Open House Picks 8/10/07: Six Months Later

If rents are $2400 a floor (which seems rather high for Clinton Hill), then it costs about the same to rent as to buy at about $1.9m for a four story. If you pay more than that, you are either paying for the privilege of managing the rental properties, or you are paying for future appreciation. If you think, as most economists do, that current housing prices are well above the trend line and there isn’t going to be any appreciation, then you shouldn’t be willing to pay even this much.

Here is the calculation:
Renting the duplex would be $57600/year. A one million dollar mortgage at 6.5% costs $65000 in interest (i.e., rent for the borrowed money), but if you are in a 40% tax bracket, the government subsidizes $26000 of that, so it is only costing you $39,000 — $18,600 less than the cost of rent. I doubt that $18,600 will cover the costs of operating a 3 unit property, but let’s say that it’s enough. So, leaving aside future appreciation or depreciation, it’d be roughly equivalent to pay $4800 rent or $1m for a duplex you are going to live in. The rental floors generate $57600 in gross income, which will cover interest on another $885k.

I omitted renovation and repair costs, on the assumption that a $2400/fl house is in pretty good shape already. I omitted any charge for your managerial services, on the assumption that anyone who would buy a 3 family probably doesn’t mind managing it for free. If not, reduce the income by how much you want to be paid. I omitted tax benefits from renting because if you make enough money to take out a mortgage on this house, you aren’t allowed to claim passive losses anyway, and most likely you are subject to AMT as well.

I omitted downpayment and principal because that part is an investment, and renters can invest in alternatives. If you think that CH is likely to go up faster than your alternative, you should be willing to pay more than $1.9m. If you think that after the unprecedented run we’ve just have, it is more likely to lag your alternatives, you should be willing to pay less.

guest 12:30 does have a good point in that posters do claim that prices will keep rising because of big wall st. bonuses, so to claim that the downturn on wall street only affects Greenwich is a bit illogical.

None of us know whether brownstones will remain high in price. However, I personally wouldn’t buy now because it’s no longer possible to get a house with rental income that justifies the high price. Witness the discussion here earlier that 1.2 million for a duplex is a good price (which is what a 2 million dollar brownstone with 2 rentals means to the purchaser). The Sunday NYT real estate section just sold showed an 1800 squ ft Clinton Hill duplex (plus celllar) for $900,000. It may be worth the extra $300,000 to own your own place, but not for me.

Yeah and Polemicist is also a widely suspected chronic liar on Brownstoner, 4:35. This is the guy who a year or two ago would claim to own millions of dollars of real estate to add validity to his rants on one thread, but was clearly renting from what he’d say in comments on another thread.

very interesting new data:

Over the past year, condo inventory levels have exceeded co-op levels as new developments (nearly all condo) continue to enter the housing stock at a steady clip. Residential development permits dropped sharply in 2007 and the expiration of the 421a abatement program on June 30th may choke off the high level of supply entering the market in 2009. So far, the elevated level of demand has kept inventory at modest to low levels.

The total number of listings has increased 9.9% from the end of December 2007 to the End of January 2008 (yesterday). Inventory tends to rise at the beginning of the year as sellers anticipate the upcoming spring market. The same period in four of the past five years has seen an increase in the number of listings:

1 Month Change (Dec-Jan)
2003, +2.3%
2004, -10.8%
2005, +16.9%
2006, +4.2%
2007, +9.9%

Clearly condo inventory is higher than it was two years ago, but co-ops are near the six-year monthly low since I began to capture this data. In fact, co-ops are 39.9% below their high in March 2003 (Just as the Iraq War broke out) and condos are 23.5% below their recent high in September 2006. Currently, overall inventory is consistent with levels seen in 2002/2003, which is contrarian to the increase seen in many metro area markets around the country at this time.

Actually, most of the ones fired worked in the back office groups downtown. They weren’t firing investment bankers who good clients. Maybe they fired young ones with no or few clients. Never the less, I can say with absolute certainty most definitely do not live in Greenwich or Westchester or Fairfield counties. How I know this is left to your speculation.