagine you'll find more of this in "East Williamsburg," but as you probably know, that's just not the same area at all.

"Actually, its less sheer age, more attitude. Its the old fart hipsters I want to punch the most."

I agree! But they're dwindling in numbers, thankfully.

It seems that for the "ok, I can rent a 1BR (but not nearly comparable to the type of building I'd own)" scenario, it comes out to ~19.6. For the "renting a place comparable to what I'd buy" scenario, it's down around ~13.3.

Am I to assume that the lower the ratio, the more I should be inclined to buy?

> I agree! But they're dwindling in numbers, thankfully.

Really? Where are they going?

> Am I to assume that the lower the ratio, the more I should be inclined to buy?

The lower the ratio, the cheaper renting is vs. buying (and vice versa).

That being said, if you are expecting prices to decline further, then that could factor in as well. I'd rather overpay renting for an extra year or two and make it back 10x buying at a lower price.

The ratio itself is really just about "carrying cost" what it effectively costs to buy/rent. What you choose to do with that is something else.

In the best case, you rent something cheaper to rent than buy, and then buy something at a lower price later, and you end up positively on both fronts (discount, and you actually saved money waiting). Beyond that, its about what you are looking to do.

How is there a 'breakeven' price to rent when downpayments and marginal tax rates vary? Like a dividend paying stock, if your monthly savings vs. rent is so great that a loss of 15-30% of value can be recouped in a short time...then 'value buyers' whatever that means in current context can begin to put a floor into a market with a lot of downward price momentum. Its hard to see how that's any less than 30% down from the 80c on a peak dollar we're at. Its lower if interest rates start moving up (despite best efforts of government).

And I haven't read the whole thread, but I'd think its clear that new devs will go down harder because they flew further and higher on cheap money (low interest rates and low down payment)...like a leveraged stock has to fall more.

"The lower the ratio, the cheaper renting is vs. buying (and vice versa)."

Huh? I think a clearer way to say it is that the lower the ratio, the closer renting and buying are to equilibrium from a current cost basis. Some would say 12x is equilibrium some would say 18x, but the bottom line is, if you feel you are at 13x, that is a pretty comfortable number to buy or rent (on a current cost basis). I would run some sensitivity analysis on that number (decrease rents, decrease asking prices, etc) to give further comfort with the current cost number. Additionally, you should note that this is current costs, if you buy and stay for a long time your ratio should improve (lock in mortgage while rents go up) however, we are at a stage in time where that timing is quite difficult to predict.

The ratio is at a point in time...at purchase. Rising rents is why people pay a high one to begin with. Its not relevent now.

> "The lower the ratio, the cheaper renting is vs. buying (and vice versa)."

> Huh?

Right... I accidentally reversed it. The LOWER the ratio, the CHEAPER buying is relatively speaking.

> How is there a 'breakeven' price to rent when downpayments and marginal tax rates vary?

There isn't one absolute breakeven, for sure. Its not just downpayments and marginal tax rates, it also includes maintenance costs, RE taxes, and a host of other factors. Its just a ballpark to work from... but you can easily do more specific calculations once you have a specific place in mind.

"The ratio is at a point in time...at purchase. Rising rents is why people pay a high one to begin with. Its not relevent now."

Rhino, I totally agree. It really shouldn't be used as a do-or-die greenlight test; it's just a general guide to gauge a ballpark value. As for rents, you're right, but you have to figure that at some point, rents will start rising again. Who knows when that will be, but people buying with a longer-term time horizon should be aware of that.

Ratios should fall when rents are falling because no one knows where its going to stop. Conversely, people will pay a higher ratio when rents are rising. Maybe the takeaway here is that you should simply not buy when rents are falling because you cannot calculate the ratio... No that's not right. The issue is when rents are falling, you should demand a low-ish ratio. We really do need to go under 10-12x don't we...because the rent could be off by 10-15% or more.

"Ratios should fall when rents are falling because no one knows where its going to stop."

That's incorrect. The ratio would get larger if rents fall making it less attractive to buy. If prices fell and rents stayed constant, the ratio would decrease and it would make it more attractive to buy.

"Conversely, people will pay a higher ratio when rents are rising."

Somewhat true. It could at least be an argument for buying at a higher ratio.

"Maybe the takeaway here is that you should simply not buy when rents are falling because you cannot calculate the ratio... No that's not right. The issue is when rents are falling, you should demand a low-ish ratio."

I think that is a good way to look at it assuming prices are flat

"We really do need to go under 10-12x don't we...because the rent could be off by 10-15% or more."

There is a lot of debate to what true "equilibrium" is. 10-12x would be a very attractive ratio to buy. However, I think your point is the right one, as rents fall, these ratios change so some sensitivity analysis is prudent.

Munckee, I'd throw in my $0.02 -- we might have another lesson in deleveraging (as if prior ones weren't enough).

Deal is -- deverlopers currently can't meet their pro-forma financial goals. They are sitting there, chewing slowly through their funds or whatever actual cash they have on hand. But this tranquility can not continue as their loans are coming due. Nor tomorrow, not next week -- but the axe is in motion.

So, devs might try to stick it out... alas they are long in a downtrend and I'd be betting lenders will end up taking properties over from the devs. At that point we'll be seeing firesales. Naturally, firesale might mean different thing to different people, but when those lenders have to close fast their prices will be far, FAR below even today's cheapest asks.

Throw on top of that bad situation in CRE and we'll be back to 1998 levels (inflation adj. probably if not worse) where 1BR costs $200k and nobody wants a studio for $75k as those who could already bought 1BRs while those were $300K.

Seriously... we'll be sitting here in January 2010 and studios at ask $300k will feel like sweet-sweet times :)

What if the developer's lender goes bust midway through construction?