What's wrong with my math?

I've been in PCV since 2004. My rent was $2700ish when I moved in, slightly more than $4000 now. Which price do you think more accurately reflects today's economic/demographic conditions?

Also, be careful about the tax relief calculations. They may change.

Aren't you overstating your tax savings (understating your after tax carry costs)? My model spit out:

Price $1,000,000
Down $250,000
Rate 5.000%
Payment $4,026
Maint 1,800
Total Gross 5,826

1st yr int 37,249
Maint @ 40% 8,640
Total Deduct 45,889
Mthly Tax Svgs @ 30% -1,147
Mthly Net carry 4,679

So if my math is correct, it's 16% 'more expensive' to buy (by this one simple measure). And you're only 'throwing away' the difference between rent and maintenance.

I see three issues:
1) Your monthly mortgage payment seems too low, especially for a jumbo.
2) You're assuming that the entire maintenance payment is tax-deductible, which is almost certainly not true
3) You're ignoring the return on the $250K that the renter doesn't have to use as a down payment

the biggest part of the math is not the carrying costs but the equity investment. If real estate falls another 20% in manhattan over the next 18 months,then you've lost $200k of your apt value. Over 18 months, that is $11,111.00/month. Then if you could invest the $250k down and get say 5% on it by renting and keeping it in a conservative investment, you would get another $1,041/ month.

So let's wrap up. All-in costs of renting: $4,050/month, less investment return of $1,041/month = $3009

All-in costs of buying and having real estate go down 20% in 18 months = $4,679 + $11,111 =$15,790.

That's a differential of $12,781/month. Phil, that is what is wrong with your math.

Philyopain,
Your are right on and it's not brain surgery here. But you will get the spin doctors out in force spinning your conclusions.

You might want to add in a conservative 4% return on that 250k down that you wouldn't need for renting which equals after tax on the income approx $600 a month. But you are paying off your loan(principle) about 1,100 per month and that increases every month. Plus your rent increases will increase %wise way more than the carry costs. Plus over the longterm your awesome appreciation gains...:D..That's why renting is a terrible waste of money.

yes Special_K but what if real estate GAINS 20% over the next 18 months then the opposite is true. Yet we don't have a SHORT TERM crystal ball do we? So for the next 18 months it's 50/50 chance up or down. So your argument is useless.

Re: Your monthly mortgage payment seems too low, especially for a jumbo.

There is another thread on jumbo rates. Your (and therefore my) 5% 30 yr fixed assumption is probably too low. Your actual carry costs would probably be closer to $5000.

Otherwise Special K is right on.

Re: what if real estate GAINS 20% over the next 18 months..?

now known in economic circles as "the flying monkeys scenario"

"yes Special_K but what if real estate GAINS 20% over the next 18 months then the opposite is true."

And what if humpty dumpty sat on a down pillowed divan instead of a wall? Try asking that to all the king's horses and all the king's men.

PhilYoPain - in addition to all the variables mentioned in previous posts, the one overwhelmingly obvious one seems to be conspicuously missing: RENT REDUCTIONS. If the recent rent reduction trend continues, that same apartment may be going for 3,000 - 3,500 in a year or less. Factor that probability into your calculations and see what gives.

My guess is that PhilYoPain is another unfortunate owner who is trying to disguise himself as a would be buyer. Sorry PhilYoPain - not biting!

50/50 chance West...50/50 chance...unless of course you show me the Crystal Ball.

steveF,

don't you know that there is a 100% chance of property prices falling over the next year, and a 100% chance that rents will fall as well. i know because nyc10022, johngalt and rhino86 told me. they can read the newspaper, and since that is the trend that EVERYONE knows about, it must continue, at least until we reach 1977 prices, at which time they will all step in and buy, thereby heralding the EXACT bottom, b/c they are able to divine exact peaks and troughs in financial markets.

The math can be manipulated based on different assumptions. But really, the answer is pretty simple. It makes sense to buy if home values are going up. It makes sense to rent, and NOT buy when home values are going down. That's about it.

It makes even more sense to continue to rent when rents are ALSO going down. Plug in whatever numbers you want, but that's the easiest way to look at it. Even if your monthly costs would be lower by buying that $1 mil apt, you are not taking into consideration that you will easily lose most or all of your down payment (on paper at least) over the next 1-2 years.

Therefore, unless you are playing with someone else's money or otherwise have tons of wealth, the answer is keep your $250k in cash or other safe investments for another year, and then buy that same $1 mil apartment for $800k.

printer...lol...i'm so glad you posted

Special_K,
Why did you stop at 20% down assumption? There is another thread here that implies 47% down, making the resulting delta even scarier ;-) Not saying that RE will go up short term, but: the longer I rent, the more money I throw away, and the probability or market reversing the current down trend increases…. Looking eight years out, (when the kids are done with PS41, knock on wood) my rent will cost me $400K. Given $1K /month in interest on the initial $250k, I am still out $300K down the tubes. So, even if I sell the place for $750K, at that point, I am still better off, right? Or do you really believe that the prices will stay depressed for so long?
PS. johngalt1945, get a life. stop looking for ulterior motives in every post.

printer and SteveF - how could you possibly believe prices MIGHT go up 20% in 18 months. First, the decline in prices would have to first, decelerate, next stabilize, and then lastly reverse and head back up. What macroecomic force would cause that? Is the economy in good shape? Are local industries in good shape? Are home prices under-valued in NYC? Do people have better access to financing? Is everyone feeling more secure with their jobs? Are people getting big raises and/or unusually large bonuses? Are rents going up? What exactly would cause NYC housing prices to go up at all - much less 20%?

Renting is not "throwing away money". It's choosing a known financial position at the end of a time period vs. an unknown financial position. The financial risk of buying is much greater than the financial risk of renting so there is a reason why during a risky market buying should be cheaper than renting, as it was during periods of the 80's and 90's.

My feeling is that today pretty much everyone who was seeking real-estate risk is already in the market which is one reason why sales have stalled, will stay stalled, until prices come down low enough to attract the risk-averse (mostly cash, small mortgage) crowd. Your example is fine and dandy for '03-'07 but nowadays you've got to entice a buyer with more than the promise of unknown future returns.

printer - I don't "know" when this market will bottom, and I never claimed to have that knowledge. I wish I did - I wouldn't be wasting my time reading and posting here. Of course, like everyone else, I have an opinion backed up by REAMS of data that I have posted many times.

What I do know - if you read my other posts - is that:
- rent:purchase ratios still have a ways to go for buying to make sense
- employment in NYC is still declining, and with it, renters and owners alike
- inventory is increasing every day (supply and demand)
- credit is still very tight

There are other factors, and I'm sure there are arguments for the opposite as well, albeit VERY far and few between.

The truth is that I'm ready and able to purchase an apartment, but given the items listed above, along with other FACTS and STATISTICS (not opinion), it just doesn't seem to make sense now, or for the next year at the earliest.

As for calling a bottom...you're right, I can't say when or what the bottom will be. HOWEVER, of what I am very confident is that when we do reach it, there won't be any "bounce", "recovery", or any other term associated with the excesses of the past decade. Ultimately, the market will simply stabilize, and as such, I, and other buyers, will be able to take our time purchasing. The way it should be.

pjc..everything you mentioned above is in the process of getting better. U should have bought in Dec 08. Also, the equity market is your best indicator. Money talks.

Re: 50/50 chance West...50/50 chance...unless of course you show me the Crystal Ball

- There is a 50/50 chance when you flip a coin (heads or tails)

- Real estate prices can go UP or DOWN, so one (a child for example) might say the odds are 50/50

But I would say to the child, if we stick a wad of gum on one side of our coin, the odds are no longer 50/50, and there's a while lotta gum in the current real estate market. :-)

west34 there's a whole lotta sideliners that's for sure. look at these boards for confirmation and the fact that sales volume is off 60%. That's 60%! Buyers said "wait for Nouriel to sound a little positive".

"Why did you stop at 20% down assumption? There is another thread here that implies 47% down, making the resulting delta even scarier"

Couldn't agree more.

"Looking eight years out, (when the kids are done with PS41, knock on wood) my rent will cost me $400K. Given $1K /month in interest on the initial $250k, I am still out $300K down the tubes. So, even if I sell the place for $750K, at that point, I am still better off, right? "

No. I have seen people make this mistake time and time again. After tax interest plus after tax maintenance costs are also "money down the toilet." Using west34th's numbers, the $4679 after tax costs include $900 of principal repay. So you have $3,779 of money down the drain even with buying. If the losses wind up being greater than 20%, then you are throwing away the $900 principal per month as well.

Here is a REAL example.

These two are the EXACT SAME unit in the EXACT SAMEE building:

http://www.streeteasy.com/nyc/sale/342481-condo-100-west-58th-st-times-square-new-york

http://www.streeteasy.com/nyc/rental/467053-condo-100-west-58th-street-times-square-new-york

$3500 to rent versus

$1,357,000
Common Charges: $1,136
Taxes: $947
Prudential estimated mortgage:

"Mortgage Amount = $1,085,600
Down Payment = $271,400
Monthly Mortgage Payment = $7,223 [7%]"

So assuming you are in the 45% tax bracket, (which I am) its net $7252.43 per month after-tax deductions to buy a place that costs $3500 a month to rent. Plus you would be out $271,400 for the down payment. I would say that investing $271,400 in a few two year jumbo CDs and/or investment grade muni bonds and saving $45k a year by renting would leave you ahead by $361,000 after two years PLUS interest. The ONLY way you would end up ahead after two years is if the place went up in value by 27% in two years. Raise you hands if you think that will happen?

I excluded closing costs and commissions, and any interest earned on CDs or munis, which would really mean it would have to go up a lot more. Like 20% a year.

Raise you hands if you think that will happen?

I am renting until 2011 at least, no matter what.

I'm not at all disputing the REAMS of data. With the exception of rent/buy ratios (which is an opinion, not a fact), those are all indisputable facts. And anyone who has a pulse knows about them.
By the time those factors turn around, the market will have gone past bottom. Inventories will disappear b/c the sellers will be in a better position themselves. You'll miss the bottom, and while you're stomping your feet that someone should sell you to at the bottom tick that a comp sold for, the market will be moving away from you. You'll have wasted 5 years living in a rental, whose rent by that time is going back up. It'll be a seller's mkt, and you'll end up living, whether renting or owning, in a place that's not what you want.
Or, you could take advantage of the market right now - tremendous inventories and some desperate sellers. Place bids on places you like, with no great worry about a place 'getting away from you', because there are plenty of places on the market. Will you lose some money on paper over the next year or two? Probably, but by the time you are ready to sell in 7 years, you'll more or less be even. And in the meantime, you'll have spent the next 7 years living in a place you love.

SteveF, the equity market is the "best indicator"? Even if that was true, do I need to point out that the Dow is currently in the 7000's, in December it was in the 8000's, in September it was in the 11000's and a year ago it was close to 13000.

If you think that such a massive loss of market wealth over the past 12 months means we might see a quick and fairly dramatic increase in home prices you should be institutionalized.

Not to mention the fact that loss of wealth is only one component of what will continue to reduce demand. Unemployment is up, compensation is down, job security is questionable, credit is tighter. And then on the supply side, supply continues to skyrocket. I am not predicting price drops of 50% in NYC, but an additional 20% drop from here (over the next 12-18 months) seems almost a given.

steveF - I am neither bear nor bull but when you write things like "U should have bought in Dec 08" ... I mean, you really lose a lot of credibility with the more neutral folks posting statements like that.

special_k - come on now....there is no way that you can get a down pillowed divan on top of the wall. It would fall off. There is barely enough room for Mr. Dumpty, let alone this gigantic plush pillow. I think you should stay away from these carzy theories.

Transaction costs and holding time are also important. If you want to move to a bigger place in 3 years, you need to pay 6% broker fee, plus taxes. At $1M you get the mansion tax, city and state add up to 2.1%, does the building have transfer tax? $90,000+ in/out on the buy is a lot if you aren't staying a while.

jason - you are correct, buying that apt for $1.3mm vs. renting it for 3500/month would be a stupid thing to do. but who, exactly, is suggesting doing that? i think that most of the non-chicken little people on this board are saying that you can, without much difficulty, find places where the after-tax cost to own is (slightly) below the cost to rent. picking a new construction that some flipper bought at the peak and is desperate to get some type of cash flow in against his monstrous under-water loan is like shooting fish in a barrel.
The only argument people make, which is both obvious and true, is that for places which fit the description I outlined above, if prices decline 20% in the next year, then buying was a poor financial decision, though not devastating unless you have to sell.
Of course if prices stabilize, or go down only slightly, then buying was the better decision. And if prices go up, then it was a great decision.

But the problem is the example I cited was not isolated in the slightest. There are several others for rent in that same building, and this all over the city is pushing down rents hard at Rockrose, Avalon, etc as well as there down-market kin like Jakobson. Rents are collapsing, while asking prices are remaining fairly firm. Meaning the E in the PE ratio is falling, meaning the assets are overvalued. Its VERY easy for me to find places for rent that are FAR less expensive over the (at least) next three years than to buy. Its actually much HARDER to find the reverse. A two bedrrom convertible to 3 with 2 baths in GV? For $1MM? Not since 2000.

jason, those apartments aren't trading at those ridiculous asking prices, so its irrelevant to the discussion. its like me using 12x rent (which is where many people would bid) as the price to prove that apartments are cheap. the market is where properties are currently trading, and though real-time data is hard to come by, I think that those prices aren't so far off from post-tax cost = current rents.

"jason, those apartments aren't trading at those ridiculous asking prices, so its irrelevant to the discussion. its like me using 12x rent (which is where many people would bid) as the price to prove that apartments are cheap. the market is where properties are currently trading, and though real-time data is hard to come by, I think that those prices aren't so far off from post-tax cost = current rents."

What are you talking about? Post-tax costs, but EXCLUDING maintainence, property taxes, transfer taxes, closing costs and insurance? You can't take the good and ignore the bad. Until we see actual data showing actual price declines, I assume asking rents and asking sales prices are firm. In fact, asking RENTS are negotiable as are asking sales prices.

Parity in the absence of emotional factors is not the catalyst to buy. Given a 20% overshoot on the up, look for at least a 10-20% overshoot on the way down.

Given there are many fundamental factors, which printer refuses to address other than saying "you don't know", driving the market down without sign of bottoming, look more confidently for a 10-20% overshoot on the way down.

Stocks are at 1997 levels with a proven superior income yield over time thanks to the profit motive- the real question is why even glance at New York real estate trading at 2005 levels if the best argument is parity to falling rents?

Who is John Galt?

the real question is why even glance at New York real estate trading at 2005 levels if the best argument is parity to falling rents?

ummm, how about for a place to live? i never argued that New York real estate is the best, or even a great, or even a good place to park investment money. i wholeheartedly agree that US stocks are a better place to put your investment for the intermediate term. Owner-occupied real estate is about a lot more than finding the best ROI.

there was a thread where someone had uploaded a model for calculating all kinds of stuff (including monthly payments, net carrying costs, etc.)... and there was some back and forth at tweaking it. can anyone point me to that thread (can't find it from my searches), or put up a basic model for us?

Well printer that is great and I agree. its just that my lease is up June, and there is NO WAY I am buying given the math as I see it. I think prices will be flat or down in real terms until 2011, so I would rather be the sucker who waits too long than the fool who dove in too soon.