Timing The Market: The Wait & See

Excellent post! Very helpful to me and I can see how it would be helpful to any buyer in New York City.

One of the features of the economic stimulus package fashioned yesterday by Congress and the Bush administration would provide guarantees to more -- and much larger -- mortgages in an effort to boost the housing market. But it also would expose the nation's two government-sponsored mortgage companies to greater credit risk.

With defaults rising, investors lately have shunned nearly all mortgages not guaranteed by Fannie Mae and Freddie Mac. They assume that the two companies, which are private but were created by Congress, would get a bailout in a crisis.

Fannie Mae and Freddie Mac buy from lenders only mortgages that conform to their standards. Currently, that means the largest mortgage they will buy on single-family homes in the continental U.S. is $417,000. Their standards on down payments and verification of income are stricter than were those of many lenders during the housing boom.

Noah,

nice to see you got a mention in this recent article talking about the 'possibility' of a slowdown from foreign buyers

http://nymag.com/realestate/realestatecolumn/43261/

yep, if their local economy isn't doing well, they sure ain't gonna speculate on Manhattan condos right now

uwsider - thanks..yet I get this all the time from those that haven't been reading UD since beginning and dont know me when I was bullish on market:

"You are the only broker I know that is working night and day to create a negative environment for the purchase of real estate. If I was management at Halstead, I would have a good talk with you: Be a gloom and doom blogger or sell real estate, don't do both."

Apparently, I am a doom & gloom blogger and predicting NYC will crash 50%! I had no idea!

Now and then, it's good to see you write from both sides Noah. Don't be too baited by comments into saying too much in those "other forums". Keep up the good work.

Great blog. Thanks for the information. Ignore the other bloggers that are negative. You are giving honest information, and it in the end, it will serve you well in business and in life.
I saw your quote in nymag. Interesting. I still think the odds are pretty good for a strong spring/summer.

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Nice analysis, Mr. Digs. May I quibble?

Seems to me that your advice to those people who want a larger place in a year or two but can’t afford it yet means that they should try to time the market. How so? Because the only way they win by waiting (assuming they can buy something smaller now and be comfortable) is they can comfortably park their assets in a place that will do better than their real estate will do (where would that be??) AND if the real estate market declines.

If the real estate market improves while they are waiting, the gap between their resources and that larger property is likely to grow. If they had bought something smaller, instead of waiting, their appreciation in that property will probably leave them a smaller gap. If the real estate market is flat while they are waiting, their economic position is likely to be neutral for buying that larger space, but they will look better to a coop (especially) if they are already ‘successful’ coop shareholders.

While it is not as simple as I outline here (particularly for pepole concerned about their future income), I think the better suggestion is that someone who plans to remain in Manhattan (in that new apartment or a successor) for a long period of time (10 years) runs a greater risk of not being able to catch up to the market if they wait until they can afford that larger apartment. Indeed, there is an argument to be made that *especially* if you expect to be living somewhere else in 5 or more years, your Manhattan real estate equity is going to be even more valuable if you move to the near suburbs, and even more valuable still if you arbitrage to a much lower priced housing market.

Love to hear your thoughts on the ability of your hypothetical buyer-waiting-for-the-larger-apartment to park their current assets where they can comfortably predict they will out-perform the real estate market. If Manhattan real estate loses 10-15% in the next year or two because we are in a recession, where is the stock market?

THX for making me think more systematically about this issue.

HOW did I spell my own name wrong?? (yikes)

Sandy - love it. Excellent question. I think we need to consider two things when looking at the point you raise:

1) opportunity cost
2) buy/sell transaction fees

Since you are wondering about the hypotheital buyer or the buyer who cant quite afford the true 2BR that they need, but may be able to afford a large 1BR/1.5BTH. Also lets say they are expecting and in 5 years they will absolutely NEED a 2BR/2BTH property; this is the situation.

To NOT BUY will likely result in less losses than TO BUY. The reason lies in the top 2 things I mention above.

OPPORTUNITY COST - By buying, a large portion of your money is in an asset that could rise, stay flat, or fall. By not buying, you could park it somewhere for at least 4-5% for now.

TRANSACTION FEES - what will it cost to buy & sell the large 1BR, then buy and sell the larger 2BR? You must take into account the 7-8% sell side costs of purchase price because in this type of analysis the deal must close to retrieve assets if we are to analyze the investment decision.

If you wait, you only have one set of buy/sell fees. So, to rent and wait, you are saving:

a) 11-12% total transaction fees for condo
b) 8.75% - 9.75% total transaction fees for co-op

That right there is a pretty hefty #. To make it work, we need to estimate appreciation, and it would probably have to be about 8-10% a year each year to both bypass opportunity cost that is earned by not doing deal and savings of transaction fees for initial purchase.

am i lost now?

Noah,

This is a very helpful post. I have two questions regarding the debt/income ratio that you discuss above.

1. I am assuming you exclude mortage and/or real estate tax deductions for purposes of this analysis (I know that the bank does). For example, any mortgage I would take out would be a jumbo and given our tax bracket I would expect an approximately $2,100 taxbenefit each month at the beginning our loan (it will phase out over time). Am I correct in not taking that into account forp urposes of debt/income even though it is a very real beenfit (and one of the great benefits of buying).

2. Assuming one sticks to your 28% recommendation, that means that you can be spending over 50% of your net take home each month on housing. Particularly at the beginning of the year, when we are paying max on social security taxes from our payroll, my wife and I probably clear less than 50% of our earnings net of all taxes. So, if we are at even 25% debt/income, we will pay over 50% of our net on housing. Now, whether that is acceptable depends a lot on what your gross is. The higher it is the more comfortable one should be that 50% of that large number is still enough to cover all expenses ex housing. But as a general rule, does 50% of net income seem to high to spend on housing.

Thanks.

Colgin

Hey Colgin! Long time..thanks for commenting.

I do NOT exclude the tax benefits of owning. Either do co-op boards! Reality is, you need to pay the full amount monthly, and realize the tax advantage next April when you save on the interest payment & re taxes deductions.

At very least, I take the more conservative route by doing it this way and I know this is how co-op boards look at the ratio. Yes it is a very real benefit, but not for those that cant afford the monthly payments and barely make it to time where savings are realized. Thats a red flag for coops.

2. No i dont think so. sounds about right to me, but as you said, there are other variables there that could play into what is considered acceptable or not by boards/lenders

If you wait, you only have one set of buy/sell fees. So, to rent and wait, you are saving:

a) 11-12% total transaction fees for condo
b) 8.75% - 9.75% total transaction fees for co-op

INVENTORY???????????

Right now, customes that have been on the fence for the last two years are snapping up 3BRs+. They have the knowledge and understand the marektplace.

Sit on the fence, you may have the money, but there won't be any apartment for you.

Don't forget the Euro is at almost 1.5 to 1. What happens if its 2-1 in a year?

MY ADVICE

Buy the biggest apartment you can afford now! Borrow from mom or dad or father-in-law if you have to. This apartment (asset -in Noah language) will be worth a fortune while you wait out to time the market.

Look at Tribeca, after the World Trade Center, it dipped for about 30 days!

Get a grip - Follow your instincts -

Don't you also take into account the interest on your mortgage while figuring out the opportunity costs?

hey if you can afford it, do it! Family gifts count to me! Why not. But if you dont have access to this capital, and cant afford it, obviously DO NOT buy the biggest house you can afford if you will outgrow the size in a few years and have to sell before the 4 year minimum. Thats where transaction fees will get you, especially if you go back to renting because you still cant afford a larger place.

FWIW, when I said "I assume you exclude tax deductions" I meant that I assume that you ignore such deductions, i.e., you look at gross payments, for purposes of debt/income. So, you are confirming what I had assumed.

oh sorry..YES, I confirm what you said then

While you are figuring out transaction costs, the price of a 3Br that you want to sell to get a bigger apartment and a house in Shelter Island for you and your family, - will go through the roof.

And even if you don't sell, at least you can wait out any market comfortably in an apartment that you could grow into rather than waiting in a rental.

You fail to understand the thinking process and physcologgy, of keeping up with the Jones, is Jr in the right school, playing with the right children, like it or not, these things are factors in New York City.

There is a social cost to being in a rental, ask any one in New York City who is not computing transaction costs.

Sandy,

I recently ran a buy v. rent analysis factoring in all the closing costs and other costs necessary to own. I did this for a 2BR in the $1.5M range.

Noah is correct. In order merely to break even, the value of the apartment would have to appreciate approximately 10% per year.

I would not make that bet.

Sandy, do you ever have buyside clients? I ask because what I've outlined is pretty fundamental stuff, and I think it would be virtually negligent for a buyside broker not to know how too look at the numbers.

I should clarify on the previous post - that is to break even after two years.

Good point about the transaction costs - 3 sets in my scenario (buy now + sell later + buy) but only 1 in yours (buy later).

But you ducked on the where-else-to-put-your-assets (safely) question. While you say “you could park it somewhere for at least 4-5% for now” you sound like you are talking about a savings account -- is that what people do in real life? If you are talking about the stock market, yes ... people *could* get at least a 4-5% return, but in a recession that drives down Manhattan real estate values how many civilians are going to get 4-5% picking stocks, or in mutual funds?

I am less sanguine than you about people being able to do better in non-real estate assets in that scenario, but I totally agree that they should be informed and make their own choice.

Plus there is the idiosyncrasy of personality involved. The Trader types tend to value everything in monetary (“investment”) terms; other people assign a higher value to the psychological benefits of “owning” a home and controlling their environment more.

THX for playing along.

Question for you: Reading over the post/comments, I don't understand everything, but I don't see any mention of current rent payments factoring in. If you're paying $3K/month in rent for your Manhattan 1BR ($36K/year), shouldn't that factor in? If your out-of-pocket costs are 5% on a $600K 1BR, that's only one year of rent payments. So even if your new place doesn't appreciate at all and you move out after four years, it still seems to me like you'd be coming out ahead because of tax breaks, built-up equity, and no more rent.

Thoughts?

Renter,

What you propose is not a fair comparison. You need to compare the "lost" rent payments with the "lost" nondeductible portion of your interests payments as well. It is not fair to stack rent up just against buying and selling transaction costs. In your rent v. buy analysis you also need to reflect interests payments in the buy scenario.

Colgin

what is the differance between 1.75% closing fees with a coop and 9.75% transaction fee for a coop.....whats included in the transaction fee?

Thanks Colgin, your right. Sorry such a n00b.

Noah,
Thank you for the above posting, very helpful as always. For the debt to income ratio do you think it is reasonable to include the bonus for both my husband and myself in the income total? I am looking to buy and our income doubles if I include the bonuses. I don't have a bonus in my employment contract, but my husband does, but only the first year (he recently got a new job). However my bonuses have been steady for 7 years. What will most coops and banks accept?
Thank you

Teri - thx..I would! I would present it to the seller broker that way, and if there is any question, have them call the managing agent to see if the board would look negatively on the bonus that is proven by tax returns yet not shown on employment contract. If your letter of employment can include that part of your salary, should be good to go!

good luck

Noah, I think you're doing fabulous reporting (and you're not particularly bearish on Manhattan, I'm more so). The advice you give is advice that many would have been wise to follow over the past 5 or so years. This social stigma some mention to renting is simply foolish. The desire for perceived advancement, both economic and social, has caused many to overspend.

I would LOVE to own, and I have approximately 14 out of the last 18 or so years, but not if it increases my after-tax expenditures by more than double (also, some people will put themselves into the alternative minimum tax scenario with the additional real estate taxes, thereby decreasing their savings). I'd prefer to rent and go to Europe (with quite a bit left over for savings, much more than I'd be getting now for principal) for a few weeks each summer.

The simple savings account is not looking particularly remunerative, but it's one of the better options currently for those who don't want to play the markets. Gold and foreign currencies, chosen wisely, are other potential options.

Keep up the good work. The answers aren't always simple, and a given answer will only work for a certain number of people. Your answers recognize that.

thx Brenda! great to see you around here so often!

It's this simple; people buying in the Manhattan real estate market right now will more than likely end up deeply regretting their decision to do so within a few years. That's my opinion, if you think it's a good time to buy I think you'll have a big selection of properties to select from over the next six months or so.

Good luck!

I find it amusing that everyone ducked Sally's excellent question. Where exactly is everyone putting their money if its not in real estate? If you're scared we're going into a recession, I hope its not in the stock market/mutual funds. Okay so not real estate and not the stock market. So that leaves bonds or cash. I don't know a lot about bonds, but I'm assuming the rates are dropping, along with the interest rates for cash...

So I'd like to reiterate the question? If you don't like real estate, where are you putting your money? My guess is cash.

Again, I'm not an expert but with the Fed cutting rates, that will lead to inflation eventually. This means hard assets will increase in value (including real estate). With cash earning 4% then 3%, then 2%, is that realistically going to be able to help you save up? At some point you'll be losing money in cash due to inflation.

Quite a pickle.

great point space..since prob is with housing and securities that stretch out to wall st, its understandable why some are considering waiting for clouds to clear to pull trigger.

Me, Im 50% cash, 25% gold, 25% equities and of equities Im 60% long large cap tech/ag and 40% short financials via etf's

what is the differance between 1.75% closing fees with a coop and 9.75% transaction fee for a coop.....whats included in the transaction fee?

michael - I dont understand the question. To buy a co-op you are looking at generally 1.75% of purchase price on buy side. To selland close the transaction, you are looking at between 7-8% fees assuming you use a broker at 6% commission; plus other fees.

In total, the deal is costing about 9-10% to close! So, we must calculate that into any analysis if we are comparing to renting which doesn't have those fees.

noah...i understand now....one if for buyer and the other if for seller and includes commission...thanks

Noah - ahhh - the SKF! god bless that thing...

SKF is crazy volatile..its down like 40 pts in 2 weeks.

On sell-side costs, remember too that many buildings have flip taxes too with the average being 1-2% of total sale--not just on the profit.

**Again, I'm not an expert but with the Fed cutting rates, that will lead to inflation eventually. This means hard assets will increase in value (including real estate). With cash earning 4% then 3%, then 2%, is that realistically going to be able to help you save up? At some point you'll be losing money in cash due to inflation.**

It can be argued we are already in an inflationary environment, and that the new bonus Fed rate cuts puts us in a hyper-inflationary crisis mode.

**General rule of thumb is 5 years. Its a good rule, although I can live with one less. If you are going to hold the property for at least 4 years, and you meet all the above criteria AND YOU WANT TO BUY AND OWN YOUR OWN HOME, then you have very compelling reasons to pull the trigger!**

As long as you expect the market conditions to remain the same or get better in 5 years (or whatever your target exit date is).

Currently, the Fed, the Treasury secretary and WS have behaved in way that give you pause to believe that this will be the case.

And longer term, let's say 10 years - wouldn't you be better off buying a co-op than a Condo that has tax abatement expiring in 10-15 years. What will be the value of a condo which will have fees and charges go up 100-200% on a monthly basis.

And if co-ops are therefore the better option longer term, you are at the mercy of the current inventory which is below *normal*.

I don't believe that we are in a healthy economic environment, locally, nationally or gobally. I don't believe because the Fed doesn't believe. Historically,the past record of these inflationary crises says we are not, nor will we be in a better situation 5-10 years from now.

But, in the case of NYC, until inventory increases and until people start to lose their jobs at an exponential rate, causing people to leave the city, its difficult to say that, yes, home value will decrease in any reasonable way.

Excellent comment Jose.

You'd be interested in my 421-A abatement post I did a ways back! I mentioned same topic about paying top dollar for a property that will get less affordable over time (counter is what about the savings in meantime, is it worth it!)

I published this JUNE 2006!

http://www.urbandigs.com/2007/04/biggest_scam_in.html

Noah,

I really enjoy reading your posts and I think you make a lot of great predictions before they happen.

While timing the market is not a good idea longterm, it can be helpful if you can wait 1-2 years. I thought about buying last summer, but decided to wait. Now prices for what I am looking for have come down 10%, which for me is a lot.

I also have a question for you. I know you specialize in the Manhattan area. But do you see prices coming down in Brooklyn, specifically Brighton Beach? Do you know any good sites online that discuss real estate in Brooklyn?

Noah,

I find it interesting that you are against timing the housing market but appear to be for timing the stock market given your asset allocation: "50% cash, 25% gold, 25% equities and of equities Im 60% long large cap tech/ag and 40% short financials via etf's"

There is nothing wrong with renting (or, like noah, having a large cash position) until conditions are favorable for investment. This is not "timing" the market... but acting in one's own interest as an informed consumer (whether a renter, an owner or investor).

spaceboy said "If you don't like real estate, where are you putting your money? My guess is cash."

I am 65% cash, 35% Equities and of equities, I am 60% on Food/Agriculture stocks, 40% Emerging Markets (Brazil/Argentina)

small note regarding the comment about using tax effected monthly income in the debt/income calc.

Noah I think you responded that you had to wait until the end of the year to get the tax deduction. wouldn't it be smarter to increase my witholding allowances to reduce my tax during the year? uncle sam is not paying me interest.

I have not done this in practice, and I think the max deduction is to claim 10 exemptions(or something like that), so it's more of a question than a statement.

aonon - I was an equities trader for 7 years. My stock trades and buying a piece of real estate is quite different.

That said, you are right and Ill never argue that there is anything wrong with renting, especially if you are uncertain about the market or feel like prices are too high. The point is, some people do not want to rent, have a longer term horizon for their investment, and find themselves in a comfortable position to buy; so, choosing to rent solely because they want to time a 5-10% decline, might prove to be the wrong decision with 12 months (or whatever) rent thrown out the window by the time they pull trigger.

That comment about my holdings is old. I am out of gold right now, lightened up my short exposure, and increased my cash exposure. I feel that we are nearing a pause in FFR and dollar may, and I repeat may, get some support. I do not want to be holding the bag if commodities priced in dollars lose the currency trade speculators. It could be very volatile.

Hi Noah,

So, two of the four requirements apply to me. I have a secure job (school teacher) and plan to stay for a period of 5-7 years. The liquid assets and income-debt ratio is the issue. After closing costs on a new 2bed, 2bathroom, 2 balconies condo and corresponding parking lot near Riverdale (tax abatement inc..thanks for that famous post...lol) I'll only have 6K as an emergency fund. I don't have any present debt, but considering my monthly payment on the 255,000 mortgage, my ratio will be high. I'm thinking I can always rent the second bedroom...