Where we're going from here - the bullish argument

This is from a recent speaking engagement (check out what Ian Gordon thinks about stock market):

Roubini said the latest surge is just another bear market rally following the pattern of other rallies after the government intervened. He expects the market will test the previous low because of worse than expected macroeconomic news, disappointing earnings and because banks will fail after the stress tests come out.

"Once people get the reality check than it's going to get ugly again," Roubini said.

Roubini made the comments before appearing with bank analyst Meredith Whitney and Canadian bears Ian Gordon and Eric Sprott at a Toronto event titled "A Night with the Bears." They all correctly predicted the current financial meltdown.

Gordon, author of The Long Wave Analyst newsletters, told the event's audience of 1,500 that he expects the Dow Jones industrial average to plummet to 1,000 based on the idea that economic events repeat themselves in regular sequence every 60 years or so.

Sprott, a Canadian hedge fund owner, told the predominantly business crowd that systemic risk remains and that investors should buy gold.

I liked this one - "By this time next year, as bonuses have been paid out..."
At best, IMO, these bonuses will be in line with 2008 bonuses (which sucked across the board).

IMO, that's a plausible best-case scenario.

The Somalian Pirate War?

Where to begin. I actually think your scenario is the way things will play out but not until 2011 at the earliest.

Stock Market-yes we have had a remarkable bear market rally. seems to be sputtering at the moment though. even if this were the bottom in the market the Wall st that poured gasoline all over the RE market rise does not exist anymore. Do you really believe the days of mega bonuses are around the corner? Actually a rising stock market hurts the RE market as people put their coins in what the feel is a cheap asset. RE is still expensive both in people's minds, price/rent ratios and price/income ratios.

CAlifornia/florida etc-we are done with the first wave of foreclosures due to the bursting of the credit bubble, the second wave is coming due to resets and unemployment.

I would feel more confident of a bottom in RE prices if people stopped calling every sliver of good news a bottom. We need real capitulation to hit bottom. Right now sellers have hope. That needs to be crushed before a bottom is put in. The accumulating weight of overpriced inventory will push down prices in a much more rapid time frame than is usually expected in RE. Early indications show the spring selling season to be a bust.

Interesting that it's now considered "bullish" to predict a 12-15% drop in current values, on top of an existing 20-25% drop (in other words a 30-36% drop from peak to trough). And then increases of 2-5% per year from there (meaning it would take around 10-12 years to get us back to peak prices).

I happen to completely agree with this prediction, but I hardly consider it bullish.

West81st, you were referring to printer, right?

I think there is so much unknown (jobs, stress tests, uptick rule, mortgage rates, will the banks actually lend money to companies, what will the bonus/TARP money situation be for the banks, will the mortgage deduction be capped at 28%, does the economy show signs of recovery and anything else that hasn't been thought of yet + a bunch of other things I didn't mention) that I think it is almost impossible to predict what the short-term future will hold for us. We are at a point in this recession where we might be at a turning point (up or down), but it is different from past recessions and the government intervention is different from other recessions that I am not confident in a "rock-solid" prediction of things getting much better or much worse at this point.

That said, no one wants things to get worse. Let's hope the economy stabilizes and the jobs picture isn't as bad as it might get and people get through this.

I'm going to draw upon Ritholtz today (although there's another good Rosenberg warning available as well):

www.ritholtz.com/blog/2009/04/misunderstanding-positive-data/

I'd just add that there is some truly horrid stuff coming out: pensions; life (and other) insurance companies (government's on that one though); CRE (gov't just announced possible plans for that); foreclosures and mortgage delinquencies are increasing again; personal credit defaults (credit car, auto, and student loans) all increasing; bankruptcies are on the rise, hugely, both personal and projected business; but most of all

THE STRESS TESTS. Don't have the link, but Reuters is reporting that the government is planning to delay the results of the stress tests until after banks' reporting season is over to "soften the impact on stock prices." They are further reporting that the government thinks it may be damaging to report the results for given banks, so they may do a composite report, a state of the industry sort of thing. Inquiring minds must wonder what the hell this portends. Treasury only has about $150 billion left, so they'll need to get back in front of congress shortly. Do they think they'll get the money without making the results of the stress tests public?

waverly: Yes, I was referring to printer's scenario as a plausible best case. A plausible worst case might be very different. Macro isn't really my department.

cfranch - no, i don't believe we'll return to '05-'07 level bonuses, that's why i said "confidence in bonuses - albeit at much reduced levels from recent years". However a 35% decline from '07 prices would take us back to '03-'04 type levels, which is where I think bonuses will go back to once things are said and done.

I'm with West81st and waverly on this. This is probable best-case, though I don't think anything's nearly stable enough to feel confident one way or the other. There is always the greedy part within that would love to pick up a great apartment for a dirt-cheap price, but I don't think that's enough for me to say anything will happen with absolute certainty. Good post though, printer.

Well thought-out analysis.

Based on it, when do you think you will be able to buy an apartment and rent it out to an unrelated third party and not lose money? That would require in most instances a 50% decline from current prices, whereas you are predicting at most a 15% decline. Are you, therefore, predicting an 80% increase in rents when, in fact, unemployment is skyrocketing, incomes are falling, and rents are falling along with them?

Thanks West81st.

This plausible best case suffers from two major flaws it strikes me (even if the macro picture turns out to be right): 1) the downturn in nyc re is still in the early, sticky reality-denying phase, so it won't be clear how bad things are for a while, particularly with the new developments that are teetering on the edge of collapse..unlike say Miami where things have been unwinding for a long time..2) it seems to disregard the pure bubble, greater-fool element of nyc prices that never made sense, even in the good times in my view.

I don't think that most people looking to buy now are investors, so that measurement is not relevant to my analysis. And I'm not going to pretend to know enough about how those properties are financed, and the tax strategies one can utilize to reduce the cost of ownership, to hazard a guess as to where investors will see value.

That said, if my 2 bed that's priced at 825k is renting at 4500/month right now (see discussion in this link http://www.streeteasy.com/nyc/talk/discussion/10000-success-on-neogotiating-new-rentals), with a 2200 month maintenance, drops another 15%, the price would be 700k. at 2300 net a month to the unlevered buyer, that would yield a return of about 4%. Not great, no, but not horrible given that the 10yr is around 3%, and if you believe my scenario that the underlying asset value (and rental income stream) will both resume a more normal 2-5% appreciation, its a pretty good investment.

A lot of strange things are going on in the financial markets, and to commit a major investment by looking at yield relative to treasury yields would be fraught with peril. Planning your life around very low tr yields when the government is hellbent on reflating the economy is a bit like buying an apartment in nyc because you think the price will go up.

There was relatively little speculation in the NYC market (compared to FL, CA, NV, etc.) so I don't know how accurate it is to compare the unwinding of the market here to what happened in those locales. I know there were many in other hot real estate areas that made a living flipping property, and I don't know a single person in NYC (not saying there weren't any, but not many) that made a living doing this. I think it's anybody's guess where things will be a year from now, and this thread has some excellent thoughts, but I will be surprised if it follows a patern similar to other US markets. The 80% co-op market really dis-incents (sp?) heavy transactional activity through board reviews, flip taxes, etc.

OTNYC, you haven't read the stories of real estate brokers buying up properties in developments? Plus our new development develops at a very different pace. FL, CA, etc. had flippers holding devalued apartments. NYC has developers holding devalued apartments.

For this market to truly move as a result of declining prices one would need to see underwriting standards relax a great deal. There are some sideliners with plenty of cash, but I think a great many people who were priced out of the market were, so to speak, priced out of life as well. I don't see that there are that many people sitting on the cash necessary to purchase certain classes of apartments. Some may do better.

I don't mean to make a direct analogy -- my point is , if something doesn't make sense (Tr yields at these levels when the govt is printing money), and apartments selling at 1500psf , steer clear.

Also, your apartment seems to a less egregious than many examples of rent/price relationships.
"
Are you saying you don't think prices will fall dramatically in all these recent and new developments with price psf of well over 1000, sometimes as high as 1700psf or even more. There are numerous examples that seem insane, and were based on greater-fool more than anything (phrased more euphemistically, as "a good investment"). Check The Caledonia, for example.

"I don't think that most people looking to buy now are investors, so that measurement is not relevant to my analysis."

Which proves, pardon my honesty, that you don't know what you're talking about: That is the measure used by economists. Economic theory says that goods and services are valued at their output value, not their input value. Therefore, as you get the same thing if you rent or buy - a place to live - they should cost the same. Yes I know about the "tax benefit," but a) if you rent out to a third party, you get even more tax benefits; and b) tax benefits are a function of income, not of expenses; c) they are baked into prices by increasing them; and d) they are not taken into account for mortgage purposes.

Moreover, empirically it has been proved that the correlation between rents and owners' carrying costs is 1:1. For all the reasons cited above. And because rents are correlated to incomes, so must owners' carrying costs be. Incomes are falling.

As stated in another thread - and often on this board - until rents are in line with owners' carrying costs, property prices will continue to decline, and inventory will continue to build. Your "analysis" is fundamentally flawed from an economic perspective.

I second jim in that sentiment (and, thus, valuation) of NYC RE, although it may get somewhat affected by the general country-wide sentiment towards the US economy, is mostly local and specific. And we haven't seen one iota of the coming catastrophe here yet. That's why predicting 10-15% down on top of 20-25% down is seen as bullish. That's why LICComment and friends are MIA these days. Take new developments as a test case. Their sales are down close to 70% yoy. They've been offering substantial "silent" discounts to however walked into the sales office, along with other promotions (the funniest one a trip to Venice if you buy at the Rialto in W'Burg). Lately, their discounts have become public and even stridently publicized (all the prestige range from NorthPiers to Avonova). That shows that not enough people was walking into the sales office for the silent strategy to have any future. Combine that with the new requirements from lenders, and the need to pay their construction loans, and that spells A-U-C-T-I-O-N for me, or going rental. That's probably going to come by late 2009, when everything else fails. So I don't personally think the NYC RE market will stabilize just 3 ms after that starts happening, no matter how CA, NV or FL are doing. The only chance would be if everything falls 30% in 6 ms, but that's not likely. So I see accelerating bleeding until 2011. Rents are falling so much that the rent-buy ratio makes the buying proposition more and more unappealing.

"And we haven't seen one iota of the coming catastrophe here yet. That's why predicting 10-15% down on top of 20-25% down is seen as bullish. That's why LICComment and friends are MIA these days."

Trompiloco, you don't consider 20% to be an iota? I mean, what are you expecting, 95% off peak? And do we really need to just lump everyone into camp A and camp B in such a black and white manner? I mean, if your goal is just to say you agree with me, so you're right, and you disagree with me so you must be a broker in denial, that works, but I think we're trying to get at something a bit deeper here. That said, I think you paint a good picture of what one of the more worst-case scenarios might look like.

I guess I am "bullish" since I envision only a 35-40% drop in prices (from peak).

stevejhx - while prices need to reasonably correlate to rent (and currently they are still way, way out of line), I do not think they need to correlate on a 1:1 basis. First of all, there is still a premium for ownership due to the part-real and part-imaginary benefits of owning. Second, if you own for many years, your carrying costs could be greatly reduced compared to then-current market rent (assuming a typical market where prices and rents gradually increase over the years). I think a more realistic price-rent multiple is something like 1.25:1. And we aren't anywhere near there yet, so I think prices will continue to decline - significantly - but not as much as you think or hope.

Steve - I'm not getting into an argument with you on the benefits of the tax-deduction - your position on that has been made clear, and is set in stone. All I know is that when I pay my taxes, they are substantially less as a result of that deduction, which means more cash in my pocket.

Jim, et al. - I agree with you that the new development mkt, and condos in general, will see a larger price decline than co-ops will - that's why I stated that I'm using median co-op prices as my measuring stick. There certainly were flippers involved in those markets, and they drove those prices to absurd levels - the spread in prices between condos and co-ops expanded greatly during the run-up, and I see no reason why it won't contract. In fact, I would expect that spread to collapse to nothing, and in a few cases of developer/flipper distress, to end up priced lower than comparable co-ops.

Finally, the improvement in CA, NV, etc. mkts will have, as I stated in my initial piece, a 2ndary, or tertiary (depending how you look at it) effect on prices in Manhattan. The insane bubble in those markets didn't directly impact Manhattan on the way up - it had an indirect impact through the bonuses paid to bankers/traders/hedgies in the securitization markets. As those markets stabilize, at drastically lower levels, so will the negative impact on bonuses - which will stabilize (for those who still have jobs), at drastically lower levels.

One issue worth repeating is the significant loss of jobs in precisely the segment that would support the rent/buy example example cited above. I have no idea of the actual number of jobs that have disappeared (i.e. never will come back) in the $100K - $300 K range but would imagine that when its all said and done it will be at least 50,000. That will create an impact never seen before I am afraid on real estate in the city.

Another strange phenenoma to consider are the number of people who are living in apartments that while they can afford the monthlies (because they may have paid down the mortgage or have a relatively low mortgage because they've been there so long and purchased at such a lower price), they could not afford to purchase at current levels unless they can sell at current levels. So, unless you are leaving the city for good, you have a real problem in dropping your price to so called reasonable levels for fear that you won''t be able to buy back in.

That will slow down the drop but keep transaction levels much lower for a prolonged time.

"there is still a premium for ownership due to the part-real and part-imaginary benefits of owning."

They're imaginary.

"if you own for many years, your carrying costs could be greatly reduced compared to then-current market rent"

Perhaps. Owning is generally considered riskier; therefore, it should be cheaper.

"a more realistic price-rent multiple is something like 1.25:1"

Then it would be impossible to buy a home and rent it out.

"your position on that has been made clear, and is set in stone."

It's not "my" position - it's the position of economists.

"All I know is that when I pay my taxes, they are substantially less as a result of that deduction, which means more cash in my pocket."

No one doubts that. Until you don't have an income, or until the price of the property falls further than your "tax benefit," which is what is happening.

There are some reports out that up to 600,000 foreclosed properties, many in California, haven't entered the market. They're being held off by lenders as shadow inventory. Plus, morgage mods are failing and the GSEs just lifted a moratorium on foreclosures (which has artificially improved the numbers recently). Unemployment in California, particularly, is ghastly. I wouldn't be looking at California as the place for sunny information yet. Maybe some interim, seasonally-based, improvements, some activity from foreclosures, but nothing structural.

aboutready, i just caught you posting from yesterday about leaving for Seattle. My wife and I are doing the same thing. She is already there with her practice and I will join her later this year. I have been following this(posted below) website for about 2 years now and will give you great insight into Seattle area housing bubble.]
Hope you find it interesting;
http://seattlebubble.com/blog/

Some benefits of ownership are real - freedom to renovate or modify your space, knowing that no one can increase your rent, or kick you out at the end of a lease. The benefits of renting are real too, and often overlooked.

As for the price/rent ratio I take back my comment on the 1.25:1 ratio - actually this is not the metric I would use, since carrying costs of ownership could vary dramatically depending on how much was financed. The target that I actually use to gauge the appropriateness of a price is approx. 15x annual rent.

pgj267, thanks for the site, i'll definitely spend some time checking it out. we wouldn't be moving for quite some time, but i may very well take advantage of this downturn to purchase the retirement home (i need to do some research on reclaiming an investment property for personal use, which i understand can be quite difficult in San Francisco, our other more expensive option, but i hope it's feasible in Seattle).

i'm from the area, and have owned property before in Seattle. i would love to return, but can't feasibly do so until our daughter is in college. i love new york, but it can be a bit of a slog, and i have found it much more tiresome in the last few years. good luck, and begin the yearly chant, summer is only eight months away!!!

pjc, i did some financial analysis and figured out that it would be much cheaper to renovate my rental than to move/buy. i've decided to treat it as a home, instead of a way-station, just like many long-term new yorkers view their rentals.

pjc - 12x annual rent is the standard. It equates to 30% PITI, 40x monthly rent in income terms, depending on the interest rate.

Normally, since real estate is a long-term asset, you would calculate the equation using the rate for a 30-year fixed mortgage, which approximates the 27.5-year depreciation of real estate (sans land).

There are benefits to both owning and renting. Owning, however, is far riskier, and therefore it should be less expensive than renting. Owning is effectively capitalizing and hedging against future rent INCREASES. However, rents do fall, as they currently are falling, so if you capitalize and hedge against them, and they fall, you wind up losing a lot of money.

Regardless of the "tax benefit."

I haven't been MIA at all. But thanks for missing me.
steve is still as wrong as ever about the rent ratio. 12x is too low and and tax benefit analysis has never been correct.
Also, almost everyone who has rented and owned will tell you that there are tangible and intangible benefits to owning. Denying that is just silly.

bjw, you're right, "not one iota" was a poor choice of words. What I meant to say was that, since it's been so sudden and etc., the issue has not hit in the mass media full force yet. I mean, we had denialists here a month ago. Things will change when auctions and real distress and races to the bottom start, which I reckon will be in 6 ms to a year. And I just don't think that it can stabilize soon after that. I expect it to drag on for a bit.

My, my, my... how times have changed.

Here we are on a thread arguing between 35% vs. 50% declines...

WOW. Thats a landmark.

Of course, interesting to note that many of the folks arguing for less of a decline are ones who said there would be no decline... so you know how that goes. ;-)

BTW, when the "bulls" are saying "only 35% down", I guess its officially time for the bears to pull out the "told you so..."s

This may put a crimp in that upward sentiment:

www.calculatedriskblog.com/2009/04/march-fomc-minutes-outlook-revised-down.html

Revised GDP projections basically to flat this year, modest gain early next year. It keeps getting moved back, despite vast amounts of taxpayer money being committed to the cause.

Trompiloco, I agree, it'll likely drag on for a while. I don't know how important it is to worry about "denialists" though (unless you want to play childish games of I-told-you-so, like our pal above here) - the market will work as it has to, regardless of how anyone here wants things to turn out.

One of the biggest benefits to owning is the chance to use leverage to buy an appreciating asset.

Similarly, the absolutely worst part of owning is taking on leverage to buy a depreciating asset.

That's why, for me, the buy-or-rent analysis is simple - if prices are steadily increasing, it probably makes sense to buy. If prices are going down (like now), it makes no sense to buy (unless you have special needs or tons of money to burn). Keep renting and invest in something safe, until there is a noticeable stabilization of prices. That's my philosophy.

pjc has a good philosophy.

Or, buy when rents > owner's carrying costs. It happens.

"But thanks for missing me."

Who missed you?

"steve is still as wrong as ever about the rent ratio. 12x is too low."

12x is the historical rate. Proved by Fortune magazine. Don't know where you get your figures, because you never say.

"and and tax benefit analysis has never been correct."

I was talking about investment real estate. What is wrong about what I said about it? Everything is tax deductible.

"Also, almost everyone who has rented and owned will tell you that there are tangible and intangible benefits to owning. Denying that is just silly."

No one denies it. There are also tangible and intangible benefits to renting. In fact, there are tangible and intangible benefits to just about everything. The question is - at what price?

OP has decided to forget about many many other issues in his 'analysis'

1. Commercial loan losses nowhere near peak, hurting banks, the securitization markets, spreads, etc.
2. New York specific problems - higher taxes, higher maintenance, falling rent
3. It is a much greater hurdle than you think to get the loan market moving intrinsically on its own without government manipulation/subsidization of the primary and secondary markets and without accounting tricks.

Steve - I think you are overlooking the intangible benefits of owning a property. This provides several things to the buyer: The security that a landlord can't raise the rent, kick you out, or otherwise harrass you. The ability to renovate to your desire without consulting the landlord. A sense of accomplishment and self-validation.

Thinking only in economic terms assumes humans are rational beings which we are not. I have a degree in economics and I understand where you are coming from. I have also been a renter and an owner, and regardless of what happens, I just cannot imagine being a renter again. I think I would feel very "unsettled".

> There was relatively little speculation in the NYC market (compared to FL, CA, NV, etc.) so I don't know how accurate it is to compare the unwinding of the market here to what happened in those locales.

The face that prices went to 5-6x incomes compared to 3x historical average is evidence enough of widespread speculation.

I agree - there was a different kind of speculation here maybe, but people certainly bought into the frenzy.

"I think you are overlooking the intangible benefits of owning a property."

Not at all. I have been and am both an owner & a renter. There are intangible benefits and tangible benefits to both. The only question I ask is, AT WHAT PRICE?

Empirically, the correlation of rents to owners' carrying costs is 1:1 in the long-term. The fact is that, in the long-term, very few people are willing to spend a lot more to own than to rent, and vice versa. There is much more risk to owning than to renting - if you are going to hedge your bet against rising rents, you'd better be sure that over your time horizon rents are going to increase and your property isn't going to decrease in value. That is where we are right now.

1999 was a great year to buy property in Manhattan. 2009 not so much, after a near sevenfold increase in prices in ten years. Rents are now collapsing. If someone could show me how this market is sustainable in the medium-term, I'm all ears. The fact is that no one has been able to, and what I predicted a year ago would happen is, in fact, happening.

Remember spunky?

stevejhx - I acknowledge that 15x price-rent ratio is historically on the high side, but in my view this is justified due to the fact that interest rates are at once-in-a-lifetime lows - giving a bit more of an advantage to owning. Still, I wouldn't buy right now (in a highly-leveraged transaction) even if the interest rate was 2%.

OTNYC - I agree that renting is "unsettled". But another way of looking at it is that it also provides freedom. And right now, I would rather be free of massive debt.

People think that "speculation" is the only reason for prices to increase rapidly. It is not. Cheap credit is one reason, rising incomes is another reason.

The fact is, there was a HUGE increase in disposable incomes in Manhattan due to Wall Street bonuses, which were predicated upon false profits that are now being reversed. Those incomes have collapsed; credit has all but dried up. The industry is retrenching, never to be what it once was.

Property prices are a function of disposable incomes and leverage. They should equal rents based on that function. The only reason for them to increase faster than rents is if there is an expectation that prices will continue to rise. AKA a bubble mentality.

The bubble mentality is gone. Leverage is gone. Incomes are drastically lower. Unemployment is rising. NOTHING - no amount of wishful thinking or imaginary analysis and "tax benefits" can change that reality. Nothing can stop this correction, which has only just begun.

Nothing.

"in my view this is justified due to the fact that interest rates are at once-in-a-lifetime low"

That may be true, but it may be offset by increased property taxes and expiring abatements on new development.

stevejhx: "b) tax benefits are a function of income, not of expenses;"...just because you said that, you should have no right to undermine anyones point with your loud, senseless arguments.

In financial markets a speculator is defined as someone who purchase (sells) a good solely because they think the price will increase (decrease). A hedger is someone who purchases/sells a good because it's required for their business/operation. So traders speculate in wheat futures while General Mills buys/sells wheat futures as a hedge.

Shift to NYC real estate. How many people bought in '03-'08 because they absolutely needed the extra space (growing family), wanted to move to a better school district, etc... vs. how many people wanted to get on the free money train that was real estate? How many people bought within their means as opposed to stretching to buy with the intention of being in a better financial situation 5 years later (worst case scenario sell for a small profit)? I'm thinking NYC over the past 10 years is mostly speculators.

"just because you said that, you should have no right to undermine anyones point with your loud, senseless arguments"

Really? If you lose your income how many tax deductions do you get?

I believe the answer is ZERO.

Unless you think it's not.

In which case give me your answer.

80s man's point is well put. Under the rubric of "speculative", I would put the general idea that people set aside common sense because they thought the market would keep going, that there would always be a greater fool.

Now every potential buyer should ask themselves: Do I want to be the last greater fool in the NY housing bubble?

In these threads I cringe every time I rent about the price/rent ratio. No such ratio makes logical sense unless the rent is NET of monthly charges. This is obvious, if you think about it, because not doing so would mean that two apartments with the same rent but very diff. monthly charges would sell for the same price, which makes no sense. Even a rule of thumb has to have some economic logic to it.

While I am at it, to the extent that building services result in higher monthly charges, there is little economically logical reason that a higher services building should sell for a higher price than an otherwise identical apartment, because you will pay for the services forever through monthly charges. (It would make sense to pay slightly extra for physical, permanent amenities that represent historic costs but which have value; paying extra capital price for variable amenities financed through monthly charges would only make sense if there was some scarcity value, ie, some reason other buildings could not offer the same services).

the false god of tax breaks... hmmm if I'm in the 50% tax bracket.. I should be 50% happy to lose money since it's all tax deductible... so if I am at 100% tax bracket I should be trying to lose every single dollar in the market... whoooot! Wheres' my etrade acct?

Nice 80sman.. couldn't have said it better myself. i knew one guy who's capital "appreciation" on his 1 bdrm in 2000-2007 was like 2 x his actual take home pay.... now go figure, how long can this ridiculously last when you are being paid a second or third salary for living in NYC? oh, I got the answer... 8 years...

"How many people bought in '03-'08 because they absolutely needed the extra space (growing family), wanted to move to a better school district, etc" - I think quite a few, actually. The prenomemon of young families staying the in the city in greater numbers even after the second or third child and even once the kids started school is a post-2000-ish development

"vs. how many people wanted to get on the free money train that was real estate?" - there was clearly some of this, more in the new condo market than elsewhere, but I don't think it was the kind of driver of the overall market that it was in, say, a Miami or a Las Vegas

"How many people bought within their means as opposed to stretching to buy with the intention of being in a better financial situation 5 years later (worst case scenario sell for a small profit)?" - I think this is a good point, and it wasn't just speculators who stretched. Many of the families were willing to buy beyond current means on the assumption that income growth would allow them to grow into the real estate in a few years. Aggressive mortgages facilitated this on the condo side, but even in supposedly conservative co-ops I know cases of people doing their permitted 50% (for example) financing with one bank and borrowing a big part of the "equity" from another bank with the plan being to pay down the equity loan with the next two years of bonus cash.

"I'm thinking NYC over the past 10 years is mostly speculators" - Mostly? I just don't see it. A huge number of people did in fact buy to occupy with their family. Many did so on aggressive terms and based on fantasies about future earnings potential, but the speculation was more on career trajectory than real estate as a investment per se.

That's right, w67. In fact, if they raise sales tax to 10% you should go out and buy MORE because sales tax is TAX DEDUCTIBLE!

Just like mortgage interest. Therefore, if sales tax is tax deductible, the more I buy the more I save.

On taxes.

Now, if anybody cares to refute that argument, note that you are simultaneously refuting the "tax benefit" argument for mortgage interest.

sales tax is not tax deductible

columbiacounty, I believe it can be (and someone correct me if I'm wrong here) if you itemize, though I don't know anyone who does it that way (you have a choice between deducting sales tax or state/local taxes from W-2s).

"sales tax is not tax deductible"

Oh yes it is:

http://www.irs.gov/individuals/article/0,,id=152421,00.html

Now - do you care to make the argument?

i thought we were talking about people buying million dollar apartments with annual maintenances of over 50K? If so, I would assume that they need to have at least 250 K in income and if they are living in NYC they are most likely subject to city and state tax at around 10% or $25 K. Since you can only deduct either the $25K or sales tax, I think it is safe to say that sales tax is not tax deductible.

which one do you deduct?

bjw - people items sales tax instead of income tax in states where there is no income tax: Florida, Texas, Wyoming, etc.

You can also deduct sales tax if your state income tax is lower - if you buy a car, but have no taxable income, for instance.

So - somebody make the argument, please!

Sidelinesitter vs 80sman

Isn't this kind of semantics? What do you call it when someone living in Manhattan made the decision to buy an apartment at a price they knew was wacko...but felt that there risk was reduced because prices kep rising, and it seemed that would continue. People I knew were nervous when buying during this bubble, but kept telling themselves it was ok, because, as crazy as they knew it was, it seemed bound to continue onward and upward. Is this speculation?...I don't know.

"Housing in the ground-zero areas of the bubble (California, AZ, Nevada and Florida), are clearly bottoming"

really?..please provide your data...In January Arizona's had its worst month ever..down 5.5%....just because february and march were not down over 5% doesn't mean things are getting better in these ground zero places...the distrsseed situation continues, perhaps after 6 months of sub 5% mortgages things might start to improve, maybe..

i thought we were discussing real estate pricing in NYC. and if you have no taxable income, you are highly unlikely to be living in a multi million dollar NYC apartment. yes...I know there are no doubt 3 people you know who qualify but ....

jimse - starting from 80sman's definition of speculation, the differences are much more than semantic. Relative to your definition, not so much.

I deduct local taxes, but that's not important to the argument.

The argument is - if you deduct sales tax shouldn't you buy more stuff to get a bigger tax deduction?

That is the essence of the "mortgage tax deduction" argument.

But it's patently false. If you buy something for $9.99 it still costs you $9.99, whether you pay 5 or 10 cents less in income tax.

Would you go around saying, "I paid $9.99 for this, but since my income tax fell by 5 cents, it really only cost me $9.94"?

No.

Yet that's what the "mortgage tax deduction" people claim.

Boy steve sure can screw up an argument to try to make it fit his conclusion.

IF you were to deduct sales taxes, and IF your choice was to buy an item or rent it, then when comparing the costs of those two choices, OF COURSE you would look at the after-tax cost to you to buy compared to the cost to rent.

Go ahead steve, contort some other argument in a crazy way to try to make your mistaken conclusion look correct . . .

Sorry LICC, but you pay sales tax regardless of whether you buy or rent chattel. Therefore, it makes no difference.

Plus - that's not the argument. The argument is what does it cost? It costs what it costs, not what it costs net of income tax benefits.

I'm really trying to take you seriously but it's tough. So...when I deduct my mortgage and portion of my maintenance each year from taxes that I would otherwise I've paid, what do you call that?

columbiacounty - I don't deny that you can deduct them, from your TAXES. If you pay taxes. Which means that it reduces your taxes and is a function of your taxes, not of what the dwelling costs you. It does not reduce what you pay every month to the bank, which you must pay whether you have an income or not, and whether you pay taxes or not.

Looked at a different way, if you pay $10 for a widget and sales tax is 10%, you pay $1 in sales tax. If, then, you deduct that from your income tax and you're in the 50% tax bracket (ignoring the argument about how to calculate income tax deductions), your income tax falls by 50 cents.

How much did the widget cost you?

$10.00.

How much sales tax did you pay?

$1.00.

How much less income tax did you pay?

50 cents.

Your total aggregate cost is indeed $10.50. But the widget cost $10.00.

Following on that, if your income is tax exempt, the widget still costs your $10.00. The sales tax was still $1.00. And your income tax is unchanged.

Zero.

but you're making up hypotheticals to justify your position. the truth for me (and many, many others) is that i have paid less tax for years because of deductions for real estate. in your world, you would say that was a lowering of taxes...in the real world, it is an offset to the cost of that real estate, ie. you don't get the reduction in taxes without the real estate.

if a time comes when you no longer have income and therefore no taxes, then your cost for that real estate goes up and if you then chose, you can sell it or accept the increase in net cost to you.

columbia, I understand your point and I know that many people look at it like that. But if you do, you have to look at the offsetting cost - the opportunity cost of not investing elsewhere. You're only looking at one side of the argument. You didn't look at the lost income side, so you haven't looked at the true cost. Only the part that gives you the answer you want.

That's first. Second, economically, you would have to look at the economic effect of any transaction, and the economic effect of such a transaction is on taxes, not on how much your dwelling costs you.

Third, in accounting terms, you would need to book each entry separately: your housing expense would be your housing expense on any P&L; your tax expense would be your tax expense.

There is no valid argument for looking at the transaction the way you do: it violates principles of accounting, economic theory, and financial theory. It does, however, jive very well with what real estate agents would have you believe to overpay for a place to live.

"in the real world, it is an offset to the cost of that real estate"

No it doesn't. It offsets the tax you pay. Basic bookkeeping tells you that.

Moreover, basic economic theory will tell you that in real terms, the tax deduction is offset by higher prices exactly to the point where carrying costs = rent. Take away the tax deduction and watch property prices fall.

"you don't get the reduction in taxes without the real estate"

You could get a reduction in taxes from buying shoes if you deduct sales tax. That does not effect the price of the shoes.

what lost income? from my downpayment? if so, very tricky because I could have easily lost most of it depending on how it was invested.

what does the economic effect of any transaction mean in english?

yes...book each entry separately but, my friend, when you produce an income statement, they all roll up together.

Very low blow to equate me in any way with a real estate agent. Tempts me to suggest that you may be related to a baboon.

columbia, furthermore, the absurd conclusion drawn from your argument is that if you take out a mortgage you wind up paying LESS for an apartment than if you pay cash, because you pay less in tax.

But that's not true. You pay exactly the same. But overall it costs you more because you're paying interest, which is what is tax deductible.

"what lost income? from my downpayment?"

No. Opportunity cost is on the full amount invested, regardless of where you get the money from.

"what does the economic effect of any transaction mean in english?"

The economic effect is the economic nature of the transaction: what does it seek to gain? What are you buying? You're buying a place to live - whether you're buying through rent, through a mortgage, or in cash.

"yes...book each entry separately but, my friend, when you produce an income statement, they all roll up together."

No. They remain separate. They do have a cumulative effect, however, but that is economics, not accounting.

"Very low blow to equate me in any way with a real estate agent. Tempts me to suggest that you may be related to a baboon."

Did I do such a thing? I think not. Where do you see your name in this: "It does, however, jive very well with what real estate agents would have you believe to overpay for a place to live"?

printer,

i really hope i'm wrong and you're right. i want you to be right. but that's not what will happen.

towards or at the end of this year, 2009, we shall witness the real crisis emerge. it will make what we went through at the end of 2008 look like a walk in the park.

the global financial system, as we have known it since the end of WWII, will undergo a dramatic change with new rules and new players.

remember this when the end of 2009 is upon us.

MMAfia.... stop that... I need another year to finish my bomb shelter... won't TARP 2.0 and 3.0 and people going on and on about Michelle's new clothes keep the masses from turning to cannibalism?

hahahahha... baboon... dude you just got called a baboon!

Wow, steve is combining two of the most ludicrous assertions he has made on these boards. He thinks opportunity costs include the full amount of purchase and not just your downpayment. That is just flat-out wrong. He wants to include the borrowed money as an opportunity cost, even though if you didn't buy your home you wouldn't have borrowed that money. He also never accounts for the asset appreciation of the property or the costs of rising rents. He also just cannot understand the economic effects of tax deduction benefits.

I really don't want to get into the mathematical methodology of rent v. buy calculations, but i can say that as a potential high-income purchaser, i don't consider the tax benefit any longer. the amt wipes it out, plus, it seems to me that the tax deduction for real estate mortgage interest paid by high-income earners would be a very easy target in upcoming budget battles. it certainly isn't something i'd rely on to make my decision. for less expensive properties bought by individuals below a certain level, that might be different.

Many of the above posts actually argue for a quick and dirty crash, not a long-drawn-out spiral, so ironically those with the most negative sentiment actually support in some ways the overall outline (bottoming soon) of the OP: disappeared-forever jobs paying 100-300K; incomes reduced to zero eliminating tax advantage of owning; plummeting rents; boom prices fueled by high leverage; boom prices fueled by speculation on quick profits rather than demographic needs. I prefer to believe the best-case scenario sketched above, but compelling arguments are made for a more rapid unraveling and a lower bottom.

lowery, i'm the worst of both worlds. i see a modestly quick descent (although, it's been descending for quite some time already), delayed but not prevented (probably made worse in many ways) by fiscal and monetary policies, with the lower bottom scenario, and remaining there for a good long time.

aboutready, I'm afraid I can't disagree with you, as much as I wish you were wrong

lowery, hopefully in a year or so we will be able to look back and laugh at our foolish pessimism.

jimstreeteasy, when you buy property expecting it to return 15-20% per annum you are a speculator. The fact that a property has the convenience yield of the buyer being able to live in it while waiting for the huge price increase does not remove said buyer from the speculator class. In '06 many people were proud to be speculators. In '09 the word brings up images of ponzi scheme collapses. What a difference a few years make.

The credit bubble meant that for you to live within your means meant you lived far beneath your peers (just ask w67street). Most people don't have the fortitude to do what's right when everyone around them having fun doing what's wrong. The used to write children's books with these morals (e.g. the ant and the grasshopper). Now we have petrfitz' new media learning tools for pre-schoolers. I wonder what lessons they provide.

jobs jobs jobs

Bloomberg says NYC must lay off thousands
As many as 7,000 layoffs to compound 9,000 reductions already this year

ALBANY, N.Y. - New York City Mayor Michael Bloomberg told department heads Wednesday to identify thousands of city employees for layoffs by next Monday because the city’s economic outlook has continued to deteriorate and tax revenues remain short of projections, according to a letter obtained by NBC News.

Sources at City Hall said as many as 7,000 more jobs could be eliminated. Bloomberg’s budget plan for next fiscal year, which begins July 1, already included at least 1,300 layoffs; the new round of reductions would bring the likely total to more than 8,300.

Those layoffs would cut even more from a city bureaucracy that lost 9,000 workers in January.

Most city agencies, including the Health Department, the Buildings Department and the Administration for Children’s Services, face an additional 4 percent reduction, according to the letter, written by city Finance Director Mark Page and obtained Wednesday afternoon by NBC station WNBC of New York.

However, some agencies will take less of a hit. Uniformed services like the police and the fire department face additional cuts of only one-half of 1 percent, and schools are being asked for a smaller 1.4 percent reduction.

Bloomberg gave his department heads until noon ET Monday to decide which jobs will go. Page said that he was willing to consider alternatives to layoffs but that there was not much left to cut other than jobs because the budget had been slashed so much already.

“Given the efficiencies you have already achieved, this next step would most likely rely heavily on additional headcount reductions, whether through attrition, or, as is more likely, through layoffs,” Page warned.

Familiar story for big cities
New York is being crippled by the same economic problems that have led to deep cuts in many of the nation’s major cities.

Bloomberg is wrestling with a projected midyear budget deficit of $4 billion. Officials said his letter Wednesday was intended to persuade state lawmakers and municipal unions to cooperate on several initiatives he has proposed.

Among them, the mayor has asked the Legislature to allow the city to raise the sales tax above its current 8.375 percent. He has also urged lawmakers and the unions to create a new, less-generous pension tier for new employees, and he has said city employees should pay 10 percent of their health insurance premiums.

A buyer is personally liable for the mortgage, and money is fungible, so you can look at borrowing money to buy a house as inflating the balance sheet of the investor/buyer with debt. The buyer with other assets could have chosen to buy with "equity", i.e. other assets such as cash or liquidated stock investments. Once the home is bought the buyer has asset price risk of all his assets, stocks, the purchased apartment, whatever.

For most the purchase of a 'home' is a highly emotional transaction so a lot of our icycold arguments won't really hit home (pun intended).

Anyhow, currently it does not pay to buy a home - it maybe just maybe ok to switch homes but the problem will be to sell first your own one. Better move was/is to sell, go into rent and find in the next 2-3 years your dream apmt at a dream low price. I don't think your wife will agree to that....

printer, when the economy picks up and buyers return there won't be nearly as much money to spend as there was in '03-'08. Remember the stock market is down 50%, some large hedge funds are down even more or out of business all together. Several investment banks are down 90% or out of business. In the next few years people need to rebuild their financial strength. I don't see banks lending someone who almost went broke in '09 $1.5MM for a 2BR apartment.

This is a 10 year process. Housing market crashes. City cuts services and taxes the hell out of everything. Tearing of hear. Grown people crying. Then, when all hope is lost, an economic recovery. Finally people rebuild their credit, finances and track record of savings/earnings, then we can get back to a bull market.

^^"tearing of hair

My tax deduction was pretty real this year. Since steve won't let me show it as lowering the cost of home ownership, I think I will classify the benefit to my cat. Therefore it is really beneficial to have a cat.

JM, your real estate taxes don't push you into the AMT?

Lots of people on here clearly want to buy.

Noticed a clear uptick in interest the last few weeks. :)

Happyowner - are these "lots of people" really just the many voices in your head? Which specific observations have led you to perceive an increase in interest? Is it:

(1) The fact that pretty much all of the sideliners who post on this site won't touch NYC real estate at the current grossly unrealistic price levels?

or

(2) The fact that the only bulls on the board are owners or sellers?

because it can't be

(3) Your therapist, who told you that the only way to quell your anxiety about the daily deterioration of your net worth is to stop paying attention to the real estate market.

Or is it:

(4) The fact that you have been, are currently and will always be in denial.

I happen to agree that rent/buy (for owner-occupied) is not as out of whack as many uber-bears believe, even with falling rents. BUT, that's largely due to the artificially low interest rates, driven by the government's zeal to reflate the bubble. Those low interest rates can't last forever. When they go up, what do you think happens to that rent/buy calculation? And therefore, what do you think happens to prices?

newbuyer99 I agree with you. low interest rates only make the price look low in terms of monthly bills ... they aren't as low as you think because in reality as rates rise you sacrifice your equity ... the magic of the fed (take the supply off the market please). that said low interest rates and ultra low prices are great because of limited loss potential to your equity. here is a great calculator i found to dynamically compare rent to buy costs:

http://www.cepr.net/calculators/hb/hcc.html

on the margin it seems the 1.2mm apartment renting for $6000 is only worth about 800k ( I assume in a market where supply rises 5x faster than demand educated players would bid 10-20% below 800k on the 1.2mm example to try lock in the low fixed interest rate ).

happyowner - did you get your burst of optimism from the following write-up in the NYT? I see where you're coming from!

April 9, 2009
Housing Slump Hits Manhattan

By JOSH BARBANEL
While sales have picked up a bit in some suffering housing markets in the West, creating a glimmer of hope that home prices nationwide may be approaching a bottom, the Manhattan real estate market has just begun a steep slide. It parallels the decline in New York’s financial services industry, and housing analysts say it may continue long after other markets heal.

"My tax deduction was pretty real this year. Since steve won't let me show it as lowering the cost of home ownership, I think I will classify the benefit to my cat. Therefore it is really beneficial to have a cat."

What part of my explanation did you not understand, JuiceMan?

1) That you show tax benefits as tax benefits?
2) That the tax benefit increases the price of the property?
3) That if you show the "tax benefit" as one of ownership, you need to show what you've given up to gain that benefit?
4) That tax benefits over the long-term are unlikely to offset the loss in principal that's here & still to come?

Typically, you have a very tenuous grasp on the basics of accounting and economics. You pick and choose the rules to get the answer you like. Like refinancing having this miraculous effect of raising the cost of rentals.