May 19, 2007

Slowly and surely, the MSM is going HousingPANIC - Forbes on how it's cheaper to rent than buy

I think I'm turning HousingPANIC, I think I'm turning HousingPANIC, I really think so...

I think I'm turning HousingPANIC, I think I'm turning HousingPANIC, I really think so...

Only problem with this MSM article (one day they'll think, not just type) is that they say rents are too low. Uh, rents are where the market says rents are, and hint, they're going lower, not higher.

Cheaper To Rent

These are scary days in the housing market. Sales of existing homes in the first quarter of the year were down 8.4%, but prices have barely budged, dropping only 1.8%. Many potential buyers are wondering if it makes sense to rent for a year and hope that as sales slow even more, prices will finally come down significantly.

In most cities, renting rather than buying is a good idea for now. Green Street Advisors, a research firm specializing in real estate investment trusts, looked at a 19-year average ratio of monthly mortgage payments to monthly rent payments for the 50 largest markets in America. They then looked at a current snapshot of that same ratio and calculated how much rents would have to change to bring the ratio back to its 19-year average.

In 80% of markets, rents are more than 10% below their historical averages, and home prices are too high.

If you're looking to buy in Portland, Ore., you should probably think twice. Rents there are 61% too low. The current ratio of monthly mortgage payments to monthly rents in Portland is 2.04, versus a 19-year average of 1.27.

45 comments:

Anonymous said...

Its been that way for the last few years, where has the MSM been?

Anonymous said...

Portland at 2.04 - it's TWICE as expensive to buy than to rent

Wow

Paul E. Math said...

I agree with their conclusion that it's cheaper to rent than to buy. But that's just sloppy journalism to state these conclusions without telling us how they got there. How are rents below historic averages, I would like to know.

But I guess this is a good sign. It used to be that the dumb journalists were all pumping real estate and only the smart ones were wise to the con. This article shows that even dumb journalists are writing about the housing bubble - it can't be long before even the dumb people start telling me there's a housing bubble. That's when prices fall off a cliff.

Anonymous said...

It's SOMETIMES cheaper to rent than buy in SOME cities and for SOME people. As Paul E. Math stated, it is very sloppy journalism since they give no indication of how they come up with the conclusion.

I live in a city where a 2500 sq ft home, with a big yard home in a great neighborhood can be had for $250K-300K or rented for $1500. It would be very foolish to rent.

borkafatty said...

Take a look at China and Russia's current account balance.

Now scroll to the bottom and look at ours the Great US OF A

http://tinyurl.com/2ysmjk

We are fucked, right after the 08 Olympics China is going to say kiss my ass.

Kenduffelsniffenspotzen said...

I was out walking around the neighborhood in Green Bay last week. I am amazed at how many single family homes are sitting empty and abandoned. Where did all the people go?

Anonymous said...

They can't bite the hand that feeds them too hard. All the ads now in a newspaper are from the REIC mafia and the editors have decided to go over the cliff with them and their Republican handlers/owners. Maybe they are doing it on purpose. Discredit and bankrupt it - just like their doing with the government.

King of the Bitter Renters

Anonymous said...

I was going to pass this article on, but it makes no sense. Is sounds like they are saying Portland real estate is a bargain despite low rents. Huh?

"The reason: While Portland home prices have grown steadily, they have remained low compared to other West Coast cities like San Francisco and Los Angeles. "

Anonymous said...

I live in Portland and there is a very strong belief here that housing will become as expensive as SF or LA. They're truly in denial. They think proximity insures similarity. That's like saying Providence will someday be as expensive as New York City.

area 51 said...

Oh I see, it's not that house prices are too HIGH, it's that rents are TOO LOW. OK, I see, all we gotta do is jack up those rents to get that ratio back in line. Makes sense to me! Solves the P/E problem! Now if we could just deal with that pesky Price/Income ratio........OH YEAH inflation here we come! Forbes you rock! Forbes for President!

belchorama said...

This article makes apparent a serious problem with the "free press". People that are obviously incapable of critical analysis are given an enormous voice and an enormous audience, while those capable of critical analysis are forced to eke out an audience in the blogosphere, because they were too smart to end up as journalists (good ekeing work, Keith). This is one major contributing factor to the bubble. At least now these monkeys with typewriters have come around to the view that housing is a bad buy in today's market (through no independent thought of their own, surely). It makes their stupidity less maddening than it was a year ago when they were still quoting TCDL as a wise prophet in every column.

belchorama said...

I'm still laughing and shaking my head at "rent is 61% too cheap". Boy is that a strange way of putting things, and it must have taken some serious screwball analysis to arrive at that conclusion, although I'm sure the monkey writing the article had no idea how that number came about. To him, the square root button on a calculator is essentially a random number generator. Or, since he undoubtedly does not understand the concept of random number generation, it is essentially a magic button.

Anonymous said...

I live in a city where a 2500 sq ft home, with a big yard home in a great neighborhood can be had for $250K-300K or rented for $1500. It would be very foolish to rent.

SURE...If you want to live in Detroit or some forsaken wide spot in the road in Kansas...

Anonymous said...

"I live in a city where a 2500 sq ft home, with a big yard home in a great neighborhood can be had for $250K-300K or rented for $1500. It would be very foolish to rent. "

Hmm, just the interest alone on a 250k-300k house would be about 1500 a month. OK, you save a few hundred on taxes, but that doesnt count things like property taxes, maintainance, etc. I dont see how you are coming out ahead relative to renting. You are already spending as much as rent/more on interest on the loan and other upkeep. The amount you spend on equity would likely see better returns if put into CDs or stocks. Even in your situation I am not sure how you are coming out ahead

Anonymous said...

I wouldn't give them too much credit for having a light bulb moment. What's probably happened is that Joe reporter can finally get enough info from a Lexus search to spit out an article.
That's really all it's proof off.

Mort said...

Hey Keith, your puppet needs a drug rehab.

Balanced View said...

I am a huge fan of HP, but I think it veers too far in its direction. For example, Anon 9:22pm points out that monthly payments to own can be higher than renting. However, what this person and others forgets is that, after 30 years, that home can be paid off. And then you can live in it rent-free (though, granted, not tax free). Or you can buy a smaller home (since the kids will hopefully be gone by then) and then pocket some cash. What often gets lost on this blog is that, while buying property can be treacherous in the short term, if you stay in one property for 20-30 years it usually turns out to be a much better deal. Unless you truly believe that, even after 30 years, that home will still not be worth what you buy it for today. Having said that, renting can be much less expensive if you can't find an affordable property you'd like to own for 20 years.

Anonymous said...

no crap

Anonymous said...

I live in a city where a 2500 sq ft home, with a big yard home in a great neighborhood can be had for $250K-300K or rented for $1500. It would be very foolish to rent.

May 19, 2007 2:05 PM
--

name the city.

jorghis said...

Balanced View:

(this is anon 9:22 again)

I am not missing it, I am accounting for the fact that homeowners build equity. Let me give you an example with some simple numbers. (rounded for simplicity)

I pay 1k rent a month right now to live in a very nice one bedroom condo on the coast of florida. The condo is valued at 250-300k right now. A mortage payment for this thing would cost about 1750 a month at a low fixed rate over 30 years. Now, if you go the mortage route at the end of 30 years you own a condo worth 500k (assuming it goes up at the same rate as inflation, which frankly is optimistic given that its overvalued now, but I digress). If I continue renting and instead invest in stocks with that extra 750 a month (say I average a 9% return) I will have about 1.5 million dollars. Also, I have not tied myself to any liabilities trying to do this, I dont run the risk of the inevitable housing crash, I can move whenever I feel like it, we havent counted all the other upkeep costs associated with owning a condo/house, etc.

Now most potential homeowners dont bother to do this math, they just see the sales pitch of "renting is throwing your money away!" When people start to realise that paying substantially more to own a house than you would to rent it is financially unwise the market will really start to hurt for housing.

Guy Daley said...

Name the City? where you can find 2500 square for $1500 a month?

Easy - Phoenix metro area.

You really must get acquainted with www.craigslist.com

You'd be surprised at what you can find.

But the drawback of a 2500 square foot home is your going to get gobsmacked by the cost of water, electricity and natural gas.

Balanced View said...

Reply to Anon 9:22

Hi,
I think your calcs are off. If your condo is worth $300K, let's say you put down the normal 20%, then you'd have to borrow $240K. At a 6% interest rate, the monthly cost would be $1,439. However, you'd get a mortgage interest tax deduction, lowering your monthly payment to $1,079. I have no idea what your taxes would be. If they are $250 per month, then it would cost you about $350 per month extra to own, or $4200 per year. Instead, if you rent and invest this $4200 in the stock marklet and get a 6% return after capital gains taxes, you'd end up with only $332K, much less than the $500K the property may be worth. And when those 30 years are up, you'll never have to pay rent again. Don't overlook the financial benefits of living in a house that's fully paid for. You'd only have to pay property taxes, which will hopefully be something like only $5k-$10k per year at that point.

Anonymous said...

jorghis,
O.K. you have 1.5 million at the end of 30 years. Does this qualify you as a millionaire. What is the definition of a millionaire? Everybody can be a millionairae according to your method.

Anonymous said...

The city is Atlanta you crackpots, go to craigslist see what you can get for $1500 a month and you'll see that the same home can be had for $250K to buy.

Anonymous said...

And pretty much anywhere in the South actually.

Anonymous said...

Hmm, just the interest alone on a 250k-300k house would be about 1500 a month. OK, you save a few hundred on taxes, but that doesnt count things like property taxes, maintainance, etc. I dont see how you are coming out ahead relative to renting. You are already spending as much as rent/more on interest on the loan and other upkeep. The amount you spend on equity would likely see better returns if put into CDs or stocks. Even in your situation I am not sure how you are coming out ahead


You didn't do very well in math class I take it.

I put 0% down and get a $250K loan for a $250K home. That comes to a $1500 payment @6% fixed 30 year.

First year of the loan:
- Payment of $18,000 ($15,000 interest, $3000 principle)
- Property Tax $3000.
- Insurance $500
- Tax saving at 33% state/fed marginal tax bracket = $5940. I itemize so don't throw back the $10,000 standard deduction I'd get as a renter, wouldn't apply to me as my deductions w/o interest are well over $10,000 already.

Net cost year to own: 18K + 3K +0.5K - $5.94K - $3K = $12.6K. Add $1K for repairs and it's $13.6K total cost of living to own.

Compare that to renting the same house for $1500 and the total cost is 12 * 1500 = $18K.

So own = $13.6K, rent = $18K. Oh yea renting is definitely the way to go.

Paul E. Math said...

Anon 1:55 PM, you may have made a few mistakes in your calculation.

You can only deduct the interest you pay on your mortgage, not the whole payment. So your yearly deduction is 33% of 15k, not of 18k, it's $4950, not $5940. Or am I missing something?

I'm also wondering where that final -$3k came from at the end of your calculation. Where did that come from?

Also, I think your maintenance costs are low. The general rule of thumb is that you can expect to pay 1% of the price of your home on maintenance costs per year. In your example that would be $2.5k/year, not just $1K. If the house is an older one then you can expect to pay even more.

Finally, if you have a 100% LTV ratio then you would have to pay PMI, which I didn't see in your calculation.

I don't want to get argumentative about this, I'm just trying to make the point that the comparison is much closer than you state. And the example was originally given as a non-inflated area, imagine what it's like in a place like where I live (Boston area), renting an apartment for $1k/month where identical units have sold for close to $250k.

Jorghis said...

@balanced view:

You rearanged it a bit by adding in a down payment. If you do this you also should be considering the scenario where I instead put that 60k in stock and continue adding $4200 per year with 6% annual return compounded annually. In this case I still end up with 700k. And this isnt counting the additional thousands a year I will be up from not having to pay homeowners assoc. fees, maintanance, insurance (very expensive in Florida), etc. It is likely that I will end up worth a good bit more than that. And of course, there are other benefits such as being able to move whenever I want.

So at the end of all this I buy your house for 500k and pocket the 250k difference. And the scenario we have set up is overly favorable for the owner. (assumes you stay 30 years, doesnt count all costs, assumes the interest im getting is all in taxable accounts)

@anon1:55

I concede, I didnt really do the math on your scenario. In your situation it may make more sense to own, but only if you plan on living there for an extended period of time. Also note that in most markets the yearly cost of living for renting is not higher than the yearly cost of owning.

Generally speaking the point I am trying to make is that if the total annual cost of owning minus the total annual cost of renting is at all significant then owning doesnt make sense. Even moreso if you arent going to live there for 30 years. (and lets be honest, most americans dont live in the same place for 30 years straight) Most of the big markets that people speculated wildly in now have price to rent ratios that are way higher than they should be. Owning should not only cost the same or more than renting after 5+ years time, it should cost less, there will likely be an adjustment to reflect this over time.

buy low sell high said...

In Texas, the property tax on a $250K home would be roughly $8,000/yr. With the shoddy construction going on the past few years, the maintenance would be much higher than $1K/yr. It would also be very hard to rent out a house for $1500/mo. Most of the houses I see listed for rent go for around $1200/mo. As for the utilities on buying a house vs renting an apartment

My sister's house costs $850/mo avg for utilities. My 2/2 apartment with 1150sf costs $150/mo avg.

Her total living expenses = $2800/mo
My total living expenses = $950/mo

I'm in a nice neighborhood only 10 minutes from a major employment center and 15 minutes from a major university where I am working on my graduate degree during the evenings. She lives in the outer surburbs and her husband is over 20 minutes from his workplace. I max out my 401K and IRA and still have $2000/mo to put in to stocks and mutual funds.

IMO buying now would be like buying in the NASDAQ in September 2000. Perhaps I will buy a house for a 20% discount after I finish my graduate degree. When I say buy, I mean pay for it myself 100% - not go into a lifetime of debt slavery and eating rice and beans.

Anonymous said...

The HOA fees for condos is normally $300/mo and will increase as the building ages and inflation forces it up up and away. A 1/1 condo should cost no more than $120K if it is close to the beach. Since when is paying $300K for a 1/1 condo a good investment when it can be rented for $1K/mo? Do you think the landlord is happy renting out that albatross at a 50% loss each month?

Anonymous said...

balanced view,

Did you forget to add the original $40K that was used as the 20% down payment?

The $4200 yearly contributions plus the $40000 initial investment would come to a total of $463K at 6% annual returns after tax.

You also forgot to factor in that the mortgage interest tax deduction decreases each year as more of the payment goes toward paying off principle instead of interest.

Let's say you have a wife and kids. It might be worth it to pay 20% more to own, since that brings stability to your family. If you have to sell before five years, you lose about $8,000 in closing fees and another $15,000 in Realtor fees. So you start off down $23,000 right off the bat to buy. Your $250K house has to sell for $275K just for you to break even on the transaction.

Anonymous said...

The city is Atlanta you crackpots, go to craigslist see what you can get for $1500 a month and you'll see that the same home can be had for $250K to buy.

Atlanta is the Detroit of the south with several added bonuses:
bible thumpers, rednecks, peckerwoods, and trailer trash. It's also a major police state.

I would rather be dead and buried here in Humboldt that alive in Atlanta!

Balanced View said...

Response to Anon 9.47pm:

a) I agree that people will probably lose money if they sell a property within 5 years of purchase. That is one of my main points: selling within 5 years can be a disaster, but selling after 30 years should be very beneficial.

b) You mention a $463K investment value, and that may be true, but it's missing my second point: once your mortgage is completely paid off, you don't have to pay rent ever again. You may have to pay property taxes, but not rent. And if you pass the home down to your kids, they can either cash out or also live rent-free. This website does not spend enough bandwidth extolling the virtues of living in a home that's completely paid for. Or extolling the virtues of buying a home that you will hold for 20-30 years.

Anonymous said...

and with the price of gasoline the idea of voting with your feet and moving to an area a lot less expensive and troubling has gotten more expensive...........and there has been a mass of people before you, and most smaqll town sold development as a way to keep taxes low, when in fact, it rasised them , aND raised the unendingly, and complaints serve no purpose...........

Anonymous said...

ditto to where did all the people go?????????, this place feels like a ghost town, yet i can taste the polution?

Anonymous said...

area 51 said...
Oh I see, it's not that house prices are too HIGH, it's that rents are TOO LOW. OK, I see, all we gotta do is jack up those rents to get that ratio back in line. Makes sense to me! Solves the P/E problem! Now if we could just deal with that pesky Price/Income ratio........OH YEAH inflation here we come! Forbes you rock! Forbes for President!

---------------------

Of course the problem with any large rise in rents is that you can't get a neg. am. teaser rate loan to pay the rent, so rents can't really rise much faster than wages. Good if you rent, bad if you have bought near the peak of the bubble.

Anonymous said...

Balanced View said...
I am a huge fan of HP, but I think it veers too far in its direction. For example, Anon 9:22pm points out that monthly payments to own can be higher than renting. However, what this person and others forgets is that, after 30 years, that home can be paid off. And then you can live in it rent-free (though, granted, not tax free). Or you can buy a smaller home (since the kids will hopefully be gone by then) and then pocket some cash. What often gets lost on this blog is that, while buying property can be treacherous in the short term, if you stay in one property for 20-30 years it usually turns out to be a much better deal. Unless you truly believe that, even after 30 years, that home will still not be worth what you buy it for today. Having said that, renting can be much less expensive if you can't find an affordable property you'd like to own for 20 years.

May 20, 2007 12:22 AM

---------------

If the interest payments on the loan are equal to the rent, the total payment (principal, plus taxes, maintenance, insurance, and maybe even HOA) will be MUCH more than rent. Sure, you *may* own a place after 30 years (if you don't move or take any equity "out for a spin"), but you will have purchased a depreciating asset. Adjusted for inflation, the prices of the 2005-06 bubble peak will NEVER be seen again.

Anonymous said...

Anonymous said...
jorghis,
O.K. you have 1.5 million at the end of 30 years. Does this qualify you as a millionaire. What is the definition of a millionaire? Everybody can be a millionairae according to your method.

---------------------

If by "millionaire" you mean someone who's "rich," the answer is NO. You need ~$20 million for that now, and will need much, much more in the future. 1.5 million in 30 years' time is a decent start on a retirement fund, that's about it.

reality check said...

Balanced View said...
Reply to Anon 9:22

Hi,
I think your calcs are off. If your condo is worth $300K, let's say you put down the normal 20%, then you'd have to borrow $240K. At a 6% interest rate, the monthly cost would be $1,439. However, you'd get a mortgage interest tax deduction, lowering your monthly payment to $1,079. I have no idea what your taxes would be. If they are $250 per month, then it would cost you about $350 per month extra to own, or $4200 per year. Instead, if you rent and invest this $4200 in the stock marklet and get a 6% return after capital gains taxes, you'd end up with only $332K, much less than the $500K the property may be worth. And when those 30 years are up, you'll never have to pay rent again. Don't overlook the financial benefits of living in a house that's fully paid for. You'd only have to pay property taxes, which will hopefully be something like only $5k-$10k per year at that point.

--------------------

Hmm... what about the opportunity cost of the $60K+ downpayment and various fees and closing costs?

Also, 6% is pretty low for stocks historically, unless you are talking about real (inflation adjusted) return, which has historically been about 6%. But then real home price appreciation has averaged 0% historically, so the $300K home will probably still be a $300K home in 30 years, minus wear and tear and return of prices to long term historical averages. If you bought near the top of the bubble, odds are it will be a $150K home in 30 years.

Anonymous said...

once your mortgage is paid off, the taxes on the property will be equal to the mortgage payments and the place will be so highly tax assessed that it will not sell and your retirement savings will be nothing and ditto to your dollars in spendong power and earnings, lest you forget the millions of people trying to fleese you

Anonymous said...

aint no where to run, unless you like the life style of the illegal..humm...

Balanced View said...

For Anon 1.55AM:

This is exactly what I mean about the one-sidedness of some people on this site. Anon implies that buying property will not really pay off, because once you've paid off your mortgage your taxes will be as high as your mortgage payments were.

Rent prices are almost always higher than tax prices. Although your taxes may be high, it would cost you much more to rent. Case in point: my in-laws own thier home and pay taxes of $350 per month; if they rented their place, they'd pay at least $2,000 per month.

My main point: short-term speculating will probably be a disaster, but long-term ownership should work out alright. I think that message gets lost in the shuffle here sometimes.

I'd also like to admit that I live in the New York City area, where real estate is a nightmare, but property should especially hold long-term value unless the jobs radically disappear from the city.

Anonymous said...

Portland is about 9 months away from feeling the full impact of the housing bubble. If you bought a house in Portland in the last two years you will be weeping. There are tons of rentals in Portland and they are increasing in numbers. The big increase in rental homes started about 4 months ago (check craigslist) and continues grow. There are tons of 4 sales signs up and few houses are selling. Condo projects are biting the dust and the overbuild extends up and down the I-5 corridor. Vancouver in particular is way overbuilt, with lots of rentals and houses for sale.

Portland rides in the wake of California and Portland is a bubble of its own, with local realtors talking "we are a unique market" and "all real estate is local". With California starting to tank, Portland is not far behind. Any hint of recession (Portland's job market is weak, heavily service based)and/or a high tech squeeze and things will get bad quickly. Not for the longterm owner, but for folks who bought at the wrong time (past two years), they will be underwater overnight --- subprime, Alt-A, ARMS, etc. People don't like to talk about it and get easily offended, do the Ostrich if you don't like the message. Reality shows up quickly.

Anonymous said...

I pay 1500 a month to live in a 600000 dollar house that is the house next door sold for that last year. This house is in a gated community with 475 dollar a month HOA dues. Granted this covers outside water, mowing and snow removal.
Now I would assume a 600000 dollar mortgage is probably more than 1025 a month. So I am much better off renting.

Plus I just paid 34236 dollars for a sign last year to get rid of my McMansion.

I also use my 1500000 of equity invested in UK bonds earning almost 14% including currency exchange to pay my rent.

Thats my take on rent vs own.

portlandrealtor said...

Do you have a link to that study by green street advisors?