Open House Picks

all that matters is the buyer’s opinion.

Manhattan is not that hard to get to. Do it every day.

I saw the Clinton Hill house. Is the owner the NY Times real estate writer of the same name?

A good job overall. Nice building — 21*45 on a wide street — nicely renovated. Taking out the hallway wall was brilliant, and together with the furniture arrangement makes the living room appear much larger than usual. The kitchen is also very well done. Upstairs, less impressive. The middle floor has two bedrooms that have too little privacy from each other for teenagers but would be great for littler kids who like each other (and parents who want separation from them). On the top floor, the light is wonderful — skylights and side lot-line windows taking advantage of the lower house next door. But the entire top floor is one room — not exactly family friendly, and who else needs/wants so much space? What did they have in mind putting the toilet in the shower? And what about closets?

The picture window needs to be replaced already and some of the other windows looked like they may be of similar quality, so I’m slightly concerned about workmanship in the renovation. The floors appear to be softwood throughout and are in excellent condition, suggesting that the were refinished for sale; softwood like this won’t stay looking new for long.

The house is set back on the lot, giving a small backyard, as seems to be standard on this block. Helps the light in the front, so probably a reasonable tradeoff.

The biggest negative, however, is location. The block and the neighborhood are stunningly beautiful (all the more so if you haven’t been there in a few years). Still, the back of the house looks out onto the projects. The nearest subway is the G; the C is several long blocks away. There is little local shopping. This is definitely car territory — but with limited parking.

Then there is the price. The broker told me that three offers have already been made and fallen through at or above asking. I don’t understand why anyone would offer that much, but the falling-through part makes complete sense: no appraiser doing his/her job could justify this price.

The garden apartment is nicely renovated and rents for $2300. That conveniently helps to calculate the value of the place.

Rents are much **less** likely than purchase prices to include a “greater fool” component (i.e., prices always go up so it doesn’t matter if I overpay because in five years I’ll be able to sell it to someone even more irrational). Thus, rents are a better indicator of the actual market view of the right premium for NYC and a beautiful neighborhood and lots of hip looking people walking around, and the market discount for the lack of transit and residual crime fears.

Assuming a rental value of $10,000 for the entire building, its value to a long term investor would be no more than $1.2m. Short term investors (flippers) might pay more than that, but only if they thought they could sell to someone else who would pay even more — and in a declining market that doesn’t make much sense.

An owner-occupant can pay more than an investor because of the tax subsidies. Mortgage interest is deductible up to $1m principal amount, worth about $25k/year to owners in high tax brackets, which could allow you to pay about another 350k. More importantly, owner-occupants pay no taxes at all on the implicit income from renting to themselves, so they should be willing to settle for a lower return than outside investors. Even so, anyone paying more than $1.8m is paying more to own this place than they would pay to rent it.

And that is without putting any price on the landlord’s labor in maintaining it. Usually in NYC, coop/condo/rentals have a significant premium to comparable single family houses because people are willing to pay quite a bit to avoid landlord’s work.

Based on the rents, in a rational market, this place would sell for $1.2m – $1.6m, depending on whether buyers or sellers are getting the tax subsidy. Replacement value is about the same.

Markets are often irrational. But they generally cycle around the rational number rather than moving further from it indefinitely. It is hard to know exactly what the rational price is here, but there really is no question that it is a third to half less than the asking.

If price goes over this range, rational buyers will drop out, and rational developers will find ways to provide more supply, and eventually, basic Adam Smith will bring prices back to rationality. Why pay more?

You might do that if you fell completely in love with it. But it makes no sense if there is any possibility that you might want to move closer to a job, or your kids’ private school, or to a smaller more convenient place when your kids leave home, unless you’ve got a lot of extra money that you aren’t closely attached to.

This is an awfully large, inconvenient place for someone without several children. But if you have several children and enough money to buy it, why would you be living here? The local public schools are problematic and it is not easy to get to the private schools. Manhattan is harder to get to than from the ‘burbs.

So who is the customer? This beautiful 3 BR house makes sense, it seems to me, for a work-at-home young couple with an income of $350k and $1m savings/equity, who like their car but not lawns, want to be in a young and hopping neighborhood but don’t mind no services/restaurants/groceries/access to Manhattan, and love it so much that they are willing to risk losing $1m if/when the market returns to rationality.

Otherwise, it makes a lot of sense for lots of people at about 1/2 the current asking price.

This blog is testament to group ability to get off track and not stay focused!

MLK is my NIGGA!