Another 35% decline?

Thanks for the posting, cfranch.

Don't really understand their methodology ("affordability") but certainly dovetails with my own thinking.

It's approximately what I've been saying for the past 15 months.

"Affordability," Topper, is usually the ratio between disposable income and property prices, which is 30% PITI, 40x monthly rent in NYC. It is also the ratio between rents and property prices - 12x annual rent.

WITHOUT the tax benefit.

So Juicy, this must be your CLARION CALL to jump right back in to real estate, right? I remember you said that that's what would happen if prices fell significantly.

You also said that the problem wasn't that property prices are too high but that rents are too low, and they would increase. That was another great call.

henry blodget..was the king of the internet bubble on the way up and on the way down...unfortunately he only let his clients know when to buy and not when to sell...he kept his sell "views" between him and his co workers and was subsequently barred from the securities industry for life. smart guy..got kind of made an example of, but still did alright.

I think his analysis is spot on.

12x annual rent is a standard industry comp for rent / own analysis ?

(im asking..im new to these comps )

m_m, it depends on interest rates and the specific market, but yes, in NY that is the long-term average.

It's also 30% PITI & 40x monthly rent, which are the same ratios.

blodgett's been coming out with some good stuff recently. what i like about clusterstock is he lets his writers publish pieces that run counter to his general views, but he often can be found commenting on the pieces. makes for more lively reading.

marco, go check some old threads on this. steve's analysis is way off and mistake-filled when it comes to rent/own comparisons. 12x is too low.

LICC - does your phone vibrate every time Stevejhx posts a comment? Do you have a picture of him in your wallet? Do you curse his name while you're walking, alone, in the streets?

I've never seen anyone so haunted by someone as you are by Steve.

Maybe you should ask yourself why. I'll give you a hint: you're a moron and easily batted around. You're Steve's plaything. We all reached that conclusion a long time ago.

But please, every time Steve posts feel free to post your usual "Don't nobody listen to Steve. He's silly" comments, because we really are listening to you! Really we are!

Beaty,
Interesting analysis.
Prehaps it's a crush. You know, like in Jr. High, you like someone so you ive them lots of negative attention.
Just an alternative analysis.

By the way, good info.
thanks cfranch

For a very long time prior to the mid/late 1990's, 100X monthly rent ( which is significantly less than 12X annual rent) was the norm for condo rental capitalization.

This was not Henry's analysis, it was DB's.

All in all, I think a price/rent ratio of about 12 is a reasonable long-term "rule of thumb."

I'd note, though, that such ratios "naturally" float over time to reflect overall capital market conditions.

REIT (publicly-traded commerical real estate) yield spreads have actually closely tracked Baa yield spreads over time (+0.81 correlation). Such yield spreads are now at close to record high levels which would argue in favor of a lower price/rent ratio.

All in all, I generally prefer to think in terms of rent/price ratios which more closely approximate "capitalization" rates. REIT cap rates bottomed a couple of years ago at about 5% and have now rebounded to close to 9%.

Topper's comment about 12x is correct. It does fluctuate depending on interest rates (mostly).

"For a very long time prior to the mid/late 1990's, 100X monthly rent (which is significantly less than 12X annual rent) was the norm for condo rental capitalization."

Because interest rates were very high, probably, and there weren't a lot of condos or market-rate apartments back then. Just a guess.

Personally I think it peak to trough will be 90% because of insolvency. In generally everyone should raise as much cash as possible. Your studio apt is worthless if you don't have money for food.

"Personally I think it peak to trough will be 90% because of insolvency."

Do you really expect to buy a $1 million apartment for $100,000? Do you realize how stupid your comment sounds?

So trying to apply "12x annual rent is a standard industry comp for rent / own analysis" - can someone check that I understand it right please -

If rent = $10K/ month then = $120K/year = $1,440,000. So right now $10K is about the "average" rent for a classic 7 on the UWS - but it is not the "average" purchase price, it's lower. So for the ratio to become true either rents have to go up, or prices have to come down - I just want to make sure I'm understanding the thrust of the ratio as I had never seen it before. Thanks in advance.

Let's do the math on the 12X rule. Take a modest 2-bed renting for $5K. Based on this "rule of thumb", the unit should sell at fair value for $720K. Let's assume a buyer puts 20% down and is left with a mortgage of $576K. At the current prevailing 30 year fixed rate of 5.5%, the monthly mortgage payment would be $3,270.47. Let's assume a middle of the road maintenance of $1400. Total monthly outlay is $4,670.47. The tax-advantage true monthly cost comes out to $3,501.47 (I used the Corcoran calculator, and assumed 50% deductibility and a 35% tax bracket). I did not make any egregious assumptions here. A 3/3 or 5/1 ARM loan would yield a much lower monthly cost, and many buyers put greater than 20% down. Even if we do the math for a 5% return on the down payment of $144,000 yielding 2.5%, which comes out to $300/month, we are still better off buying than renting. I don't think 12X makes much sense as a rule of thumb. Running the numbers backward, for there to be parity between buying and renting using the above assumptions, we are closer to 15.2X rent, which means an apartment that rents for $5,000 should sell for $912,000.

Anyone wanting to check my math, please go ahead - I don't claim to be a wizard. I just remember running the numbers when I was shopping around and it seemed that the break-even point between renting and owning came to around 15X annual rent so I ran the math again quickly and came back up with that number. Of course, this also assumes a flat market. Typically (but certainly not always!), buyers who sit on a property for longer than 5 years tend to see at least a modest increase in their price which changes the math entirely (as does a modest or large decrease). We ended up paying $870K for a 2-bed that rented for $4,900 in the same building and feel we did OK.

i agree that 12 x seems too small to me. using 15 x and my$10K number from above i get to $1.8mn for a classic 7 on UWS. Still sounds low to me, but getting closer.

SteveJ, Topper, others, thoughts?

OK, this was a very long time ago, but a guy who has been a fairly major player in NYC for quite some time and has been a hard money lender who I have used personally when I needed hard money, and who I've done some consulting work for.........

made his bones buying small buildings in what is now considered Park Slope for 2 (TWO)... that's right - 2 (TWO) TIMES RENT ROLL.

I was going to post (yet again) how these "predictions" include Wayne, NJ and White Plains and that this "analysis" is grossly off base (just as the Goldman report was discredited on this very site) but someone else beat me too it. Joe is dead on here, but unfortunately he will be dismissed because of his profession.

http://www.businessinsider.com/real-estate-broker-claims-nyc-isnt-like-other-markets-2009-3

What's really funny is that steve takes the bait every time, even though he himself has discredited the use of Case-Schiller data when discussing the Manhattan market.

“Looking at the data table in the Deutcshe Bank report we see that the New York numbers actually refer to the New York metro region, from White Plains to Wayne, NJ, and I assume including all 5 boros. If I'm not mistaken that's the same data set that the Case-Schiller index uses, also widely reported today, out of Chicago I believe. Both show ignorance of the reality that that is not New York City, which is a very different thing. The NY metro suburbs are subject to similar forces as every other part of the U.S. real estate landscape.”

As soon as the UWS performs the same as Wayne, NJ - I'll start listening to these idiotic prognostications. It sells newspapers I guess, but it is complete malarkey

As soon as the UWS performs the same as Wayne, NJ I'll start listening to these idiotic prognostications.

marco_m
about 13 hours ago
ignore this person
report abuse 12x annual rent is a standard industry comp for rent / own analysis ?

(im asking..im new to these comps )

stevejhx
about 13 hours ago
ignore this person
report abuse m_m, it depends on interest rates and the specific market, but yes, in NY that is the long-term average.

It's also 30% PITI & 40x monthly rent, which are the same ratios.

-
SO, IF 12x annual was the long term average, WHEN was the LAST TIME that we had 12x, AND, when was the last time it was below 12x? or someone said 100x monthly which is 8.3x. WHEN was that?

If you are looking for an equilibrium or "fair value" price, 100x monthly rent (i.e., a bit more than 8 x annual) is probably more accurate than 12 or 15x. First, it is the actual historical NYC ratio for several decades before the mid-1990s.

But more importantly, if the ratio is any higher than that, investors can make more money selling to homeowners than renting -- which means that some of them are likely to do that, which means that SUPPLY increases, which has a tendency to bring prices down.

OTNY is calculating DEMAND, on the assumption that potential buyers will be indifferent between owning and renting when their monthly costs are the same with a large mortgage. That is not a reliable assumption: in a declining market, many potential owners will expect to be paid for the risk of future price declines. Or in non-finance terms, they'll worry that if they have to sell unexpectedly in the next decade, they won't be able to get their downpayment out. So they'll want monthly costs to be LESS than rent.

If potential buyers are doing a rational calculation as if they were investors, they'll want to earn a return on their downpayment -- without taking into account future price increases or decreases -- that is significantly higher than the mortgage rate, because highly leveraged illiquid investments are extremely risky. Indeed, using standard models, they'll calculate the return on the purchase price (without loan) first, looking for a return on the entire capital at risk (i.e., the purchase price, unmortgaged) that reflects the risk -- something certainly a good deal higher than the mortgage rate. And, since they are aware that the sale price will depend on this calculation as well, they'll use interest rates that are reasonable estimates of future interest rates -- in other words, they won't pay more just because the government is subsidizing mortgages at the moment.

Note that if OTNY is right and buyers are willing to accept risk for free, then rental investors can earn extra profits by converting rental properties to owner-occupied until the supply increases to the point where buyers get spooked into changing their mind. The only equilibrium point is when SUPPLIERS have no incentive to increase SUPPLY -- i.e., when rental investors are indifferent between renting long term and selling (and builders are indifferent between building or not). That is the standard equilibrium market clearing price where marginal price = marginal cost of producing one more unit for sale.

The old NYC rule of thumb -- 100 x monthly rents -- is a pretty good estimate of what a rental investor needs to get to make a reasonable profit. The only reasons to pay more than that, from a rental investor's perspective, are because (1) you think that rents are going up or (2) someone else is willing to bear risk for free (i.e., interest rates are too low or you'll be able to sell to someone who'll foolishly pay more than 100xrents). Thus, since this is what the property is worth as a rental, if as prices are higher than that, investors will assiduously search for ways to convert rentals into owner-occupied.

OTNYC
about 3 hours ago
ignore this person
report abuse Let's do the math on the 12X rule. Take a modest 2-bed renting for $5K.

Modest 2br isn't $5K. Luxe new development is.

I've been told by NY real estate old timers that it used to cost less per month to own than to rent. This changed in the late 90's as the housing mania took hold. Rents cost more because they are risk free and do not have the same barriers to entry (down payment, credit scores) that owning does.

PS: These are all rules of thumb.

If you want to make a more precise calculation, think like a generic investor planning to rent (and expecting to sell to someone who is planning to rent -- so there will be no capital gains unless estimates of future net rents change). Calculate the rents you can reasonably expect to get, including increases over inflation (unlikely over time). Calculate the expenses you expect, including repairs and renovations (larger than you think over time, and if you inflate rents, be sure to inflate these too). It's easiest to make the calculation assuming you are paying all cash. You can ignore taxes, since both income and expenses are taxable.

Then try to decide what return you would want to make on your all cash investment for (1) the risk that you'll need to sell during a market slump, (2) the possibility that you'll be able to sell during a market bubble, (3) the work and hassle of running the place, (4) the upside and downside risk that the city will become more or less attractive to people in the right income bracket, and so on. At a minimum, the interest rate you pick should be more than you'd expect to earn in the stock market (being a landlord is more work) and more than you'd expect to make on a long term bond (real estate is less liquid and tenants are usually not AAA rated).

Once you know this, you can figure out the most you can pay and make the profit you expect. If other people make the same calculation, this'll be the value of the property to a rental investor. If homeowners are willing to pay more -- rental investors will sell to them until supply increases enough to bring prices back down to this number.

I don't see any reason why being able to borrow should change the calculation. The value is the value. The loan just divides it up between the owner and the lender, with the lender getting lower risk in return for a lower return and the owner taking higher risk for a higher expected return. (Of course, that assumes that the banks are actually charging for risk, something they sometimes omitted in the last decade).

Chasing & Finance - good points all, although I don't know if comparing NYC now to NYC in the 70's - 90's is a fair comparison. It is a safer, more desirable city to live in. In the past, most upwardly mobile young couples starting families would dream of that big paycheck so they could move to a nice, comfortable suburb - that same demographic is now dreaming of that big paycheck so they can upgrade to a Classic 7 on the UWS. It still amazes me that I can leave my front door and be in the Hall of minerals at the Nat History Museum in under 5 minutes. I will concede that if you don't have the money or access to credit, you can't buy the property - but the demand is definitely there - it is just nervous or broke.

FinanceGuy - the structure of co-ops which are still the dominant ownership form in Manhattan strongly discourage renting - your analysis in your second post assumes an easy rental market which NYC is not.

OTNYC: NYC is definitely more attractive than 20 years ago -- but that should be picked up fully in rents. So you can safely ignore that in a rent::own calculation -- it affects both sides of the equation equally.

Since prices are determined at the margin, it doesn't matter if coops discourage renting. Especially since with current prices the issue is the reverse: can rental landlords sell to homeowners? They can, but rent stabilization slows conversion, so adjustments to equilibrium are unlikely to be fast. That's one reason why the bubble was able to continue as long as it did (the other is that real estate trends can be self-sustaining even when they get quite far from equilibrium: every price increase makes another one more likely, just as every price decrease cuts someone's wealth, reduces some bank's willingness to lend, and makes some buyer more nervous about resale value.)

But over time, if it's more profitable to sell than rent, landlords will figure out ways to rent. That increases supply in the owner-occupied market, tending to bring prices down. Eventually, increased supply has to overcome the self-sustaining trend.

OTNYC's issue will be more real if we overshoot on the way down. If buyers get really spooked, prices can easily drop to the point where owners will want to convert to rental. Each conversion to rental reduces supply in the owner market and tends to slow or reverse the price drop. The coop structure will slow that process and thus make the bottom lower than it would otherwise be: coops won't convert, so they won't help the owner-occupied supply contract. But we are still far away from this being a realistic issue.

As usual, JuiceMan comes up with a reliable source of information: "You can't conflate the NYC market with the surrounding area -- they're 'apples and oranges' he says."

Ah yes! That special market! And I supposed you can't conflate NYC and Tokyo, either, where prices collapsed after a bubble and have never recovered.

And then this quote from the article JuiceMan quotes: "As a broker, I have no interest in maintaining prices anywhere above where they should be."

LMAO.

JuiceMan, you have yet to issue your retraction on there being no "tax benefit" in the 12x ratio, and that you would "believe everything I say" once you can get a discount on a Manhattan apartment.

OTC's mistake is he takes a "carrying cost" ratio and then makes a deduction for taxes, and doesn't offset that deduction with the corresponding opportunity cost of investing elsewhere. He takes just one side of the equation. If you are going to take ratios with explicit deductions you have to be comprehensive; if you are going to take ratios with the deductions discounted into them (like the 12x ratio) then you don't add the explicit deductions back in.

It's a simple methodology.

JuiceMan - you've yet to prove anything about anything, except (like your BFF) you claim you do and move on. Prices are down already about 30% from peak yet inventories keep rising. Can you explain this, please?

I don't understand why people say 12x sounds low. Sure it sounds low over the last 5 years, because the ratio made a new high in Manhattan for every year after 2003.

And yes it was lower in the 1990s because mortgage rates were like 8%...

12x sounded high in 1995 when you could buy a studio for 8x.

"OTNY is calculating DEMAND, on the assumption that potential buyers will be indifferent between owning and renting when their monthly costs are the same with a large mortgage. That is not a reliable assumption: in a declining market, many potential owners will expect to be paid for the risk of future price declines. Or in non-finance terms, they'll worry that if they have to sell unexpectedly in the next decade, they won't be able to get their downpayment out. So they'll want monthly costs to be LESS than rent."

Financeguy, are you me?

My impression is that a nice L-shaped studio today goes for about 20X.

My friend bought a walk up studio on Jane in the mid 1990s for $60k... It had a $400 or so maintenance and the market rent for it at that time was like $1200. It was a high floor walk up.

The only intelligent debate here to be had is how low the price to rent multiple can go if the interest rates can be held at these low levels. Now that 30% down is in print...demand is going to fall, not rise. Its how stock markets work, its how real estate works.

steve, you are like a hamster on a wheel. You run real fast but don’t get anywhere. Note that steve didn’t comment on how grossly exaggerated the article was because the dataset used is completely irrelevant to Manhattan. He not only knows this, but has argued strongly about it on this board. Instead he says silly stuff like:

“It's approximately what I've been saying for the past 15 months.”

Steve then discredits the broker (as I said he would) rather than recognize that what the broker is saying about the dataset is 100% correct. Then he attacks me and makes up things up like:

“and that you would "believe everything I say" once you can get a discount on a Manhattan apartment.”

steve, your approach is tiresome and stinks of desperation. If we are going to have intelligent debate here, you have to be consistent and can’t type things that you have dreamed, hoped, or prayed for. That is unless you change your screen name to Nancy Pelosi or move to Wayne, NJ.

No reason to buy any time soon. Until inventory starts to fall, and now that we're entering the slow summer season it will continue to rise. After the nonexistent "busy" spring season.

The last boom-bust cycle lasted 14 years. This time the fall has been faster, but I see nothing to cause prices to rise again - we're never going to be trapped in a housing bubble like this again. Last one was 1929. You'd think we'd have learned.

The 12x formula looks a lot different with 5.5% mortgages than with 8.5%-and-higher mortgages. The 5.5%, 6%, 6.5% mortgages of the past boom/bubble were an anomaly compared to the prior 20 years. Rents for new construction have been so high because - chicken and egg - developers paid so much to acquire land during the past boom/bubble. That's because ..... it was a bubble, and because rents were going up. (chirp, chirp) If condo prices in Manhattan went back to 12x annual rent, they would still be very high, even with 6% mortgages. Which brings me full circle to what is missing now from the already-dire situation to make it the full-scale catastrophe people are wondering about: a spike in mortgage rates. Any predictions? People have screamed for years that interest rates must and will go up. But here we are......

Hegel's paradox.

"History teaches us that we learn nothing from history."

I think mortgage rates will start increasing in 18-30 months and probably hit 8-10%. The govt will do everything in its power to keep them artificially low for the next 12-24 months to help stabilize the housing market in the hopes that that will help stabilize the economy. That's a big part of the reason why I think we're in for a pretty bad double dip. Still another big leg to go with RE when rates increase. Kind of crazy when you stop and think about the fact that prices are rapidly declining yet mortgage rates are at what is essentially an all-time low.

The mortgage rate obviously affects the 12x ratio, though if you do the math it's not that material. The mortgage tax deduction - or the elimination thereof - will also affect the ratio. If it's repealed or reduced, property prices will go down but rents won't be affected.

That's because - LICC & JuiceMan - the tax deduction is implicitly (not explicitly!) incorporated into the 12x ratio.

I did the math...and if you assume a mortgage rate...a 75% mortgage and use the idea that pre-tax equivalence is the equilibrium and then impute the ratio...a 5% vs. 8% is like the difference between 12x and 8x price to rent.

So to all on this thread, if you were about to make an offer on an apartment - don't say you wouldn't - what % down from peak prices for similar units would be appropriate in your view, to try to account for where you think the market is going, and will likely eventually bottom out. 20% is clearly behind us. 30% seems to be in the cards now, but if you were going to try to guess where we're heading, would you offer down 40% from peak? 50%? More than that? Any and all responses appreciated. Thanks.

liquidpaper, you should offer 75% off of peak. Since we are already at 65% off what's another 10%? This is unfortunately the logic used by the people you are asking this question to.

Here is a great little comment from stevejhx discrediting the very dataset that he celebrates above. Isn't this fun?

http://www.streeteasy.com/nyc/talk/discussion/7251-yet-new-yorks-housing-prices-are-doing-remarkably-well-relative-to-elsewhere-in-america

"Today’s Case-Shiller housing price figures indicate that New York City’s prices dropped 7.5 percent in the last year"

stevejhx: If that is his premise, it is entirely wrong. Very little of the index includes New York City, as the index includes only single-family houses, and those are few and far between in the 5 boroughs.

Ergo, his conclusion is entirely wrong.

Which if a = b and b = c then stevejhx is saying that the conclusion in OP article is entirely wrong. Isn't that right stevejhx?

steve, and his few followers, just keep babbling the same wrong analysis over and over again, even after it is addressed and discredited. steve's ratio does not take tax benefits into account at all, even though he says it does. Laughable. steve rambles about opportunity cost but doesn't account for principal appreciation. He thinks opportunity cost should be measured by the entire purchase price and not just the down payment. What??? steve never accounts for rising rents. Ridiculous. He cherry picks only the factors that benefit his analysis and ignores those that show he is wrong.

12x is too low. Not because of comparing it to the early 90s, but because the actual numbers, like OTC reviewed, show it is too low in today's market. That may change if rents change, prices change, interest rates change, etc., but as of today, 15-18x is more realistic.

LQ: If I were in the market today, I would bid whatever made sense with the rent vs. own comparison. For example, classic 7s in okay condition in average buildings (assume you're renting from a prof. LL) are renting for 8k+ on the UWS. So make your bid on a classic 7 accordingly.

IMO, to do anything else doesn't make sense.

NYC being more desirable to own now as compared to the 70s or early 90s does not affect rents equally. When the city's future looked bleak back then, people would be more likely to rent and then move. Now, more people want to stay and settle in NYC, and people are more likely to move here to own and live.

JuiceMan, you're at it again! Mixing apples and surfboards.

I say that the Case-Shiller index doesn't include Manhattan and therefore makes no statement about Manhattan, and you conclude therefore that the 12x ratio is not applicable to Manhattan because Manhattan isn't in the Case-Shiller index, even though the Case-Shiller index measures changes in the price of the same single-family house over time, and the 12x index measures the ratio between property prices and comparable rents.

What ARE you talking about? What does one have to do with the other? Where does Case-Shiller measure rents?

You're really desperate. Already you owe me a promised retraction on there being rent-to-buy ratios that don't explicitly include the "tax benefit," and you promised you'd believe everything I said if you could get a discount on a Manhattan property, yet neither has occurred.

So?

You're the only one on this thread who mentioned Case-Shiller. You're the only one in the world who thinks that Case-Shiller is anywhere closely related to the price-to-rent ratio. You're getting more and more desperate by the post.

It's actually kind of sad.

This rent ratio that people talk about is directly the inverse of the expected return.

eg 12x annual rent = purchase price
is the same as saying
purchase price X 1/12th = annual rent

1/12th = 8.33%.

Given where interest rates are and that you can finance 80%, you'd have to have a very high expected return on the 20% that you have to put down, to get a combined % 8.33%.

So if it is lower than 8.33%. Just pick say 7.33%, the ratio, or 1/7.33% = 13.6x
6.33% = 15.8x
5.33% = 18.8x

so that is in response to the post:

stevejhx -
The mortgage rate obviously affects the 12x ratio, though if you do the math it's not that material.

"Now, more people want to stay and settle in NYC, and people are more likely to move here to own and live"

True, but what if this changes in the years to come from higher taxes, service cuts, and side effects from a severe local slowdown? Lets at least be aware that the statement above is a high risk one considering where we came from, and what may lie ahead? Thats my biggest fear, that this great city becomes less desirable as a place to live and grow a family.

LICC - on another thread I gave you the opportunity to post all of your "appreciation" assumptions to show us what you assumed. Nothing happened.

And you still don't comprehend the basic concept of discounting.

Wow. You two - the only two remaining on this board who are of your mind - are really sad. You denied that prices would fall at all, then you said that they would just fall a little, and now that they're down by 30% (even admitted by realtors) you deny that they will continue to fall, even though at these prices inventories keep rising.

Wow.

10023 - using your comment (and thanks) - 8,000 x 12 x 18 (the highest ratio I have seen proposed anywhere on this thread) = $1,782,000 = the highest I should be willing to pay for a classic 7 if I am hell bent on buying something in the near future. And using 15 as my ratio then the top end of my range slips to $1440,000. In other words, as before on this thread, either rents have to go up, or prices have to come down for the ratio to be in balance. Thanks all!

UD: Exactly. All the young families (kids under 8) I know are scared of what rising taxes and poorer city services will mean to QOL. On the other hand, none of them can really picture themselves in Jersey, Westchester or LI. There has been a seismic shift in attitude with my generation - that burbs are uncool and we move there only if absolutely necessary.

steve, yet again you change the subject of the thread. You started talking about 12x, not me. Read the OP and your reaction to it. Classic switch the topic steve. LMAO! What about the 35% drop steve? What about the OP? What about Wayne, NJ?

There are 30000000000 threads about your faulty 12x ratio, go to one of those and opine all you want. This thread is about laughing at you for being completely inconsistent about how you look at market data. 35% in Wayne, NJ woooohoooo!!!!!!!!!!!!!!!!!!!!!!

True UD, but that is determination a potential buyer would have to make, and it is not easily quantifiable.

LQ - I have seen cheaper classic 7s (good example at 322W72) but I'm not counting owners unable to sell who can only rent for the short-term. It is mighty inconvenient to have to move every 2 years, so I'm only looking at the long-term rentals bldgs on WS with no foreseeable plans to convert. And of course, there are transaction costs associated with buying and selling, so 15 is a perfectly good ratio to use as well.

If we had stable jobs and a very long-term view of staying in Manhattan (kids' schools nailed down, positive view of U.S. economy), then I would not be averse to buying a classic 7 with the right layout for 1.7m, that does not need any work, in an UWS bldg with good financials.

When steve starts getting desperate, he starts lying and making things up. When did I say prices wouldn't fall at all? When did I say prices won't fall any further? Practically all of the debate I have had with steve has been about his wrong, flawed rent ratio analysis.

steve, don't you get tired of being made to look silly all the time?

Juiceman: "I also feel that prices are out of whack (in some cases) in relation to rents, however I don't believe we are as far out of whack as others. With a 5-10% correction in prices and modest increases in rents, I believe the market will be closer the equilibrium that is often talked about on this board."

http://www.streeteasy.com/nyc/talk/discussion/3552-inventory-over-7000

From approximately a year ago.

So what's happened? Prices down 30%, rents down, as well.

I did look at the opening post, Juicy. Here's what the article says: "In New York City, meanwhile, where prices started falling later than the rest of the country (and from a higher peak) prices have another 35% to fall. And that's just to get back to fair value. If prices stop at fair value after a bubble this big, it will be the first time in history in which this happened."

"What about Wayne, NJ?"

I've never been to Wayne, NJ, but one of my roommates freshman year in college was from there so it has a special place in my heart. But the 12x ratio has NOTHING to do with where a property is located - it's a market constraint as (depending on interest rates) 30% PITI / 40x monthly rent = 12x annual rent = purchase price. It's the same equation everywhere.

You and LICC are the LAST people in the world who still seem to believe that Manhattan is "special," that the capital of capitalism is exempt from economic laws. Rental prices are a function of incomes; property prices are a function of incomes and leverage. It is truly that simple.

LICC from one year ago: "If a person found a place to live it that they really like, and their life situation is right for purchasing, then of course they should buy. dco would have such a person give up a place that they love because of an unsupported view that prices will drop 30% in a year."

"Things are slower now, but that means the market is reverting back to crazy levels from previous ludicrous levels."

http://www.streeteasy.com/nyc/talk/discussion/3661-answer-this-simple-question

Enough said.

LMAO! You just can't do it can you steve? You just can't admit that that 35% is based on faulty data (that includes Wayne NJ) which, you yourself have said is faulty.

"You and LICC are the LAST people in the world who still seem to believe that Manhattan is "special," that the capital of capitalism is exempt from economic laws. Rental prices are a function of incomes; property prices are a function of incomes and leverage. It is truly that simple."

More hamster spin to avoid the actual topic of this thread. steve confuses himself so much with his inconsistencies he has to constantly change the subject.

This is too easy.

Thanks for those quotes steve, neither one supports your lies and false statements about what I have said in the past.

Is that the best you could do? Please keep spending your time looking back at my statements on streeteasy for the past year . . .

Where in the OP does it say anything about 12x ratios? hmmmmmmm, I wonder why steve would try and confuse the topic? 35% in Wayne, NJ here we come!!!

JuiceMan, here's the title of the article cited in the OP:

"New York City Real Estate Prices To Fall At Least Another 35%"

Where do you see "Wayne, New Jersey" in that title?

"You just can't admit that that 35% is based on faulty data (that includes Wayne NJ) which, you yourself have said is faulty."

No, I can't, because to the best of my knowledge, Wayne, New Jersey is not part of New York City.

When it becomes such, I will reevaluate.

"Where in the OP does it say anything about 12x ratios?"

It doesn't, JuiceMan, nor need it. I have CONSISTENTLY said over the past 18 months that I've been posting that real estate in Manhattan would fall 50% from its peak. I based that on the equivalency of owners' carrying costs to market rents, 12x annual rent = purchase price = 30% PITI / 40x annual rent, and any number of other equations.

I believe it is commonly accepted that prices have already fallen 30% from their peak. The OP says they have another 35% to fall. I say they have another 30% to fall. If so, 100*.7*.7 = 49, meaning that with another 30% fall prices will have fallen 50% from their peak.

Which is what I have ALWAYS said.

LICC - the quotations are the quotations.

JM: "steve confuses himself so much with his inconsistencies he has to constantly change the subject."

OP: "New York City Real Estate Prices To Fall At Least Another 35%"

JM: "You just can't admit that that 35% is based on faulty data (that includes Wayne NJ) which, you yourself have said is faulty."

Steve: "I based that on the equivalency of owners' carrying costs to market rents, 12x annual rent = purchase price = 30% PITI / 40x annual rent, and any number of other equations."

Hmmm.

JM: "What's really funny is that steve takes the bait every time, even though he himself has discredited the use of Case-Schiller data when discussing the Manhattan market."

And I never even made reference to it.

I based that on the equivalency of owners' carrying costs to market rents, 12x annual rent = purchase price = 30% PITI / 40x annual rent, and any number of other equations.

Yes, these are not equations - you've fixed the inputs.

30/40/12 etc are all static numbers. That makes no sense. If anything, take the equity markets which are the second most fluid markets in the world (the first being foreign exchange) - the past 18 months should have taught that markets are fluid, there is no fixed input to guide prices or assets, otherwise we would have volatility merely based on true randomness and weather only.

klonipin, very nice post. Completely baseless, but very nice post.

Property prices are a function of personal income and leverage. Stock prices are a function of expected corporate earnings.

Stock prices do not have built-in market constraints.

Real estate is not a liquid asset.

Purchasing owner-occupied real estate is not an "investment"; it is capitalizing rent.

Other than that, you're spot on.

baseless?

Property prices are a function of the risk and return of the asset class.

"Property prices are a function of the risk and return of the asset class."

Not owner-occupied residential real estate. For investment property that is true, but it's also completely unrelated.

Owner-occupied residential real estate is a substitute for renting.

Oh, only one type of property acts differently from all other types of property based on who lives there. Makes sense now.

ps - to "capitalize rent" you need to plug in the rent ... and an expected or hurdle rate of return.

we can dance if we want to
We can leave your friends behind
Cause your friends dont dance
And if they dont dance
Well they're no friends of mine
Say, we can go where we want to
A place where they will never find
And we can act like we come from out of this world
Because you're one far behind

steve can dance!

huh?

Hmm. How can I explain this to klonipin?

If you own investment property someone else pays your mortgage. That additional return makes up the difference between the long-term low rate of increase in residential property prices, and the risk-adjusted return for other assets classes.

If you buy a car to use yourself, the economics are completely different from buying a car to lease to someone else.

If I buy an apartment and rent it out to someone else, it's not the same as if I buy it to live in it myself. Feel free to think it is, but if I live there I'm paying down the principal; if someone else lives there they're paying down the principal for me. The former is capitalized rent; the latter is an investment.

Completely different.

"to "capitalize rent" you need to plug in the rent ... and an expected or hurdle rate of return"

No you don't. You need to take the amount the place costs you and amortize it over its expected life.

You really don't know what you're talking about.

JuiceMan, I think now you officially need MAO inhibitors. Don't drink coffee or red wine or eat aged cheese when you take them, though, as the interaction could kill you.

To capitalize rent, you need to assume a rent, and an appropriate rate of return. You've simplified the first input which is fine and ignored the second by assuming it is some fixed always 1/12th.

That's wrong.

Listen to the outgrowth of your argument - you are saying that two properties identical in all respects are worth different amounts based on who lives there?

Does that really make sense to you?

No you don't. You need to take the amount the place costs you and amortize it over its expected life.

Ok stevejhx, tell me how your amortization schedule works.

I can't give you a lesson in accounting here, klonipin, except to say that the substance of the matter is to take an expense (rent) and book it as a long-term asset, and then amortize the amount over the expected life of the asset.

For real estate that is generally 28.5 years net of land, but if you expect to live there only 7 years, then you would amortize it over 7 years.

You would also capitalize all the transaction expenses.

Maintenance expenses would be expensed, not capitalized.

This is basic accounting, k.

So, how does it work? Let's take out the pencils.

27.5 years - sorry!

Scenario 1: I buy a place and live in it
Scenario 2: I buy a place and rent it out for $3000; I rent the place above it for $3000 to live in.
Steve, are you saying that these two scenarios imply the apartment is worth two separate prices? That seems to contradict things you've said before. What am I missing?

This isn't accounting.
I think you've pulled an interesting trick, when called on your simple "equation" as being incorrect, you've now thrown out a bunch of big concepts and added in some new inputs - but you didn't show me anything.

If you are unable to go from rent to purchase price "stevejhx: "to "capitalize rent" you need to plug in the rent ... and an expected or hurdle rate of return"
No you don't. You need to take the amount the place costs you and amortize it over its expected life."

I'm willing to give you the benefit of the doubt and go from purchase price to rent. But show me you have more than rhetoric, big words, and irrelevant numbers.

Go pick any Manhattan property of your choosing and go through your exercise of "You need to take the amount the place costs you and amortize it over its expected life."

wishhouse - i asked the same question.

yes, I was just trying to simplify the question even further, for my own sake.

steve..capitalize 7 years of rent and make that what the asset is worth ? then i guess we would discount that to get to what its worth today? 7 years is to little, but a good place to start I think

This is another of steve's misapplied concepts. It is amazing how he cannot understand analyze and apply principles correctly.

How is owner occupied real estate simply capitalizing rent, when after your mortgage is paid you own the asset? An asset that you bought with leverage that you can now sell for its market value? If you rented for the same period, at the end you do not own an asset. How can you ignore the asset purchase part of owner occupied real estate?

"are you saying that these two scenarios imply the apartment is worth two separate prices?"

No. I'm saying that one is capitalized rent and the other is an investment with a return.

The return on capitalized rent is to have a place to live + the (usually modest) increase in its market value. The return on the investment is the (usually modest) increase in its market value + the fact that someone is paying off the principal.

k - just Google "capitalized expense," but this might help you understand the concept:

http://financial-education.com/2007/03/03/capitalization-versus-expensing/

I've done the exercise numerous times over the past 18 months.

Liccomment he switched from capitalizing rent - which he can't seem to do - with amortizing purchase price. You should be able to do it both ways - merely algebra. But when I offered him to do it the one way he said he could, I got a bunch of jibberish and was told he didn't want to teach me accounting.

You aren't clarifying your position stevejhx.

"You aren't clarifying your position stevejhx"

The word clarity can never be used to describe stevejhx's position

you have to come up with a terminal value (selling price) for the asset. i think you need these items to come up with a model

1. terminal value
2. years of ownership
3. discount rate (mortgage rate)

i think mainetenace will have to be capitalized as well as taxes. basically take the PV of the terminal value as well as the PV of the annualized rent + maintenance and i think you have a rough estimate of what you should pay today

ok Marco, you are entirely correct. But Steve hasn't show us how he can capitalize and create a present value without using a rate of return which he says isn't relevant.

thx! the rates will have major impact on the vlaue we get from the model. fortunately they're pretty much given to us. you cant really use anything greater than long run GDP for growth and current mortgage rates can be used for discount rate.

You guys can beat on Steve all you want. There is nothing magic about 12x, because interest rates are a huge variable. All we know as fact is that the relationship between rents and prices blew to amazing highs after 2002 in our fair city. You know, like the stock market had never traded much about 20x EPS before the tech boom, and then it traded at 40x. What do we know about stock market returns since then? What in turn can we surmise about real estate returns in the near future? 12x rent is a decent number with low interest rates.... if rates move up, the ratio will be lower. 12x is still a median and cycles don't revert to medians after bubbles, they overshoot. Another 30% down in Manhattan is easy...if rates move up it can be much worse. I showed people the history of the price to rent ratio in Manhattan...in 2003-2004 it broke to new highs.. LICC and JuiceMan pretended not to know what they were looking at.

Marco, you can't use the mortgage rate, because the mortgage is debt, and ownership is equity. What do we know about equity returns vs. debt returns?

Yes, you do need to capitalize as a rate of return...Maybe the answer is the required rate of return on real estate equity is the mortgage rate plus a spread. In this way, we could relate the price to rent ratios of the 1990s to what the equivalent might be at todays lower mortgage rates.