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July 28, 2005
All Equitied Up With No Place to Go
The mathematics behind today's "Trapped in a Bubble" story makes perfect sense. Say you decided to buy a $200,000 studio three years ago with 50% down and were selling it now for $300,000 so you could trade up to a one-bedroom. Your $100,000 in equity would now be $200,000. Great, but that one bedroom that was $400,000 when you bought your studio is now $600,000, so despite your increased equity, the mortgage you'll need a mortgage that's $100,000 higher than you would have three years ago to carry that one-bedroom ($400,000 instead of $300,000). Oh, and your income has not kept pace with the rise in housing prices. Doh!
Trapped in the Bubble [NY Times]
Comments
I guess this is good in a way -- there will be people to buy houses that go into foreclosure or that people can no longer afford and the market won't totally collapse.
Posted by: Anonymous at July 28, 2005 9:26 AM
'Bubble' definitely not good for people looking to 'trade up' but great for ones looking to scale down. I looked earlier this year and found wasn't worth it to me to sell my mortgage free house to move 2 blocks - the costs of selling and buying plus $500K difference in price tags.
Posted by: Anonymous at July 28, 2005 9:47 AM
Have heard the same thing about trading down, although people looking to their homes for retirement are going to find that even trading down isn't going to leave them with as much money as they had expected, when smaller and starter home prices have climbed equally as quickly. It's a shame - I feel like a lot of those people worked hard and deserve to take some money into retirement! I know I'm hoping for it 40 years down the line!
Posted by: Anonymous at July 28, 2005 10:14 AM
Not to get all Pollyanna here, but there are at least some people whom the rising market helps to trade up. When I sold a co-op to buy a fixer-upper house, even though the house's price had been lifted by the same tide as my apartment, clearing a profit on the co-op gave me a down payment (and, more important, $$$ for major reno) that I would not have had otherwise. If I had never bought an apartment but rented instead, I wouldn't have been able to afford a house even if the real estate market had stayed flat the entire time -- at least, not without very risky financing.
Of course it also helped that my income had gone up since I bought the co-op -- enough to cover a higher mortgage but not enough to bankroll a gut renovation without the profit.
Posted by: linusvanpelt at July 28, 2005 10:35 AM
I fear this will all end badly. I think we need to start thinking about what happens in prices don't return to their current levels for ten years.
This seems especially possible in the fringier nabes in Brooklyn. Will Clinton Hill be to the 00's what the East Vill was the the Early 90's?
Posted by: scotty at July 28, 2005 10:45 AM
I am with Linus...I sold my coop in Park Slope and bought a two family brownstone and had money to renovate and carry me for a year before I got a tenant to finally help with the higher mortgage.
Posted by: tom at July 28, 2005 10:46 AM
Who buys a 200k studio when they have a 100k downpayment? I think your scenario is very unlikely.
Posted by: Anonymous at July 28, 2005 10:48 AM
Also, interest rates were a point higher 3 years ago.
Posted by: Anonymous at July 28, 2005 10:51 AM
Linus, good point - there are a lot of people who did what you did and have money now that they wouldn't have had otherwise. But still, had prices climbed at a normal pace, along with incomes, it is likely you still would have made money (albeit not as much) on your co-op and been able to afford a house - it's what people have been doing for years. You may have had to hold onto it a little longer for the equity, but it would have been a more usual situation than what's been happening recently.
Posted by: Anonymous at July 28, 2005 10:58 AM
I agree with linus and have posted similar thoughts before on www.apartmenttherapy.com -
In response to this post:
"Last fall, I spent $280,000 on the studio apartment I now sit in. I remember telling my mom that I had gotten a great deal on the apartment, which was probably the moment I became a true New Yorker: the ability to spend over a quarter of a million smackers on one room, and actually brag about it.
After recently putting in a $17,000 kitchen, curiosity got the best of me and I invited two real estate agents into my apartment for a “free market evaluation”; I wanted to know what my apartment might be worth now – and if I’d overpaid for my little kitchen.
The first agent arrived and immediately told me that if I chose to sell today, I could probably get $419,000.
How somebody arrives at the figure “$419,000”, I have no idea, but it was music to my ears. It is hard for me to believe that in less than a year my 450 square-foot apartment could have appreciated by $139,000. He also felt that putting in a $17,000 kitchen probably added $40,000 to the property. Weird math, happy owner.
The second agent arrived and asked if I was a decorator. Obviously, he’s a tasteful genius. He priced my apartment at a more modest $390,000, still a huge increase. In New York, he explained, it’s best to underprice a bit, as people will fight over an apartment and outbid each other.
In the end, I am a proud owner who is staying put in a great little apartment, which I try to think of as a one-room luxury hotel suite; the bed is in sight of the oven. But even if I could sell my apartment and live like a king in my native Pittsburgh, I still eat the $2.75 special at Gray’s Papaya three days a week"
and someone asking how this increase helps the owner, I responded with this:
"What can you do with an apt that has appreciated so much when everything else has? I have seen ppl ask that one before and they always ask it rhetorically when the answer is always it depends.
Let's just talk apts here and not houses because the most affordable places are apts. With about 80% of the nyc apt comprised of coops, with these coop boards being very strict on financials (most in Manhattan below the 100's will generally dictate 20% down) chances are good that the average middle class person in nyc is not going to be limited, in terms of cost of apt, by their income but by their savings.
When you're talking condos you will need at least 10% for the deposit when you go to contract.
You will also need an additional 5-6% in cash to cover closing costs plus 6-12 months worth of maintenance charges (for coops) in cash or liquid assets (401K,IRAs do not count).
So you could have a couple like the two examples here
http://forums.newyork.craigslist.org/?ID=28377998
http://forums.newyork.craigslist.org/?ID=27611449
who have 175K and 200K household incomes but only 60K and 50K cash saved respectively. These days they could qualify for mortgages in the 800K to 1MM range but that won't help them because their savings are too low. If they were buying a coop they would be limited to a $200K coop (20% dp plus 5% closing costs). If they were buying a condo they would be limited to around $330K (10% dp plus 5% closing costs). So let's say they really wanted a 2BR apt in park slope. They go for around 550K-600K for coops. Both sets of couples could easily qualify for that kind of mortgage but they would need close to $150K to close. You can see where I'm going with this can't you?
Had they bought something like TF's apt when he did, they could sell today and have enough cash to buy what they really wanted.
That is what the increase gets you. The down payment on the place that your income could easily carry but you could never afford because no one can save that amount of cash in that short of a time unless they are an ibanker.
Other examples of where trading up works is when you are on a career path (sorry but ibanker springs to mind again but even teachers get hefy raises when they get promoted) that gives you large raises as you get promoted. The increase on your little studio gives you a big down payment on a bigger place just when your income increases enough to carry the bigger mortgage.
Other examples here
http://forums.newyork.craigslist.org/?ID=22285151"
Posted by: VDH at July 28, 2005 11:00 AM
Scotty,
Seems to me if someone is buying a house in Clinton Hill, they probably have plenty of space. If you have a reasonable mortgage payment, sufficient space and like your home, then here's what most likely happens if prices don't return to current levels for ten years: you stay there for ten years, enjoy your home, and don't lose a dime. Or you move, and if you haven't stretched your finances outlandishly, you will find that the next place you buy will have dropped even more in value.
I realize I write this having just posted that I was able to renovate a house using the profits from my co-op. But the important thing is, I did not buy the co-op planning to make a dime off it, much less triple its value. I bought a place I could afford and was comfortable staying in indefinitely if need be. That's what anybody buying a place, in any market, should do. And if you can't afford to do that, you can't afford to buy. Otherwise you're taking a huge gamble.
Granted, some people are taking that gamble and those are the ones who should worry. And there is risk in a downturn for those forced to sell. (Though "forced" is often liberally defined.) But for most people, the best insurance is a simple rule: never, ever, buy your principle residence with plans that *require* you to make a lot of money off it, especially in the short term.
Posted by: linusvanpelt at July 28, 2005 11:05 AM
We used round numbers for the sake of explication. Obviously we know most people don't put down 50%. Geez.
Posted by: Brownstoner at July 28, 2005 11:07 AM
Well, selling your apartment will provide you with the downpayment to trade up. That is a good point, but you need a first time buyer to complete the cycle. As you said, the requirements for buying a coop is so steep that nobody, who does not own previously, can qualify. Eventually you will run out of people at the bottom. That is why a pyramid scheme will eventually fizzle out.
Posted by: donaldjr at July 28, 2005 11:10 AM
anon at 10:58 -- the problem is that in the scenario you describe I may have been able to afford a downpayment, but not $100K+ in renovations. (And trust me, I would not have been able to afford a move-in condition house in my neighborhood.)
Anyway, I am not saying the situation is good for homeowners at large, only that there are some, like me, who have benefited from exactly the same circumstances that hurt the people in the article. I don't claim to have benefited from anything but dumb luck, though.
Posted by: linusvanpelt at July 28, 2005 11:10 AM
20% is a round number
Posted by: Anonymous at July 28, 2005 11:10 AM
It, and the percentages surrounding it, get less round as the example extends to the one-bedroom purchase. This is a very silly discussion.
Posted by: Brownstoner at July 28, 2005 11:12 AM
I don't think your numbers make perfect sense. But anyway, I really have a hard time understanding who makes 100k off of a 1 bedroom place they've owned in Manhattan for the last couple of years. 300k would sound more likely to me. 100k? Seems so odd.
Posted by: Anonymous at July 28, 2005 11:17 AM
I don't get the 100,000 either. Unless they sold some time ago
Posted by: Anonymous at July 28, 2005 11:28 AM
People, people. $100K or $500K, Brownstoner was just using simple numbers to illustrate a simple idea: that the problem with the value of your home going up X% is thaat more expensive places have also gone up X% (or more). So the absolute dollar gap between the value of your place and the one you want to buy has gone up over time.
I thought Brownstoner was very politely saying that the whole NYT article was completely duh-obvious. Apparently not duh-obvious enough for everyone, tho.
Posted by: linusvanpelt at July 28, 2005 11:34 AM
True Linus, but that's my point - you have bought 100K beyond what your normal means would have gotten you, which is what so many people have been doing. People still did that before the bubble, but the 100K for renovations that you had in cash would have come from the mortgage. And while it would have certainly been more expensive that way, it wouldn't have been unusual.
Posted by: Anonymous at July 28, 2005 11:42 AM
Linus,
For every home owner's sake, I pray everyone is as level headed and rational as you are.
I'm just worried that that's not the case. And there will be some kind of massive government bailout for the unfortunate that we'll all have to pay for.
Posted by: scotty at July 28, 2005 11:51 AM
Scotty,
Look where the most market froth is. Somehow I'm not staying awake nights worrying that the Bush administration will rush in with a megabillion-dollar bailout campaign for homeowners in the blue states. I mean, just look how anxious they are to fix the alternative minimum tax, which whomps exactly the same people.
(The guy who takes a bath on that condo in Lauderdale, tho -- there'll be a Brinks trunk backing up for him!)
Posted by: linusvanpelt at July 28, 2005 11:57 AM
Linus,
Good point. I guess in my head I was seeing it at as a larger version of the S&L bailout. But those were banks... not Democrats.
Posted by: Scotty at July 28, 2005 12:17 PM
A government bail-out of homeowners...are people high?
Just FYI interesting article this morning in the London newspapers - home foreclosures just hit a 13 year high albeit at pretty low levels and after having declined for 13 years...none the less there will be articles coming to your neighborhood soon...
Posted by: Anonymous at July 28, 2005 12:48 PM
I don't buy it. 100k increase? I traded up last year. But then again, I had made 350k in 3 years on my 1 bedroom. And rates dropped.
I think they decided market was too high and they'd sell, rent, and wait for it to drop. But it didn't. And now they're stuck and they've changed their story. I know people who have done that too.
Nobody bought for 200k in 2002 and sold for 300k in 2005. Nobody. Not in Manhattan.
Posted by: Anonymous at July 28, 2005 1:10 PM
Good points mades about the "only" 100K profit.
Basically, the sold too soon which is the worst thing you can do in real estate. In stock investing/trading you should sell too soon (sell into strength) but if anyone analyzes the numbers provided by OFHEO you will see that what I have said here in the past about timing RE sales after the peak has been known to have past is better
http://forums.newyork.craigslist.org/?ID=28091457
But, back to the point. It sounds like they sold then started looking, otherwise the numbers don't make sense. Quick search on propertyshark shows that their coop was in London Terrace which has experienced very large price gains since they sold in April 2004. They should have held on until they found a new place because they have left prolly another coupla hunnerd on the table with nothing to show for it.
Posted by: VDH at July 28, 2005 1:16 PM
Great minds think alike!
Posted by: VDH at July 28, 2005 1:17 PM
I think that selling into a rising market can benefit the person trading up, but it helps a lot if they combine that with a move to a less expensive zip code. e.g. If you bought a 1BR 10 yrs ago in Brooklyn Heights, you wouldn't be able to but a brownstone there with the profits, but you probably could in South Slope or Clinton Hill.
Posted by: anon123 at July 28, 2005 1:43 PM
Linus is spot on (and so is VDH).
"never, ever, buy your principle residence with plans that *require* you to make a lot of money off it, especially in the short term."
A simple, yet powerful concept. Truer words have never been spoken. I've made over 7-figures on the homes I have bought and sold over the past 10 years. While I certainly think of home ownership as an investment in the future, I never ever thought I would make this kind of money. Each purchase was intended to be a long-term committment. And if the value of my home today dropped below my cost, I would be bummed, but I would sty put.
You buy because you are making a long-term commitment - period.
Posted by: BigBubba at July 28, 2005 1:49 PM
Hey Linus: "principal," not "principle."
Your posting:
But for most people, the best insurance is a simple rule: never, ever, buy your principle residence with plans that *require* you to make a lot of money off it, especially in the short term.
Posted by: Lucy at July 28, 2005 1:51 PM
Yeah, I tend to dash stuff off without proofreading, this being the Internet and all. I can spell "pedantry," though!
Posted by: linusvanpelt at July 28, 2005 2:07 PM
Lucy, can you help me out with my spelling too?
I think I prolly spelt a coulpa hunnerd things wrong
Posted by: VDH at July 28, 2005 2:17 PM
I once read that there is no "right" or "wrong" time to buy -- if you are ready in your life to buy, have the financials all in order, etc. then it's your time. You can read RE articles and projections from all over the world til you're blue in the face but unless you have a crystal ball, you don't know what the market's going to do.
Posted by: i own a condo at July 28, 2005 2:28 PM
wait -- they only made 100k on an apt they owned for 3 years in London Terrace? Having bought, lived, and sold there, I really find that suspect.
Posted by: Anonymous at July 28, 2005 2:42 PM
Lucy, I'm with you. Who takes real estate advice from guys on glorified chat boards who don't know the diff btw principal and principle?
Posted by: Anonymous at July 28, 2005 3:19 PM
Hey VDH: It's not spelling I'm talking about, it's the use of the wrong word in the context of the comment. I don't comment on spelling, a good thing given your response to me, but only about the misuse of words by people otherwise making cogent comments.
Posted by: Lucy at July 28, 2005 4:12 PM
We live in a city where people pay $100 for a piece of raw fish arranged nicely over a bed of white rice. If you have F. U. money who cares what people think, just buy it. If you see a brownstone in Bed Sty that brings out the color in your eyes, just buy it.
Posted by: Anonymous at July 28, 2005 4:57 PM
Re: the comment about the foreclosure rate going up in England.
I don't know why this hasn't gotten much press, but it's up in the US as well:
"RISMEDIA, July 27 – The number of properties entering foreclosure nationwide increased to 67,024 in June compared to 62,432 in May, RealtyTrac reports.
That was the highest number of new foreclosures reported in any one month in 2005, and caused a 7.4-percent increase in the nation's foreclosure rate, with one new foreclosure for every 1,726 households."
http://rismedia.com/index.php/article/articleview/11084/1/1/
Posted by: Sloper at July 28, 2005 5:39 PM
Lucy, the point is that typos are made all the time and, as long as the context is understood, it really does not matter on a forum like this. However, the reason I called you out on it was that your method of commenting and then quoting Linus made it very confusing to see what you had written yourself. I had to read your quote of Linus to see if there was a correction within that text also.
Typos happen - simple as that.
I own a condo - what you are talking about really does get to the point, as has already been mentioned. The couple in the article were trying to time the market. There is no other conclusion that can be made given the numbers being quoted in the piece. As such, what you are saying is correct, but there is also something else going on and that it NY Times reporters fudging facts (and BigBubba and Linus also mentioned this on the craigslist housing forum) to present the story that they want to whether the facts support it or not.
Posted by: VDH at July 28, 2005 5:43 PM
It's amazing that those people from Manhattan didn't consider coming to Brooklyn. Go figure! $4400 a month in rent for a box would get you a house in Bed Stuy.
Posted by: Browngirl at July 28, 2005 5:44 PM
Bottom line - if you're coop is suddenly worth 3x what you paid, it's time you headed out of your comfort zone to a less trendy zip and find an undiscovered architectural gem. Take your windfall, put down a healthy chunk on the house (so you don't need tenants, or at least don't have to rely on them to swing your house), keep some back for the reno... then watch your lovely home appreciate, even if more modestly than we've seen these past three years or so... Oh, and most importantly, enjoy it! Isn't this the brownstoner ethos?
Posted by: Anonymous at July 29, 2005 8:28 AM
Oh, and don't hang me for the typo, please. It's early, and I haven't had any coffee yet...
Posted by: Anonymous at July 29, 2005 8:29 AM
8:28 am anon is right. That is the first thing I thought of by the end of this article. Why didn't some of these families move to where they could get more for their money?
Posted by: Anonymous at July 29, 2005 10:27 AM
Because they still don't get it! They think moving to Brooklyn is tantamount to moving to Siberia. Poor, deluded souls....
Posted by: Park Sloper at July 29, 2005 4:16 PM
The Red Hot Chili Peppers are leading the way at this years MTV Europe music awards with four nominations...
Posted by: Nash Stephen at November 17, 2006 9:49 AM
The Red Hot Chili Peppers are leading the way at this years MTV Europe music awards with four nominations...
Posted by: Nash Stephen at November 17, 2006 9:51 AM
Veteran actor William Franklyn, known for voicing the 1960s Schweppes TV adverts, dies aged 81...
Posted by: Connor Casillas at November 22, 2006 10:34 AM
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