Continuous Productivity

Continuing on the Real Estate Topic...

In the 1980s, in the midst of New York's real estate boom, my parents' apartment complex, some 360 units in total, was bought by a developer who converted it into a co-op. As tenants, my parents had the option of staying and continuing to pay rent, or buying their apartment. Two bedroom apartments very much like theirs were offered to the public for $120,000. Tenants could buy at a discount—first $80,000, then $60,000, then less.

Much less. By the mid-'90s, the New York City real estate market had crashed. Apartments similar to my parents' could be had for under $30,000. On more marginal blocks, closer to the train line, beautiful old apartments could be had for even less. My parents did very well in the crash: Their landlord—a British real estate partnership hoping to cash in on the '80s boom—went belly up and they finally bought their apartment at auction in 1995 for $101. That's not a typo.

Remember, this was never a neighborhood in terminal decline. Over the years its makeup shifted with new waves of immigrants. (It is now the most notable Indian enclave in New York.) But none of it was ever burned out or abandoned. The local high school wasn't great (I went to a magnet high school in another part of the city), but my elementary school was excellent—much better than the private school I attended in first through third grades. But it was a neighborhood that was always just outside the edge of "fashionable," and so the real estate ups and downs of the broader market were magnified there-it joined booms late, and was hit by busts early.

A great article pointing out fallacies in the assumptions of many that real estate prices will rebound. I have been having this argument for as long as I can remember. Initially, it was that real estate prices were inflated and real estate was not a safe/necessary investment as most assumed. Recently, it's been against the false belief that real estate prices should rebound. Just because something sold at x previously does not mean that it will sell at x again. That is just absurd...ask pets.com about that pricing anomaly.

Just a Reminder...

Contrary to popular opinion, housing prices will not necessarily rebound:

Loose Lending Leads to Jail

During the high times, you couldn't go to a party or event where you didn't run into the wealthy "mortgage guy" or "condo-flipping doctor". It's amazing how loose lending standards will make anyone believe he was a real estate maven. There will be many more of these cases coming to light:

Eve Mazzarella was a Las Vegas success story. The high-school dropout and former housemaid moved to the Nevada city in 2000 from Seattle, got a certificate from the ABC Real Estate School and started selling houses in what would become the hottest market in the country.

In 2006, Mazzarella recorded sales of $13.8 million and made the National Association of Realtors' ``30 Under 30'' list, which names the best young agents in the nation. Mazzarella started her own company, Distinctive Real Estate & Investments Inc., in December 2003. She whipped around town in a Mercedes-Benz sport utility vehicle. She planned to build a three-story office building in Vegas's shabby downtown north of the Strip and preserve a historic house on the site by lifting it onto the roof.

Her competitors were impressed. ``She was an up and comer with a brilliant future,'' says Forrest Barbee, a broker at Prudential Americana Group, a Las Vegas agency where Mazzarella once worked.

The dream ended at about 5 a.m. on March 13, when federal agents smashed through the door of a stucco home on a quiet, grassy cul-de-sac looking for Mazzarella, 31, and her husband, Steven Grimm, 45, an erstwhile mortgage broker.

The day before, the U.S. Attorney for Nevada had indicted the couple on 6 counts of bank fraud, later revised to 13. Prosecutors say the pair recruited fake -- or ``straw'' -- buyers to apply for loans to purchase 227 properties worth $107 million. They told the straw buyers they would pay the mortgages. Then they skimmed thousands of dollars from each of more than 432 transactions, the indictment says, stashing the cash in 80 bank accounts.

Just Walk Away

Faced with seemingly never-ending falls in the value of their properties, some American home-owners are taking radical action; they are choosing to walk away from homes and their mortgages.

In May 2006, at the height of the housing boom, Karen Trainer bought a $500,000 apartment in California - with money borrowed from her bank.

By this year, Karen still owed $500,000 on her mortgage, but her apartment was worth $200,000 less.

So she was deep in negative equity and, to make matters worse, the interest rate on her loan was about to increase.

"I thought 'this is crazy'," Ms Trainer says. "It just does not make financial sense."

I know this article wants to make it seem like this is some sort of radical financial solution, but this is actually how the banking system works. It's called default. It's been happening for a very long time.

Having said that, I think there is some accuracy in the notion that at an individual level, the stigma associated with default has decreased. I mean it's much easier to blame the economy and government rather than taking accountability and understanding how real estate prices and mortgages work. Well, there's always the government there to bail you out.

Why Manhattan?

Economist Tim Harford estimates that it costs an extra $150/day to live in a trendy location like Manhattan.  Bryan Caplan tries to discern what it is about Manhattan that is worth the extra $150/day since it can't just be the cultural aspects and the the proximity to great restaurants.  He posits:

...Tim misses the most important amenity of all: people. If you're a trendy, successful person, the inhabitants of Anytown, USA are boring. The typical Manhattanite wouldn't want to buy a mansion in a small town in Kansas because he would be bored out of his mind. Opera and restaurants might not be worth $150/day. But if you've got a decent income, $150/day is a small price to pay to not to fall asleep in your soup.

You might reply: "You're forgetting that the typical resident of Rock Island wouldn't want to move to Manhattan because he would be annoyed by their effete, snobby ways." There's some truth in this. But on net, the Manhattan premium still makes sense. A sizable minority in places like Rock Island dreams of living someplace like Manhattan, but almost no Manhattanite dreams of living in Rock Island. So without much higher rents, there would be a net influx into Manhattan.

So, the argument is that Manhattanites want to be around other Manhattanites. 

Condo Economics

Developers usually put up their own money for a project first, then spend borrowed funds. Once developers have spent their money and have commitments from lenders, they have a strong incentive to keep building to finish the project.

"These developers had millions of dollars tied up and they had them financed so they just moved forward," says J. Ronald Terwilliger, chief executive of Trammell Crow Residential, which builds many rental apartment buildings and also a few condos. "What they hope is that by the time the project is finished the market comes back."

For those of us wondering why the cranes are still out in full force despite the fact that we are in the midst of a housing bust.  Another interesting quote from a mortgage broker who was looking to sell her condo:

"When the world goes to hell in a handbasket, the last thing anyone wants to buy is a condo," says Cathy Schlegel, a mortgage-loan broker in Fort Worth, Texas, whose condo in a high-rise called The Tower sat on the market for 14 months before she finally sold it at a loss in February.