How Much Should You Borrow Based on What You Want to Pay Monthly

So you hear a lot about relative cost to rent versus cost to buy, but really, you're thinking... What can I afford?  Or, more likely, how much can I borrow but still pay the same amount in mortgage as in rent?  Today I want to show you a quick and dirty way to figure that out.

First, take your monthly amount of rent. Let's say $3000 for a round number.

Then, you need to subtract something to represent the maintenance (for a coop), or common charges + property taxes (for a condo) that you might be paying. This amount varies a great deal based on the size of the property that you are looking at. Common amounts are $500-$800 for a one bedroom or $800 - $1000 for a two bedroom, and go up from there. 

Let's say we're looking at a one-bedroom and want to be conservative, so we'll take $800 as the number. $3000-$800=$2200.  Notice we didn't include insurance. This is because homeowners policies are not a very big jump from renters insurance policies, so we'll assume that cost remains the same. (If you don't have a renter's insurance policy, you should seriously consider getting one up - your belongings are not covered by the landlord's insurance policy if they are stolen or destroyed).

So we have a principal and interest payment of $2200. Now, we look at the current interest rates. Your bank's website can provide those to you. Keep in mind two things: 1) interest rates change daily and 2) when the economy is good, interest rates tend to move up.  So if you are doing this exercise for a future purchase six months from now, you might want to add .25%-.5% just to be safe. (of course you can always buy the interest rate back down if you have the cash and the desire).

At the moment I am writing this, I just clicked over to the Bankrate.com website. Bankrate is an independent web site that publishes information about mortgage rates across many banks and regions of the US. Keep in mind that New York rates may be different from the national average. Coop loan rates are usually higher, as are condo loans, though somewhat less so.  Indeed, Bankrate gives me a range of 3.97%-4.89%, while the national average is listed as 4.29%.

Let's again be conservative and use 4.75% as our rate. Now, we flip over to http://www.realestate-calc.com/Mortgage_Calculators/Mortgage_Amortization.asp, where we find a nicely laid out table of the cost per $1000 borrowed. Scroll down to 4.75 in the first column, then slide your finger over to the 30-year column (all the way to the right). The number is $5.22. That means for every $1000 you borrow at 4.75% interest rate, your monthly payment is $5.22 for a 30 year self-amortizing loan (meaning when you hit the last payment of the 30 year loan, you have paid off the loan).

Ok, so now we take your monthly rent payment less allowance for monthly maintenance fees (remember that? $3000-$800=$2200), and we divide $2200 by $5.22. So in other words, we are seeing how many thousands of dollars we can service with the $2200 we already pay.  The answer? 421.456. Just multiply that by $1000 (or  move the decimal over 3 places) and you'll get $421,456, which is the amount of mortgage you can carry, plus maintenance charges and (if condo) property taxes.  

Now let's take that one step further. You generally need a 20% down payment to get a mortgage. Most coops require that at least 20% be put down. Condos might only require 10% (some coops do as well, but banks have become more stringent since 2008 and it's harder to get a 90% mortgage on a coop than it once was).

The amount of mortgage that we figured, $421,456, represents 80% of the total cost of the property that you can purchase. This is the maximum loan to value ratio (or LTV) that most loans allow. Dividing that number by four tells us what 20% of the total price must be. Answer: $105,364.

To get 100% of potential purchase price, we multiply that number by five. (because 5 x 20% = 100%). So $105,364 x 5 = $526,820.

So, the total purchase price that you can likely afford while still keeping  a similar housing payment to what you pay in rent is $526,820. This assumes a down payment of $105,364 (the 20% number we calculated earlier).

In the hottest parts of Manhattan, this will get you a studio or a small one bedroom. In northern Manhattan, this will get you even a two bedroom. Even in Brooklyn, you can score a very nicely sized one bedroom or even two bedroom depending on area (though probably not in Williamsburg, alas).  So if you feel you can't afford to buy, think again. You can afford to buy if you can afford to rent at Manhattan's prices.

Sellers Reappear, Buyers Can Take a Breath.

Nice article on DNAinfo.com says more condos are now on the market after a few months where lack of inventory was causing bidding wars. This is good, because, according to the article, Manhattan condo prices are already back to and surpassing their peak value in 2007.

This article illustrates what I consider to be Phase 3 of the housing market.  In Phase 1, lack of buyers caused prices to fall. Sellers who had to sell at that time did so for much less than they could have just a few months before. But the sellers who didn't have to held onto their properties.  Sure, there was inconvenience for more than a few. Some had outgrown their space, while others needed to relocate for jobs or personal reasons. The ones who could hold on in their spaces did, while others managed to find renters to cover their expenses while they moved on with their lives. The result: eventually the equilibrium between available buyers and available sellers returned, but at a lower price point (econ 101, as some of you may recognize).

Phase 2: The buyers return. In this case, an easing of lending criteria (not by much, but you no longer had to be Bruce Wayne in order to qualify for a mortgage), an overall sense of more security that people weren't going to lose their jobs, and the resumption of the march upward in Manhattan (and Brooklyn) rents made them interested in buying again. People started looking around.... and didn't find all that much on the market. In the course of about 3 months over fall 2012-winter 2013, the lingering properties were swooped off the market.  That lead to a shortage in apartments, which means prices go up!  So, yes, there were stories of bidding wars earlier this year.

Now we are hearing signs of Phase 3. Phase 3 is - you guessed it - when the sellers return to the market. Not just any sellers, but what I would call "optional" sellers. These are people who would like to get rid of their apartment but have a little flexibility in when to do it. The owner who's renting after relocating to another city, or someone with a pied a terre that they don't use as much but can afford to keep. Or even the growing family who's a bit cramped but making do. 

Suddenly, selling seems more convenient to them now, and they are starting to put their properties on the market. The result: buyers have more to choose from, and a little more time to look. Prices probably won't drop, though. The market isn't loose enough for that. The bargain hunter days are pretty much over. Sellers may not all get the delight of having multiple sellers willing to jump through hoops for their property, but you can only sell to one person anyway. So price well (ask your real estate agent for help with that), and you'll still feel the love.

Is there a Phase 4? Yes, but it's not pretty.  It's the crazy market that existed 2003-2005 and again briefly 2006-2007 before the weakness finally caught up to NYC. Bidding wars, lack of contingency clauses, and lots of heartbreak. It's painful to be a broker during those times, even if I'm the listing agent, because I meet a lot of nice people and a lot of them end up heartbroken because they lost out on a bid. So I'm hoping Phase 3 - where buyers meet sellers in a healthy market - is here to stay for a while.

2012 May Be the Year of the Starter Apartment

So the headlines of the last nearly 2 years have been how luxury homes (over $5 million) just don't seem to be slowing down... until they kind of have. I mean, at the very top end people will always have the money to buy. But now, according to a couple articles, family sized apartment sales have been slowing down.

Instead, it looks like the little guy is finally feeling a little more confident, and smaller starter homes are starting to finally move on the market.  It may not be all about the want to invest however, as Manhattan rents are starting to fly skyhigh again. All you renters, that means you don't have 48-72 hours to "think over" apartments. February, a traditionally slow month, saw very high rental activity.

When you're out shopping for apartments, you need your previous year's tax returns and/or W-2s, letter from your employer showing salary and tenure, 2-3 consecutive paycheck stubs, and bank statements showing enough reserves to pay all the move in costs (please don't send a checking account statement showing only $50; you are trying to prove you are financially qualified to pay rent monthly!). You may also need a copy of your ID, a reference or previous lease from your current landlord. Forewarned is forearmed: I would have quite a fortune if I were given a commission for every renter who missed out on an apartment they loved because they didn't take my advice and have all their paperwork close to hand.

THAT's 700 Square Feet!?!

Found this post on the other day that highlighted a great issue: measuring square footage of a property and whether, or how, to report it.

With prices above $1000 per square foot in many parts of Manhattan, we care about every inch! As mentioned in this blog post, square footage is measured in several ways. In new development condos, for instance, the square footage is measured by the floor plate. That means some of the square footage in the apartment is between the drywall and the studs, unfortunately.

In prewar apartments, square footage is often (but not always) measured from interior wall to interior wall. Why the difference?  Because floorplans for the prewar buildings are often not available. As a result, new layouts are drawn using interior wall measurements only.  So next time you see a 650 square foot prewar and a 650 square foot recent development listing, and one feels a lot bigger, you know why.

The actual issue discussed in this blog post is whether to list the square footage of a property in the marketing materials. The author tells a story of a very particular buyer who tried to back out when the actual square footage differed from the listed amount by less than 1%.  That's a pretty extreme example to me, but it happens.

A colleague of mine doesn't list square footage because she finds that people have different opinions of the same number. Instead, she asks them to tell her how much they think the space is. Predictably, answers vary all over the map.

The truth is that layout greatly affects the perception of square feet. In my opinion, potential buyers will tell you how much usable square footage they see. Does the unit have a long hallway from the entrance to the foyer? Wasted Space. Square bathroom or narrow rectangular bath? The wide square shape may be perceived as larger. Galley kitchen or open kitchen with breakfast bar? That's a toss-up. Some will count the separate kitchen as more space, while others will perceive the narrow kitchen as smaller than it really is.

I've gotten pretty good at figuring out - within 50 square feet or so, how big an apartment is. Sometimes I work forwards. For instance, if a prewar apartment has a 12' x 22' living room and a 12' x 15' bedroom, then total square footage is likely between 750 (if a galley kitchen) and 850 (if eat-in kitchen).  Other times, I work backwards. For instance, if an apartment is a full floor of a townhouse, then you take the size of the town house (ie, 20' wide by 40' long, a typical size in the West Village) and subtract 50-100 square feet for the interior staircase. A longer house makes for a bigger apartment with an interior dining room and/or a second bedroom.

One thing I do not recommend is using a "rule of thumb" or "legendary" square footage. I once knew a seller who represented that his apartment was a certain square footage because "the coop assigns one share per square foot". Unfortunately, the buyer's appraiser found that the real number was nearly 300 square feet less. The buyer cared very much about the square footage and wanted a huge price drop. Turns out he cared about the price per square foot, even though the property appraised for the contract price. He didn't want it unless he was getting a deal, even though he'd been through the apartment several times and felt it met his needs. Ultimately, the sale died.  Moral of story: do take a measuring stick and measure the apartment yourself, even if you "know" what the rough number is.

As a broker (and a person with a decent - though hardly perfect - spatial perception), I appreciate an approximate square footage in the listing information. It helps me understand whether I should even bring a customer to a specific listing, or if it would be too small. I use floorplans and photos to help me make that decision (and the more information a listing has, the more likely I am to shortlist it for a customer).

Bottom line: Measure the property, even if you have documents stating a particular square footage. Always use the word approximate. Provide more visual information to complement the square footage information (floorplans, photos, etc.). It could save your sale.

Condo Sales Report Show 20% Jump Below 14th St

Condo Sales: Manhattan condominium sales report

Monthly data reported by the website Condo-Sales.com show a nearly 20% jump in per-square-foot condo sales below 14th Street from August 2009 - August 2010.

Per square footage sales in the area that covers the East, Greenwich and West Villages, Soho, Tribeca, Little Italy, Chinatown and the Financial District jumped from $1,055 per square foot in August 2009 to August 2010, the most recent month for which data has been compiled.

While it is possible that mass closings in a large new building may have skewed this average, no large buildings (such as 15 Central Park West) closed that we are aware of. Buyers searching for a condo should take into consideration the higher per square foot price and adjust their budget - or expectations - accordingly.