psychology in 1994 downturn. NYT article

"What do people expect for $179,000 -- 1,500 square feet and an $800 maintenance?"

lol, why not?

i didn't know this happened! "Banks would not lend money to buy studio apartments." that really helps to bring down the low end of the mkt.

studios are more risky for lenders than 2 bedrooms, no doubt about it. i just never heard that banks didn't lend for them.

Interest rates on conforming loans are a lot lower today than 1994. And this article is about the low-end of the Manhattan market, at the last low point in value. So will we see those kinds of values again. I doubt it.

it all depends on how bad the economy gets. unemployment is just starting to go up in nyc but it's at 10% in many states already. check out japan, real estate values not only never came back to bubble prices but they keep on going down as of today!

the aging of the population is key to asset prices and in USA it should be a negative force for the next decade and a half. something puzzling to me is how politicians in washington disregard the effects that inflating USA out of this crisis will have on the old living on fixed income.

A classic example of what price/rent ratios used to be in Manhattan.

Annual rent: $16,800
Price: $99,000

Price/Rent ratio: 5.89

Compare that to today's ~ 20.00 X!

That also works out to a "gross" yield on investment of 17%!

Conclusion: Prices have to come way down in order to reach more reasonable price/rent ratios.

ACROSS town, Bill Brandt is trying to sell his one-bedroom at 320 East 42d Street in the Tudor City complex for $99,000. The 21st-floor unit is beautifully restored and has what Mr. Brandt calls a "Euro kitchen" -- a one-piece stainless steel unit with sink, stove and refrigerator, built into about as much space as a large hall closet. There are views of midtown and plenty of sunlight.

Mr. Brandt had lived in Florida for the last few years and rented the apartment out for "about $1,400."

""I tell them it's 325 square feet," he said. "Actually, it's smaller than that, but I want them to at least see it before turning it down."

The last sentence is kinda funny. Pretty soon most sellers will be saying that. At 5.89X annual rent, I could buy my 1-bdrm for $155K, or about 300/sq ft. Patience - it will get close to that IMO - 2-4 years from now (when interest rates are skyrocketing b/c of inflation).

"it will get close to that IMO - 2-4 years from now (when interest rates are skyrocketing b/c of inflation)."

yep, true. a good strategy is to buy at that point with cash. although having a mortgage that gets paid through inflation is not a bad situation to be in!

In the NYT article - "Apartments on or below the second floor of doorman buildings were excluded as were walk-ups of more than two flights because the market for such apartments is a more specialized one."
What does it mean that the market is a more specialized one? 15 years later, have things changed?

""Apartments on or below the second floor of doorman buildings were excluded as were walk-ups of more than two flights because the market for such apartments is a more specialized one.""

rachel, here "specialized" is an euphemism for "too crappy to be considered" IMHO.

anyone who thinks you can get a 1 bedroom anywhere near $155k is delusional. Seriously, in order for that to happen, hal the city would have to doe from a plague.

I remember those days well. My coop was selling sponsor-owned 300 sq ft studios for $26,000 - $40,000 cash depending on floor. 750 sq ft one bedrooms were all in the low $100s! I tell people in their 20s and early 30s who werent around then about this and they dont believe a word of it.

Well, alpine, I know we would all hate to see the city "doe."

meant to say die.

or we could also say DOA.

Older or disabled persons prefer first floor apartments.

admin, BSexposer, eal:
what about the salary back then? Inflation? Market?

"anyone who thinks you can get a 1 bedroom anywhere near $155k is delusional. Seriously, in order for that to happen, hal the city would have to doe from a plague"

Well, Wall St is pretty much dead. The mortgage broker industry is suffocating due to plummeting sales volume / prices. Law firms are laying off tons of people. All of this will trickle down to every industry / profession. Banks aren't lending unless you put down a MINIMUM of 20% cash - that excludes 50% of potential buyers. Mortgage rates will eventually go back up. Not saying you will get 1-bdrms for $150K, but $300K is definitely possible. Prices will overcorrect on the downside - 50-75% off of peak prices IMO.

beholder, all I can say is that on a young law associate's (second year, top tier) salary + legal assistant's in 1995 ($130-150K combined income), we were able to afford a small two bedroom coop, and we needed less than $15K to close. I can't recall our interest rate, but our total after tax cost was around $1500 monthly, if I recall correctly.

for what it's worth, i was finishing high school back then, so this is reading econ and finance papers, not from 1st hand experience: discretionary income was higher than now, no doubt about it, for the average worker. not true for so for those at the top of the food chain. for the avg worker salaries didn't keep up with inflation and basics like education and health skyrocketed. mtg rates from 7% to 9%, but the current tightening of lending standards will do more harm on prices (due to shrinking pool of buyers) than a 2% difference on rates.

http://mortgage-x.com/general/national_monthly_average.asp?y=1994

when it comes to inflation, in the early 90s there were changes to the methodology and i'm not sure that they completely kicked in by 1994 (i'm kind of sure htey didn't). to see apples to apples you need to undo them as John Williams does in shadowstats... (grossly add 3% to current estimates). if the official one was 4% in 1994, for time series comparisons one should use sth closer to 7%.

"The compounding effect since the early-1990s has reduced annual cost of living adjustments in social security by more than a third. "

"In particular, changes made in CPI methodology during the Clinton Administration understated inflation significantly, and, through a cumulative effect with earlier changes that began in the late-Carter and early Reagan Administrations have reduced current social security payments by roughly half from where they would have been otherwise. That means Social Security checks today would be about double had the various changes not been made. In like manner, anyone involved in commerce, who relies on receiving payments adjusted for the CPI, has been similarly damaged. On the other side, if you are making payments based on the CPI (i.e., the federal government), you are making out like a bandit.

In the original version of this background article, I noted that Social Security payments should 43% higher, but that was back in September 2004 and only adjusted for CPI changes that took place after 1993. The current estimate adjusts for methodology gimmicks introduced since 1980. "

http://www.shadowstats.com/article/consumer_price_index

also on the buyer's side, it's not only about the quantity of discretionary income but also volatility of that income. the pre-mortgage debt burden is higher than in the 90s (the buyers that enter the mkt now enter it with more student debt than those that entered it 15 years ago).

the competing uses of the money that could go towards buying a better/bigger house are not so discretionary for Gen Xs, like saving for retirement (there's higher belief of social security not being there among the young) and education of their kids. i wouldn't be surprised if in housing "less is more" for the future youngsters and mac mansions go the way of the dodo.

IMHO, the 15-year gap, make a difference in the marketability of an apt. The special market of retired baby boomers, working class Gen X and Gen Y, and the emergence of NYC as one of the safest and best-living city in USA -- have made apts referenced in article sound great.

expect prices to revert back to the mean, maybe slightly higher than these prices, but only slightly

but shouldn't the unsustainable price increases due to easy credit overshoot to the downside? both thanks to forced selling and foreclosures.

admin, absolutely. real estate is generally an (approximately) 20-year cycle. it is much, much different generally than other asset classes. it, like all other classes, overshoots to the downside in serious downturns, but it tends to take a LOT longer.

rachely, your arguments also all work to the downside. there are people who live here now who have seen very little of what NYC can have to offer during a downturn. i think we'll color them surprised over the next couple of years.