NYC Apartment Boom: Bedroom Surprises
After touching off quite a lively debate with my last piece on the NYC housing bubble, I wanted to do a follow up piece that answered some questions and explored the issue of appreciation based on number of bedrooms. I also wanted to go as far back in time as the data permitted and look at price appreciation versus inflation to get a feel for how much "excess" return was generated in the New York City market as the result of animal spirits above and beyond inflation.
I like to be transparent about my methods to highlight the limitations of my primitive analyses, so let's go through the drill again. I used data from Miller Samuel on the Upper East Side market that extends back to 1989. I used the Upper East Side market because it has not been a transitional neighborhood and should not reflect appreciation based on greatly improved quality of life as some emerging neighborhoods in New York may. Note also that, as in my last piece, I interpolated the data for 2005 in the graph below because Miller Samuel didn't have the data (although I understand Jonathan Miller does have a note from Epstein's mom to explain why he didn't show up to work that year).
Purists will be relieved to know that I calculated compound annual growth rates for this study (CAGRs), and separated them out into 3 time categories; 1989 - 2007 (full period), 1989 - 1999 (stagnate market) & 1999 - 2007 (robust market).
You may be surprised to know that during the period 1989 to 2007, 1 bedroom apartments appreciated more rapidly than either 2 bedroom or 3 bedroom units:
CAGR of UES Median Price Gains Coops/Condos 1989 - 2007
1BRs - 6.7% per year
2BRs - 6.2% per year
3BRs - 6% per year
The same did not hold true, however, in the rather moribund 1989 to 1999 period:
CAGR of UES Median Price Gains Coops/Condos 1989 - 1999
1BRs - 2.2% per year
2BRs - 2.8% per year
3BRs - 3.1% per year
In contrast, during the robust 1999 to 2007 period:
CAGR of UES Median Price Gains Coops/Condos 1999 - 2007
1BRs - 12.7% per year
2BRs - 10.6% per year
3BRs - 9.6% per year
I was surprised by these data and wondered if it was peculiar to the Upper East Side, so I did the same analysis on the Upper West Side data from Miller Samuel.
CAGR of UWS Median Price Gains Coops/Condos 1989 - 1999
1BRs - 3.2% per year
2BRs - 6% per year
3BRs - 4.8% per year
Interestingly, prices for 2BRs led the way during this time period. For the more bullish years of 1999 to 2007, however, 1 bedrooms played a little bit of catch-up:
CAGR of UWS Median Price Gains Coops/Condos 1999 - 2007
1BRs - 12.3% per year
2BRs - 8.9% per year
3BRs - 14% per year
Furthermore, on the Upper West Side as one might have expected, the increasing population of families pushed up the median price of more scarce 3 bedrooms by 14% per year. This drove 3 bedrooms to the leading position over the full 19 year stretch, with an appreciation of 8.8% per year, versus 7.3% for 2 bedroom units and 7.2% for 1 bedroom units on a compound annual basis; more in line with what you would expect for larger apartments that are in less supply.
The chart below shows the Upper East Side apartment figures graphed against owner equivalent rents. As in my earlier piece, I just took the 1989 price of a 2 bedroom as my base and inflated by the annual rate of growth of owner equivalent rents for the New York area from the Bureau of Labor Statistics. Some folks complained that I only looked at data back 10 years to the beginning of the boom in my last piece, albeit without intent to deceive (potentially making the bubble look worse). So here you have a "full cycle" picture, which I think is very telling. After underperforming inflation for the 1989 to 1999 period, the market raced ahead of it for a number of years and got far above the trend line in the last couple of years. We can see that this may be part of a normal "full cycle." It doesn't detract from the idea that a regression to below the mean may be quite painful, however.
Noah and I recently discovered this jiffy display tool for Urban Digs which I will utilize to let you look right at the raw data on the various apartment sizes for the Upper East Side, here (View image) and for the Upper West Side, here (View image). Additionally, you can pop up the chart above and see it more clearly if you click here (View image).
I also want to note that in comments on my last piece someone accused me of over-dramatizing the run-up in prices by presenting average annual growth numbers (in addition to total appreciation figures). They then presented their calculations of the compound annual growth rates for the various neighborhoods in the study. The numbers looked too low to me, but I didn't get a chance to calculate them until I sat down to write this piece (and I really felt my point was valid regardless of the start point or growth rate calculation method). But we at Urban Digs are always open to dissenting views and constructive criticism. So let me give you the correct compound annual growth numbers here.
From 1998 to 2007, the compound annual appreciation of 1 bedroom condo and coop median prices for the following neighborhoods discussed in my last piece were:
CAGR MEDIAN PRICE OF 1BR CONDO/COOP FROM 1998 - 2007
Greenwich Village - 12.4% per year
Upper East Side - 13.4% per year
Upper West Side - 13% per year
Clinton - 15.4% per year
Harlem - 23.1% per year
Washington Heights - 31.9% per year
Is your head spinning yet?
Posted by truthteller
Fri Feb 6th, 2009 11:16 AM
Nice work Noah.
Bottom line as follows.
A safe mortgage is a maximum of 3 times the buyer's yearly income, yet mortgages have been 5 to 10 times incomes in the last few years.
Anyone who buys now will suffer losses immediately, and for the next several years at least, as prices fall into line with tighter lending and stagnant salaries. Anyone who bought a "bargain" this time last year is already sitting on a very painful loss.
The bottom will be here when buying a house to rent out clearly makes money. At that point it's justified to buy because the rent covers the mortgage and all expenses, eliminating risk.
A return to traditional lending standards means a return to traditional prices, which are far below current prices.
It's all here: http://patrick.net/housing/crash.html
Posted by Office - Noah
Fri Feb 6th, 2009 11:33 AM
well credit Jeff! But I tend to agree.
Posted by Fred
Fri Feb 6th, 2009 11:43 AM
check out curbed - northside piers' PHs in Williamsburg are closing for 40%+ off original asking.
Posted by baileybee
Fri Feb 6th, 2009 12:04 PM
awesome, this is great, definitely a broader picture of what is happening.
i dont disagree with the fact the re price will come down. but i do think this provide you with a more complete picture, so that you can come up with your own conclusion as to how much it will come down.
Posted by Thisson
Fri Feb 6th, 2009 12:13 PM
Nice article, and good comments so far.
However, I will suggest that a "safe mortgage" is less than 3x a buyer's yearly income because of exposure to maintenance increases/common charges, and because anyone living in NYC likely has a very high tax rate (city + state + federal).
My guess is that a "safe mortgage" in NYC is 2x annual gross earnings before taxes. But of course reasonable minds can differ on this point.
Posted by OT
Fri Feb 6th, 2009 12:36 PM
Jeff - fantastic work here, not that you need a pat on the back from me! I haven't had a chance to fully digest the math, and I performed a similar analysis that focused on co-op only which I seemed to remember concluding lower annual appreciation. I will post again later once I have had a chance to dig this up. I am curious to know your thoughts on the exact impact of a reversion to mean across the 20 year data - basically how far down to you think we need to go without factoring in the risk of overshooting the mark.
In response to TT, I bought on the UWS 2 years ago, put 35% down, and my carrying cost is $1200 per month lower than rent in the same line in my building - and that doesn't factor in tax benefits, which bring the number closer to an $1800 benefit. In my case, despite buying at a point where the market peaked, I am well ahead. My down payment if left in the S & P would have suffered a 50% hit. Even if I sell now and take a hit, the deterioration to capital would be much smaller than having kept the money in the market.
I think the rent vs. buy disparity arugument is much more relevant to new development, which I think anyone will agree was driven much more by speculation and greatly out of line with long term real estate fundamentals.
Posted by Sandy Mattingly
Fri Feb 6th, 2009 01:12 PM
LOVE the detail, Jeff! Much to chew on ... THX
Posted by Buyer
Fri Feb 6th, 2009 01:17 PM
OT- Your math only works if you were leveraged 3:1 in S&P. Plus, if you decided to sell, there is no guarantee you would find a buyer since the housing market has become illiquid.
Posted by Buyer
Fri Feb 6th, 2009 01:32 PM
Let me try to be more clear.
If your apartment cost 1MM and your bought at the top...
In the S&P you would have lost 175k (50% of 35% down). However, you have actually lost around 250K (25% of total cost). If you are saving 1800 a month, it will take you 3.5 years to make back the extra 75K you lost. Even if you invest all of the savings at 4%, it will take you years to break even.
That assumes that your apartment does not lose any additional value. It also does not count your buying/selling expenses which probably add another 5% or more to your loss.
As Noah would say, just keeping it real.
Posted by lars
Fri Feb 6th, 2009 01:42 PM
Buyer,
You point out exactly the problem many folks are facing realtime and that is leverage. Works great on the way up, but is a killer on the way down.
Posted by Fred
Fri Feb 6th, 2009 01:43 PM
Buyer - he's not counting the discount for current market. he's just looking at carrying cost which is a valid argument, if you don't have to sell, but the big caveat is rents are dropping and maintenance and taxes are rising. add back liquidity risk and you kind of get to the same place. i actually would take exception that he's "saving" $1,200 because the only way you get to that conclusion is by leaving debt service aside and only comparing ownership maintenance with gross rent for a comparable unit. perfect example of why the market is upside down - folks don't look at homes as strategic financial assets in both up and down markets.
Posted by truthteller
Fri Feb 6th, 2009 02:14 PM
OT, I'll be simple.
You're screwed, some slick talking broker convinced you to buy into a bubble.
Problem is, there are no more suckers on line. It was all a Ponzi scheme.
Prices must come down at bare minimum 50-650%. What's all the bellyaching, prices went up what close to $200%, so let em come down to a level where a mortgage will be 3 times vastly reduced income.
Everyone listen up, don't listen to these broker snakeoil salesmen.
Posted by faustus
Fri Feb 6th, 2009 02:19 PM
Fred - "He's not counting the discount for the current market, he's just looking at carrying cost, which is a valid argument, if you don't have to sell"
Actually, it's not at all a valid argument. Who says that an owner of stock needs to sell? Does that mean that you should only look at the carrying cost of the stock? Of course not. If I own C at $25, can I ignore the fact that it's now at $3?
Comparing the value of one asset based on cost to the value of another asset based on market is patently absurd.
These are arguments of desperation, wholly illogical and fabricated merely to provide emotional salve.
Posted by Eastvillboy
Fri Feb 6th, 2009 02:30 PM
Another major point to make about the NYC RE market: it is highly influenced by both Macro and Micro. And then there's the "Micro-Micro" which is the actual building.
Some buildings due to their age, location, mystique, whatever are going to hold up better than others. This may seem obvious to most here, but deserves to be said.
That is why certain overall analysis like the one Jeff is providing may pertain to the overall Market, but may not be pertinent to a single owner in a single building.
Personally, I became concerned about my own unit when I found out that a unit in the Co-Op had been sold at a loss. The woman had to write a $20,000 check to the bank at the Closing. From what I heard this wiped out her Savings (not to mention her equity). I think this is a story we're going to be hearing a LOT more about and considering that Prices are determined by Comps the negative feedback loop is going to be detrimental to the Market as a whole.
Think Globally, but act Locally. That's the "Micro-Micro" of the Market.
Posted by Buyer
Fri Feb 6th, 2009 02:52 PM
truthteller - We are basically in agreement, but you don't offer much to back it up. Isn't this blog all about discussing the economics of NYC real estate based on hard data? Not to mention your tone seems crafted to incite rather than enlighten.
Posted by Fred
Fri Feb 6th, 2009 02:58 PM
Faustus - chill. was just making the point that if he wants to ignore what he would sell it for today, it's a valid argument. folks don't trade RE like stocks so, yeah, he can ignore the hypothetical reduction in current price. if you in fact took the time to read my entire post, you would see that we agree. the fact is if he wants to look at a true carrying cost comparison, he should include debt service (less int deduction) plus opex and then compare it to what the same unit rents for today. all that mattes is cash on cash if you don't have to sell. now, if you want to do it absolutely correct, you'd estimate a residual value based on what's happening today for sales prices, discount the whole thing back, or just do an IRR. i wholeheartedly agree that no one can sit here and say they are actually making money owning today versus renting (using cash on cash as the basis). once you factor in depreciation, you are clearly underwater but folks who don't have to sell don't care - i just think that's there are many more folks who want to sell and we've reached the tipping point which is self-perpetuating and will grow in strength as the year chugs along.....
Posted by faustus
Fri Feb 6th, 2009 03:40 PM
Fred - I do agree with many of your points. The fact is though that all too often you hear the argument that "it was a great investment back then, therefore..." or arguments based on "not needing to sell", neither of which, of course, relate to values today. A cash-on-cash analysis is probably more useful in determining whether or not to sell in this market.
Just trying to stay focused on values today, not yesterday.
Posted by Donald
Fri Feb 6th, 2009 04:54 PM
I love how everyone thinks the housing bubble was a ponzi scheme. I bet you don't even know what a ponzi scheme is. Bubbles are not ponzi schemes. In a ponzi scheme, there has to be someone in charge... a head guy, someone like a Bernie Madoff. THere has to be someone at the top of the pyramid. But in the housing bubble, no such person existed. Who was the "master-mind of the bubble? The answer? Nobody. (And please don't even waste my time with Lereah/ Yun/ NAR because they could not even start a potato bubble if their lives depended on it)
Posted by OT
Fri Feb 6th, 2009 04:55 PM
TT - you may be right, although I don't feel screwed. I love my home and for what I could rent with my monthly outlay, I'd be miserable. I plan to be there for the next 5-6 years so I expect to be OK. One of us will be right with our prediction and I hope it's not you, but it may well be. And a broker didnt' talk me into anything. I don't use buy-side representation and I negotiated aggressively in anticipation of a downturn - and won.
Buyer, your math is right but your assumptions wrong - don't feel like giving out too much personal info but suffice to say I got a good deal on a fixer upper in a great building and know how to get the job done affordably. I recently had the property appraised for a refi (therefore no incentive to fudge to a purchase price) and it came in above what I paid plus the renovation costs. It had appraised above the closing price first time around as well.
Fred - you're right, I didn't factor in the debt service dollars, but hey, its Friday and I'm tired.
Oh, and I did the math for reversion to mean assuming housing tracks inflation in the long run. I used Jeff's numbers from the chart and calculated that median price would need to fall to $827,935, or a drop of $572,065 from the current $1.4M. That is a drop of 40.86%.
Again, I don't see this happening because New York is a very different place than it was in the late 80's / early 90's, but it very well may. I just don't think it is realistic to expect a drop by more than that. But if it happens, I will be picking up what I can afford for the next cycle.
Posted by OT
Fri Feb 6th, 2009 04:58 PM
Back to the point of the article, question for Jeff - did the rent numbers you use for comparison include rent regulated units? If so, this is not a particularly accurate comparison as it has been nearly impossible to get into a rent stabilized unit for the past 12 or so years. A comparison of 20 year trend for sales against 20 year trend for market rate apartments would be more accurate. I expect that 2 lines would be much closer if you filtered out rent regulated units as their annual increase is fixed and low. Given that there are 1.6 million rent regulated apartments in NYC (5 boroughs), I expect this factors in heavily to your analysis.
I spend way too much time on this site...
Posted by Donald
Fri Feb 6th, 2009 05:22 PM
If you are satisfied with your apartment OT, that is great. There is no need to justify your purchase. Unfortunately, there are lots of miserable people out there who enjoy taking something that is positive and turning it into something negative.
Posted by Seller
Fri Feb 6th, 2009 10:12 PM
OT- you don't seem out of touch to me. From what I can see you've been acknowledging the facts and agree with predictions supported by empirical data -when the predictions are legitimate. You also seem to have an informed take on real estate trends in Manhattan.
All one needs to do is look back at posts following the articles here over the past few months, and you will see that any data, news, or sentiment that is bearish is immediately conflated, and usually cheered on. On the contrary anything that is not completely bearish is immediately downplayed or regarded as fallacious.
As Donald points out, there are lots of miserable people out there that won't be happy until this market changes to suit their wants, and apparently they believe that if they keep saying what they're saying people will start to buy it, rational or not. They may possibly get their way given the state of our economy, and I'm sure they will come out to gloat about it if that should happen.
Your point of view is appreciated here and I hope you will continue to voice it.
Posted by bear
Sat Feb 7th, 2009 07:09 AM
OT-
Respectfully disagree with your math.
I will use my numbers, fill in for yours.
Rent of my apt: $4.5 psf/mo
Maintenance/tax of same: $2.0 psf/mo
Net Rent saved on cash outlay: $2.5 psf/mo
Net Rent saved per year: 12 times = $30 psf/yr
Cash outlay for my apartment: $1100 psf/year
Net Yield Cap Rate (after tax)=30/1100=2.7%
Aftertax yield on NYC Muni 30 year: 5%
Aftertax yield on 8% Cap Rate REIT: 8%*.65=5%
(AVB or EQR REIT)
So, I see my apartment's fair value of about 2.7/5, or about 45% lower compared to renting and investing the proceeds. The NYC bonds have similar credit risk to your taxes going sky high in a city wide financial crisis. The Apartment REIT rent growth should approximately match your rent growth over long term.
Do the same for your apartment, and include your fixer up time at $50 per hour and all materials and permit costs.
Thanks,
-Bear
Posted by bear
Sat Feb 7th, 2009 07:13 AM
OT-
(Typo corrected.)
Respectfully disagree with your math.
I will use my numbers, fill in for yours.
Rent of my apt: $4.5 psf/mo
Maintenance/tax of same: $2.0 psf/mo
Net Rent saved on cash outlay: $2.5 psf/mo
Net Rent saved per year: 12 times = $30 psf/yr
Cash outlay for my apartment: $1100 psf
Net Yield Cap Rate (after tax)=30/1100=2.7%
Aftertax yield on NYC Muni 30 year: 5%
Aftertax yield on 8% Cap Rate REIT: 8%*.65=5%
(AVB or EQR REIT)
So, I see my apartment's fair value of about 2.7/5, or about 45% lower compared to renting and investing the proceeds. The NYC bonds have similar credit risk to your taxes going sky high in a city wide financial crisis. The Apartment REIT rent growth should approximately match your rent growth over long term.
Do the same for your apartment, and include your fixer up time at $50 per hour and all materials and permit costs.
Thanks,
-Bear
Posted by Craig
Sat Feb 7th, 2009 08:28 AM
Just a minor nit on the comparative economics presented in a few of the blogs above. Many of them use the return on S&P in recent months as justification for having invested their down payment in a home. They also assume that all of one's down payment was in stocks, as opposed to some more balanced portfolio of 50/50 stocks/bonds or similar. This allocation is more prudent over the long run and would have returned a loss for sure since Sept, but a much smaller one (15% - 20% or so) than the 40% typically quoted here. And those are backward looking numbers. For someone looking to buy today, the question is are stocks more fairly valued from a fundamental earnings perspective than real estate, and what is the longer run return expectations for stock vs. NYC real estate. While there is certainly more downside potential in stocks from here, I would argue that both valuation and long run risk/return expectations favor stocks from here.
Secondly, if someone was in the process of looking/buying a home, I would hope that they would have had their down payment set aside in cash rather than stocks, since they couldn't afford to risk that down payment. Unfortunately, many probably didn't, falling victim to the same psychology that the "market could only go up" after the five year bull run we had seen prior to this summer/fall. Probably the same psychology that allows one to fall into the trap that "NYC real estate can only go up" during the bubble of all bubbles.
This post doesn't really push the ball forward for the main analyses of buy v rent (which have been well represented by Fred and Buyer), but thought it worthwhile to point out a bust in some previous assumptions.
Posted by RWZ
Sat Feb 7th, 2009 09:26 AM
OT:
I'm getting into a situation similar to where you were a few months ago - facing a renovation and the real need to get the job done within budget. I would like to learn from your renovation experience. Is there a way of contacting you not via a public blog?
RWZ
Posted by chris
Sat Feb 7th, 2009 09:42 AM
Thanks Jeff (and Noah) for this brilliant analysis, and for the clear presentation of your findings. While it's always possible to quibble about the methodology used, your analysis illustrates very well the broad trends (and risks) and in the end that's all that matters.
I would like to add a footnote to the discussion of home ownership vs investments in other asset classes. Instead arguing about real estate vs S&P500 for instance, you should take a macro view of ALL assets that you own. It's simple portfolio management theory. IF your real estate is a disporportionately large percentage of your overall assets (say 15% or more), you should either (1) sell or (2) lock in your gains by shorting REITS. In the case of (2), at least your gains on the REIT short will offset the likely capital loss on your real estate holdings.
Posted by jeff
Sat Feb 7th, 2009 10:27 AM
The owners equivalent rent figures I used are from the Bureau of Labor Statistics and are New York area figures which includes parts of Jersey, Long Island & Westchester. As such, my guess is that the data is dominated by market rate rents (I bet they don't include rent controlled apartments). The negative is it is not a pure comparison with New York City or the neighborhoods in particular, where rent trends can definitely vary. On the other hand it's a decent proxy for the cost of living in the area. I have done some work on rent guidelines board rent increases for rent regulated apartments in the past and interestingly, they tend to mirror free market rent increases, with a lag.
Posted by OT
Sat Feb 7th, 2009 12:46 PM
Bear - you lose me about half-way through your calculations, so I will give you my variables and perhaps you can run the math for me.
Rent of my apt: $5 psf/mo
Maintenance/tax of same: $1.2 psf/mo
Net Rent saved on cash outlay: $3.8 psf/mo ??
Net Rent saved per year: 12 times = not sure how you calc
Cash outlay for my apartment: $935 psf (includes my renov)
Net Yield Cap Rate (after tax)=not sure how you calc
Aftertax yield on NYC Muni 30 year: 5% (assume this is right?)
Aftertax yield on 8% Cap Rate REIT: 8%*.65=5%
(AVB or EQR REIT) ** not sure where this factors in **
Again, I would appreciate if you perform the remaining math.
Seller - appreciate the kind words, and agree with your post.
As for the comment on investment selection comparison, that is a personal preference - I am not a finance type so I keep most of my $ in an S&P indexed fund - and yes, I have gotten hammered for it. I just know that for my case, I would have put the money in an S&P fund, not a tax-advantaged muni or other, smarter class.
RWZ - happy to share what I know. If you post your email or phone number, will be happy to contact you. In my previous property, did 90% of work myself on a gut renov, and this time around did 10% of the work. Used a fantastic contractor I would be thrilled to recommend.
Jeff - thanks for the clarification on the rent question. I know how it is with data, you use what you got. I will dig to see if I can find some better data for Manhattan rents that mirror the neighborhoods you used for the sales.
Just anecdotally, when I moved here in 1997, I lived with 4 guys in a 5-bed on E. 85th for $3200 / month - seriously. Now 2 of the rooms were tiny, but we fit pretty comfortably, and my portion of the rent (I had the b!tch room) was $500. Cant' imagine that unit rents for any less than $8000 now (elevator building, no doorman, top floor).
Your rent data show about a 50% increase over that same period which I find exceedingly hard to believe. Don't think it's particularly accurate to compare 20 year sales data in the nicest Manhattan neighborhoods to a tri-state rent figure (let's face it, rents in Newark simply don't go up all that much). Not dogging you, just trying to understand the analysis a little better and hopefully improve the accuracy.
Posted by chris
Sat Feb 7th, 2009 02:12 PM
Jeff, now that I have digested it some more, do you have information about what the underwriting standards were to get a mortgage in 1997 vs 2008? Is it fair to say that during the height of the boom in 2008 banks were willing to lend 6 to 11 times household income to buy a house, and that in 1997 this figure was only 4 to 5 times? Assuming future underwriting standards at 4 to 5 times household income, many homes would have to decline by as much as 50% to attract buyers that can afford them ... which is roughly the 1997 price level. Basically, reading your blog here I come to the conclusion that the market value of an apartment should be its comp of 1997 + cumulative inflation for the 1997-2008 time period.
Posted by OT
Sat Feb 7th, 2009 04:43 PM
Regarding mortgages as a multiple of income, are you guys really serious about banks lending at 6 to 11 times income (Chris & TT)? I am not being snarky, just really surprised. The first mortgage I ever took out was 2.5 X income, and my most recent is about 2 X income. Even so, both boards gave me the business about whether I was earning enough to cover my living expenses.
Having been on 2 separate boards that would be considered "easy" boards by NYC standards, I know that neither would DREAM of considering a mortgage that was over 3 X income. I mean think about it, if you make $100K per year, you take home about $60K of that (assuming health benefits, 5% contribution to 401K, etc.). A $300K mortgage at 6% is $1800 month, plus figure $700 for maintenance. Your annual nut comes out to $30K, half of your disposable income. NO coop board in Manhattan of Brooklyn would allow this, and I'm not sure how condos work, but they may balk as well.
I suppose in FL, SoCal, Vegas, etc. this happened but I assure you not in Manhattan.
Also, some of you are comparing median NYC incomes to median NYC mortgage amounts. This is an apples to oranges comparison. NYC is a city of 8.2 million people (source, Wikipedia), and only about 10,000 properties trade hands in a good year in Manhattan. If you factor in people that buy/sell, out of towners, and foreigners, probably a total of 6000 Manhattan residents actively trade property in a given year. I think it's fair to assume that these are people that earn more than the median NYC income. The top 1% of New Yorkers earn a median $420,000 income, and there are over 82,000 of them. Yes, many live outside the city, but I am sure there are a few thousand at any point that need a darn roof over their heads.
Posted by Eastvillboy
Sat Feb 7th, 2009 04:47 PM
Donald, you stated:
"But in the housing bubble, no such person existed. Who was the "master-mind of the bubble?"
Let me answer this question for you as you seem to have overlooked the most notorious mastermind of the largest Bubble the World has ever seen.
The answer to your question is simple. Alan Greenspan was the one who orchestrated the inflation of Housing prices. He did this by foolishly lowering interest rates to ZERO percent (a folly being repeated by "Helicopter" Ben Bernanke).
In order to avoid the severe Recession that was necessary following the Tech Bust and 9/11, Greenspan squashed rates and turned every American (and most of the world, for that matter) into Real Estate speculators. This global, synchronized rise in home prices was a pure Bubble and was bound for ruin from the moment it started. Just ask the people in Spain, Ireland and the UK (to name only a few).
Greenspan orchestrated this Bubble to "push out the pain" down the Economic timeline so that his Legacy would be preserved and he could fade away and release the reins of control before the wreck began.
Only recently did Greenspan admit that his models were "flawed" and his economic vision was incorrect.
http://www.bloomberg.com/apps/news?pid=20601087&sid=ah5qh9Up4rIg&refer=home
What was that vision?
No one can say with certainty, but the models that were built on infinite home price appreciation had to start somewhere as did the securitization of debt and transference of risk among multiple counter-parties.
These are all legacies of the Greenspan Era and thus brings a MOST simple answer to your question.
The responsibility for the Worldwide Bubble in Housing lies at the feet of Alan Greenspan. Plain and Simple.
Posted by Jim
Sat Feb 7th, 2009 08:12 PM
There are multiple causes of the housing bubble, but I totally agree that Alan Greenspan bears more responsibility than any other person.
I believe that he will go down in history as the worst Fed chief ever....a man who did great damage to the U.S. and the world.
Posted by Office - Noah
Sat Feb 7th, 2009 08:58 PM
my vote goes to a couple of main reasons:
1) fractional reserve lending
2) deregulation / increase of leverage to 30:1, 40:1
3) fee based securitization model
4) flawed ratings models
5) the fed
6) corporate greed / consumer speculation
7) exotic loans / risky loan products using fee based securitization model to offload to private investors
8) loose lending standards using the fee based securitization model to create more RMBS/CMBS to offload on secondary market
...to name the main few in my opinion. The system was designed to make money around every corner.
Posted by truthteller
Sat Feb 7th, 2009 09:00 PM
Hey you guys, you don't need to believe me. You think things will bounce back--I don't think so.
Take a look at this.
Two years of recession, or ten years of hell?
I urge you to watch this interview with F. William Engdahl an economist and political scientist about our very bleak future.
Here's the link.
http://therealnews.com/t/index.php?option=com_content&task=view&id=33&Itemid=74&jumival=324
Posted by Bear
Sun Feb 8th, 2009 10:13 AM
OT-
Rent savings 3.8*12 = 45.6 psf/year
Cash Outlay = 935 psf
Cap Rate = 45.6/935 = 4.877%
Market Cap Rate for similar investments = 5%
Fair value = 4.877/5 = 97.4%
Your apartment is only 2.6% (100-97.4) overvalued.
You are seeing a better deal because you have a low cost apartment with a low maintenance/cc. I don't see that now in full service buildings on the UWS similar to my building.
Jeff-
Owner's equivalent rent is not a good statistic -- actual rents would be better. Owner equivalent rents is derived from a survey of owners asking them how much it would cost to rent their home. It has a tendency to lag market rents. I never liked that the Bureau of Labor Statistics included this figure for housing cost. As a result, Greenspan saw no inflation for the 13 or so years it took for him to create the housing bubble with negative real rates, pricing people out of real estate so that their alternative was to participate above their ability to pay down a mortgage with a 30 year/20% down conventional loan.
-Bear
Posted by Bear
Sun Feb 8th, 2009 10:28 AM
OT-
And one final comment -- don't confuse your after tax cap rate with the professional investors.
You get a big tax savings when buying vs. renting -- you don't have to pay tax on your consumption of the apartment. It doesn't matter whether you use a mortgage or not -- this is still free.
If you invest however, your cap rate is the 8 to 9% quoted above because you do pay tax on your income. So an investor will find your apartment 40% overvalued compared to what he can get on similar apartments, and my apartment overvalued by 3 times.
The investors (REITs) are trying to SELL your apartment at the inflated price (low cap rate) that it currently trades for, and cannot sell them fast enough. This is why Swig is going bankrupt -- he can't sell them fast enough.
This tells me that the real market where things would trade if people could sell as fast as they wanted, would be much lower. Unfortunately, this puts the developers in a position of having negative equity, so they cannot sell. Instead, they sit.
Same thing with people who need to move out of the city. They cannot sell fast enough if they hold to the current market price. They get stuck carrying for two years (10000 apartments/15 sold per day).
I see this market as severely out of equilibrium with its own supply and demand.
-Bear
Posted by RWZ
Sun Feb 8th, 2009 04:37 PM
OT: thanks for your offer to share information. Forgive the weak obfuscation attempt, but in the hope that this helps avoid the automatic trawling of numbers, three four seven five one three oh four four two.
Posted by OT
Sun Feb 8th, 2009 08:39 PM
Bear - thanks for running the numbers, makes more sense to me now. Based on your posts, it appears I did OK given the cap rate comparison. Wish there was a way to add satisfaction of living as a variable to the equation.
RWZ, will give you a ring to discuss this week.
OT
Posted by Sandra
Fri Apr 8th, 2011 07:33 PM
L1uUJd AFAICT you've covered all the bases with this answer!