Walking away from contracts

Some reasons:

1. You loved the place SO MUCH (and you can afford it comfortably) that you just have to have it, even at a 40% mark-up (using bs10065's #s). Similar concept: Bidding war.

2. The cost (monetary, psychological, physical or otherwise) of having to move to/remain in the current residence by breaking an existing purchase contract outweighs the the anticipated 40% loss. e.g., You have to get out of your current rental, and you have a contract to move into your OWN new apt. which you love. You won't mind the prospect of a 40% mark-up. e.g. 2, You need to move out of the current place, but you hate moving. So that you won't have to move in the future, you purchase now at a 40% mark-up.

More reasons: You "sold high" and see a new purchase as simply swapping assets. You have a 10-20 year time horizon. You see RE as different than a simple financial transaction/investment and not like buying a stock or mutual fund. That quality of life figures into it all along with the financial aspects--unlike buying a stock. This is kind of a dumb question. People's circumstances differ. One-size fits all financial approach is a sure sign of financial naivety.

Duvravcic offers two, not entirely implausible, reasons for making an irrational economic decision. That doesn't make the decision any less irrational. I'm in a situation that resembles aspects of the scenario Duvravic describes. I'm contemplating a bid on an apartment I first saw a year ago, a year before I sold my former residence at the top of the market. It's a spectacular space, I know I would love living there, and I can afford it. I'm living in a rental short term, and would prefer to move from here to a place I own. However, although the price has come down drastically, the realities of the Manhattan marketplace leave no doubt that an offer at anything close to the current asking price would be imprudent economically-- I would be throwing away money that could be put to better use for, say, retirement savings that I will likely need given the future trajectory of Social Security. Persuading myself to buy because I really "love" the place, or don't want to incur the intangible, non-monetary "costs" of continuing to rent is a sentimental alibi for a bad economic decision, not a rational justification. In the current climate, I can perfectly understand why a rational economic actor would say, "I love this place, and I'd prefer not to have to move to another rental, but I want to put my assets to their highest valued use, which, at the moment, is not overinflated Manhattan real estate. So, I'm going to walk away or offer what I think the apartment is worth, even if my offer is refused."

Another possibilities--you entered into a contract with a seller in distress (e.g., divorce, bankruptcy) and you got a great deal. It might not be such a great deal now, but your potential losses are much more limited.

All valid comments. Must be nice to have an extra few hundred grand to throw away (literally) for the sake of being attached to an apartment that you love. I guess I am an economic beast - obviously noneconomic factors do play a role to a point. But when the delta is potentially half a million on a 2BR apt, hard to fathom emotions taking over that much.

bs10065...short term, no one knows where the manhattan market is headed, data or no data. Your guess is as good as the most respected "expert". But historically over the long term prices rise. So maybe, since you CANNOT time the market, the best time to buy is when your life situation says "hey, I'M READY, it's time to buy!"

steveF: "So maybe, since you CANNOT time the market, the best time to buy is when your life situation says 'hey, I'M READY, it's time to buy!'"

It may be true that you can't perfectly time the BOTTOM of a market, but that does NOT mean that when faced with the either-or question of "will the market move up or down in the next year?" the best anyone can do is a 50-50 guess.

My personal guess is that for most apartments in NYC, there's at least an 80% chance that their prices will be lower 12 months from now. I may not be able to time the perfect BOTTOM, but I can still, with reasonable certainty, estimate the probable short term future of prices.

Just because it's on sale does not mean you have to buy it. In fact, there really are no forced buyers. There are and there will be more and more forced sellers who need to sell due to loss of income, divorce, death or Madoff. UD shows 252 contracts signed in the last 30 days in Manhattan. Inventory is 9,426. That is 37 months of supply assuming none of those contracts get cancelled. 1,188 new listings in the last 30 days and 1,416 price cuts. You might not want to believe it steveF but even Manhattan real estate can be subjected to the economic laws of supply and demand. Noah's chart of new listings versus contracts signed is eye popping.

cherrywood, I don't think you get it that not everyone is looking for bargains. Do you know how hard it is to find a place you absolutely LOVE in Manhattan? I've had some places that gave me a boner--but they have been in Brooklyn, where I just cannot live for many reasons. I considered, but I just can't.

If I find an apartment that would give me a boner in Manhattan AND IF I CAN AFFORD IT, who are you to tell me that I am being irrational? Remember, I CAN AFFORD IT. Comfortably so. Why is that irrational? Why do I have to wait for it to go on sale (or even worse, rent), delaying the gratification of the immediate ownership? I just don't get it.

yo..jake...

cherrywood.... wow.. I wish my wife thought like you :)

"Timing markets" does not work but the RE market is not a "true" market.... b/c people are completely emotional about it. Me thinkz... the emotion that I sense may be a tad negative and accelerating.... no?

duvracic... do you know the kinds of boners you can get with $5,000/hr... ask Elliott... :)

Let me do the math.... mmmmm wait ....save $1MM on my 3bdrm (already saved $500K in 3 yrs)..... get call girl at $1000/nite (I'm cheap like that).... I can't do the math... but I thinkz those are many years of boners... and that's on top of the boner I have from being in the "right" apt..... duvie... perhaps u be broker? Not a put down.... just a Q :)

I think the main reason people do not walk away is the emotional aspect of losing their 10%. In many cases, that 10% is more than $100,000.

Bingo, alpine. So much of buying is psychological. It's a tremendous decision to pull the trigger in the first place, and then to have to consider walking, especially when walking costs tens of thousands of dollars - that's rough.

Duravcic, I don't disagree that you have every right to your (non-economic) preferences. And I have every right to call those preferences irrational, as an economic matter. Gustibus non disputandum and all that. To be sure, the Chicago school economists do say that at the end of the day "value" is determined by willingness to pay. So I say . . . knock yourself out, baby-- just don't pretend that there's no meaningful difference between maximizing your (subjective) utility and maximizing your (objective) wealth.

cherrywood, I must disagree because your argument is basically that everyone should shop at the outlets, instead of the retail shops along 57th Street. That is YOUR value priority and YOUR right to do so, but you cannot assess how "irrational" paying retail might be to other consumers. Here is why.

There is an $800 pair of Prada shoes I absolutely adore and (feel that I) need, which, at the end of the season, may be available at the outlets for $560--or at a 30% discount. Now, you must realize that the same pair may NOT be available at that time at the outlets. So you pay retail for them.

This may be a poor financial decision for middle-class Americans, who should be saving money and who shouldn't be spending that much on a pair of shoes. I agree with you. However, if you have sufficient income, the 30% difference won't even make a dent in your wallet.

The same is the case for many in the NYC RE market--keeping in mind that MANY of us with a great deal of disposable income are NOT in finance, retail, service, etc. and are NOT adversely affected by any economic fluctuations. In fact, many of us in medicine, for example, have recently been blessed with increased patient traffic.

I've been looking at properties in the $1m range, WELL below my means, and paying 50% less (or 50% more) won't make any difference to my finances whatsoever. In fact, I prefer NOT to wait at all and purchase if and when I find a good, "boner-worthy" property in that price range. So, cherrywood, my CPA would agree with me that I am not making an irrational financial decision. I CAN EASILY AFFORD IT. Period.

Duravcic, The fact that you think "I can easily afford it. Period." is a relevant rejoinder to my argument demonstrates beyond a shadow of a doubt that you lack even a tentative grasp of rudimentary principles of economic theory. Why don't we just agree to disagree?

Okay, cherrywood, if that makes you happy.

But you are simply wrong because the "judgment" you are passing on me absolutely requires general base data on my salary, which you don't have. With your big words, you must realize that logical flaw. Again, $1m is WELL, well below my means, and an extra 30% (or minus) won't even make a dent (or a bump) on my bank accout. It's as insignificant to me as paying $1.29 or $.99 on a pack of gum. Seriously. Why is that so hard to imagine conceptually?

Duravcic, It's not a matter of "conceptual imagination". I don't want to get into a logical fallacy dispute with you, but to say that paying 30% (or 40% or 50%) more for real estate (or any other commodity) than you could get it for 30 or 40 or 50 days from now "won't even make a dent (or a bump) on your bank account" is, as you put it, "simply wrong"-- it will. What you mean to say is that you don't CARE if it makes a dent or bump (chose your trope) because you want what you want when you want it for reasons that have nothing to do with the economics of the purchase. Fine. The fact remains that from a wealth maximizing (as opposed to a utility or preference maximizing) perspective, the decision to pay 30% more now for something that probabilistically speaking will cost you 30% less at some future date is not rational economic behavior. It's not about what makes me happy-- it's not my money so I don't care. It's about the fact of the matter, and facts are stubborn things-- you'd be out of money that you would otherwise have.

BTW, I'm not judging you (how could I? I don't know you). I'm judging the soundness of the "argument" (you think) you're making (if that's the right word for it). Have a terrific weekend.

3. Its the only cash down payment your have (had)

4. You spent some time looking, finally found something you could commit to, and got very used to the idea of arranging your furniture in the space, the thought of starting the process over (and who knows when after you've committed yourself to waiting for the lows) fills you with dread.

Still, I'm an economically-driven beast, I would walk.

the popularity of blogs only really just started to take off after Sept 11, 2001. I wonder what the discussion would have been like in these boards had they existed during that time when everything seemed very bleak as well. Granted, there are definately major differences this time around but still, then there was a lot of lost wealth, Wall Street job losses, people fearing for their lives of another terrorist attack, anthrax, dirty bombs and real estate prices down 10% minimum in just a few months. At that time the move out of equities as an asset class into real estate was due to the fact that equities seemed much riskier than the real estate. This time real estate is the problem and not internet valuations but still recoveries do eventually come and the tax shelter of $500k of capital gains for a married couple is the best available in the US... i think it all comes down to your time horizon and what stage you are in in your life cycle (single, married but no kids, full family, empty nester, etc) and thus the difference in your housing needs and ownership horizon.

go get em... cherrywood...
duvi... gotz a boner... or prada shoes... now i'm confused.... bramus?

Actually w67, rogerwilco is on to something-- we do need to acknowledge "existential" concerns like "housing needs" & "time/ownership horizons". RW adds a nice wrinkle to the economic question (in noting, e.g., the capital gains tax benefit). And,in a vast improvement on the duvi's banal Prada example, wilco makes a fair and nuanced point about the concrete value of goods that are not directly monetizable, but which, depending on one's stage in the life cycle, still confer demonstrable economic benefit.

Ya know, I try to not be too negative, but sometimes reality just gets in the way. The reason I think, personally, that I would walk away from a contract is because I don't really think a 30-40% decline from the peak prices is going to be it.

I mean, as I see it, we're in deep butt mud. We've had the largest (near) bank failure in history (WaMu), the largest bankruptcy in history (LEH), huge forced mergers (BAC/MER & JPM/BSC), the bailout of the world's largest insurer (AIG), the bailout of the world's largest mortgage underwriters (Fannie and Freddie), a stimulus package with direct checks, a nearly 1 TRILLION (think about those zeros) stimulus package in money thrown at banks, the near-failure (probably still gonna happen, at least to one) of the Big 3 automakers, the bankruptcy of a large electronics retailer (CC), the lowest stock prices for MSFT, GE, BAC (just to name a few from varying industries) in a decade, the largest real estate declines in 30+ years, and, oh yeah, some of the largest monthly job losses since the Depression.

I don't want to be a stick in the mud but, ah, come on.

Couple those rosy pictures above with the fact that interest rates were kept at lows when credit was ridiculously easy to obtain. Real estate values, SKYROCKETED, in the last ten years, while incomes didn't grow; except mainly in the real estate and banking industries. Whoops. Look at when NYC values exploded in the last 10 years. Kinda coincides with interest rates at 1% and bank stocks on the rise, no?

Sure, this is a very diverse city that will always have an alluring pull. However, the losses from the income of the banking industry and real estate sales cannot be downplayed. The money tossed around by banks, construction, and real estate sales is all but gone and not likely to be returning anytime soon.

New developments are coming onto the market as rentals because they can't be sold. What is that gonna do to the prices of other, "old" rentals? What industry or industries are filling the void left from banking, real estate, and construction layoffs to come in and rent or buy these vacancies? How is a city that received a majority of its income from these sales going to continue to grow as it did without that funding?

PD is understaffed and cutting future academies down, FD is talking layoffs, arts and education are being cut. Projects everywhere are being put on hold. Will higher crime, diminished arts (all those closed Broadway shows), slashed education spending, dirtier streets, anemic tourism due to a (for now) rallying dollar and economic downturns throughout the world, and a battered job market really keep this city growing as it has?

I dunno about you, but I find it hard to believe. The city, and the country, has been in relatively undeterred ascendancy for over 25 years; maybe this has lead most to forget that times have been much worse for much longer periods of time...

duvravcic, one point and one question. You keep saying you can afford it, and putting it in caps. That's great, and we're all happy for you. One of the beautiful things that riches allow is that ability to do irrational things without noticeable negative consequences. That doesn't make them any more irrational. In other words, I agree with cherrywood - you can afford to be irrational, and that's great for you.

Incidentally, your prada shoes example is not great, because you may value your time to go to the outlets more than a few hundred dollars. I very, very much doubt that you value your time not to shop for another apartment at a few hundred thousand dollars.

My question is more interesting. You say that the few hundred thousand dollars by which you overpay don't matter to you, won't make a dent, you can afford them, etc. Extrapolating, I would think your income would have to be well north of $1MM/year, and your liquid assets in the same neighborhood for a few hundred thousand to be as insignificant as $0.30 on a pack of gum. And you say you're not in finance, and sounds like you may be a doctor. Celebrity doctor perhaps? Because I certainly don't think I know any doctors that make that kind of money. The only people with that kind of money that I know are either (a) in finance, (b) celebrities, (c) bigshot CEOs or (d) heirs to wealth. What do you do, and how did you manage to get so wealthy?

that doesn't make them any less irrational, I meant.

simlar to holding long positions in the stock market -- and it falls --- and then it falls again -- and again--- and with impending poor 4Q and 1Q results --- you are still long --- not trading -- just sitting there like an idiot watching your funds deplete....

hmmmm...

InvestorMan: Sad to say, but I agree with your doomsday scenario. Does anyone even remember the '80s?!?! I'm afraid NYC is already heading back to the '80s ('70s?), in regard to more crime, higher unemployment, broken-down subway system, more crime, more people living on the street/in shelters, even less money for schools, dirtier streets, did I mention more crime, and more violent crime. I think fewer students will come here for college or after college, AND that fewer families will stay in NYC, reversing the trends of the last decade.

Open question: Me, I'm a middle-class American (by NYC standards) in it for the long haul (I heart NYC) and am looking to buy my first apartment, a 2bed/2bath (in a safe neighborhood) for, I hope, considerably below $1M. I'm in no hurry; how much longer should I wait? InvestorMan said >>I don't really think a 30-40% decline from the peak prices is going to be it.<< I know nobody has a crystal ball, but how much farther do you predict prices will fall?

suznyc,

My advice would be to put in lowball offers today. The market is clearly heading down, so there is no rush to buy. If someone accepts your lowball offer, then great. If not, best to wait.

bs10065: Thanks for the advice. Makes sense.

Don't hold your breath for a true 2-bed, 2-bath in a good nabe for less than a mil. .

Sure, you could dredge up a tiny box with a few extra walls and a couple of miniscule waterclosets that calls itself a 2-2 but if you're hoping for a well-proportioned classic 6 for under $1M, well, ain't gonna happen anytime soon, if at all.

I must add that for all the delusional sellers out there, there appear to be a similar number of delusional buyers, as evidenced by suznyc's post. It'll be interesting to see what happens as these two sides finally begin to get their heads out of their arses and come to terms with reality. Then, perhaps, we'll finally start to see some movement in the market.

We're not talking about prada shoes here, we are talking about what is generally the most significant purchase of anyone's life.

This isn't waiting for a sale, this is making sure you aren't risking your financial future.

Squid - sounds like you are fairly delusional. A relatively nice 1,300 sq ft 2 BR/2 BA that was $1.5M in 2007 will more than likely be selling for under $1MM when this all shakes out. To think otherwise is being naive. I would agree that there are differences in NY than the rest of the country. For starters, most NYers that can afford these types of apartments are not living "check to check". Yes they may be overlevered/stretched for an apt under the assumption the bonuses would keep coming, but even if they lost their job are probably not down to their last $$'s. Unlike a typical family in the Sunbelt who couldn't even afford a downpayment, took out a 95% interest-only mortgage and is now, well up sh*t's creek when they lose their job. BUT eventually the NY'er who currently has enough cash in the bank to cover his $1.5M mortgage private school garage spot, etc. (read: 20-30k/month in expenses) can't do this any longer. After searching fruitlessly for a job in finance earning his old 400k-1mm compensation he realizes those jobs simply don't exist anymore (nobody is hiring, banks won't be paying that to mid level VP's/junior MD's going forward and hedge funds continue to blow up by the day). As a result, this person will be forced to sell at some point - it might not be right away, but the time will come...maybe 6-18 months out. Suddenly all those $1.4-1.7M 1,100-1,400 ft non descript 2BR apts will be selling for 700k to 1M. Now tell me who is delusional to think you won't be able to find decent 2BR under $1M in the next year or two.

bs10065, I totally agree. It's the mid level former wall street warriors that are going to drive the 1-2.5mm apartments down when they realize their paychecks will never recover. The ones with young families who bought those apartments are going to bail for the suburbs. By doing so they can cut their monthly living expenses in half and still feel like they are living the stereotypical upper middle/ lower upper class "good life".

>>Squid - sounds like you are fairly delusional. A relatively nice 1,300 sq ft 2 BR/2 BA that was $1.5M in 2007 will more than likely be selling for under $1MM when this all shakes out.<<

Depends on what you mean by 'relatively nice'. If by 'relatively nice' you mean any or all of the following descriptions - low floor, zero light, view of a brick wall, non-attended lobby, a somewhat undesirable nabe, cramped rooms, funky layout, estate-condition wreck in need of gut reno - then yes, it's entirely possible you'll grab yourself a deal for under a mil within the next year.

If, however, you're pining for light, space, view, solid building, great nabe, then I wouldn't hold my breath.

But hey, prove me wrong. I'd be ecstatic to find my dream apartment for under $1M.

Squid - you seem to think the market will hold up. Maybe I am on the UES and am a bit skewed on prices since I realize downtown is more pricey. With that said, pre-crash you could have gotten a fairly decent 2BR apt (1,200+ sq. ft) for $1.5-1.7 million. I think we share the view that a run-of-the-mill 2BR should have never been that expensive (1,200-1,500/ft was nuts - that was 5th avenue pricing 7-8 years ago). After prices come down 30-40% (WHICH THEY WILL), those same apts will be back to 2002-03 prices of high six figures at best. Wait and you'll see.

how long do you think people will hold onto their sale price...before they realize they are not going to get the 1k per square foot anymore...I say during the summer...any thoughts....maybe fall..right before the holiday's ...

We just went through an extensive rental search. We wanted/needed a 3-bedroom or 2-bedroom convertible 3 with a balcony or some other outdoor space. Most of the stuff we looked at was 1100-1400SF or so. There were literally tons of options for around/under $5000, including some with amazing views, great locations and/or beautiful interior.

For those apartments to sell for under $1MM would require the buy/rent to go below 20x. Doesn't seem delusional to me at all.

Obviously depends on just how nice you want your neighborhood - I am not describing 5th, Madison, Park or the prime areas of CPW.

We were looking UES, UWS and midtown, so I admit I don't know downtown very well.

16-17X, not 20X. I need remedial math, but the point stands.

How much have rental prices come down? I have a large (1,500ft) 2BR for $6,500 on UES. Wonder what it would rent for today.

I've seen the biggest rent drops on the UES. Times put out an article saying 15-30% in some cases. Medians seem to be in the 5-9% range, but that includes rent stabilized and such that can actually increase in these markets.