We found ourselves pondering this question as we reviewed yet another newly listed Battery Park 1BR in the $400k range
zzzzzz of which there are probably 10-15 more exactly like it on the market, none of which have sold in months
like we said, zzzzz. Here are the stats:
Address: 2 South End Avenue (aka the Cove Club, one of our favorites) #4E
The digs: 623 sq ft 1BR, northern exposure. There are no pictures, but we can already see it's boxy layout and parquet floors.
The monthlies: given that it's Battery Park, we didn't even blink at the monthly carrying costs of over $1700
blecch for such a tiny apartment. We can almost hear the more seasoned brokers squawk "but that's built into the price!" and the less seasoned brokers squawk "who really cares who you write the check out to, sweetheart, it's either the bank or the condo"
all we can say here is that if this sounds reasonable to you, you need a quick lesson in equity. Anywho, of these carrying costs, $1021 per month are non-deductible common charges and the rest ($740 per month) are deductible taxes.
Based on our knowledge of the rental market in the area, we believe that we can rent an equivalent unit for $2200 per month. So, does it make sense to buy?
We started to try to answer this question by
popping on over to Streeteasy, which as many people know, has a very cool feature for each listing showing a total monthly cost if you buy the apartment at a variety of prices. When we looked at #4E, with a 20% downpayment and a 5.8% mortgage rate,
we were confronted with a total monthly payment of $3,756 or 71% more than what we would be paying if we simply rented the apartment. "But wait!" you say. "Isn't there a tax deduction in there somewhere?" Actually there are two. The first is the deduction on the mortgage interest. Using
this handy-dandy calculator, we determined that for our loan amount of $340,000 (we put down $85,000) at a 5.8% interest rate over a 30 year term, we would be able to deduct $19,606 in the first year or $1634 per month
sweet. Assuming we have an all-in tax rate of 33% (let's pretend), that leaves us with an extra $540 per month, which brings our monthly payment down to $3216. We can also deduct the taxes (but not the common charges) of $740 (giving us a monthly benefit of $244),
bringing our total monthly payment in year 1 to $2972, which is still about 35% more costly than renting.
So we said, how much would this apartment have to cost in order for us to basically (see below) break-even right from the beginning? Even we were surprised that when we did all of these calculations again at various price points,
the actual break-even price of this apartment is drum roll please $200,000, or about 53% lower than the current asking price of $425,000. At that price, we would be paying just $2700 per month ($2200 if you include the tax benefit), which would be the same as renting the equivalent unit.
Of course, this analysis is unbelievably simplistic. It ignores important things such as what happens in later years (fewer deductions, more equity), transaction costs for buying and selling the property, renovation costs, the opportunity cost for the downpayment and appreciation in both rental and housing prices. Probably, we think, our all-in tax benefit is also a touch high. If you'd like to factor in these variables (and more), check out this
very cool calculator courtesy of the New York Times, which lets you run scenarios galore based on probably every single variable that you could ever imagine impacting your decision, ever.
Unlike our analysis, which focuses on Year 1 break-even, the NYT model looks at a 30-year horizon and tells you in which year you will first break-even based on the cumulative cost/benefit of renting vs. buying. When we typed in the stats for #4E (using the model's base assumptions for things like price appreciation), we learned (kind of surprisingly, even for us)
that at the $425,000 price point, it's actually NEVER better to buy. Even after 30 years, you still don't break even. So what about our $200,000 price point? If you buy at that level, the NYT model tells us that you'll hit the break-even point after 5 years, which seems reasonable given the mantra that if you do not plan to stay in your home for 3-5 years, than buying will likely be more expensive than renting.
So what does all of this mean? Well, if you're a buyer and rent vs. buy is an analysis that makes sense to you, any way you look at it (unless you are anticipating another housing bubble), prices are still way too high. Of course, if we all made decisions based on economic models, we wouldn't have had a housing bubble, a dot-com boom or any of the countless psychology-driven economic events that we can all point to. This analysis should also serve to remind us of the unique economic variables impacting Battery Park (those darn common charges) which for whatever reason owners are willing to stomach but can't pass them on to renters, who just don't see as much value in the area.
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