Diceman said:"it makes you think "jesus i should buy as well then". "He never bought his own home.

Diceman said:"it makes you think "jesus i should buy as well then". "He never bought his own home. >>I don't believe there's any biblical evidence on this one way or the other. Presumably he lived someplace in between trips. While some passages suggest he had brothers and sisters, many Christians reject this idea. In that latter case, since his father appears to have died but his mother was living, under both Jewish and Roman law, he would have owned the family house. Of course, in this case he still did not buy it.

This is a nice spreadsheet, but I have a couple of minor carps. First, you discount to PV using monthly rates, then compound to the horizon using annual. This only makes a difference of $2,720 with the numbers on the sheet, but could matter more with a longer horizon, lower tax rates or higher reinvestment rate. Second, you oversimplify the taxes. You can only deduct the mortgage interest by giving up your standard deduction, and only to the point that your deductions phase out. That's why the mortgage tax deduction is valuable only to moderate high income taxpayers (joint income $120,000 to $300,000). This probably describes a lot of people who might use the spreadsheet, but by no means all. Similarly, you assume state and local income tax is deductible from federal, this is not true in all states and, in any case, has the same limitation as mortgage interest.I prefer to approach the problem differently. In the numbers you supplied, a $1,200,000 apartment gives monthly savings of $2,600, which is 2.6% per year. Since the savings go up by 3% per year, that's a yield of 5.6%. The alternative, after tax, is 5.4%. So if the apartment value goes up by 3% per year, buying is 0.2% per year better than renting. The breakeven price appreciation for the apartment is about 2.8% per year. You compute 1.1% by doing a more elaborate analysis, but you have to introduce lots of assumptions (a mortgage, a horizon and tax splits). Thinking about those things, in my opinion, focuses attention on the wrong variables and does not result in a better answer since most people have little idea about these things. In fact, I would leave it as the apartment returns 2.6% per year inflation-adjusted, tax-free and leave it to the buyer to decide if that is a good or bad return.I don't like incorporating the mortgage in the analysis. If buying something is a good investment, leverage may make it better. If it's a bad investment, leverage might make it worse. But leverage does not change whether it is good or bad. So putting it in the analysis complicates things without changing the result.Finally, the natural way to think about this spreadsheet is to compare the apartment to an investment in securities. 10% implies you consider the apartment about as risky as large-cap stocks. That might be true over a fixed five-year horizon, although I think it exaggerates the risk. But for someone who is willing to live in the apartment long-term (basically, someone who does not expect to have to move for a job and has correctly anticipated family changes), the risk is much lower. Usually it is the risk element that is crucial to the decision, someone stable will find buying attractive, others will not.

Aron's got some valid points, it is a a VERY simple analysis [lotus 4.2 on a handheld 8 years ago fer cris'sake!!!] . . . . but the analysis is not quite as naive as one would think at first blush . . . . ">This is a nice spreadsheet, but I have a couple of minor carps. "First, you discount to PV using monthly rates, then compound to the horizon using annual. This only makes a difference of $2,720 with the numbers on the sheet, but could matter more with a longer horizon, lower tax rates or higher reinvestment rate<"oops, Aron's right, careless of me" >Second, you oversimplify the taxes. You can only deduct the mortgage interest by giving up your standard deduction, and only to the point that your deductions phase out. That's why the mortgage tax deduction is valuable only to moderate high income taxpayers (joint income $120,000 to $300,000).<" wwwweeeelllll, yes and no. top "quoted" tax rate in america is 36.6%, but by using a 39.9% tax rate one approximates the effect of the "deduction phase out" within 10 bps for incomes twixt $128k and $2 million [and folks above $2 million/yr don't need this sheet]"> Similarly, you assume state and local income tax is deductible from federal, this is not true in all states and, in any case, has the same limitation as mortgage interest.<"see 39.09% approximation above, and as for some states not allowing deduction, well, I've lived all my adult tax paying life in NYC and environs [except 2 years in europe] so I suppose there might be some states where this is true. [and when I did live in europe I could deduct my London mortgage interest against my american taxes]"> I don't like incorporating the mortgage in the analysis. If buying something is a good investment, leverage may make it better. If it's a bad investment, leverage might make it worse. But leverage does not change whether it is good or bad. So putting it in the analysis complicates things without changing the result.>"if one wants to view the purchase in the way described above, just put in 100% down payment, then the mortgage payments [and tax effects of the same] fall out of the analysisthe bottom line is I was thinking in terms of "how much can the apartment fall in price and still be breakeven to renting" . Aron prefers to think "how much of a yield do I get by buying over renting". Translating between the two figures is trivial. Its like a bond trader that quotes a bond as "8.16% YTM less a steenth" vs one that quotes a bond as "98.67 cents on the dollar"

the bottom line is I was thinking in terms of "how much can the apartment fall in price and still be breakeven to renting" . Aron prefers to think "how much of a yield do I get by buying over renting". Translating between the two figures is trivial. Its like a bond trader that quotes a bond as "8.16% YTM less a steenth" vs one that quotes a bond as "98.67 cents on the dollar" >>I agree and I did like the spreadsheet. The important thing is to do the numbers, how you do them is secondary. In my experience most decisions are either so clear that any reasonable quantitative approach points the same way; or so close you might as well flip a coin.Still, there are easy and hard ways of looking at things, and your example is a good one. Yield is notorious for causing bond investors to make bad decisions. It's hard to explain to people why a GNMA with a guaranteed yield of 6% is not necessarily a better investment than a 10-year treasury with a guaranteed yield of 5%. Both are backed by the full faith and credit of the US government, both have the same expected duration.Or, consider the argument a broker made to my mother-in-law. I bought her some 4.5%, 10-year non-callable municipal bonds. The broker told her those were bad, she should sell them and buy some of his 5% 10-year bonds that were callable at 101. He said if the bonds don't get called you get 5% instead of 4.5%, if they do you get even better than 5% yield.If you focus instead on price, you avoid these traps. In 10 years, the treasury will pay about $150 plus $3 times the average reinvestment rate over the period. The GNMA will pay about $180 minus the change in rates squared. The non-callable bond will give you about $156 at maturity if rates don't change. The callable one will give you $164 if rates don't change, but an average of $136 if it gets called.It's not that one is right and one is wrong, it's just that most people make fewer mistakes thinking about price than yield.

Is it only the stock market performance that drives the real estate market? What about low mortgage rates?They say back then, late '80s/early '90s, it was a different story since rates were high and people could not make the mortgage payments.

New York, and to a lesser extent London, Boston, Hong Kong and Singapore, are heavily dependent on the financial services industry. It is the brokerage profits that fall after a stock crash that pushes down real estate prices. When business contractions follow stock market crashes real estate prices used to fall. But in the 80's we've seen more job cuts in good times than bad, and the short recessions don't lead to lots of distress home sales. Real estate declines have been regional rather than economy wide.The big real estate disaster of the early 1990s had more to do with banking practices than interest rates, and more with interest rates than the economy. Throughout the 1980s, inflation expectations were consistently too high, and credit spreads consistently too low. That led to double overvaluation of real estate, developers borrowed at too-low credit spreads, based on too-high cash flow projections. When that collapsed in the post-Gulf War recession, real estate deflated quickly.You can trace everything back to the 1987 stock market crash. Real estate in New York declined after that, and didn't recover with the stock market and economy. The 1990s crash was a disaster for Manhattan (not me, I bought in 1993) because the stock market and banks were both hit hard, the market had been declining for five years on top of the world decline in prices.But things came back. Remember when Canary Wharf was worthless? And people would give you one free year on a three year lease? And you could see through newly constructed buildings in Houston?

The stock market keeps going down (as expected?), historicaly how long is the lag between the stock market and the real estate market? After 87 did the real estate market crash in 89/90??

The small declines in real estate prices in the early 90's in London and New York (20% or so) make us feel comfortable that it is no big deal (they recovered quite quickly). But I just read Bill Gross May/June Investment Outlook at "Pimco.com" where he has a chart of Tokyo apartment prices showing a decline from $1 million for the average apartment down 300K in the 10 years from 1990. Are we sure this cannot happen in London or New York?

And what should people have invested in instead in Japan? Stock market (down more)? Government bonds (no interest)? Banks (ha!)?Nothing is certainly, but New York and London have had good real estate values for centuries. Solid properties in both cities are as safe as any equity investment can be. If they fall 70%, there won't be a lot of good investment alternatives.

And what should people have invested in instead in Japan? Stock market (down more)? Government bonds (no interest)? Banks (ha!)?Nothing is certainly, but New York and London have had good real estate values for centuries. Solid properties in both cities are as safe as any equity investment can be. If they fall 70%, there won't be a lot of good investment alternatives. >>I though the question was "buy or rent" and all I pointed out was that in view of the risk of 70% decline renting is not that bad (while investing your money in the US)

I though the question was "buy or rent" and all I pointed out was that in view of the risk of 70% decline renting is not that bad (while investing your money in the US) >>I didn't mean to jump on you, and I don't think it's always smart to buy. I'm not sure that property values won't decline by 70% in New York and London, nor did I say "impossible" when it happened in Tokyo.But when evaluating extreme bad scenarios, it's important to ask what the alternative is. For example, if the US Treasury defaulted, there's not a lot of investments that would be safe (canned food and guns in the basement of a defensible position, might be good).A financial pessimist might reasonably rent an apartment in New York or London, and sock away spare salary and bonus in gold or Swiss Francs or something else.

. . . A financial pessimist might reasonably rent an apartment in New York or London, and sock away spare salary and bonus in gold or Swiss Francs or something else. >>Bingo . . . . liquidity is comfortingof course there are certain regrets . . . . . . in 1993 the world of manhattan real estate was falling apart, [down 35-40% from 1988 peak]. that is why my spreadsheet [posted a few messages back] looks at things in terms of "how far can the price fall to be breakeven to renting". in 1993 that spreadsheet kept me from buying the typical $300k co-op/condo when my rent stabalized 2 bedromm was 970/month. That same apartment is now costs about $1MM [of course my rent is now 1150/mo]. was i smart or dumb, who can say?

<< <i> . . . A financial pessimist might reasonably rent an apartment in New York or London, and sock away spare salary and bonus in gold or Swiss Francs or something else.</i> >>Bingo . . . . liquidity is comfortingof course there are certain regrets . . . . . . in 1993 the world of manhattan real estate was falling apart, [down 35-40% from 1988 peak]. that is why my spreadsheet [posted a few messages back] looks at things in terms of "how far can the price fall to be breakeven to renting". in 1993 that spreadsheet kept me from buying the typical $300k co-op/condo when my rent stabalized 2 bedromm was 970/month. That same apartment is now costs about $1MM <img src="i/expressions/face-icon-small-blush.gif" border="0"> [of course my rent is now 1150/mo]. was i smart or dumb, who can say? >>What is the typical co-op/condo in New York that costs $1m?

. . . What is the typical co-op/condo in New York that costs $1m? >>depending on which part of manhattan, prewar or post war, doorman elevator highrise, or brownstone walk up "a buck" could get you:- 900 square foot prewar penthouse on 5th Av. overlooking central park- 1800 sqft postwar on E67 by 2nd Av.- 12 to 1500 sqft in tribeca/soho- 12 to 1400 sqft in better parts of upper east/west side condominiums cary a 20-30% premium to co-ops