Ok, so credit at the lower end is looser than I thought it was . . .

"I was told that overall, we could run a debt service ratio of up to 45% of our income."

wow, which bank is this? this seems a reminiscence of the humongous credit bubble we just went through. it's not 100% dead then.

I know, right? Ah, those glory days when Citi let me borrow at a ratio of 50% of my income! (To be fair, I never missed a payment.)

This new quote was from Wells ... if you want to email me at work (ali [at} dgneary [dot} com) and put "Streeteasy" in the subject line, I'll give you the name of my guy.

ali r.
{downtown broker}

ali, don't you consider renting yourself a bigger apartment for a year or two and buy at much lower prices? or you think that prices are not going to go down from here?

i'm thinking, if you want to buy a nice 2Br/2Bth for example, your savings could end up being several annual combined incomes that you could use for retirement (just as an example, or to retire earlier, or college for your future kids). the possibility of paying several hundred thousands less for the same unit is worth considering. also, you might not want to find yourself underwater if your income or your hubby's for some reason diminishes. obviously you could sell your current studio if that happens, but probably at a lower price (as the price of your studio and new home have correlation +1). it's a courageous move to buy into this mkt.

this is why most apts that are selling are under $900k right now...

admin, one reason that I am buying is that I am a bull who predicts a static sideways market for the near future -- if I DON'T think prices are going to drop 20%, and I fear that rates may climb from here (both true), then I want to buy now.

Secondly, we can jump a couple of rungs up the ladder -- from a studio to a Jr. 4, or at least a fake one -- but we can't jump too many rungs. 2BR/2BAs in nice downtown buildings are, at way over a million, still way out of our price range. (*sob*)

You guys have all bought my book, right? Http://tinyurl.com/2ag28z (*evil grin*)

ali r.
{downtown broker}

"DON'T think prices are going to drop 20%, and I fear that rates may climb from here (both true), then I want to buy now. "

i agree with the second, disagree with the first. if you are buying with a lot of cash then you actually want rates to go up to lock in as small as principal (the value of the house) as possible. if you are financing most of it, then you care more about monthly payments. so maybe even if prices go down 20% you might not care so much. my strategy would be different, i would try to lock in the lowest principal possible and then refi to a lower rate down the road. i would wait to see more distressed sales coming into the mkt, waiting for prices to go down more so that the big jump is possible. save cash like crazy meanwhile.

read your book and loved it, you are a great writer!!

admin, do you think that in the future conforming rates will get much lower than they are now?

if "future" means a few years, no. in the very short term maybe but only for a little while if the FED keeps on trying to artificially lower them. but the 10-yr bond yield (their closest benchmark) has no where to go but up.

harvard? true?

when i was growing up they used to say "you go to harvard and you can write your own ticket anywhere!"

why didn't you write your ticket to a bigger apartment? the little bit of your book that i just read on amazon looks well-written and fun to read.
well done.

Thanks for the info, ali & good luck with your search. Hope you'll update us on your progress.

Questions: I assume you are partic happy that you bought a condo because now, you can turn it into an investment prop by renting it out?

Had yr studio been a coop, you'd not be able to treat it as an investment prop (since coop bd wouldn't allow rentals) & you'd have to sell it in order to buy a new place?

Thanks

Portfolio lenders want to lend more but have been highly restrictive (especially for jumbos), that should ease a bit as confidence builds. Rates should ease a bit lower as well, assuming again money begins to flow.

oh my! ali, i was going to tell you exactly the same thing as sniper.

there's going to be a big mkt for a fun to read book about the nyc housing bubble. the book i'm thinking about is one that will end up as required reading for MBAs and real estate courses but is also a great gift to give to anybody that's about to buy his 1st home. getting people like jonathan miller or urbandigs to contribute would be great, interviewing players maybe. including bullish typical statements at always appear at the peak of every bubble: for sure!

could include basics of the economics of real estate "for dummies" inside a fun to read recounting of one of the biggest real estate bubbles in history. i'm thinking about my own kid for ex. i'd surely put him to sleep if i try to tell him about the real estate bubble 2000-2008. instead, i'll give him your book and he'll have fun reading it while making him more financially literate.

for you it could be the gift that keeps on giving, and will land you the 2br/2bh.

Harvard, '87. Lots of my classmates have had great careers (I think Jeff Zucker who runs a TV network was a year or two ahead of me) but lots did not -- there are still some X factors, and I think frankly sexism in Corporate America is still one of them.

Thanks guys for the encouragement about writing, but I have to tell you Book One (which was favorably reviewed in places from Newsday to Newsweek) didn't exactly earn me a down payment to a new apartment. Publishing in general is having tough times; I don't think I'll end up doing Book Two until I figure out something that works really really well on the Kindle . ..

ali r.
{downtown broker}

I agree admin so that's why I'm a bit confused about what you said here:
"my strategy would be different, i would try to lock in the lowest principal possible and then refi to a lower rate down the road."

If we are already at rates that can't go much lower and they have nowhere to go but up, then refinancing at a lower rate down the road won't be doable.

Bankers will always give you enough rope to hang yourself, be aware of that.

There are basically two kinds of lenders, honest predatory lenders, and dishonest predatory lenders.

1) Honest predatory lenders try to stick you with terms you cannot pay so that they can take your house. That's it, they want you to fail so they can have the property.

2) Dishonest predatory lenders stick you with bad terms and expect you to keep paying on the loan, no matter what.

Those are your two choices. Choose wisely.

By the way, kudos on the correct usage of the word "loose". I'm surprised people are not jumping up and saying it should be lose! Of course, loser is what the banks want when they lend you a ton of money. ;-)

divvie, basically when rates go up home prices go down to compensate for the higher cost of financing. the nerdy example at the limit to illustrate this comes from a paper i've read when the avg home price was around $220k. it estimated that if rates where too high (ie: no credit available) then the avg home price would drop to $85k. ie: when only cash purchases are possible.

now, if you have a lot of cash to put down you wouldn't want to buy a house when there's cheap and readily available credit. first: you could qualify even under very tight standards and second you don't need to finance a whole lot. hence, it's better to wait till credit is more expensive and standards are tighter if you have cash. that's all. it's both the supply/demand issue with the fact that after all, monthly carrying costs have to match income. the higher the financing costs, the lower the principal you can pay with the same income. so unless incomes grow to compensate for this, then the demand for houses at a given price has to go down. better affordability for somebody that has cash means a lower home price. for somebody that doesn't have cash means lower financing.

mini recessions that push rates lower happen fairly frequently. that's when you lock in a lower rate. i expect higher mgt rates on conforming "on average", doesn't mean you'll not see low ones here and there for a short period of time. anyway, this is a hypothetical mental exercise that tries to do the optimal thing on a pure financial basis. that reminds me of my nerdy years...

admin, good posts. the way i look at the whole home price thing is as follows: most people, once they can afford the down payment, figure out what they can pay on a monthly basis and then back into the mortgage they can afford and thus the house/apt they can afford. So let's work through an example, assume I can pay $900/month.

Today: 30 yr fixed interest rate = 10%. The all else equal, I can afford to buy house A for $100,000, with month mortgage of $877.

Sometime in the future: Int rate = 6%. Someone with the exact same profile as me can now afford to pay $146,000 for house A and pay exact same monthly of $877.

So if I buy in a high interest rate environment, where prices have fallen to accomodate for those interest rates, and sell in a low interest rate environment, I can make 46%, all else equal.

I believe admin, part of your point is that you'd rather buy when int rates are high and pay the $100k. Then even if they didn't fall to today's lows, but say 7% from 10%, then not only would you have bought at a cheap $100k price, but your monthly payments are now $665.

In my mind, since interest rates are going up, this is precisely one of the reasons to wait on buying. All else equal, prices will have to fall to accomodate for the lack of affordability of the monthly payments.

exactly Special_K. there are another 2 good benefits as i see it.

1. you lower the chance of being significantly underwater (that risk is high if you buy with very low rates and then they rise significantly). for me this is important if you don't have other significant reserves.

2. the trick of paying off a 30-yr mtg sooner by paying double principal whenever possible is so much easier to put in practice thanks to the lower principal.

obviously if you have $10 million of cash you don't care about any of this. but the mere mortals should think this thoroughly and not fall for the "interest rates are low, hence it's time to buy a house". that's not true across the board.

ali, wouldn't a jump in interest rates lead to a decline in purchase prices? Or are you predicting sideways movement in prices at the same time mortgage rates climb?

I like the THEORY that a jump in interest rates leads to a decline in purchase prices, but so far I don't feel like we're seeing that happening.

For example, let's try to look at the change over the past three months. I think while buyers and sellers can agree that there have been drops from peak 2006 prices, and some people who were pushing crazy list prices are coming to reality, we're not seeing HUGE Q/Q movement out in the field.

The market is so thinly traded nobody really has numbers, but the appraisers are using 1% decline per month --

On the other hand, we have seen rates move up -- by what, 50 basis points in the past three months?

So if I was looking at a $600K apartment with $200K down, in November that would have cost 5% * $400K which is $2,000 a month.

Now in February it's at a $582K apartment at 5.5%, so it costs $5.5 *$382, which is $2,101 a month. As a buyer, it feels like that's moving the wrong way to me.

To balance the 10% move up in rates, the apartment's price would have to be $565K now, and I just don't feel like I'm seeing that much of a slide.

ali r.
{downtown broker}

not sure i understand your example front_porch. the apartment hasn't sold yet. maybe it sells for $500k for all we know. more importantly, the move in prices down is much more driven by all the other negative macro factors affecting nyc. the effect i am talking about regarding interest rates is marketwide. it's a fact, when rates move up, real estate prices fall. for something as small as a 50bp move, you might not see any impact. trust me, if rates went to 10%, manhattan would be down 60%+ from peak.

Front Porch,as a real estate broker, you should know that Wells Fargo is terrible with coops. Go to Citibank or Chase for coops. I realize you are looking at condos but the majority of purchases are for coops.

"I like the THEORY that a jump in interest rates leads to a decline in purchase prices"

LOL, this sounds like creationists calling evolution just a "theory"

anon10, my experience with clients has been that Chase is holding their money in their pockets and not lending currently.

ali r.
{downtown broker}

I didn't think credit was loose until I spoke with a friend this w/e who is getting 90% financing, about 40-50% of which is a HELOC. He lives in Atlanta but still I didn't think deals like this were being made anywhere.

i've heard anectodally that credit is loose for comforming loans. this was the whole point of the massive bailout of fannie/freddie right? the gov't is simply subsidizing loans to those people. the current loan limit in the city is a little over $600k right now i think. as i mentioned above, this could explain a lot of the activity we are seeing in studio/1 beds.

ali,
Chase is holding their money? How is that going to help lead us out of this crisis? Are you serious about this? How can they not be lending? Somebody call Washington.

And give me those old time coops, 25% down and none of that funny HELOC stuff. People should buy what they can afford.

No wonder Fannie/Freddie may need another $200 billion.

"this could explain a lot of the activity we are seeing in studio/1 beds." great point!

"this was the whole point of the massive bailout of fannie/freddie right? the gov't is simply subsidizing loans to those people." i've never wanted not to be a taxpayer so badly before.

admin - could not agree more, although I'm one of those irritating left-wingers. I don't mind paying taxes, but for f's sake, could you invest in something decent on my behalf? I went all cash shortly after the Dow's peak, only to become a taxpayer/owner of AIG, Citi and the GSEs?

i'm amazed at the gov wasting $ trying the impossible (keeping inflated home prices from falling) while letting empty food pantries to rely on private donations and having a tough sell extending unemployment insurance. the 1st money should absolutely go towards avoiding the worst. not into making people believe that their home and 401(k) will eventually rebound. sickening.

> I went all cash shortly after the Dow's peak

If all the folks who said this were actually true, there wouldn't be an economic crisis...

nyc, it's in part that those that timed it right can now talk freely and celebrate. those that didn't don't talk as much.

same thing with housing, i don't think people are dishonest about whether they saw it coming or not. remember the reactions you had to face few years ago while expressing your bearishness on real estate. the bull's bragging was much louder. now they are silent and the only thing you hear is "i saw it coming" from the guys that were treated like losers by the bulls (besides the occasional homeowner playing victim here and there). so anyway, congrats aboutready!

I think public opinion will soon turn with the increase of unemployment, the focus will shift from saving housing prices to saving people from starving by providing temp assistance and job prospects. And this should be the RIGHT thing to do.. not all this PORK and subsidising mortgage rates/foreclosures etc

nyc10022 - I did sell the Chelsea condo a bit early (2004) so my timing was certainly not perfect. The volatility in the stock market was giving me hives.

bugelrex and admin, you're right. nothing like stimulating the economy by providing sustenance, rather than inappropriate asset support and pet projects.

ali, I think the numbers you're mentioning right now are short-term movements - what I was thinking of was larger mortgage rate jumps, for instance if fixed rate conformings were to go up to 7% in the space of a year or so - do you think purchase prices would stay level or only come down too small an amount to make a difference? I should think a significant rise in mortgage rates would be a death knell to RE given all the other factors' alignment. But I do note with interest your observation that the lower market segments are holding up better than the jumbos.

"We won't take full advantage of our borrowing capacity -- we don't think it's prudent to spend that much on housing,"

Sure it is. Buy a condo you can't afford, and get a bailout from the government!

ali, regarding the THEORY one has to get nerdy. i'm not sure how much research on real estate broker are expose to. i'm sure after reading your book that almost none in that 45 hours during licensing (was it 45?), so mostly is after that.

anyway, check out "House Prices, Interest Rates, and the Mortgage Market Meltdown" by Mayer and Hubbard, page 5:

"The data show that for the first two groups of markets, much of the
increase in house prices through 2005 can be explained by fundamentals,
particularly lower real long-term interest rates. However, excessive price
appreciation as early as 2003 in the “recent boomers” is much harder to explain
with a user cost model. This finding is consistent with arguments made by
Glaeser et al. (2008) for these parts of the country where new construction is easy
and prices almost surely must be driven primarily by construction costs. Finally,
high rates of house price appreciation after 2005 are difficult to explain by
fundamentals even in the historically cyclical markets. "

after 2005 my gut feeling is that the expectation of further appreciation and the way availability/cost of credit for an asset works when the collateral is precisely that asset (well explained by what soros calls reflexivity) explain much of the rest. this is an untestable theory of mine given that quantifying expectations of appreciation to begin with is very hard and the second even harder.