2008 Nov 15th

What’s Going On in Today’s Real Estate Market? It’s a Question of Balance.

Hoboken Condo Buyers – Consider This:  Think it through!

Same property  a year from now, or a month from now, or a week from now

The Hoboken Condo Buyer’s Bottom Line

Even though the property value in our hypothetical example declined 15%, the monthly payment only declined 7%.  The savings a buyer might recognize through even a significant price reduction can quickly be eroded by an increase in interest rates.  I’m not predicting what’s going to happen to Hoboken condo prices or mortgage interest rates in the future.  Nobody knows that.  But the facts are as follows; property values are low right now, as are interest rates.  While property values may or may not fall a bit lower before they rebound, interest rates are far more likely to increase.  Taking advantage of low interest rates NOW may outweigh the benefit of future price declines (which may never occur.)  Do the math.  Just some food for thought.
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  1. AL

    Lori,

    Your Internet site is great and you do a very good job tracking the Hoboken real estate market.
    Said that, your reasoning in this posting is not correct. For a good mortgage calculator you can go to Bankrate (http://www.bankrate.com/brm/mortgage-calculator.asp).

    1- First of all it is not sure that mortgage rates will go up. In historical terms current mortgage rates are low but history does not always repeat itself. Mortgage rates might even go down in the future. As we have seen, house prices do not always go up even if they always did in the past. In order to save the real estate market the US treasury started buying mortgages. This will go on for some time and will keep mortgage rates low for some time.

    2- The correct effective saving per month is $135. Over a year this is $1,620. Net of taxes is slightly less for the early mortgage payments. Over 30 years it is $48,600. If you invest this saving at a good rate your effective saving from lower monthly payments will be much higher.

    3- The monthly payment might even be almost the same (difference of $135) but if you wait and buy at $425,000 you have in your pocket $75,000. (15% of 500,000) = YOU SAVE $75,000 IMMEDIATELY! And you will be able to invest this money at higher rates (if you believe that rates will go up!)

    4- Moreover, if you wait your downpayment is 15% lower. You’ll have to put down $85,000 (20% of $425,000) instead of $100,000 (20% of $500,000). YOU SAVE $15,000 IMMEDIATELY! And you will be able to invest this money at higher rates (if you believe that rates will go up!)

    In conclusion, for sure you save immediately $90,000 if you buy the same $500,000 place at a 15% lower price with a 20% down-payment. Moreover, your monthly payment will be $135 less each month even if rates go up to 7% (quite unlikely). All this to say: Hoboken, rent! Don’t buy now! Waiting will allow you to save so much money that you will be able to send your children to a better college.

    I currently rent and I am a prospective buyer at 15% lower prices. I do not work for any real estate agent and don’t have any vested interest in this.

  2. Lori Turoff

    Hi Al,
    Thanks for your detailed analysis. As I said in my post – I have no way to know and would not pretend to know what’s going to happen in the future. If I did, I’d be in Vegas. Your analysis is surely more detailed but my point was more simple – there is more than one factor to consider when deciding when to buy and sometimes the factors may move in opposite directions. I would still urge potential home buyers to think ALL the considerations through carefully.

    It’s a personal decision and not an entirely objective one. For me, the bottom line is that having bought my first condo in 1981, a few years out of college, I could not live in a place I did not own and really feel “at home”. That’s not a number driven decision but let’s say it is an emotional one. Each person has to do what feels right for them.

    I may have a slight interest in people buying now since I am a realtor but I have an interest in people buying a year from now, as I hope to still be a realtor then. If my numbers don’t agree with yours it was not due to any intentional bias on my part so please forgive me if you thought me off the mark on this one. I prefer to develop new business as a result of providing open, insightful, intelligent, helpful, entertaining, honest and unbiased information on the Hoboken real estate market on this blog. So far it seems to be working pretty well.
    – Lori

  3. JC

    Al…you make good points and I agree folks should be on the sideline right now but Lori’s point is well taken. When price goes down and interest rates go up the monthly payment still is similar (all other things being equal). Thats the take away….she discloses that she is a realtor on the site so thats fine too.

    A few thoughts on Al’s post.

    Points 1 and 2…I agree with 100%

    Point 3: Just some clarification; If you buy for $425k and not $500k you surely DONT have in your pocket $75,000. While its true you bought the place for $75k less, you dont technically “save” $75k and you wont be able to invest this $75k either since it was a ghost savings. You do save the down payment on the difference in which you covered in your final point. But to say you have $75k in pocket is wrong. When you sell you will be selling for $75k less, sure, and that will reep rewards.

    I still believe, as I think Lori does too, the best time to buy a condo is whenever its best for you as a life decision primarily and investment decision secondary.

    Personally, I bought a few months ago, and I knew Hoboken was falling and most likely will continue falling. But, no matter how much research one does or how intelligent, nobody can time a bottom…. so I bought. Mostly because I wanted a home and not a temporary rental. I was able to put down 10% and receive a jumbo mortage at 6.75%. Just a short few months later there is no way I would be able to receive those type of terms. Oh yeah, my down payment would have dissapeared in the stock market anyway. :)

    That’s actually a serious problem too that will negatively effect the RE market. Potential buyers may have kept their down payment $ in the stock market and now sitting at 50% less.

  4. Lori

    Thank goodness I bought more real estate over the past 28 years than stocks. I buy a stock – the company tanks. Guaranteed. Some of us have the kiss of death when it comes to investing in anything other than a CD. Thanks JC for your point of view.
    – Lori

  5. John

    Agree with all the math above but there is one key assumption I disagree with. Hoboken real estate has got 20-30% downside in it, if not more. The job picture looks horrible for NYC and the tri-state. Taxes are going higher in Hoboken (and I’m not just talking a little higher, new assessments are on the way). And on top of all that, the condo market is about to be flooded with hundreds of new units in January-February 2009 when the new Maxwell building closes. Everyone that put down a commitment on those units is already seriously underwater and the few people I know who invested with down-payments are planning to walk away.

  6. Lori Turoff

    I have no idea what’s coming, and while we can certainly hope for the best we will work with the hand we are dealt. I’m not sure I see the supply of units at Maxwell Place having that great an affect on the general Hoboken condo market. Prices (especially when you look at the taxes and maintenance fees) are significantly higher than average. Maybe Maxwell is more in competition with the option of buying a condo or co-op in the city. As for taxes – it ain’t going to be pretty!

  7. John

    follow-up. Forgot one point in previous post. Oil is down >50% from its peak. The market is down ~40% from its peak. Gold, tin, aluminum, copper, iron ore, steel are all down >40% I believe. Shipping rates are all down monstrously for bulk product (Baltic dry index). We’re going into what is expected to be the worst recession in >30 yrs. There is a global asset re-pricing underway. The housing market is not inherently different from other asset classes except that it takes longer for the market to price in recent news and developments. To be sure, we call all expect another huge leg down for residential real estate!

  8. JC

    I agree with John things residential RE will continue to be ugly, but lets not underestimate our government working on a housing fix. I dont know what they will decide or if it will work, but nobody should bet against gov. regulation. Housing could bottom tomorrow but sell sideways for 10 years….which would be the same as another 4 years of declines followed by 6 years of appreciation.

    I do know that I’m glad we live near NYC and not in the middle of the california dessert in a developer made town. Poor folks out there.

  9. Dmitri

    I am personally going to buy in Hoboken when price per Sq. foot reaches $400.00. Not because I think it is a bottom, but because factoring enormous RE taxes I can afford to own at 400/sq foot price only.
    We make enough money to buy now ,but I want to enjoy my life as oppose to work for the bank(morgage) and state government(taxes). I’ll rent until then.
    Hopefully this world wide shake down will teach US consumers one important lesson : Your house is NOT an investment nor it is an “American Dream”.

  10. Lori

    I can’t agree that your house is not an investment. It shouldn’t be the primary reason you buy a home but the appreciation potential of it is certainly one of the benefits of home ownership in the LONG TERM.

  11. JC

    Lori, can you do anything about the left margin? Its didfficult to read the last few comments. thnx

  12. DmitriDmitri

    Unfortunately appreciation has been “sold” to US consumer and it is mainly a marketing gimmick. Here is what I think of RE appreciation.
    Historically over last 70 years or more appreciation of RE was trailing inflation: around 3% annually. I can do better by putting money into savings account or buying CDs from the bank. Appreciation that we saw from 2001 to 2005 is a bubble that is already burst, so that is not an investment criteria to buy a house and hope for a market bubble.
    As far as real appreciation is concern it does happen sometimes when a certain area gets real price spike (due to infrastructure project by the government or some other factor), but let me ask you this: If my house appreciated 100% in a last 10 years (lucky me) what happened to the neighbor’s house? Did his/her house went up 100% as well? It is not like I can sell my house for a million and buy bigger house in my area. They all went up, as in tide lifts all boats.
    So unless you are selling your property in a dramatically appreciated area to move to Midwest or some Steubenville, Ohio then you will have a use for that appreciation. Yes your house went up 100% but so as every house in your area , food prices went up, commodities and energy went up inflation ate 3-5% a year from “appreciation” etc…
    May be I am wrong , but i just don’t see any appreciation in RE.

  13. Mark

    I am currently buying a condo in Hoboken (yes, everyone says I should wait) and I am fully expecting prices to go lower; perhaps significantly lower. I look at the purchase in two ways: first, it’s the right time for us to buy to have something of our own to make a home and second, we are saving a reasonable amount by not paying rent (after tax considerations, my calculations came to us at least breaking even, which means whatever goes towards condo equity is a bonus). To me that’s an investment; sure, my life may take a turn and I would have to sell at a loss, but I expect to live here for a while as Lori’s “long term” argument and I believe that when it comes time to sell, my condo may very well be worth more than it is now. To me, that means that even if I kept up with inflation, I am happy because otherwise I would have been paying the same amount in rent. Perhaps if I did a more complex model, I can instead invest my down payment and come out the same or slightly better, but even breaking even (which I believe is the worst case long term) is worth having a real home to me.

  14. Lori Turoff

    Money considerations aside – renting and owning are simply not the same thing. When you are a tenant it is simply not your property. Your landlord could be a jerk, could sell, could die, etc. There’s less motivation to take care of the property or make improvements. I haven’t heard of too many renters redoing a bathroom or kitchen lately. Renting is short term by it’s nature. That has an affect on the community. Back in the day, Hoboken was known as a cheap place for young kids to rent. Hoboken landlords had little incentive to make improvements to their properties as what they could recoup for their investment was severely limited by rent control. The community was much younger, less affluent, less diverse, less stable and less concerned about local issues (like schools). Owners have a vested interest in maintaining or increasing their property value. Making the neighborhood a better place to live, as has certainly happened in Hoboken in the 10 years I’ve been here is not a small thing. All boats rise in a rising tide – it’s true. When more residents are involved, concerned and committed everyone benefits.

  15. AL

    JC you are right about point 3). You realize the saving when you sell and the saving could be tax-free.

    In order to determine whether it is better to own or to rent from a pure financial point of view you need to take into consideration many factors. There are some factors that will favor owning (tax deductibility of interests, real estate taxes, 250K/500K tax exemption on profits on first home, …) and some that favor renting (no maintenance costs, no real estate fees and taxes when you move, interests/capital gains on your downpayment money, …). Among the many factors that have a relevant impact there is the appreciation that your home is going to experience over the period you‘ll live there. Now, most likely if your home is going to lose value over that period, you are better off renting. You can even compute the breakeven appreciation percentage that would make you indifferent between renting and buying. For me this breakeven rate it is 1% and since I expect negative appreciation over some time to come, for me renting is better. I repeat that this analysis is just based on financial factors.
    Let’s move on to the nice story of owning and being part of a community. I believe that the US is a very heterogeneous society with many different cultures coming together in this land of opportunities. Homeownership is a way of letting different people share a common interest. Consequently, programs that increase GOOD homeownership are positive. Fannie Mae and Freddie Mac are in principle good.
    Nevertheless, I completely disagree with the idea that the renters are soulless, detached and indifferent elements of the society where they live. From the way they are sometime presented it looks like these horrible renters are the reason of the problems of the local communities. Maybe we should establish an Anonymous Renters Association where renters could meet, discuss their problem with lack of commitment and establish a 10-step process to homeownership. Homeowners already have their condo association meetings that usually provide good occasion to appreciate homeownership.
    Decent renters have a vested interest in the society where they live, they care about having parks, low crime and good school. Why wouldn’t they?

  16. Lori Turoff

    I wasn’t talking about neighborhoods other than Hoboken. I disagree with you that there is no difference between renters, as a whole, and owners. Especially in a neighborhood with rent control. Not only has more ownership made a difference but the intention of the owners to stay in Hoboken long term has made them more involved and concerned about the city. From schools to traffic to city government, people who buy in Hoboken and plan to stay here more than a year or two take a greater interest.

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