Tuesday, June 09, 2009

Tim Geithner can't sell his house for more than it's worth

U.S. Treasury Secretary Tim Geithner can't sell his house:
Real estate agents say Geithner recently rented out his Westchester County home after it didn't sell — even though he reduced the price to less than he paid.

Geithner put the five-bedroom Tudor near Larchmont on the market for $1.635 million in February.

Agents Scott Stiefvater of Stiefvater Real Estate and Debbie Meiliken of Keller Williams Realty say the house was rented for $7,500 a month on May 21, a few weeks after the asking price was dropped to $1.575 million.
Here is his house on Zillow. The guy lives in a bubble (pun intended); Zillow says it's worth $200,000 less than his asking price.

Let's do a little math. He's renting it out for $7,500/month, which is $90,000/year. Divide $1,575,000 by $90,000 and we get a price-to-rent ratio of 17.5. That might seem equivalent to a typical stock market P/E ratio, but it's not a price-to-earnings ratio. It's a price-to-sales ratio.

According to real estate "guru" John T. Reed:
The average operating-expense ratio of a residential rental property is 45% plus or minus about 2%. That is, the operating expenses—taxes, management, utilities, insurance, etc.—will consume about 45% of the gross income. That percentage applies all over the U.S. for all types of residential property...
Therefore, we can estimate the annual net income of Tim Geithner's house by multiplying the annual revenues by (1.0 – 0.45):
$90,000 x (1.0 – 0.45) = $90,000 x 0.55 = $49,500
Then divide his asking price by the annual net income to get the P/E ratio:
$1,575,000 ÷ $49,500 = 31.8
Alternatively, we could divide the annual net income by the asking price to get the earnings yield (cap rate):
$49,500 ÷ $1,575,000 = 3.14%
So, the Treasury Secretary of the United States thinks his own house is worth 31.8 times the annual profits it can generate. He's willing to accept an earnings yield of only 3.14%. That's a horrible rate of return! Compare the 3.14% earnings yield with the 5%+ cost of a fixed rate mortgage.

This guy is an economist? Hey, Tim, take the hint: You need to drop the price!

14 comments:

  1. the average operating-expense ratio may be 45%, but his is certainly not 45%.

    his is probably over 100%.

    I looked up how much your mortgage payment would be on $1.6M house with 10% down and 5 year 30 year fixed interest rate, and it's around $7730.. I'm guessing his property tax is $12K at a minimum so that's another $1K per month. Add $100/month for maintenance and say $100/month for insurance and we're approaching $9K.

    So he's losing around $1500 a month at the very least. So the P/E I'm calculating is -89.

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  2. The mortgage isn't counted as part of the operating expenses.

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  3. Perhaps Geitner's decision to rent his home rather than leave it on the market unsold has more to do with his current job outlook than market conditions. He may need to move back in sooner than he first anticipated.

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  4. I don't see why anyone think Tim Geither is an economic genius... this is just more proof of it in my view! Even us small town folk in Clinton, UT have the sense to lower our prices when the market is bad.

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  5. Geithner is a fool - well demonstrated!

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  6. The guy lives in a bubble (pun intended); Zillow says it's worth $200,000 less than his asking price.

    Pffft!

    Hey, my neighbor sold his house last month for $432,500. Until about three days ago, Zillow said it was worth $330,000.

    But, ya know, currently Cyberhomes says it's only worth $258,000. So really I think the only fair thing to do is to give the buyers $174500 back, right?



    "Time to drop your price!!! Zillow says so!"

    Thanks for the laugh! You guys are hilarious.

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  7. Actually Geithner is a crook.
    And Oboe is obviously a realtor troll with too much time on his hands.
    Whats the matter troll? Can't you find a client to lie to?

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  8. actually oboe is full of shit

    icb over at another blog quoted this same link and property. Just search for his comment in that post from 3 months ago

    http://www.dchousingprices.com/2009/03/hunt-begins.html

    ALSO, you can simply see a snapshot of the page in the google cache from 4 or 5 days ago and see that zillow had it in that price range as well.

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  9. Interesting Analysis. Yeah, drop the price.

    I wonder how our other statesmen are faring in today's market.

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  10. "You can simply see a snapshot of the page in the google cache from 4 or 5 days ago and see that zillow had it in that price range as well."

    Sounds like Inspector Clouseau needs a refresher course on "How to use the Intertubes".

    I'll do the work for you, though, and no Google cache is needed. You just need to look at Zillow's home value history chart for the property:

    http://www.zillow.com/homedetails/charts/423579_zpid,1year_chartDuration/

    Oh, well... You can lead a horse to water, but you can't make him drink; you can lead a man to knowledge, but you can't make him think.

    Look out! There's a realtor under that bush over there!

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  11. "Sounds like Inspector Clouseau needs a refresher course on "How to use the Intertubes". "

    Dont get mad that I called you out on your lie that they had a different price 3 days ago. Clearly google cache said it was listed at the same price 5 days ago. I did learn something about how to use zillow though, but then again...why? You told me its worthless! lol

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  12. LIAR!!1!

    Heh. No, not mad. It's kind of a mixture of amused and perplexed at your mulish truculence.

    Oh, well, I was considering restating the obvious point of my original post in very, very simple terms, but it's clear you're just being willfully obtuse.

    There seems to be a lot of anger amongst the few remaining posters here. Not sure if it's a general malaise, or specifically that prices haven't fallen by 70% yet. At least not in places where anyone would want to live. :)

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  13. "Heh. No, not mad. It's kind of a mixture of amused and perplexed at your mulish truculence."

    look oboe

    dont be perplexed. I did a quick google search on the home you posted and seen that you are either ICB or quoted the same exact property he quoted (small world huh?) and that google cache showed that you are full of shit. All I did was point out that you are full of shit, get over it.

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  14. oboe / ICB / ibcJune 15, 2009 8:55 AM

    Jesus, you are one paranoid crackpot. I hope you get the help you so clearly are in need of.

    No one should have to wrestle with the kinds of personal demons that you so clearly struggle with. My heart goes out to you.

    You are in my prayers.

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