Detailed analysis of building and call for predictions
Started by Trompiloco
almost 17 years ago
Posts: 585
Member since: Jul 2008
Discussion about
Hi guys, I've just completed a detailed analysis of price trends in a building that I've been watching closely and I want your feedback. I think it may generate a productive debate. This building (444 East 86th) is a good example because it's solidly OK without being fancy. UES, very good school district (PS290), acceptable maintenance and a bit too far to the East of subway. It is big and... [more]
Hi guys, I've just completed a detailed analysis of price trends in a building that I've been watching closely and I want your feedback. I think it may generate a productive debate.
This building (444 East 86th) is a good example because it's solidly OK without being fancy. UES, very good school district (PS290), acceptable maintenance and a bit too far to the East of subway. It is big and therefore it provides tons of info. There are plenty of 2/2 in the market (there was another thread debating whether they should be considered 2/2 or Jr4, but since a few sold for over 1M in 08, let's call them 2/2 for sanity's sake)
OK. So here's the data. The highest ever sales were 3 in 08 of apartments I assume were luxuriously renovated, but not necessarily on the highest floors:
Sold 11/2008 32 F 1,080,000
Sold 07/2008 19 A 1,050,000
Sold 04/2008 9 F 1,100,000
Consquently, 3 very nicely renovated apartment got listed in 2008 at even higher prices, but they were too late to the party:
33 F OLP 1,300,000 (05/2007) now: 999,995
36 F OLP 1,150,000 (02/2008) now: 999,000
18 B OLP 1,200,000 (01/2008) went through 7 price cuts and sold for 775,000 on 02/12/2009
In conclusion, there has been only one sale after all hell broke loose and it has been 35.5% below OLP and for a 2004 price.
What do you expect the apartments currently listed to sale for?
I'll give you the run up of those apts.
There are 2 luxury renovated ones in high floors (33F and 36F) asking close to 1M. They would have to sale for what 18 B sold or less.
There are 2 that appear to be in passable condition and have been in the market for 5 months, going through price chops but keeping the floor differential:
23 F @ 825,000
6F @ 750,000
There is one wreck on a relatively high floor (16A) that just came in at 765,000.
For this last one there is a relevant comp, which is a estate sale in 2008 on a higher floor (29H) that went for 925,000 at the absolute height of the market. If the peak-to-through fall is 40% and we substract a few extra bucks for lower floor, I say 16A should sale in a few months for 530,000 to 580,000. If things got scarier it could go for as little as 450,000.
In terms of history, the obvious comp for the 2008 estate sale at 29H is a same line likely estate sale in 05/2004, 8H, that went for 535,000, meaning 43% less.
So, my prediction is that the top-tier of these apparent 2/2 will fetch between 700 and 750 when we hit rock bottom. The middle-tier will go for 600 to 700, and the lower rung for as little as 480. What do you think?
I hope everybody's head is spinning now. Sorry for the math.
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Response by nyc10023
almost 17 years ago
Posts: 7614
Member since: Nov 2008
Trumpiloco: Don't get hung up on the 40, 50, 60% off "peak" thing. Look at what that unit costs to rent now, and that's all that matters. IMO, prices will reset until it costs the same to buy as to rent, and factor in the fear of losing capital on top of that. At the last trough, it was cheaper to buy than to rent.
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Response by nyc10023
almost 17 years ago
Posts: 7614
Member since: Nov 2008
I don't know the Upper East Side well, but just to give you an example: small 2-bedrooms in our neighborhood cost approx. 4500 to rent back in late '99, to buy that same apartment cost us 90k down and 3000 (after tax deductions).
So we bought. I suspect that once prices reach that level (I don't know what rents are in Yorkville), people will start buying again though not in big numbers because of fear of losing capital.
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Response by crescent22
almost 17 years ago
Posts: 953
Member since: Apr 2008
By my calcs, we're already there (rent/buy parity) at $700,000. Highly assumption based, but 20% down, the monthly payment on a $560,000 mortgage at 6.375% is $3500. Tax effect that at 33% and add maintenance of $1600 with 40% tax deductible and the total is about $3650. This is below where Yorkville 2-bedrooms are going for.
Do people not assume the 20% down when doing these comparative calculations? Because all-in-cost is likely above rent in the theoretical situation of 0% down
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Response by Trompiloco
almost 17 years ago
Posts: 585
Member since: Jul 2008
In that specific building I only found 1 rental available and it's for a 1br/1bt @ 2,750. Apparently the apartment has been available for rent for over 1 year. There are two 1/1 for sale at 635K and 599K with 1250 in maintenance. Assuming everything goes for ask, both the rental and the sales, the relationship is:
a 490K mortgage at 6.25% + 1250= 4267 - (33% off 3200, meaning 1056)= 3211
versus
2750
You also have the opportunity cost. But I think the most relevant factor is how much would that rental really go for? I think both prices have a lot to fall...
But that's just me.
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Response by stevejhx
almost 17 years ago
Posts: 12656
Member since: Feb 2008
crescent22, the way to do the calculation is if you could buy the apartment and rent it out to an unrelated third party and break even. Forget your fancy "tax break" calculations because no bank will take that into consideration for financing, and it disappears if your salary changes. Reductions in tax are reductions in tax, not reductions in carrying costs.
So if it costs you #3,500 to rent it should cost you no more than $3,500 if you buy (factoring back in any tax abatement) on a net cash-flow basis.
"WHAT ABOUT THE TAX BENEFIT?!" you're still screaming.
If you look at it as an arm's-length third-party rental, you get to deduct EVERYTHING except principal from your costs. That includes property taxes, mortgage interest, maintenance, etc. Only when you at least break even with all those deductions would you consider buying an apartment to rent out to someone; otherwise, you would be carrying a long-term operating loss. Why, then, would you pay more to rent an apartment to yourself (effectively what you're doing economically) than you could get to rent it to an unrelated third party?
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Response by stevejhx
almost 17 years ago
Posts: 12656
Member since: Feb 2008
If you want to do fancier calculations and take the tax benefit into account, you need to use the imputed rent calculation, which also takes into account expectations for future price increases. Do the math - using imputed rent (or even owner's equivalent rent) NO ONE would buy a property if the expectation is that it will decrease in value in the future.
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Response by columbiacounty
almost 17 years ago
Posts: 12708
Member since: Jan 2009
think you nailed it with your last line...all the math in the world goes out the window if the underlying value of the property is in potential free fall.
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Response by crescent22
almost 17 years ago
Posts: 953
Member since: Apr 2008
Good points, steve, plus the tax benefit from interest falls as the mortgage goes on through the years.
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Response by triplec
almost 17 years ago
Posts: 27
Member since: Dec 2007
Tax benefit also decreases if Obama's plan is passed re: lowering tax deduction at a certain income level (forget what it is - $250k/year, I think).
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Response by Trompiloco
almost 17 years ago
Posts: 585
Member since: Jul 2008
Also, stepping aside from the rent vs buy argument, there is a very basic argument to be made here about buyer psychology: the seller of 18 B, who took 35% below his OLP, definitely thought things are going further down and didn't want to risk it. That was around Christmas, when the DOW was at 9K and the idea of an economic recovery by mid-2009 was not a punchline. I would add at least another 10% down since then just for buyer psychology, which would put the current mark-to-market value of 18 B at 700K. The B line has three exposures and a balcony, and the F line has one exposure and no balcony. On top of that 18 B was on a higher floor and in better condition than 6 F, which is currently asking 750K. So, in all fairness, I think 6 F would be lucky to get 620,000 today. And tomorrow doesn't look promising.
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Trumpiloco: Don't get hung up on the 40, 50, 60% off "peak" thing. Look at what that unit costs to rent now, and that's all that matters. IMO, prices will reset until it costs the same to buy as to rent, and factor in the fear of losing capital on top of that. At the last trough, it was cheaper to buy than to rent.
I don't know the Upper East Side well, but just to give you an example: small 2-bedrooms in our neighborhood cost approx. 4500 to rent back in late '99, to buy that same apartment cost us 90k down and 3000 (after tax deductions).
So we bought. I suspect that once prices reach that level (I don't know what rents are in Yorkville), people will start buying again though not in big numbers because of fear of losing capital.
By my calcs, we're already there (rent/buy parity) at $700,000. Highly assumption based, but 20% down, the monthly payment on a $560,000 mortgage at 6.375% is $3500. Tax effect that at 33% and add maintenance of $1600 with 40% tax deductible and the total is about $3650. This is below where Yorkville 2-bedrooms are going for.
Do people not assume the 20% down when doing these comparative calculations? Because all-in-cost is likely above rent in the theoretical situation of 0% down
In that specific building I only found 1 rental available and it's for a 1br/1bt @ 2,750. Apparently the apartment has been available for rent for over 1 year. There are two 1/1 for sale at 635K and 599K with 1250 in maintenance. Assuming everything goes for ask, both the rental and the sales, the relationship is:
a 490K mortgage at 6.25% + 1250= 4267 - (33% off 3200, meaning 1056)= 3211
versus
2750
You also have the opportunity cost. But I think the most relevant factor is how much would that rental really go for? I think both prices have a lot to fall...
But that's just me.
crescent22, the way to do the calculation is if you could buy the apartment and rent it out to an unrelated third party and break even. Forget your fancy "tax break" calculations because no bank will take that into consideration for financing, and it disappears if your salary changes. Reductions in tax are reductions in tax, not reductions in carrying costs.
So if it costs you #3,500 to rent it should cost you no more than $3,500 if you buy (factoring back in any tax abatement) on a net cash-flow basis.
"WHAT ABOUT THE TAX BENEFIT?!" you're still screaming.
If you look at it as an arm's-length third-party rental, you get to deduct EVERYTHING except principal from your costs. That includes property taxes, mortgage interest, maintenance, etc. Only when you at least break even with all those deductions would you consider buying an apartment to rent out to someone; otherwise, you would be carrying a long-term operating loss. Why, then, would you pay more to rent an apartment to yourself (effectively what you're doing economically) than you could get to rent it to an unrelated third party?
If you want to do fancier calculations and take the tax benefit into account, you need to use the imputed rent calculation, which also takes into account expectations for future price increases. Do the math - using imputed rent (or even owner's equivalent rent) NO ONE would buy a property if the expectation is that it will decrease in value in the future.
think you nailed it with your last line...all the math in the world goes out the window if the underlying value of the property is in potential free fall.
Good points, steve, plus the tax benefit from interest falls as the mortgage goes on through the years.
Tax benefit also decreases if Obama's plan is passed re: lowering tax deduction at a certain income level (forget what it is - $250k/year, I think).
Also, stepping aside from the rent vs buy argument, there is a very basic argument to be made here about buyer psychology: the seller of 18 B, who took 35% below his OLP, definitely thought things are going further down and didn't want to risk it. That was around Christmas, when the DOW was at 9K and the idea of an economic recovery by mid-2009 was not a punchline. I would add at least another 10% down since then just for buyer psychology, which would put the current mark-to-market value of 18 B at 700K. The B line has three exposures and a balcony, and the F line has one exposure and no balcony. On top of that 18 B was on a higher floor and in better condition than 6 F, which is currently asking 750K. So, in all fairness, I think 6 F would be lucky to get 620,000 today. And tomorrow doesn't look promising.