June 17 (Bloomberg) -- When will the feverish New York real- estate market break?
That's the question a lot of New Yorkers previously locked out of the city's housing market are wondering. Even with thousands of layoffs at the city's securities firms, prices on apartments and townhouses have hardly budged.
Yet perhaps a little exchange onBrownstoner.com, a blog that covers the Brooklyn real-estate market, offers the houseless some hope, and city financial officials pause.
On June 11, Brownstoner had put up its ``House of the Day,'' a four-family townhouse in Carroll Gardens, south of Brooklyn Heights. The site observed that the house had some charm, but still wondered if the $3.5 million price-tag was still too high.
The comments, as usual, flowed in. Of course the house was insanely overpriced. And then at 2 p.m. came this from one poster: ``A nice small apartment building for a retired couple,'' he wrote. ``But if I had this much cash, I would probably put it in tax-free bonds and enjoy life on a shoreline somewhere.''
The stealth investment strikes again!
In 2006, more taxpayers than ever before said they received tax-exempt interest, according to the Internal Revenue Service's Statistics of IncomeBulletin.
More than 6 million tax returns reported collecting tax-free interest of almost $70 billion. That may sound like a lot. But that's still out of 138 million tax returns.
Tax-Free Income
Even with their reputation for safety and tax-free income, municipal bonds are just not part of the nation's financial culture, which is why I stopped dead at their mention on the Brownstoner real-estate blog.
This being the Internet, of course, nothing goes unquestioned. ``daveinbedstuy'' wrote in: ``2:00 what are your tax-free return assumptions? Even with $3.5 MM you can't live on any nice shoreline, maybe some lake in Western Pennsylvania!!!''
Another one, ``sam,'' called daveinbedstuy a big spender. ``Palm Beach or nothing?'' he asked.
And then at 5:44 the mystery municipal bond expert came back in with the math.
``You can buy 30-year munis at 5 percent easily. With a $3.5 MM investment, your interest income is $175,000 a year, which is equivalent to a pretax income of approximately $350,000 if you're a New Yorker,'' the poster wrote.
`Nice Beach Place'
``I would bet you that amount that not even .1 percent of the posters here make that much. I think you can find a pretty nice beach place on a monthly nut of $14,500. Maybe not the Hamptons, but you could afford a $1 million beach house somewhere else and still have plenty of spending money.''
And there you have it: the wonders of tax-free municipal bonds explained!
I took a look at the calendar of bonds priced this month to see just how easily you could find 5 percent New York bonds (you would want to buy in-state bonds to enjoy the full benefit of the tax exemption), and found that it's a little tough.
On June 9, the New York City Transitional Finance Authority sold $700 million in revenue bonds rated AA- by Standard & Poor's Corp., and the yields ranged from 4.39 percent in 2021 out to 4.88 percent in 2038. Another New York issuer, the Housing Finance Agency, sold $109 million in bonds rated AAA by S&P that yield 4.65 percent in 2038.
So I'm not so sure how ``easily'' you can find 5 percent tax-free in the current market, but maybe with a little looking. Top-rated issuers are paying about 4.60 percent to borrow money for 20 years.
Alternative Investments
At 10:02 a.m. the next day, another commenter offered thanks on the ``muni bond tutorial, which was instructive. Bet you 3/4 of us hardly barely almost don't even know what a muni bond is.''
Actually, the numbers suggest that three-quarters is an optimistic figure.
Another poster noted that the townhouse under discussion had been purchased by its current owners for $1.54 million in July 2004. Property owners, at least in New York (Brooklyn is a borough of the city, a component) still believe they can get the astronomical returns piled up during the hottest years of the real-estate bubble. The amount of time townhouses like the one in Carroll Gardens remain on the market suggests otherwise.
And then when you have people consider these prices and think about alternative investments like municipal bonds, maybe that will let some of the steam out of the New York market.
(Joe Mysak is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: Joe Mysak in New York atjmysakjr@bloomberg.net
