The Case-Shiller index shows SF and NYC going up in almost precisely lockstep. Going down, however, SF is well ahead of NYC. The only reason "SF is comparing very unfavorably to NYC in the Case-Schiller index" is that the NYC market is still in dream-land.

Posted by: FinanceGuy at October 2, 2008 1:45 PM in response to Brooklyn Manhattan's St. Paul, Not Compton

The financial industries are not being brought down by "irrational" panic, but by their own terrible investments, which have left them insolvent.

If you lend money to people who have no reasonable expectation of paying it back except by selling overpriced real estate to other people for even higher prices, and then take the loans and shuffle them around to investors who don't understand what stands behind them, sooner or later there is going to be a problem.

Our bad luck is that it was later, so the problem is quite large. Someone, presumably US taxpayers or our lenders (i.e., the Chinese), is going to have to pay $1-3 trillion to repair the damage they've done.

NY incomes are going to drop faster than in the rest of the country, since more of them are directly or indirectly tied to the recently deceased business model. In a rational market, which this has not been for the last 6-8 years, that would lead to a sharp and dramatic real estate price drop, even if prices were not bubble-inflated to begin with.

If I remember correctly, in Tokyo's bubble bursting, real estate values dropped 85%. Our bubble is by most measures no smaller.

Posted by: FinanceGuy at September 22, 2008 11:29 PM in response to What Lies Beneath?

Uh... this price is incredibly high by any realistic valuation method. Does anyone seriously believe that it would cost $15k/month to rent a comparable place, or that it would be impossible to build similar sized and quality housing for this price, or that the normal rules of the market have been repealed? The bubble still has a long way to deflate.

If this sale is indicative, the adjustment looks like its going to happen the same way as after the (much smaller) late 80's bubble: by relatively flat nominal prices until real prices drop back to trend. That route, with current inflation, implies a flat or slowly declining (in nominal terms) market for the next decade.

Unless, of course, enough sellers get tired of waiting or want to go on with their lives or lose the jobs that were paying the mortgage. This market is so small that it wouldn't take many sellers who don't want to wait a year to change the tenor quite quickly.

Posted by: FinanceGuy at August 24, 2008 9:02 AM in response to Sales: 146 Sterling Place Fetches $2,730,000

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 in response to Co-op of the Day: 123 Henry Street

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 in response to Co-op of the Day: 123 Henry Street

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 in response to Co-op of the Day: 123 Henry Street

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 in response to 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 in response to Co-op of the Day: 123 Henry Street

Polemicist seems to be advocating a return to the bad old days of urban removal. I prefer a more capitalist approach to development. If developers can't convince people to sell their rights, then probably the rights are worth more than the development. Straight market.

2. Arbitrage: Arbitrage is just a fancy word for buying and selling in different markets. All it means here is that developers buy rental properties, or warehouses, and convert them to owner occupied, when the price of owner occupied is higher than the value of rentals. This increases supply which, in the long run, will decrease prices. Not by magic or with any guaranteed time frame. But that's how capitalism works.

I don't see any evidence that brownstones are priced any more irrationally than other real estate in the neighborhood. If people were paying for the art of brownstones, old ones would sell for more than new ones, and brownstones would sell for more than less artistic apartments on a per sq ft basis. The opposite is true. Housing is a commodity, not an art.

People are willing to pay for neighborhoods, which are not commodities. But when the price gets high enough, the supply of neighborhoods increases. Park Slope is at least three times the size it was when I first knew it.

And, of course, there are lots of modern facades. Virtually every "brownstone", for example.

3. In normal markets, investors expect to be paid, not to pay, for investing. That's what happened when Polemicist's parents' bought, and indeed in virtually any time in NYC history before this latest run-up got going. You can count on sales prices dropping to the point where renting will be more expensive for comparable spaces.

4. If there aren't any direct rent to sale comparables, just adjust for sq footage and condition. It isn't exact, but it's close enough to tell you whether someone could make money by shifting usage (arbitrage). In any event, markets are rarely precise -- if they didn't get out of whack, there wouldn't be any way for finance guys, or developers, to make money.

Posted by: FinanceGuy at August 9, 2008 6:39 PM in response to News Flash: Everyone Wants to Live in the City

wburghipstersaredirty's analysis is quite good, except for one thing: there is no city in the world that has long term appreciation as high as 2% over inflation. Shiller has charts if you want empirical evidence. At that rate, the city would rapidly become unaffordable to its residents, far more expensive than its neighbors and lose its attractiveness.

Long run, housing prices track construction costs, which track inflation, not more.

In NYC, medium run, the city has become more attractive than it used to be (although the same is true of most of its competitor cities). Brooklyn has also become more attractive relative to Manhattan than it used to be. Both of these could sustain some secular price increase.

The improvement in NYC quality of life should be reflected in rents -- and indeed, Brooklyn rents are closer to Manhattan, and higher than Westchester, than they used to be.

Rents are far less susceptible to bubbles and funny finance than sales prices. No one pays higher rent today because they think they'll be able to flip the apartment tomorrow. And rents can't go up much faster than incomes for long or you run out of renters.

NYC housing is readily converted from one to the other. So long as sales prices are higher than rental values, rentals will convert to single family owner occupied. So long as sales prices are above the cost of construction, more stuff will be built.

So comparing rents to sale prices is a good way to filter out the bubble and see only the real improvement in the neighborhoods. If you are trying to figure out what is most likely to happen to prices in the future, your best bet is to assume that sales prices will drop until they meet rental values and construction costs.

Wasder says he is paying less for his house than he did in rent. If the two places are more or less equivalent, and if he is including the opportunity cost on his downpayment as a cost, then that's a pretty good sign that he paid a fair price.

Posted by: FinanceGuy at August 9, 2008 5:57 PM in response to Auction Time for 306 St. James Place

Polemicist:

1. Fear of future profit-restrictions obviously could reduce investment in new building.

But the problem then is fear, not rent stabilization. Abolishing rent stabilization won't help that, at least as long as tenants continue to have the right to vote and they continue to view monopoly pricing power as immoral and inefficient.

Actually, the best way to end *fear* of increased rent stabilization is to enact the strictest imaginable scheme right now. Then investors will just work with it instead of frightening themselves with populist fantasies.

2. The difficulty of assembling development sites is an inevitable consequence of any property-based regime. The only way to "solve" this problem is to give developers the right to expropriate others. That cure is worse than the disease. Under capitalist regimes, developers can only develop if they can persuade existing rights-holders to accept payment for their rights. If they can't do that, then presumptively their development activities are not efficient. Stealing the rights of tenants would make development easier, but not more efficient, fairer or more socially useful.

3. It would take a significant price drop for Park Slope brownstones to sell for less than replacement cost. Renovated brownstones with details do not sell for a noticeable premium over similar sized brownstones with modern renovations. So, in the end, it seems that the marginal buyer is buying neighborhood and house and renovation, not Victoriana. Thus, modern construction costs are the point, and it is not hard to build a comparable space to this (less than pristine) brownstone for less than $700 per sq ft, as evidenced by the fact that developers are still managing to buy overpriced land/buildings and create new properties at current market prices all over our area.

4. In most suburbs, but not in brownstone Brooklyn, there is not a fully comparable rental market for upscale single family homes. Moreover, zoning often makes conversion from owner occupied to rentals or vice versa difficult. Hence the Appraiser's rule is not irrational.

But in Bklyn, we are blessed with a deep and liquid market in many housing types and the zoning regime places few restrictions on arbitrage from one to the next. If rental and owner prices get out of whack, as they are now, rentals will continue to be converted to owner-occupied until equilibrium is restored. Pre-bubble, honest appraisers in brownstone Brooklyn always weighted rental value heavily, and post-bubble they will go back to doing so.

Posted by: FinanceGuy at August 8, 2008 5:34 PM in response to News Flash: Everyone Wants to Live in the City

Oh, I see lechacal got here first, with essentially the same calculation as mine. The house needs to drop by half to be comparable to a rental.

Posted by: FinanceGuy at August 8, 2008 4:47 PM in response to Open House Picks

FatLenny -- you seem to have forgotten taxes/insurance/heat/repairs. Add in that stuff and your 6k goes to 8k.

Then, there are no 7% jumbo loans, so add something more for the 2.12m loan, if you can get it. Say another 1%, so you are up to 9k.

Then add 7% opportunity cost on your downpayment, which could have been in long term bonds or the stock market making that much. That's another 2500, so we are at $11500.

This assumes that real estate values don't drop. If they do, you need to add in whatever equity you lose. If it's a highly optimistic 10% over the next year, that's another 22k/mo.

And all of this assumes that you are happy to be a landlord for free.

This house is wildly overpriced.

Posted by: FinanceGuy at August 8, 2008 4:44 PM in response to Open House Picks

Park slope is a two BR duplex that would rent for no more than $5000. But to own it you need to spend $11-12,000 per month in interest, taxes/maintenance and lost income on your downpayment.

If it depreciates by 30% in the next two years, which would still leave it overpriced, that adds an extra $33,000 per month in lost equity.

Why does buying this make sense?

Posted by: FinanceGuy at August 8, 2008 2:25 PM in response to Open House Picks

fsrq --

Rent stabilization reduces rents on the units it applies to, although the statistics suggest that it doesn't do so by much (outside of the most expensive areas, it mainly smooths the boom/bust cycle).

The main impact is to make stabilized rental housing much more predictable and therefore a better, less risky investment, thus reducing the return that investors demand and increasing their willingness to invest.

To the extent that it removes some people from the competition for unregulated apartments, it probably reduces reduces demand and thus rents for unregulated apartments and prices for comparable owner-occupied units.

These effects, however, are not likely to be large now, because of inequality (few people can afford market rates) and because market rents and sale prices currently are well above construction costs.

At market equilibrium, owner-occupied sales prices = unregulated rental value = construction costs, which is why competent appraisers use all three methods.

If sales prices are higher (as they are now in Manhattan/Brownstone Brooklyn), developers make money creating new supply until prices come down by converting rentals or building new units. If rental values are higher (perhaps what is happening in the sections of Gravesend discussed above), then developers convert in the other direction.

If rent stabilization were suddenly ended, stabilized rents would converge with unregulated rents. Since there aren't enough people in the city to pay current unregulated rents for all units, unregulated rents would come down. Since this would make renting cheaper,some people would decide not to buy, and condo/coop prices would drop too. Obviously, developers would respond by cutting back new construction.

Thus, Polemicist is exactly 180 degrees off. Rent stabilization almost certainly INCREASES development activity in the city. In the short run, it probably increases the prices the rest of us pay, but in the long run, by increasing construction of new housing, it probably will help reduce prices for all of us.

Meanwhile, anyone paying current purchase prices should note that they suggest a market in radical disarray, and wacko markets do have a tendency to turn back towards equilibrium. In the long run, prices are not likely to stray for long from either the cost of building/renovating a comparable place or the value to an investor holding to rent.

$2.6m for a Park Slope brownstone that is worth no more than $1.5m as a long-term rental investment and that would cost less than that to build from scratch is a tremendous incentive to create more... or to find a way to get rid of some rent stabilized tenants paying even less. Enough people do that and they will overwhelm the number willing and able to pay a fifty percent premium to own instead of renting.

Posted by: FinanceGuy at August 8, 2008 2:16 PM in response to News Flash: Everyone Wants to Live in the City

Polemicist is just wrong about the effect of rent control.

The only way rent controls can inhibit new building or renovation is if new housing stock is subject to rent regulation. That hasn't been the law in NYC for half a century and no one is talking about changing this basic rule. New building and new capital improvements are always permitted to charge full market rate.

NYC rent rules, including the proposals to reduce vacancy decontrol, apply only to EXISTING housing stock. They may provide some incentive to convert rental to condo/coop, but they have no effect on the overall quantity of housing available.

What they do do is to reduce the windfall profits to existing landlords who seek to profit from high demand without providing any new service. This should reduce, at least at the margin, both rents and purchase prices for existing housing.

If the market has failed to produce enough rental housing for middle class families, it is because the market is not efficient enough to produce a product that people want at a price they can afford, given the competition from the heavily subsidized suburbs.

The suburbs may be less attractive, but suburban living and home ownership continue to be heavily subsidized through the mortgage interest deduction, cheap oil, highway subsidies, wars in the Middle East, free pollution rights, school finance rules that allow self-segregation to avoid paying for more expensive education, and so on. In a fairer market system, in which citizens had to pay the cost of pollution, education and transportation even in the suburbs, we'd have much denser cities and far less sprawl. And more middle class rental housing on the edges of the cities. Rent control would have little or no effect on changes in NEW housing, but would slow down the transition to rich-in-the-center and poor-on-the-periphery in existing stock.

Posted by: FinanceGuy at August 8, 2008 12:08 PM in response to News Flash: Everyone Wants to Live in the City

Doctors are absolutely NOT liable for developmental issues, unless the doctor caused the issue by his or her own incompetent treatment. The tort system is not a substitute for national health insurance.

In tort, there is no liability without negligence (i.e., carelessness) and fault (unreasonableness). Doctors are only liable for MALpractice. That means the victim needs to prove that the doctor did something wrong--not only that the patient suffered some injury, but that the injury was the result of the doctor not taking ordinary care and not acting in a professional manner.

If the doctor treated according to standard procedures in the community, the patient loses, regardless of how bad he or she suffered or was injured, and even regardless of whether a better equipped doctor in a better hospital could have prevented the injury.

Tort recovery rates, despite what the insurance companies and tabloids repeat constantly, are actually quite low--most injured patients don't sue, and most of those who do, lose.

So, if the LICH ObGyn department has extraordinary tort liability, there are basically two possibilities: (1) they are not treating patients competently; or (2) their insurance company is settling cases they shouldn't be (i.e., they have incompetent lawyers).

Epidemiological evidence strongly suggests that smaller departments have worse results. Practice makes perfect, apparently. So leaving aside tort liability, there is a great deal of sense in folding small departments into a smaller number of larger ones. It isn't hard to get from downtown Brooklyn to Park Slope or Manhattan.

Posted by: FinanceGuy at August 7, 2008 10:18 AM in response to Public Officials, Community Members Rally 'Round LICH