Friday, December 14, 2007

Why The Housing Market Is Due To Crash

This graphic (h/t Calculated Risk) pretty much draws the picture for you. It no longer makes sense to buy when you can rent for far less than the monthly cost of ownership. We left the realm of sanity about 6 years ago.

Case in point: The apartment (a condo conversion of a brownstone; walk-up, floor-through) next door to me would rent for perhaps $2500-2700 dollars per month.

It sold for nearly $1,000,000. And has monthly maintenance and taxes. Does that make financial sense to you? Crunch the numbers any way you want, it simply doesn't add up. At certain price levels, owning is more attractive than renting. The disastrous fiscal policies of the Bush administration have created a massive real estate bubble in the US (yes, even in Brooklyn) and the next few years will not be pretty.


dd said...

Assuming a 6.5% rate, and lost interest on the downpayment, and taxes and cc's, I'm guessing $6000 to $6500 month nut. With interest deduction tax break, this could come down to $4000 to $4400 per month in real terms. So were talking about a $1500/month premium over renting. Do you believe that this property will increase in value $18k/year, over the medium haul? With the possibility of a lot more. I think it's a pretty good bet.

gary said...

Not after the appreciation over the past 10 years. I think it's dead money for the next 5 years minimum.

Of course, Ben Bernanke could take the Fed funds rate back to down to 1% and completely devalue the dollar, and then all bets are off.

All else equal, I'll pass. RE is cyclical, and I think the balance of risks is heavily against appreciation for the medium term.

gary said...

Oh, and thanks for dropping by!

Anonymous said...

Hi Gary,

I have a feeling that prices will come down 30% over the next few years, even in fancy Brooklyn, and like you said, won't appreciate on avearage, until four to five years from now.

I am dying to buy a place with a $100K downpayment (at 20 - 30% of purchase price, depending on total cost), but I fear I will lose in the short term, so I think I will wait. I'm definitely not near the $1 mil range, as the place you mentioned, but perhaps I will be able to get a lot more in the $300 - $400K range than I can now, near Prospect Park in a year or two.

Thanks for the great post!

badrabbi said...

Dd, I beg to differ;

Assumung 6.5% interest rate, and lost interest on the downpayment, the monthly payments come to $8,700 per month. Additionally, on a 1 million dollar property, the taxes will be about $1500 per month if you are lucky. Finally, if you are frugal, maintenance costs would be about $1200 per month. Thus, you will be paying $11,400 per month if you elect to purchase the property.

Granted, the interest on the mortgage as well as the taxes and maintenance are tax deductable. This means that the real money spent is about $8500.

The difference between renting and biying is HUGE. No matter how you crunch the numbers, total costs are much higher if you buy.

Of course all this means that we should run to the bank and buy buy buy!

J$ said...

buyers aren't looking at it like that though. they look at it like, i'm buying a place for $1,000,000- where is my best value for the $$ with the amenities and location i want. buyers aren't looking at specific properties and comparing rent v. own; they've already decided to own. particularly if it's not their first purchase. buyers typically don't cash out and then go back to renting, they go to another purchase.

as long as the value in prime bk is much better for the $ than manhattan, there will be no crash. also remember, some buyers will look for properties they can improve upon and increase the value on- new kitchen, bath, floors, etc. can't do that in a rental.

Anonymous said...

certainly cost of owning far exceeds renting but your estimate of the rent on this $1M prop sounds low. You'd be surprised how much market rents are.

gary said...

Ah j$, but how do people make the decision to buy? My contention is, a lot fewer people will "decide to own" based on the poor economics.

Anon, I rent on the same block, same floor, in a bigger apartment . . . wider building. Same exact layout. These are not rent stab or controlled bldgs, they're all 4-5 family brownstones. There is generally a very low turnover here, I'll grant you that. But I do have a decent idea of the rents.

The buildings are beautiful, the block is amazing . . . but prices have well outpaced reality. Recent buyers will find they overpaid.

On the other hand, I think properties like these will hold their value far, far better than all the 1 bedroom condos and studios that have been tossed up over the past few years.

Remember the late 80s/early 90s for condos? Brutal.

badrabbi said...

People will tend to purchase rather rent if they believe that:

1. The estate will appreciate in value over time.

2. They can afford the mortgage.

Regarding #1, I think many people think that the prices of real estate will continue to go up. They think that in addition to investing, they can make use of their investments. Thus they are willing to overpay.

The problem is that at some point, overpaying is no longer smart. The question is whether we have reached that point.

I tend to think that owning property is fashionable at this time. It used to be that if you owned, say, AOL stock, you were considered sexy. Now it is a condo in Manhattan or Brooklyn. Who knoew what tomorrow will bring.

To the dispassionate rational man, though, investing in condo style real estate is no longer attractive

Dhalgren said...

If the last year has shown us anything it is that New York is not like the rest of the USA. We don't have a big bubble in the classic sense. An influx of foreign buyers and the decision by investment banks to stay in the city (for now) has protected our market, especially in Brooklyn and Manhattan.

It is a fact, however, that the number of foreclosures in each zip code can drive values down (as much as 1% per foreclosure). We don't really know just how many New Yorkers will lose their homes in 2008.

The devaluation of the dollar is my greater worry.

I'm no economist, but the experience of the last 10 years has shown that New York is a special place. When 9/11 should have caused RE values to plummet city wide, the celebrities, foreign rich kids, and CEOs decided to stay, and they drove values sky high.

Manhattan is becoming a little Dubai. A rich persons island. With a third world infrastructure, of course.

curious007 said...

while your article is pause for concern -- also priming me to throw up in my own mouth -- i'm not convinced that secure neighbrohoods in brooklyn will crash. i'm not a RE investor, rather a FTBuyer in carroll gardens (via my EVillage renter days), and while I'm confident my 1 BR condo will hold, weather the storm, and eventually come out ahead, my search for a 2BR in 2012 should be fruitful enough after I've made the downpayment off of 5 years of appreciation. That's all I that too much to ask, santa?!