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Market Talk: Debating the Sidelines

Last week, we ran a missive from a Curbed reader arguing why now might be the time for prospective apartment buyers in NYC to wait out the market on the sidelines. We received a bunch of excellent, thoughtful replies—including two that make the case that the time to buy is now. Four of our favorites, after the jump; if you're in the market right now, read on...

Response number one:

First off, I'd automatically question the logic of those that use sport metaphors to describe real estate, dating, and the like. I suspect this respondent, like the rest of us on the "sidelines," is trying to put an analytical gloss on a cold reality; overvalued, undervalued, it's a moot point -- we aren't even close to being able to afford to buy something comparable to what we're currently renting. In my case, buying a comparable place would require a monthly outlay 2x what I'm currently spending to rent (I'm assuming 0 down and a standard fixed 30-year mortgage for the purposes of an apples-to-apples comparison). Thus, he continues to "save" (and presumably agitate for that promotion at work) in order to eventually be able to buy, while continuing to make the worst possible "investment" (renting), and hoping (in the face of flimsy evidence) that the market will back up considerably and perhaps "meet him halfway."

With renting, you're guaranteed a 100% loss. In my situation, I've been here four years and paid $2000/mo throughout for a place; thus, I've sustained a capital loss of $96,000. If I was able and had bought a similar place originally (say, for $650,000 at 4.75%) and sold it today, it would have to fetch less than $511,000 for my capital loss to be worse than under a rental scenario. Thus, even over mere four years, you'd have to see a price cut of over 20% to actually end up worse off than renting -- longer term, it becomes even more lopsided, as losses from renting continue to accumulate while home prices would continue their gradual, inexorable rise (and time's your friend if there's a downturn).

In addition, the claim that the returns from alternative investments are "really the only metric that counts when it comes to the buy now or buy later argument" is bogus -- shelter is a non-negotiable "investment" for everyone, whether decent (buying and standing a good chance of getting most of your money back in the end) or piss poor (renting and having no chance of ever getting any of your money back); home vs. stock market is only a consideration for people buying second homes, which is hardly widely applicable (although I'm sure it accounts for a considerable chunk of the Manhattan market, I can't imagine second-home seekers mulling rent vs. buy).

Response number two:
The benefit of owning your home is its an asset you can live in it, both in up or down markets; better yet, when times are good, you can borrow against it. As long as you have the personal discipline to manage your finances, the cycles of the market are completely irrelevant to a home owner. Disclosure: I own my home and own/rent out another.

So while you've been waiting to time the market and guess the right entry point, I've been building equity in my homes and increasing my equity base. Your points are well taken about adjustable mortgages and abatements, but you assume all buyers are stupid, and that they don't factor in these circumstances at the time of their purchase. But let's say your pessimism holds true, and the majority of home buyers are stupid and ignore these simple facts, then supply may indeed catch up to demand with buyers caught off guard (although you weren't), resulting in declining value of owners' home equity values today. But then it's safe for me to assume that the market, in general, has become cheaper, and I'm in a position to replace my assets and reshuffle my portfolio (replace my cheaper home with a significantly larger also cheaper home, or downsize my exposure and replace my home with a smaller place, or just refinance my mortgages), to take advantage of the next market cycle.

So instead of wasting our time with pointless theories about market risk factors and trying to convince us that the next real estate train is about to leave the station, you really should be asking yourself two things: what can I reasonably afford to pay in 3-5-10 years and how comfortable am I with risk? The "game" isn't as complicated as you think. Don't get me wrong, as a landlord myself, I love you renters - you represent the constant uncertainty of the markets, and so long as you're willing to pay me to bear the risks, I'm happy to provide you with the service!

Response number three:
It's nice that someone put this sentiment in stark economic terms that don't sit largely on soothsaying or gut-feeling declaration, but any rational person knows instinctively that, right now, the market is stretching toward its topside and the growth curves will average themselves out to something rational.

Extraordinary value growth cannot be sustained, especially not in the local market where luxury condos are the new tulip bulbs. Middle-class real estate - mostly being advertised as upmarket, but I know sheet rock when I see it, and sheet rock ain't polished granite - is not an optimal investment right now for domestic buyers, and is an unwise investment for people with limited resources and homogenous portfolios.

Wanna know what I really think?

Low-income housing - or, more appropriately, low-cost housing - might be the best investment right now, as the supply isn't going up at all, the people who get flushed out of their "luxury condos" will need someplace to live someday, and the outlying neighborhoods in New York are cleaning up and becoming destigmatized. Example: maybe an investor doesn't want to buy a live-in property in Bed-Stuy, but if one had a sizeable chunk of investment funds and wanted a good growth asset that didn't suck up the entire piggy bank, a two-bedroom or three-bedroom rental property in that section of town might look ripe for the picking.

For a lot of these emerging neighborhoods, think more amenities and less crack in that neck of the woods - it just takes a little while for the word to spread, and for people to accept what was formerly undesirable. When people stop thinking about rap lyrics and look around at reality, they'll find those neighborhoods attractive.

Demand will be high overall for low-cost housing because few developers are building new in this niche, but in the next few years it'll be the fastest growing sector of the national real-estate market. The biggest problem is finding reasonably priced land, but since everyone wants to build nowadays on any platform-over-a-railyard or newly-cleaned brownfield, I think the market will accommodate the growth. Plus, as I mentioned above, many properties are being rehabilitated and revitalized as the neighborhoods improve - or, in many cases, simply by virtue of the neighborhoods improving.

Of course, when that happens, along with the rental market catching up with home prices (which probably won't go down, even if they don't go up either), low-cost property owners will be cleaning up. Even live-in purchasers will see appreciation that outpaces the rest of the market over the next decade.

Luxury condos, meanwhile, will start ending up on the foreclosure market; luxury rentals will find themselves hitting lean times. They either must lower their prices (which is about to start happening) or risk the loss of the entire investment through bankruptcy or foreclosure. Since a lot of people will have no room to adjust their price expectations, they will perish in the market. Blood in the streets. You can then start the newest iteration of Curbed, called FuckedProperty.com.

I have zero money to invest right now, so all this info is useless for me. I'll continue to rent and hope next year's lease doesn't add more digits to my rent.
And, finally, the word on the street, from broker/blogger Property Grunt:
I am already meeting buyers who are taking the I will look but in no rush stance. On my end there have couple of price reductions on some listings and I am noticing overall that the market is starting to slow down.

However this could all be premature since the fed hasn't made a move since Katrina. But until Greenspan takes some type of action I would not be surprised if more buyers become gun shy.

Thanks to all who wrote. As always, your thoughts welcome to tips@curbed.com. And, hey, you never know—maybe we'll even get comments turned on around here one of these days.
· Market Talk: The Case for the Sidelines [Curbed]