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June 01, 2006
State of the NYC housing market
I've been thinking about buying a place here in Harlem, but obviously it's a decision fraught with risk. Here's a very interesting analysis on the state of the market from a guy near Wall Street:
I live in 88 Greenwich St. (Financial Distict) and was just notified that they are planning a condo conversion. This is the 2nd in our area (120 greenwich was just recently converted).Anyways, they're trying to get more than $1000/sqft (even on the insiders price) which my wife and I thought was laughable. (120 greenwich is the same). [Note: a typical house in Indiana costs $100/sf, includes a yard, and doesn't have a mandatory monthly maintenance fee.]
Don't get me wrong, I understand the prices in Manhattan, but this is seriously crazy. I mean this is the Financial District not the West Village. The Pussycat Lounge is just downstairs and there isn't a single decent restaurant in the area.
There are 400 units in this building and they are absolutely Rental quality only. Fixtures/appliances are cheap, our windows don't even close correctly so the heat and cold flow through and the wall are paper thin (which is annoying and sometime humorous).
I pay $2985/mo (market rate) for my apt (1br-800sqft used to have a nice view of the statue of liberty until another building went up last month) and they want $850,000 for this. On top of this (for those who may not know) closing costs and title transfer runs about another $50,000 (condos have a title transfer tax). So I'm thinking wow I can buy my apt for $900,000 what a fantastic deal. I only have to put down $125,000 and my payment will only be $5200/month (taxes and common charges). I'll save about $1,400/month on taxes so my net payment will only be $3,800 month!
Wait a minute! What the hell. I only pay $2895 now and I have $125,000 in the bank at 4.25% so net of taxes I'm making about $275.00 a month in interest (RISK FREE FDIC INSURED). So really my net rent is only $2,620.
Hmmm $2,620 or $3,800 which is better?
And for those who are banking on appreciation, at this point why would anyone expect this appreciate any more than the inflation rate of maybe 2% or $17,000 a year? Sounds like a lot, but if you bank the savings of $1180 a month vs. buying you can save $14,000 a year so really you're only ahead $3,000. Once you factor in selling costs of 6% it would take you about 17 years to cover this with your "profit".
Last if these things even depreciate 5% in the next 2 years and you want to sell you're dust. You've lost the $50,000 in closing, plus $28,000 in rent savings plus the 5% or $42,000, plus you'll have to pay broker charges to sell your place which could be another $20,000-$40,000. So you could walk away in the hole by $100,000.
Leverage works both ways, on the way up it's great but on the way down watch out!
It's a good argument, but the problem is that his 4.25% risk-free return is stupid. He ought to be invested at least in equities, which return 6.5 to 7% above the rate of inflation, or about 10% nominal. Even if it costs more and there's little appreciation, owning at least gives an investor the upside. Furthermore, an owner can't be told to vacate the apartment at a moment's notice. A risk-averse individual would rent, while a risk-seeking individual would strongly consider buying the right place.
P.S. Congrats to CRB on her 21st. Drink up!
Posted by adrianjo at June 1, 2006 12:04 AM