All Forum Posts by: Christian Carson

@Scott Trench, nice illustration. 

Small nit, though.

My minimum "price-to-rent" criteria actually works out to be around 4.16, not 10. At 50% expenses, that gets you to a 10% cap rate.

Even unleveraged, with token appreciation of 3%, real estate handily defeats stocks.

The stock market will reward you if you pick the winners. Real estate will, too. I'm much better at picking wining real estate deals than corporations. There's that whole thing about not being privy to board meetings that bothers me about it.

I eschew diversification, as does Warren Buffet. He likes to call his method "focus investing." As in your business, you should pick something you do well, and do more of it. 

The earlier poster, Roy N., has pointed out that the divergence between affordability in the "very expensive cities" and the rest of the country is increasing. Although gathering historical data for these criteria is very difficult, I would be willing to wager that we are reaching historic highs. 

This is equally true for New York, which has been digging itself out of a hole for forty years. Manhattan residents have never been so rich.

Violent revolution over rents in NY is highly unlikely, since this country does not restrict the movements of its residents. When rents get too high, people will move away. And they will, unless real wages increase to match. Maybe those independent coffee shops will start paying their baristas more?

Here's an interesting map showing the intra-country migration patterns of Americans. As to be predicted, various counties in Florida are the greatest scourge to population growth in Northeast Ohio. We're almost at net zero with the five boroughs, though, at 420 emigrants vs. 401 immigrants. 

My greatest concern for these expensive areas lie with the firms who employ large numbers of relatively unskilled persons in the NY metro area. Rising rents will start to drive out the jobs that can be easily relocated to cheaper locales. This will happens as more technically-oriented people start to take the helm and embrace solutions that allow better collaboration via the Internet. Although there are synergies to be had among tech people in Silicon Valley, there is no reason a call center should operate in Jersey City versus Detroit, especially when taxes and labor will probably cut their overhead by at least 25%.

 Thank you for putting it so much more clearly than I have!

 If someone making the median income in a city can't come close to buying a house, that means that income disparity is too high. It's a problem that is going to be addressed one of three ways: 1) by market operation, 2) by government legislation, or 3) violent uprising. We should be hoping it's the first one. If this doesn't get addressed economically, we're all going to be in trouble.

The main thrust of my original writing was intended to address home affordability, which necessitates examining household income (i.e., the aggregate wages contributing to per-unit rents). The median income also lessens the impact of ultra-high-wages residents (which you and I both know are far more common in NY than the city of Cleveland).

As an aside, I don't like using the city of Cleveland as a statistical marker. It is a place where people work, but do not live. I would wager that more than 80% of downtown office workers earning in excess of $60,000 per year do not reside in the city of Cleveland, but instead in one of the nearby suburbs which are less than a 5-mile drive, train or bus ride away. Nearly all the housing projects of the 2+ million metro area are located within its borders, thus skewing net incomes downward. We are trying to talk about people here who are actually in the market for a house, not people earning SSI and living in housing projects. Unfortunately, getting comparable metro data is more difficult than municipal information.

But let's try.

• Median home value, Cleveland-Elyria-Mentor MSA: 120,500
• Median household income, Cleveland-Elyria-Mentor MSA: 48,954
• Average mortgage payment, based on 3.625% + 0.75% MIP and 3.5% down: $580
• Average taxes (American FactFinder): $2665
• Debt-to-income: 28.4%

• Median home value, New York-Newark-Jersey City MSA: 382,900
• Median household income, New York-Newark-Jersey City MSA: 66,285
• 5.77 times income
• Average mortgage payment, based on 3.625% + 0.75% MIP and 3.5% down: $1,844.85
• Average taxes: $6964
• 37.4% DTI

The mortgage and taxes alone in the New York metro area come close to the debt-to-income underwriting limits. This doesn't account or allow for any other debts like student loans, car payments or loans for investment purposes. Add to that the cost-of-living adjustment and the difference in lifestyle (which, in my opinion, basically demands more events of spending) and you're getting to the point where your savings rate has to be zero or negative.

Don't get me wrong - it's fine to live in New York if you can afford it. If you're wealthy, by all means buy that waterfront house. But the averages here are telling me that something is very wrong. Clearly income disparity is off the charts in New York -- and there's going to be a reckoning with real estate prices at some point or another.

The discussion of wages influencing rents is absolutely fascinating to me. It has an important impact on rents. It's very concerning to me, also -- because real wages have been declining since the 1970s. 

Rents are essentially a function of wages and inflation. Normally, we'd assume that inflation can be disregarded because all prices will increase at the same rate. I think this relationship is becoming unhinged as the wealthiest are taking the lion's share of profits from Fed-driven inflation and government spending, with wage-earners and tenants enjoying a tiny and declining portion of the new economic activity.

This poses a dilemma for the real estate industry. What happens when inflation drives up all prices except wages? Tenants get squeezed, and real rents have to fall. Either it drives cap rates down or it drives real asset prices down.

And although I understand that a rise in interest rates will compress the spread, there still is a positive, if trailing, correlation between cap rates and interest rates. A 6% cap building is not selling in an environment with a 10% risk-free rate.

I agree. It's always better to sell at a profit when you have an opportunity to cash in on your equity. If you can sell, don't bother refinancing (even though we get used to that nice cash flow). You should be calculating your return on equity and your total ROI after taking account for cashing in gains. You may find that your ROI is in the triple digits if you sell as soon as you can.

Welcome to the forms @Robbie Fiorini . Get over to West Park and start rehabbing houses!

We're seeing the same thing here in Cleveland. New apartments are going up right alongside those old duplexes and are renting for twice the $/SF. There's a waiting list. The good news is that it's creating comparables that are shattering landlord expectations here. Most landlords haven't raised their rents because they're just not aware that they can.

The way people are profligate about spending money on housing these days is really offensive to me. I'm frugal about personal expenses--that's why I have a distaste for living in NY. I had a great time in the stints I've spent there, but the place always managed to empty my wallet. I've turned down job offers, because I would be trading away my financial future. It wasn't a sacrifice I was willing to make. 

I think it's pretty well settled that residential real estate has fairly high price elasticity of demand, with some stickiness downward (since people don't like to sell at a loss). It's because generally people will negotiate this purchase since it will be their largest. You're right to intimate that the elasticity of supply is low, but what I'm trying to point out is that the consumer is now much more able to move to where the supply is high than ever before.

The substitution effect doesn't appear to be influencing consumers with respect to these high-end real estate purchases--instead we're seeing something closer to the income effect, where a consumer increases their demand quantity as their income rises. Maybe if your annual income is $500,000 or more, then Cleveland real estate becomes an inferior good. It's safe to say that the majority of Americans would prefer to live only in the largest coastal cities, were money no object. I don't believe that that's what is happening here.

The problem I have with what's going on is that the money simply isn't there. The average New York household only makes $52,000 per year (which is only $2,000 more than my own city, Cleveland Heights) yet their median gross rent is fifty percent higher. So, the average New Yorker isn't making any more money, but they're paying out the nose anyway. I'd imagine that for this "average" New Yorker, buying a residence is absolutely out of the question. I don't buy that this is a sustainable trend.

Pebble Beach is a very nice area, and I've spent time there. Remember though that the CCC is blocking new water taps, though, which prevents new development altogether.

 If you're not a fan of my comparison, feel free to use Philadelphia and Richmond or Boston and Pittsburgh as your city pairs. What I'm suggesting only sounds absurd because so many people are in love with Manhattan for its intangibles.