"Further Cooling" to Housing Market, WSJ Says

I am a potential first time buyer, who is recently married. We have started to look for Brownstones, and the asking price just does not meet the value at the moment. I am not sure that there is a bubble, per se, but many home owners are drastically off on what their properties are worth. It appears as though certain home owners with below market brownstones are selling in hopes of striking it rich with the current high prices. As a result, the decent brownstones have been pushed slightly above their value. I do not envision a huge drop in real estate prices, because these are unique buildings, but I certiainly do expect a market correction. Houses that are now requesting 1- 1.2 million are really worth 700-900K and houses that are asking $1.4-1.7 million appear to be better valued at $1-1.3 million and so on and so on.I recently looked at a brownstone listed at $1.499 million. The interior of the house was gorgeous,with a new kitchen and many authentic details. My wide and I loved the house, but again we felt the asking price was too high. The broker said 4 months earlier it would have gone for $1.8 million, and truthfully, it might have, but I believe the house is truly worth $1.2-$1.3. Maybe in anothr four months it will reach its true value.

I don't think anyone can predict what is going to happen. But currently, the asking prices for Brownstones just doesn't meet the value. For what the asking prices are, it is worth it to buy outside teh City and deal with teh commute for what your money will get you. In fact, most of my co-workers are doing just that.

Posted by: DJB at November 15, 2005 2:00 PM

In response to the two questions posed to me yesterday.

As to the First question, accesing the value of a brownstone is not an exact science that i think we can all agree on. For people who try to assess the value of a Brownstone based on a 1 to 1 ratio of mortgage payment to rental value, this is poor economic evaluation. By owning a brownstone, you have a tangible asset that you invest your equity in, as you pay off your mortgage, the equity increases without even considering the possible appreciation, owning a brownstone is vastly different than renting. Renting results in a complete cost consume process. Meaning you pay rent for th month, and its value is consumed that month; there is no long term return. As a renter you do not pay taxes insurance, certain utility bills depending on the lease, but you also do not receive the tax breaks. The only economic benfit a renter receives is the use of teh house for teh month and whatever money they save on top of what they spend to rent. Anyone who thinks a mortgage should equal the rental is not realistic in their evaluation of the benefits of owning a home. To a small degree buying a home is like trading on margin, the mortgage allows an individual to invest in a commodity that is worth more than the individual has to spend. even better then trading on mortgage, the indiviudal gets to benefit from the commodity while he/she waits on the return.

As to an interested buyer's income, again that should have nothing to do with assessing the fair market value of a brownstone. It might determine whether the specific individual can afford the brownstone; thereby, making it over valued to the individual, but by no means should that reflect on the fair market value of the brownstone. To use another financial market analogy, if someone making less money bought Microsoft stock in the mid eighties, that does not mean that an individual making more money now should be able to buy the same amount of shares now owned by the individual who bought the shares in teh mid eighties.

My standard for assessing the value of a Brownstone is really a based on my experience along with a simple cost/comparison assessment. This is done whether the BRownstoen is out of price range or within my rpice range or below what I am looking for. I grew up in Brooklyn, lived in Carrol Gardens, Park Slope and Cobble Hill, went to school in Brooklyn Heights, and had friends that lived throughout Brooklyn in Brownstones in various neighborhoods. I have seen beautiful bronwstones with intricate original details and brownstones that were completely renovated. I worked in construction for many years doing home renovations among other things and know the cost of construction, as well as quality workmanship, when I see it. When I look at a Brownstone, the first thing I do is determine what it would take to fix the parts of the Brownstone that are in disrepair,by this I do not mean asthetic items like a brand new kitchen or bathroom, but rather warped floor boards, chipped paint, crooked stairs, cracked conccrete on the exterior, etc... . I then look at the brownstone with all the new items in place and compare it to other brownstones, which do not need the same work to see if the brownstone will measure up. Overwhelmingly, at the moment, the brownstones are not measuring up. In addition, the brownstones that have all the renovations in place and new kitchens, new bathrooms, beautiful gardens, etc... are way over valued from the cost of the plain brownstone that has not defects, but no bells in whisles either. The middle brownstones (the ones with no need for repairs but also do not have any top of the line attributes) are hardest to evaluate, for these houses, I look to location, I compare it to other houses in better and worse locations, I look to size, I look at the potential for asthetic renovations, and I compare it to other houses. Again, most of what I have seen so far, is overvalued.

As to question number 2.

the value in living in a brownstone is the simple commute and the ability to live in New York City. How much you value living in New York City is definitely a personal preference. For instane, my wife and I have lived here for all of our lives, I we can't see ourselves living somewhere else. With that in mind, the prices for brownstones are getting to the point, where I would much rather live in a big house in teh countryt spend 2/3 the amount on the house and giev up City living and the easy commute. For $600K, you can get a very nice house in a nice neighborhood in Jersey within an hour commute from the City. The house would have thee to four bedrooms, a backyard, a garage, and be located in a great school district. When living in the suburbs the factor most discussed is the taxes. You pay more than the city. For arguments sake, even if you pay $20K more per year on taxes, which would be unecessary. Over 30 years that results in $600K, when calculating that to present value that is about $300K. Even if you were to evaluate the cost of the house at $900K, it still is a better value for your money than a 1.2 million dollar brownstone that has four bedrooms, and is in need of many renovations. Now, if what you state is true and teh house appreciates more oustide teh City, then the comparison becomes even more lop sided. The only reason why my wife and I continue to look is we love New York City and don't want to leave (the personal preference).

Posted by: DJB at November 16, 2005 11:32 AM