Open House Picks

FatLenny, I'm not sure the Berkeley Place place is cheap at all. Even after the tax deduction, assuming 20% down, top tax brackets and the usual low tax rates the after-tax cost of this place is still about $12,500 a month. Even if you can get $4500 from renting the second and third floors, that's a cool $8,000 in after tax money out the door just to live in the garden duplex. And that's BEFORE you even consider cost of improvements, maintenence, etc.

That being said, I bet this place goes for at least 90% of asking. People are ga-ga over Park Slope brownstones right now, price be damned. I am a real bear when it comes to the PS condo/coop market, but I'm honestly not sure brownstones will fall much if at all in the next few years.

Posted by: lechacal at August 8, 2008 3:48 PM

1. If you think you can get a 7% interest only loan of that size right now, good luck. The mortgage market is pretty opaque right now, but best guess for a 30-year fixed rate amortizing non-conforming jumbo mortgage is 7.5% (if you want a real lender that can actually show up at the closing table with the money), and that's if you have great credit.

2. I don't think most buyers would be looking at an IO loan. If you are using the IO to see pure cost (no amortization payments included, which aren't a real cost), then we would need to look at the opportunity cost of the rather substantial down payment, which could be a few grand a month. The numbers end up basically at the same place. I used the monthly payment on an amortizing loan just as a back-of-the-envelope way of getting to the same place.

- Opportunity cost of 20% down payment, using a pretty conservative 6% after tax expected return: $2,650 per month

- Interest portion of monthly payment on 7.5% amortizing 30-year loan in early periods: around $13,000

- Monthly taxes: $500 (guesstimate based on the ridiculously low tax rates for brownstones in brooklyn)

- After-tax cost of interest and tax payments (not even counting insurance, maintentenance, etc. etc.) at 33% bracket: $9,045

So the after-tax "cost" of the down payment plus the after-tax cost of interest and taxes is right around $12,000. Then add maintenance...and tenant headaches...you get the point.

Posted by: lechacal at August 8, 2008 4:38 PM

Finance Guy -- I couldnt' agree more that this is a silly price. Not to say that someone won't pay it this year, of course. Our numbers are slightly different but the point is the same.

This is all about frame of reference. People are now used to seeing prices up to the $2 million range. People have have short memories. So they think $2.65 million is "cheap." Oh well, I won't be buying this so it's not my problem.

Posted by: lechacal at August 8, 2008 4:51 PM

I of course meant people are used to seeing prices up to the $3 million range.

Anyway, I have to disagree with FinanceGuy about the price dropping by half. No way that will happen.

And Denton, you sound like an apologist for the Nasdaq in March 2000. One absolute truth about bubbles is that people always have a justification for why "this market is different". And in the long run, it never is.

Posted by: lechacal at August 8, 2008 4:55 PM

11233: Not sure in the current market, to be honest. When I rented my apartment last September I looked at a couple of garden duplexes that were around $5k. I don't know what has happened to the rental market since then. At the time supply was very tight.

Posted by: lechacal at August 8, 2008 4:59 PM

FatLenny: The assumed rate of return for down payment opportunity cost is subjective. Some people are very conservative investors, and for them maybe the current short-maturity treasury yield is the right rate (after-tax yield of, say, 3%). The rate of return for an experienced investor with a balanced portfolio of stock, debt and cash (such as myself) will be higher (I should be able to comfortably hit an average after-tax rate of return of 7% - I used 6% in my previous post to be conservative). The rate of return for someone with a successful and growing business that is starved for capital is much, much higher.

The point is that everyone is giving up *some* return when they put cash into a down payment, and the after-tax return that is being given up should be analyzed as an expense when deciding whether a particular property is priced appropriately.

You are correct that -- completely separate from the "deemed expense" of the opportunity cost -- appreciation should also be taken into account. But that should be analyzed as a gain that offsets the "expense" of the lost opportunity cost. That being said, what do you really think appreciation is going to be in Park Slope in the next 10 years? I would wager that I would be able to buy this brownstone for very close to its current asking price in 2018. Don't forget about the 10 lost years in NYC real estate after the market crashed in the late 1980s. And also don't forget that if you buy into a falling market and have to sell your assumptions about appreciation can quickly end up becoming a nightmare of depreciation and lost equity.

And looking at recent price history gives false comfort at the top of a bubble, although for whatever reason it is human nature to do so

Just my $0.02.

Posted by: lechacal at August 8, 2008 8:33 PM

11233: Increasing the size of the down payment until the mortgage only costs $5k doesn't make this a sensible purchase. See the post I just submitted re: opportunity cost. In fact, it makes it even more expensive if the buyer's rate of return for calculating the opportunity cost is higher than the interest rate on the mortgage.

Posted by: lechacal at August 8, 2008 8:36 PM

FatLenny: What you are doing is collapsing two different concepts: opportunity cost of down payment and capital appreciation. You are absolutely right that buying into a rising market means you earn a return on your down payment, but I think the most careful and thoughtful way to approach a real estate decision is to separate the two concepts, because they really are quite different.

Just for example, if your opportunity cost were very high (for example, if you were the owner of a successful small business that needs growth capital), then you actually may have been much better off renting and putting your cash into the business than buying in 2005. Just saying "I made money" isn't even close to a good analysis. You need to be able to say "I made more than I otherwise would have," and you need to have a good argument based on your own opportunity cost.

You clearly made a good decision to buy when you did. But that is the past, not the future, and humans have a curious inability to understand that a market's immediate past is often a counter-indicator of a market's immediate future. I have been through plenty of market cycles, and I always see the same herd-like behavior. I wonder how many people in 1988 would have had contempt for a claim that prices would be flat for the next 10 years. I'm sure they were all looking at prices from 1982 - 1988 when they said that was impossible.

And no, of course I'm not putting my money in a mattress. I am putting it in the financial markets, where I am doing just fine. I think there are a lot of reasons why New York real estate has kept going up during the credit crisis (this could be the topic of a separate and very long post), and I strongly believe that the exact opposite trend is about to take place (credit crisis will abate as New York real estate sees a sharp drop in prices).

Posted by: lechacal at August 9, 2008 4:23 PM

FOOD FOR THOUGHT

For the asking price of 108 Berkeley, you could:

- Send 22 kids to a private college for 4 years (with no scholarships at all).

- Buy groceries for an average American family of 4 for the next 368 years (that's until the year 2376). Put another way, you could have been buying the same family groceries since 1640, shortly after Boston was first settled by Europeans).

- Buy 662,500 gallons of gas at $4/gallon. At a rather uneconomical 20 miles per gallon, you could drive to the moon and back almost 30 times.

- Have a concert in Madison Square Garden with your favorite band, and be the only person in the audience.

- Buy private health insurance for a New York family for the next 200 years.

- buy 8 Rolls Royce Phantoms (picture them parked along Berkeley Place bumper-to-bumper).

Posted by: lechacal at August 10, 2008 11:51 AM

When I commented earlier that I thought 108 Berkeley would go for at least 90% of asking, I was making a bunch of assumptions that turned out to be dead wrong. I went to the open house, and am now of the view that the asking price is hugely aspirational (I am trying to be as generous as possible in my words). I don't care how hot Brooklyn brownstones are, there is just no way they find someone stupid enough to pay anywhere near asking. Buyers picked that place up for $1.3 million in 2004 and have clearly done absolutely nothing to the place since then. Now they are trying to flip for $2.65 in a softening market? This is a 50' lot, which means the lower duplex can't even be turned into a proper 3-bedroom (i.e., a decent-sized family needs to take over the third floor too, leaving some meager income from the top floor to offset costs). There is a ton of money that need to go into the place before it is worth even close to asking.

Anyone else go to the open house who disagrees?

Posted by: lechacal at August 11, 2008 9:38 AM

And I mean the brownstone is 50' deep, not the lot.

Posted by: lechacal at August 11, 2008 9:40 AM

And I mean the brownstone is 50' deep, not the lot.

Posted by: lechacal at August 11, 2008 9:40 AM

I'm not making this stuff up: take a look at any online tool to help people calculate the rent vs. buy decision. They all (as far as I have ever seen) do things exactly as I have described, with opportunity cost included as I have detailed.

Posted by: lechacal at August 11, 2008 10:13 AM

FatLenny: The point is that you need to take BOTH things into account. No one is saying you should ignore appreciation. Look at the link you just sent me -- it factors in "return on savings" or something like that, which is an inelegant way of saying return on investment (and factors into the formula in precisely the same way). Look at your link. Play with some numbers. Try to understand how the numbers work together and what they mean.

This isn't a complicated point. At this stage you either get it or you don't. I'm sure that everyone else gets it (and didn't need it explained to them) and has stopped paying attention to this exchange.

Posted by: lechacal at August 11, 2008 11:04 AM

I didn't omit it -- I just assume appreciation over the next 5 to 10 years will at best be zero (which obviously some people will disagree with). I completely understand that your property has appreciated since you bought it. That isn't the same thing as what will happen in the next few years.

Posted by: lechacal at August 11, 2008 12:22 PM