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My parents are always bugging me about renting an apartment in New York City, saying I am throwing money out the window by renting and that I should buy a place - But they don't seem to have a grasp of just how expensive real estate is in NYC. They keep telling me that I should take advantage of low interest rates, but I've got a three-digit bank account balance and a very modest salary. They've offered to help me with a down payment, but is it really a good idea?
In most places in the U.S., it makes sense to buy a home rather than rent. But in the most expensive markets in the U.S. - which, of course, includes NYC - it's not necessarily so. According to a recent article in the Wall St. Journal, In the Hottest Markets, Renting Is the Real Bargain, "the relationship between the cost of renting and owning has broken down as low interest rates and an array of new mortgage products have helped turn many renters into homeowners. That has helped propel home prices upward -- and, in turn, has weakened the rental market, prompting landlords to cut rents or at least raise them less aggressively." According to the handy chart of major metroplitan areas that accompanied the article, in New York the monthly cost of renting is actually .71 of owning.
Your parents also need to realize that the AVERAGE price of an apartment for sale in Manhattan is currently one million dollars . That's just an apartment, not even an entire house or brownstone. Even if you're looking in the outer boroughs, housing prices are still high, especially in areas with an easy commute to Manhattan. Most apartments for sale in NYC are co-ops, the majority of which require at least a 20% down payment and have strict rules about how much of your down payment can be "gifted" to you, as well as strict guidelines about income. So even if your parents could give you all the money for a down payment, the co-op board would probably reject you.
But let's say you find a studio apartment in Brooklyn, it's a sponsor unit (no board approval is necessary), your parents give you the money for a down payment, and you're approved for a mortgage (most likely with your parents co-signing). Is it worth it in this case? Maybe. You'll get a tax deduction and you'll be building equity - but it will also depend on property taxes, maintence fees, insurance, and other factors. You could earn a profit when you sell, but you never know what's going to happen next in the housing market. Another thing to consider: Are you ready and willing to stay in one place for an extended period of time?
One last thought: We know there are plenty of people in NYC who rely on their parents for some or all of their housing costs. But we at Ask Gothamist like to advocate self-sufficiency, and we think you might want to hold off on buying a place if your wallet and heart aren't yet in the right place.
Need advice? E-mail ask(at)gothamist.com.
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i don't suppose anybody could paste the WSJ article for those of us without subscriptions?
i met with my accountant recently to discuss the possibilities of buying. after we slogged through my finances and my current living situation, he concluded "heh, you should stick with your apartment, it's a much better deal than anything you could afford to buy." i guess he's right, but it still sucks.
I think that the WSJ article doesn't figure out the impact of tax savings, which can be pretty significant.
It's hard to figure this out without taking into account the specifics of your situation. . .like Jimmy did by talking to his accountant. I wouldn't assume rent vs. buy is better/worse for everyone, you need to think about your particular situation.
Yea, it's really difficult for me to think that I can afford an apartment averaging 1 mil. But I know a few who have been able to put down the money for a place. Yea, I agree. Gotta check on the wallet and heart to see what they say first!
If you're not able to afford a rather sizeable down payment, or willing to stay in one place for a good while, I'd say you're better off waiting right now. The housing market is showing signs of turning, with 30-yr. fixed rates sneaking back toward 6%, and if you make a small down payment on a place just before the market takes a turn for the worse, there's a substantial chance you'll end up underwater (that is, with property that is worth less than what you owe on your note). If you don't have the stomach or the patience to ride out a market correction, I'd continue tucking money away until you can afford to plunk down north of 15%.
and if you want a coop in the city don't even think about playing less than 20-25% down, this includes brooklyn.
In general, if you have to ask, you should not buy. After doing some research on my own, even if I find a cheap place, make a 20% downpayment and pay the maintenance fee, I end out breaking about even financially when all is said and done.
I personally think the NYC housing market is saturated. Motivated by not only low mortgage rates, but also a weak dollar that inspires foreigners to come and buy. You know there is a reason why the British/French/European population in this city has grown. They can actually afford it now that the U.S. dollar is so weak.
But if the dollar grows in strength again and interest rates go up, who knows.
And anyone thinking they are making a "good investment" by buying a one bedroom or studio, don't do it. Nobody wants those things. The apartments that sell well are 2 bedrooms and higher. Everything else stagnates or goes on the market as a rental.
If anyone is interested in reading this article at WSJ, here is the link:
http://216.109.117.135/search/cache?p=In+the+hottest+real+estate+markets%2C+renting+is+a+real+bargain&toggle=1&ei=UTF-8&vst=0&vs=www.realestatejournal.com&u=www.realestatejournal.com/buysell/salestrends/20050324-simon.html&w=hottest+real+estate+markets+renting+real+bargain&d=7F1933D39E&icp=1&.intl=us
I'd been thinking about looking for a place to buy in the next year or so as well and am in a similar situation--parents say I'm throwing away money, and are willing to put up down payment money. I'm reconsidering after reading this article. In my situation, I've never had a lease under my own name--I've shared a sublet since I moved up here a year ago. My credit is good, but there's precious little of it--I have no student loans, only one credit card that I've had less than a year and have paid off in full every year.
Will this stuff hurt me or help me if I'm looking to buy? Should I get a lease in my own name for a few years before thinking about buying?
From my perspective, accepting money from your parents to make a major long-term investment is a thorny bramble and should be avoided at just about whatever cost is necessary, particularly if the investment you are considering is an overappreciated asset at the crest of a speculative bubble.
While it's almost certainly true that it's more expensive to buy than it is to rent, the WSJ analysis is crap: it doesn't include
These things, which argue on both sides of the issue, should clearly be included in any good analysis, although you'd still fail to capture big factors, such as the possible growth or decline in the value of something you buy and the fact that if you buy a place with a fixed-rate mortgage, you protected yourself from inflation for 30 years.
But to be clear, it's not the conclusion that's necessarily to blame: it's just the article that sucks.
If you know you want to stay put for a while, in the long run, it may be worthwhile to buy. The net monthly cost may be higher than a rental, but it has a lot of long term advantages (housing bubble or not).
Oh and during my apt-hunt, I found that most co-op boards permitted a parent guarantor for board approval.
Yes, maybe the article could have also included how the value of your home might be altered by significant deteriorations in local sewer services or what would happen to mortgage rates if the government defaulted on its Treasury debt.
Come on, Tim. The Journal article isn't a peer-reviewed piece for the Journal of Housing Economics. It's a comparison of top-line housing expenditures, and for that it is perfectly serviceable.
Here's a suggestion: save up for the down payment yourself by putting away money every month. In about 10 years, you'll have your down payment (all without mommie and daddy), and the housing bubble would've already popped, giving you a better deal on your place. And you'll feel better about it, because you've earned it on your own.
A snap shot comparison of top-line housing expenditures is useful for simply seeing what the difference between renting and buying is under those assumptions at one point in time. Not very useful if you plan on living in any of the cities studied for any length of time.
You really need to factor in a time horizon because if you rented for 50 years instead of buying something today - even if renting is cheaper for now from a top line cost perspective - then it would have been cheaper to buy. The wsj "study" is of little use for actually making a decision. More useful are the calculators that allow you to plug in those top line costs as well as term, expected rent inflation/deflation, expected home price appreciation/depreciation etc. Then you will get a break even point in terms of years where it will be cheaper to own than to have rented.
This is what I wrote on the Craigslit housing forum about buying in May 2004
http://forums.newyork.craigslist.org/?ID=15201889
Time horizon:
How long do you intend to keep the place? You should be planning on at least 5 or 6 years to ride out any downturn in the housing market. What ppl don’t seem to get is that, as long as they can afford the PITI, have the interest rate locked in for at least 5 years and they do not have to sell, a downturn in housing prices has no direct financial affect on them unless they wanted to take out a home equity loan or HELOC and the amount they can take out has now been reduced. Otherwise their monthly payments will stay the same. Why would you assume that a housing price downturn would force you into foreclosure unless that housing price downturn was precipitated by job losses that affected you or was due to this huge crash of immense proportions that will take the US economy into the deepest and longest recession we have ever seen due to the housing bubble bursting? Obviously I believe the latter scenario is unlikely and I hope it never happens because everyone (renters and homeowners) will suffer terribly.
Job Stability:
If you have a job when a downturn occurs and you can afford the monthly payments before the downturn then you will be fine. Just ride it out and the prices will recover and appreciate even more. If you need to move during that downturn then you could lose depending when you bought.
There are certain industries that are more secure than others in terms of job security. When buying a home you have to be able to ascertain how secure (as much as is possible to ascertain) your career path is.
Cash reserves:
Ideally you should have at least 6 months of cash to cover monthly expenses. This is an ideal and not many ppl have this but if at all possible do everything you can to establish this cash cushion. If you do lose your job you will need it to pay your mortgage (or rent for that matter) while looking for a new one or while trying to sell your home if it comes to that.
Emotional response to downturns:
Buying a home is strongly emotional experience. It is not just financial. For example, you could inexplicably fall in love with a place despite it not meeting your requirements that you have held onto for so long. Similarly you must be emotionally capable of handling bad news in the housing market. As long as you can afford your monthly payments as I said above, the only affect that a downturn will have is emotional. You may feel stupid for buying when everyone told you not to. You may feel panicked into selling to get out before the market drops even further. This goes back to the time horizon. If the place still fits your needs and you can afford it then don’t panic sell, don’t worry about it. It will come back. If you are not the type of person that can handle any down turns then you have to seriously re-consider whether you are ready to buy. That is why I always say you must be financially and emotionally ready to buy.
I have already (repeatedly in fact) articulated my thoughts on where the nyc housing market is headed so I won’t repeat them yet again. However, I will say this about the very different micro markets that exist in NYC. Moe14 has mentioned this already but he/she did get it wrong when they said there is a national bubble but not a local one. In fact it is the other way round but I would still not call it a bubble. Nationally home prices have not gone up much at all in the last few years. Basically at the rate of inflation or even stayed flat. Locally, in NYC, parts of California (San Diego is a classic example), Boston, Hawaii, Miami, and some other areas the prices have had double digit year on year gains for the past 4 or 5 years
What you find in NYC is a clear dividing line that separates buyers that are interest rate sensitive and those that are not. When rates started heading down to 45 year lows the below $750K market exploded while the above $1M market stayed steady. In fact after the last Q of 2001 when no one was buying, buying activity picked up tremendously in Q1 of 2002 and then tailed off a bit even in a declining interest rate environment. Average prices did dip lower in 2002 than 2001 so we did actually have a year on year decline which ppl don’t seem to be aware of. I remember seeing a rash of lofts n Tribeca come onto the market in 2002 when Wall st was still laying droves of ppl off and the prices stayed pretty much flat or appreciated very slowly at this time.
Meanwhile, as I said, the sub $750K market was really taking off. It wasn’t until recently that the million $ plus apts started to really move and that is due to Wall St paying big bonuses again. Again this latter market is not that interest rate sensitive whereas the sub $750K market generally is. However, when you have ppl in their 20’s being paid 6 figure bonuses some of that money will go on cars etc but some will also go on 1BR apts so the sub $750K market is not entirely interest rate driven. A rise in interest rates is usually a response to imroving conditions thus, with the economy improving, wall st hiring (the spending of all that money creating more jobs etc) home prices should tend to appreciate.
However, as I said, no one has a crystal ball so you should be very wary of anyone who claims to know that the market will correct 30%-50% or whatever or anyone who guarantees that it will still keep going up. In fact NYC did correct 10% over the 1998-1995 period with Boston correcting only 7% during its last slump between 1989-1991 and my strongest warning to anyone ready to buy a place but fearful of a downturn is missing the run up in NYC, for example, at any point after the down turn cost far more in terms of lost appreciation than the 10% correction that occurred.
Just make sure you can weather any downturn or at least cover all your bases because no one can be 100% sure.
My last point did not come across:
The final 12 month period of any run up in RE prices tends to have the highest gains. This happened in over a 12 month period straddling 1988 and 1989. These gains are typically higher than any downturn so missing out on those gains is costlier than buying in a dip.
What a dilemma. Cut the umbilical cord, kid!
Some thoughts:
$1M is goofy and not realistic because NYC has a higher-than-average number of "glamour" apartments. I'd say the average is more $350k for a Manhattan studio (I know because I bought in Hoboken in 2002 and did some homework then.)
Consider a fixer-upper and/or outer boroughs. Most fixer-uppers in apts. are just ugly, no structural issues like you would have with a house. Live with a nasty kitchen for a while.
As for parents, gift taxes, and gifts/co-ops -- consider entering into a joint partnership agreement instead. When you sell the apt, you parents (the other partner in the partnership) get a cut of the sale's proceeds. Its an investment for both parties. Or, get a grip and look in the outer boroughs, Hoboken, and Jersey City instead of Manhattan.
Do your research on your financials. "Buying A House For Dummies" is actually a pretty good book and helps a lot with the buying process. Same goes for "Mortgages for Dummies."
A rise in interest rates is usually in response to improving conditions? Huh? As macroeconomic analysis goes, that's right up there with "there are no transition costs in converting Social Security to private accounts." Credit doesn't become more dear because the economic outlook is sunshiney.
The moral of the story here is don't take investment advice from anonymice posting on Internet chat boards with undisclosed interests and unclear credentials.
Well of course TA all the advice here is worth as much as you pay for including your advice about this being a crest of a bubble.
Also, well done for taking one line that I typed out of hundreds off the top of my head a year ago and igoring all the other stuff I posted.
Let me correct that by simply saying that the NYC economy is very closely reliant on Wall st due to the trickle down effect of spending all that bonus money (which was sorely lacking in 2002 and 2003) so with an improving local economy and wall st hiring again after a long fallow period you should see prices tend to appreciate. Not at the torrid pace of the last 5 years thought IMHO.
For anyone trying to decide whether to buy or not you have seen quite a few good opinions which you don't have to take on board because who knows what undisclosed interests and unclear credentials anyone here has (including TA with his predictions) so simply weigh them all up, use them as a basis for more research and make your own mind up.
I'm writing this from a 24-hour cafe, where I am staying while I wait for phone messages from people I know, trying to figure out if there's somewhere I can sleep tonight. This is something I'm very used to, and something no one should be used to. I'm a college-educated, many-skilled person who has been destroyed by student loans and by a history of poverty that never let me see any examples of managing money or breaking this cycle.
My comment to everyone reading this is that if you can even begin to consider buying anything, in *any* borough, take a deep breath, step back, count your blessings and feel good about where you've gotten to... and remember that "doing what your wallet tells you" includes planning for all circumstances. Please never commit to a mortgage or lease that leaves you anywhere near close to the edge.
And if you really have enough for a down payment on your own, please consider giving some small percentage of your wealth to organizations that help people who have much less than you do (such as the people I see around me in the 24-hour places, in Penn Station, on the ferry, etc., who, unlike me, truly have no options).
Just marry up.
http://www.businessweek.com/magazine/content/05_15/b3928001_mz001.htm
I bought (with my mom's downpayment $$) and it was the best thing I ever did. The key is to buy a bigger apartment in a less desireable neighborhood--I have a 2 bedroom in Hudson Heights, and seriously, the roommate thing is what makes ends meet. It actually does work out cheaper for me than renting, that way.... And so I owe my mom $40k. Well, if I sell the place, I'll pay her back. There could be worse things in life...