Homeowners who bought in 2007 should be celebrating, not crying over spilled milk

Condo and co-op sales (source: Prudential Douglas Elliman via the Real Deal)

Note: With my break drawing to a close, alas, normal frequency of posts resumes Monday.

Let’s say you bought a new home five years ago, a year before Manhattan’s residential market nosedived.

And let’s assume you coughed up $1 million for the privilege of living in your modest 870-sf apartment with two small bedrooms plus one and a half baths on the Upper West Side.

The third set of assumptions might be monthly mortgage payments of $3,500, maintenance of $1,400 and other ownership expenses such as insurance and maintenance of $100 a month.

Do you wish that you had waited until now to have made the purchase?

If you are like many other former homebuyers, the answer may well be that you “lost” money by acting too soon.  But I think you’d be leaping to an exaggerated conclusion.  Here’s why:

  • Your cost of shelter would have been in the range of $300,000;
  • A crude and conservative calculation net of taxes cuts that sum by perhaps $120,000 ($2,000 x 60 months) to $180,000;
  • Neglecting the opportunity costs, including a downpayment, the result would be a monthly nut of $3,000;
  • That $3,000 probably is close to —  even less than — the average monthly rent over the five-year period, so it turns the “investment” in a new home into a wash at worst.

As you are no doubt thinking by now, the choice to rent rather than buy would produce other consequences, among them the following:

  • No pride of ownership;
  • A disinclination to pay for improvements that would make the place feel more like your own home;
  • The opportunity for appreciation;
  • The possibility that your asset might end up with a better return than you would have achieved elsewhere, such as the stock or bond markets.

You can see from the chart at the top that the foregoing considerations are not merely theoretical.  You probably also are thinking that I’ve manipulated my variables slightly to strengthen my point, and you’d be correct.  Still, I believe that my analysis is valid.

(flickr photo by _Dano)

Prepared by appraisal executive Jonathan Miller, that chart indicates to me that most buyers in 2007 will not lose money in the long term.

One reason is that average prices, as opposed to medians, have been artificially inflated by a large number of extraordinarily high luxury sales such as at the Plaza and 15 Central Park West.  As explained by the Real Deal, the median tells a different story:

While the median price today for condos and co-ops is back at 2007 levels, the average price remains higher — surpassed only by the $1.59 million average recorded in 2008 — because of the strength of the high-end sector of the market.

It seems that 2007 purchasers didn’t really make a mistake back then.  They have enjoyed the use of a new home that has met their requirements, and they would be no better off buying now than they were then.  Moreover, they would have flushed a total, say, of $180,000 in rent down the toilet.

Without getting into the math, respected real estate lawyer Stuart Saft asserted a similar observation at a real estate event that I chronicled in a post not long ago.

“If you get just what you paid,” he declared, “you’ve lived rent-free.”

I’m sure he would acknowledge his hyperbole, but the larger point strikes me as valid.

Tomorrow: No Weekly Roundup.  Monday:  Rent, own, both?

To take your own bite out of the Big Apple, start your search for a new home here.

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Malcolm Carter
Licensed Associate Real Estate Broker
Senior Vice President
Charles Rutenberg Realty
127 E. 56th Street
New York, NY 10022

M: 347-886-0248
F: 347-438-3201

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One thought on “Homeowners who bought in 2007 should be celebrating, not crying over spilled milk

  1. Sorry, I don’t think this works. First of all, if you have to sell you lose the transactions costs. 2nd, even though the 2BR is the hottest segment of the market, it has still declined on the UWS since 2007 by some 10-20%. So you are out $180,000 plus the capital loss plus the transactional costs.

    Sure there are some 2BRs that have held up in value, but they would have had “something special” going for them and weren’t going for $1 million in 2007.


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