Manhattan real estate

[Ryno]

I'm just saying that you have to carry a 1.8mil asset somehow, either by renting it, or by owning it and paying interest. You can ignore the "principal" payment in the mortgage - you are just paying yourself. So if you are going to evaluate on a total cost to own, you would do rent vs. interest-only mortgage - tax deduction + property taxes + maintenance. And I was saying that rent is about the same as the (IO mortgage - tax deduction) alone. The other variable is asset appreciation, which only the owner gets, but you need that to cover taxes + maintenance just to break even.

[DesertCat]

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I guess a shortcut would be to say 84k per year rent divided by 1.8mil is a 4.67% carrying cost. After tax mortgage is about the same, but then you have taxes and maintenance.

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He's not going to get the full tax deductions, because of NY income taxes and his income level he's way into AMT. And have we calculated property taxes, which also help trigger AMT?

Edit: I'm estimating cost of renting at around $70k per year, $7k per month minus $18k per year in interest on your $350k downpayment. Owning costs are near $110k for mortgage interest, $18k for maintenance, so $138k without property taxes. Wouldn't property taxes be at least another $30k or more?

And from a couple days ago in the WSJ.

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Mortgage Fears
Drive Up Rates
On Jumbo Loans
By JAMES R. HAGERTY
August 7, 2007; Page A1

Turmoil in the U.S. home-mortgage market is starting to pinch even buyers of high-end homes with good credit records, in the latest sign of rising anxiety among lenders and investors.

...

Lenders -- having already slashed lending to subprime borrowers, as those with weak credit records are known -- now are jacking up rates on jumbo mortgages for prime borrowers. These mortgages exceed the $417,000 limit for loans eligible for purchase and guarantee by Fannie and Freddie. They account for about 16% of the total mortgage market, according to Inside Mortgage Finance, a trade publication, and are especially prevalent in California, New Jersey, New York City, Washington, D.C., and other locales with high home costs.

Lenders were charging an average 7.34% for prime 30-year fixed-rate jumbo loans yesterday, according to a survey by financial publisher HSH Associates. That is up from an average of about 7.1% last week and 6.5% in mid-May.

The higher costs for such loans will put further downward pressure on home prices in areas where homes typically bought by middle-class people can easily cost $500,000 to $700,000.

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This may be temporary, but the interest cost for new buyer just increased over 10% in the last few months. If it stays high it's going to impact demand and prices. The value of real estate is inversely correlated with interest rates.

If I was OP, it looks like renting is much the better financial decision for this year. I'd keep my eyes open for bargains and maybe make some low ball offers if the market gets cold. But I'd only make an offer if the cost of owning was similar to the cost of renting.

[IronFly]

Tweety,

What do you do?

If I were you I'd also consider Brooklyn or NJ. Park Slope is jam-packed with your demographic.

Also, I'd try my best to stay out of a situation where you can get hurt (buying at your max). To me its worth it to wait another year or two for additional safety margin.

[Tweety]

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When I ran the numbers it was pretty close. Assuming 7.5% rate on the loan, 20% down, 1.8M place, 7k rent, 1.5k maint/month, 45% tax bracket (might be way too high but not sure), 5% earned from TBills, 2% yearly on taxes, etc.

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It's pretty tough to find maintenance that low in Manhattan in the price range I'm looking at. $2,500 to $3,250 is more common.

With the upper east side co-ops, it's generally about $1.50 - $1.75 per square foot (maintenance i'm talking about). We're looking at places that range from 1,600 to 2,200 square feet right now.

Condos are lower maintenance but still generally more than $1,500 for 2 and 3 bedroom places.

[colgin]

Trying to forecast the NYC real estate market accurately is hopeless. Good luck.

That said, now more than ever you should be a little concerned about just how prices have gone, especially in light of the unfolding credit crunch and potential impact on Wall Street and related jobs. This is not a bad time to wait and see. However, if you find a place that you would live in for at least 5 years and that you love and can comfortably afford, then go for it. However, this seems liek the worst possible time to stretch to the max for some uber-expensive $2MM+ 2 bedroom box in Manhattan. Perhaps prices will keep going up, but if ever there had been a risk in recent memory of a significant correction, it seems like there is one right now.

Moreover, you note that rent is a crazy $6-8K for a nice 2 bedroom. I don't dispute those figures as I am VERY familiar with both the sales and rental markethere. However, and I am sure you have done the math, paying even $8K for a rental is significantly les expensive on a monthly basis EVEN after taking into mortgage interests deductions (kiss goodbye real esttae tax decuction due to the evil AMT) than a $2MM plus apartment. It is not even close. Plus, you need to put down a minimum of $200K and much more if you are looking at coops. Even with sky high rents here and vacancy rates under 1%, it is still cheaper to rent (in the short run) than buy at virtually every price point and for every type of apartment. So, unless you are going to hold for say 30 years, the justification for buying has to do with factors like future price appreciation and the various benefits of owning v. renting (decorate as you wish, no landlord, etc.). Given where prices have gone over the past few years, you should be a little suspect about the potential for significant future price appreciation over the next few years. Think of it this way. It sounds like you have a pretty good job. If you are feling close to priced out fo a humble 2 bedroom, then you musthave a lot of company. Unlike stocks and certain other assets, even in manias, there is a limit to the degree of appreciation in housing due to income requirements of buyers. Prices cannotkeep going up forever without income continuing to go up with them, and now it looks like income growth in NYC may be slowing down.

Good luck and be careful.

P.S. One last thought. Many here in NYC say that real estate prices only go up. Aside from being demonstrably untrue, recall that in 2005 homeowners were saying that in every city in America and they really beleived it. Hasn't worked out that way so far. Then again, maybe NY really is different. [img]/images/graemlins/ooo.gif[/img]

[Tweety]

Great post. Really appreciate the wisdom.

I guess my wife and I are just sick of being renters and want to be owners. Maybe this is a mistake. We've held off on buying for a while and don't feel like this has paid off really.

I do have a pretty good job. I have done pretty well in the past few years but am looking at a significant income upgrade this year (get paid the bonus in Jan of 08), so I have the problem of having to convince boards that my incomes in 05 and 06 don't look anything like what my income in 07 will look like. My boss and I have already talked about compensation and we both know more or less the ballpark of what it's going to be, but he can't legally guarantee something in a letter to a board, due to legal issues. My only out here would be to strong-arm him and the firm in general to guaranteeing me something (with a threat to quit if they don't), but that is not something I want to do as I've been treated well there so far and have a very good relationship with senior management.

So basically that's where things are. Maybe I should just rent another year and then look again in 08 with the higher income profile that I'll bring to the table, but we just had our first baby a few months ago and the wife is getting antsy for an upgrade, and quite honestly i dont blame her.