Saturday, February 3

Blithe Manor

The New York Times profiles twentysomethings who fancy themselves real-estate moguls . Luciana Hyman is 24 and her husband, Daniel, is 27. They just bought a co-op in Manhattan for $875,000. Judging by the photo, it needs tens of thousands of dollars of fixing up.

As owners in a building with relatively lenient policies, like 10 percent down payments and flexible sublets, the Hymans talk about their apartment as a strategic investment that they someday plan to turn into cash.

"We're more comfortable with taking on debt and paying tomorrow," Mr. Hyman said. "If the cards topple, you can rent your place out and go somewhere cheaper."

Let's unpack this to demonstrate the unreality that the Hymans display, and the odd bias that the Times consistently shows -- an assumption that most twentysomethings (she's a schoolteacher and he's a securities trader) can afford homes that cost a million or more, give or take a hundred thousand.

I'll assume that they bought their share in the co-op building for $875,000 and put down 10 percent. That means they borrowed $787,500. Let's say that got an interest-only 5/1 ARM at 6.25 percent. The monthly payment for principal and interest is $4,102. That excludes co-op fees, taxes and insurance.

What happens if, in Daniel Hyman's words, the cards topple? Let's say that means there's a recession in which the value of the co-op falls by 20 percent and Daniel's income falls precipitously. At that point, their co-op is worth $700,000. If they have an interest-only loan and haven't aggressively been paying down principal, they owe $87,500 more than the place is worth. Meanwhile, their family income is down, so they decide to move out, find a renter, and rent an apartment.

If the co-op's value has dropped 20 percent, to $700,000, and if a lot of owners join the Hymans in putting their places on the rental market, the overall rental market is probably soft. What would be a fair market monthly rent in such an environment? $3,900, tops. Probably closer to $3,500.

Meanwhile, their monthly mortgage payment is $4,102, plus co-op fee, taxes and insurance. Unless they have $87,500 in cash, they can't refinance the loan. If they don't have $87,500 in cash, plus another $42,000 or so for the real-estate commission, they can't sell the co-op. On top of that, they're renting a place and commuting into the city.

It just doesn't work, and the reporter apparently didn't confront the Hymans for their blitheness.