Co-op of the Day: 123 Henry Street

Looks like a perfectly reasonable one bedroom apartment that costs (before the tax subsidy) the equivalent of about $3800 / month. For someone in a high tax bracket, the tax subsidy might cut that by $1000 or so.

Since either price is considerably more than nice one bedroom apartments rent for in the neighborhood, the prospective buyer is paying for the privilege of assuming the risk of price drops in the coming recession, or, alternatively, the progress of the housing bubble to new and even more implausible heights.

How much should someone be willing to pay for taking on that risk?

Does it matter that it would be quite easy for developers to create comparable apartments by new construction or conversion of rentals, so, long term, one would expect prices to approach construction costs and rental values?

Posted by: FinanceGuy at August 20, 2008 3:22 PM

Mortgage interest on borrowed part plus opportunity cost on downpayment @ 8% = 2993 , plus 772 maintenance = 3765.

I didn't check current mortgage rates, so if 8% is too high or too low, just plug in the number you think is better. I doubt that any realistic mortgage number will get you below current market rents, but maybe rents are higher than I think.

I ignored the equity part of the mortgage, since you are paying that to yourself.

An owner should expect to make more on the downpayment than the bank expects on the mortgage, since the owner is bearing more risk. For convenience, I just used the same interest rate for both, although that understates costs to the owner somewhat.

I ignored the costs of repairs that a coop leaseholder but not a renter would have to pay and, conversely, I didn't monetize the privilege of renovating that the cooperator but not the renter has.

If I were about to buy in this market, I'd also want to be paid for the risk that we are at the tail end of an historic bubble and prices are likely to drop dramatically in the near and not so near term. And the risk that, as Wall Street implodes, Brooklyn Heights rents are more likely to drop than increase in the next several years. Both these mean that the true opportunity cost of the downpayment is quite a bit more than 8%; my own guess is that the likelihood of being able to recover a 10% downpayment in the next several years approaches zero. For prices to return to long-term trend, even adjusting for the increased attractiveness of NYC relative to, e.g., SF, they need to drop (in real terms) by a third, and probably that will happen by a prolonged period of flat or slightly down nominal prices. Unless the city or its economy goes downhill as a result of the finance industry reorganization, in which case prices could head for 1990 instead of 2002.

So, I wouldn't buy now unless the ownership cost was LESS, not more, than the rental cost. That, of course, was usually the case in NYC from at least the 1940s until the last few years.

Posted by: FinanceGuy at August 20, 2008 4:16 PM

Are there 90% LTV mortgages available at 6.5%? If you've got one, I'd say grab it fast. With Freddie Mac paying 4.71% for five year money, rates like that aren't going to last.

What happens to prices if rates go up? Will the hit be taken by buyers paying more or sellers getting less?

Posted by: FinanceGuy at August 20, 2008 4:37 PM

Also, 11217, it isn't reasonable to treat your downpayment as free. It costs money too.

Posted by: FinanceGuy at August 20, 2008 4:38 PM

At 6.5% without PMI, this is indeed getting close to rental value (although not as close as McFly or 11217 calculate, because they are treating the downpayment as free, which is silly).

Not going to make you rich, but if you can hold on through the downturn of the next few years, you won't be far behind the renters, either.

And in the meantime, you can struggle with the moral dilemmas of renovation...

Posted by: FinanceGuy at August 20, 2008 6:36 PM