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February 03, 2007
Young and fearless New York real estate buyers
As I wait for my condo to finally get done, Sunday's NY Times has an article on how "prepared and fearless" young buyers in Manhattan are changing how the real estate game is played. For one thing, younger buyers are far better prepared, which makes sense when we have to pay $1000 per foot for property that may have cost our parents just $50/foot back in thier day. I remember getting strange looks from the agent at 2002 Fifth Avenue when I calculated in my head the tax impact of the building's strange ground-lease co-op structure. Eventually I had to explain that I have a degree in real estate, but the Times article convinces me that I'm not alone in building IRR models in Excel to model different returns scenarios on purchasing a condo.
The Times mentions how financing alternatives are getting more creative, which isn't really news. Indeed, the mortgage broker seemed a bit excited when I said I'd rather do 100% financing in a 5-year Interest only ARM, financing even the closing costs (which in Manhattan can be $25,000 or more for an entry-level condo), and keeping spare cash in the stock market. This makes me a "most extreme case" according to the Times:
In the most extreme cases, Joseph Gallagher, a Corcoran Group broker in Brooklyn, has had clients with high credit scores finance everything, even their closing costs. He finds that some developers are willing to take down payments as low as 5 percent to fill their apartments.... brokers say that buyers who have made enough money to put down 20 percent are choosing to keep their money in their pockets.
“Younger buyers want to retain their cash,” Mr. Gallagher said. “They don’t want to empty their bank accounts for a deposit. They want to finance 100 percent if possible.”
It was common for Baby Boomers to buy their $100,000 house with a fixed rate mortgage that was to be paid-off in 30 years. The American Dream has changed.
But even with all this thoughtful research, she rattled her family when she told them about the kind of mortgage she had chosen for what she considers a five-year investment.“My parents freaked out when I said I was doing a seven-year, interest-only ARM,” she said. “They’ve always bought properties that they’ve owned for life.”
I decided some time ago that I own too much stuff and need fewer possessions. "When you buy real estate nowadays, you're buying a payment and the potential for upside," my mortgage broker explained. I can pay a rent or I can pay a mortgage, but I have no delusions that I might actually one day own or pay-off my condo, nor would I want to. And I don't really even consider it ownership, just control of an asset and its cash flows. The best thing about "owning" will be the ability to reduce my income tax bill by a third by writing-off the interest. If I can borrow the last dollar on a 100% mortgage for 9% pre-tax or 6% post-tax and invest spare money in the stock market at 7% through a tax-deferred vehicle, why not take the 1%? Why pay-off a mortgage when it just increases one's tax bill? I may "own" the property, but really I own a monthly payment and a tax shield. I don't think many of our parent's generation would think that way, or be happy with it.
Posted by adrianjo at February 3, 2007 09:59 PM