An 'evangelist for renting' takes the plunge

News item: New York Times "Economic Scene" columnist David Leonhardt, a self-described "evangelist for renting," writes that he and his wife have been lured by falling prices into taking the plunge into homeownership in Washington, D.C. "This month, we found a house that we really liked, and we made an offer. It was accepted," he writes.

His column is worth reading. He lays out a simple formula for evaluating whether a house is best rented or bought: "... divide the sale price by the annual rent.  You can call the result the rent ratio. ... Throughout the 1970s, ’80s and ’90s, the average rent ratio nationwide hovered between 10 and 14. In the last few years, though, it broke through that historical range and hit almost 19 by the time the housing market peaked ... a rent ratio above 20 is a good indication of a bubble."

FWIW, I just ran this little formula on the house we're renting on the Westside. Our rent ratio (based on a Zillow Zestimate I believe to be pretty accurate) is 20.7. Just saying.

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com.

Comments

[optimusprime]

Hmmmm. Mine is 19.96 - guess I'll keep renting just a bit longer.

[Chuck]

The ratio on the house I rent in Mar Vista (based on Zillow estimate): 25.2. Yikes.

[La Canada Renter]

Wow - We are renting a house in La Canada and I just realized our rent ratio based on the Zillow estimate is a whopping 46! I wonder if we will ever get to a point where it will make sense to stop renting and buy something. LA is so overpriced!!

[amir]

This is not a new idea. I have family members who work and invest in the real estate market and they have been using the rent ratio for decades as a rough estimate for intrinsic value.

A few twists on this rent ratio:

The inverse of the ratio gives you the interest return of the investor. So a ratio of 20, gives the owner a 1/20 return, or 5%. A ratio of 10 gives a 10% return. This is very similar to the P/E ratio in stocks. However, the ratio doesn't include expenses or taxes.

You can see now why I don't expect investors to rush into the market with ratios in the 15-20 range. That leaves about 5-7% return before expenses and taxes. Not great.

If the Fed decides - as I expect they will - to defend the dollar and raise Fed rates. Investors will demand higher returns, leading to lower prices and lower ratios.

The other issue with the ratio is that it is not the same for all areas. As in all investments, higher returns usually mean higher risk. So great locations (like great stocks) trade at higher rent ratios, while poor risky areas can drop under ten or even five in bad times. Areas such as Beverly Hills can meanwhile sustain a high double digit ratio for long periods of time because there is little risk of capital depreciation or loss of return due to vacancies.

Note: I didn't use mortgages in my explanation because they add another level of complication.

[Jeff]

Wow. I just calculated my rent ratio for the place we're at: 67. Now, I know I've got some cheap rent and it's technically a duplex so we have upstairs neighbors, but dang, talk about a disincentive to move out and buy...

[Cal]

As long as he can afford to make the mistake (i.e. service the debt for the next 10-15 years) and does so with full knowledge.. then more power to him. But it doesn't appear like it's too big of an mistake if the houses in the local area are really renting at 4,000, that is about right for a 700k home at 6%.

I just think many think they can afford a home and don't really understand that this time they won't be selling their way out of any situation that arises. They are in an illiquid commodity. People really like to think they are richer than they are, I think that is why so many people have so much debt. They see others with things, think "well I deserve nice things too" and go and buy them on a credit card or a HELOC, nevermind actual savings, retirement or college funds.

The problem with making a mistake amortized over 30 years is you won't know the mistake until much further in the future. Unless of course you are thinking clearly and do the math yourself.

The calculator in the article is still one of the better ones on the internet allowing a person to change a host of variables.

p.s. The home I am renting is at 20.8 from list price / rental price.

[E.]

I like when this stuff can be broken down to simple math: I'm paying $1450 a month for a very nice 1br apartment, making my annual rent $17,400. In order to come down to a historical norm of a rent ratio of 15, the condos in my area would have to come down to $261,000.

Given that in my neighborhood I'm still seeing 1br condos whose only advantage over my apartment is an in-unit washer-dryer listed for $400k+, we've got a long way to go.

[greg chasen]

for the house we began renting last year in sunset park santa monica? 22.1

[blackbox]

Never heard of the guy. NEXT!

[Orange County]

By historical comparison, I used to rent a house in Foothill Ranch (South Orange County) in 1996 for 417,000 a year and it sold that year for $260,000. That would give a ratio of about 15 so it can and will happen.

[Steve]

This rent formula measures the now and not the future. If your strategy is to buy and hold long term forget rent ratio and buy. There are intangibles to buying and our society and goverment supports home owners and not renters. Look at what is happening now that tax payers will subsidize the owners with billions on this latest bailout. The renters get screwed. Look at the overall pattern, to me the ratio is meaningless. If you have to rent and can't afford to buy then move where you can. There is a provend statistic that renters die broke and owners die with a net worth of $650K, even with current conditions there is no better investment.

[Wilson]

I brought up this rent ratio a few times on Trulia. Believe it or not, Realtors went nuts on me. Realtors are adamant that rent ratios don't apply--it's like kryptonite for them.

Why is that Realtors? Any of you out here to argue against this rule of thumb?

[Al Ramirez]

I get ratio of 35, 2 blocks from the beach in Santa Monica - OK so I have a rent control appartment but still. Way too much speculation occurred in Santa Monica since I moved here in 2002. This was also 90% new reconstruct building so something new instead of a condo convert would probably be more like a ration of 50+. You can easily go broke on $150K in a major US City. So much for being in the top 10%.

[anon]

The ratio for my condo, based on the price paid in 2005 (Bubble Year Extraordinaire!) is 16.7.

A nearby foreclosure sale earlier this year had a ratio of 10.5. And it was pretty nice place. Sold in a few days.

Lots and lots of places for sale and being sold in the 12-16 x annual rent range here in San Diego.

I'd post links, but don't want anyone to think I'm spamming for a realtor.

[Anthrodiva]

The apartment we live in vs. the house we are buy: 19.75

[NoHo renter.]

Wow, I get 111. As much as I'd love to live in a house of my own, I'd be foolish to ever leave my apartment.

I moved in 11 years ago when the best thing about NoHo was the BoA shootout. I'm happy to continue to keep my under $700 rent instead of a $2500 a month mortgage.

[Anthrodiva]

Looked up comparable homes for rent in the area and the ratio is 12.5. But I am not sure people are getting the rents they are looking for...

[Tim K.]

The real version: "My wife REALLY wants a place. I make enough money that I'd rather pay more $$ now because I'm tired of arguing. Oh, and she reads my columns too so I better at least try to claim SOME responsibility for this so she doesn't think I'm blaming her when the prices eventually fall. Isn't it great to be me? I've got enough extra $$ I can afford to do this sort of thing. For those of you who don't make as much as me, this is when you start to become one of those statistics about $$ being a source of trouble in a marriage."

[Tim K.]

Seriously though, some people really, REALLY want to spend money on housing. Some feel the need to justify it, because it just isn't a cool thing right now to blow money on. Some things are "cool" to blow money on - if you can afford to fly first class, people don't think of you as an idiot who can't do math, they think you're just some hotshot rich person who can afford it. Lucky you. It would really suck right now to be the kind of person for whom the thing that floats your boat is buying a house. You have to pay a lot more $$ than ever before in history and won't have a lot to show for it. Not only that, but you have all these folks like me telling you it's not financially sound too.

Anyway, I do hope these folks enjoy their new home, but it does get irritating when I hear them try to justify it as a sound financial decision. It's NOT. The proof of that is his closing statement that the "intangibles" are worth it. It just an excuse for why his price/demand curve is totally out of whack, and but shouldn't be misconstrued that yours should be.

[sfvrealestate]

"I’m convinced that the most common real estate mistake is viewing a house first as a financial investment and only second as a home. That’s one big reason we ended up in this bubble-induced mess."
--from the NYT article.

Just like I've been saying...It's a home first, whether you're buying or renting.

[Peter I]

I'm looking at 2 bedroom condos in downtown Chicago. The building I'm most interested in has 2BR/1BA units for about 270 to 300K. The rent/own formula from the article yields a ratio of 10.5.

Can there be any doubt that I'm making the smart move?

[Tim K.]

"I’m convinced that the most common real estate mistake is viewing a house first as a financial investment and only second as a home."

This is classic, irrational advice which is used to justify many financially dumb decisions.

It's right up there with "Just live a little." and "But I deserve it."

Be *very* skeptical anytime someone tells you that you should *ignore* the numbers and go with your gut. It means they're trying to sell you something. In this case, he's trying to rationalize his irrational behavior.

The NAR is currently using this in their current radio advertisements here in Los Angeles. They are selling the message that a home is priceless - well, face up to reality. Housing DOES have a price, and many of you CAN'T AFFORD IT no matter how much you want to believe that you can.

[amir]

Peter,
It sounds like you should buy.

Wilson,
Of course realtors don't want to discuss rent ratios. Bullish stock analysts didn't discuss P/E ratios during the stock bubble either. They tried to come up with new math for a 'new' era. How did that work? Nasdaq dropped 75% and is yet to recover the loss eight years later.

You can forget about basic economic sense at your peril. When the market realizes it made a mistake reality comes back with a vengeance.

[TakeFive]

Tim K. wrote:

"The real version: "My wife REALLY wants a place...""

I'm with Tim on this one. The nesting instinct took over and the author ginned up a golden ratio to rationalize this purchase.

But it's a home, not an investment, right? At this point you can view homes at your leisure, negoitate hard, and not be worried about losing out to somebody more eager.

[M.B.C]

Wow! The people who purchased the home we are now renting couldn't afford to live in it by their own admission. We are coming in at 22.34. How is this sustainable?

[tealeaf]

SFVRE:

Isn't the price:rent ratio relevant? From the standpoint of quality of life for your buyers? In other words, why would you have more of your discretionary income go toward housing on a buy?

[neilson]

Bare minimum for a rough 'buy vs. rent' indicator should include price of house, rent, and interest rate.

[anon1137]

I wonder what could make a man denounce his religion seek out a more permanent nest?

What did you say is the reproductive condition of his wife?

[sjen]

The ratio is part of Income Approach to Value used by us real estate appraisers for ages. Nothing new. One poster Steve wrote aboout it not being important is right on. The rate of returns are good tools for INVESTORS. Buying a condo or a single family house to live is for quality of life and tax incentive first, long term investment second.

Another posting mention about his NoHo $700 apartment rent. What many renters don't realize is that just because they pay below market rent it doesn't mean that they are better of. If they don't save the difference between their actual rent and the market rent monthly, in the long run they will not outwin the homeowners who'd take 30 years to build a 100% free and clear equity.

For those out there paying a below market rent (mostly in rent control areas), please try to save the difference. If you can't, you either don't make enough money to survive in your current area (if you must vacate and rent a market rent unit tomorrow) or you've spent too much money.

In high RE value metro areas, buying a house/condo may not be your option but you don't have to die broke. Because you may not have the tax savings and equity savings by owning a house/condo, you must aggressively save into retirement accounts and investment accounts.

Being old (unable to work) and pennyless is worse than death.

[CD]

Woahhhhh, I get 47 at my rental house in SFV. The true value of this house is to be debated though, today I think it is worth what they paid for in 2001.That is one million less than what they asked for in 2006.The way things are going, it maybe even less soon. I am waiting for them to lower the rent again.

[tealeaf]

for the house we rent in Encino:

Seller's attempted sale in Dec 2007: 21.99
Zillow ratio is 19.51.

Meanwhile, we're stacking chips in savings.

Go on, call us speculators, shockg. I call it maintaining a quality of life for my family.

BTW, this thread is for Milla and other who say LA is going to be "just like NYC" in terms of expensive housing. One slight difference: rents in NYC are coming in line with housing values. Sorry to spoil what seemed like a great reason to pull the lever.

[puckhead]

AL,

You live 2 blocks from the beach in a rent controlled apt. If there ever was a renter that should not be bitter, it's you.

[Laker]

My Price (per zillow) to annual rent is 24. I guess it means rent is relatively better than buy...
However, i doubt zillow is going to buy the house...for the zestimate....
Shockg, what is your "rental ratio". (even if you own), what is the price of you house (say according to zillow), what is the rental equivalent will go for a place like yours?

[xtine]

Over in East Hollywood ours is 35.

[Ace]

I rent a brand new, luxury apartment for $1900 a month. They just opened up a brand new condo complex 3 blocks from me that has condos almost identical to my apartment for $599k. That would give me a rent ratio of 26.3.

The Realtor was trying really hard to sell my wife on buying one before I reminded her that we would have to pay almost double what we pay now for the same place. The Realtor said 'yeah, it depends on how much you can put down'. I said 'oh, so if I put down 100 percent, then I can live for free!' She didn't understand.

[eprobert]

our rent ($1920/month) represents a 19:1 rent ratio to the closest comparable (1000 sq. foot house on 5000 sq foot lot in Atwater Village). Asking rents are actually a little lower than what we're paying right now, but i'm trying to compare apples to apples here...

When it reaches 15:1 I would consider buying - that's like $350,000 range. That also happens to be about 3x our income, funny how that works out!

[Bubblewatcher]

I did the math on our 2 bedroom condo in West Hollywood. Even at $100K less than what it Zillows for, we're at about 20. Fortunately, we bought it in 1999 when the rent ratio was more like 10 or 11.

This stupid argument that these intrinsic valuations don't matter because people can simply plan to live in a place forever and shouldn't view it as an investment is really a load of bull. People may not plan five years in advance to get laid off or divorced and therefore have to sell, but life throws curve balls. There are currently over 300 condos for sale in West Hollywood -- something like a 10 month supply. Thanks to the fact that we have that low rent ratio, my husband and I can ride out an illiquid period like the one we're having by renting the place out, which would easily cover our ownership expenses and then some.

Had we bought in the past three years, however, we'd be absolutely stuck -- not able to sell, not able to rent it out, paying out thousands a month to hang onto a place we don't want anymore. Trust me, this is already happening to some of our neighbors.

We're looking to trade up, and have the wherewithal to do it even without selling our current place, but no way am I idiotic enough to take that risk when rent ratios are still in the 20s and higher in the areas we're interested in.

[E]

30 in the Los Feliz hill section per Zillow.

25 per the owners price paid in 2005.

The owner overpaid.

Zillow? LOL!

Even better rental deals out there now.

Floplords...I loooooooove you!

[Cal]

Realtors are funny. During the boom when things were going up and people were balking at the price of housing.. "It's an investment!"

Obviously, Trying to make people make a mistake and buy so they could get a cut.

Now during the bust.. "It's a home not an investment!"

Trying to create an emotional connection so people make a mistake buying now (instead of thinking about it rationally) and they get their cut.

Emotion and financial decisions don't go well together. When someone who has a fiduciary duty to you appeals to emotion you have to really ask yourself if they have your interest in mind or their own.

[AD]

So how would this calculation work if you were hoping to buy in a nicer area than you currently rent? I understand the ratio as it applies to purchasing the home you already rent (or something similar). I have chosen to live in a not so great area to keep my rent down so I can save money for a down payment. I'm doing well in that regard, have no debt, and have been watching things patiently (I'm in no hurry). I would never buy in the area I rent and hope to upgrade locations when I do decide to purchase.

[AD]

So how would this calculation work if you were hoping to buy in a nicer area than you currently rent? I understand the ratio as it applies to purchasing the home you already rent (or something similar). I have chosen to live in a not so great area to keep my rent down so I can save money for a down payment. I'm doing well in that regard, have no debt, and have been watching things patiently (I'm in no hurry). I would never buy in the area I rent and hope to upgrade locations when I do decide to purchase.

[MyLessThanPrimeBeef]

What's the ratio of the house he is buying in DC, 10 or 14?

[Milla]

tealeaf: sorry to spoil your gotcha, but rising rents are coming in line with mortgages in LA, too. some of the rents people have laid out here are certainly more pricey than my own mortgage. i have friends whose rent for an apartment is $100 less than my mortgage, and they live in Palms -- an area comparable to Highland Park. sure, they don't pay maintenance, but they also don't have a yard, a view or a garage of their own. plus, they get no tax breaks.

but putting ratios aside, unless one's a flipper, homeownership should not be all about the ROI, which is what the author of the article seemed to discover. and given that everyone has a unique financial and personal situation that is different than your own, no one can conclusively say that one individual's decision to buy rather than rent is a bad move (or vice versa). the reasons for buying should be more nuanced than any single ratio.

[Joseph...The Real Estate Guy]

As I have written many times on this blog, I see the bottom in 2012!

[puckehad]

The reactions on this blog are priceless. Bloggers called people stupid for buying a house during the bubble and treating their house as an investment and not as a place to live. Bloggers are calling this writer stupid because he bought a house and viewed it as a place to live first and an investment second. So basically bloggers are calling people stupid because they were stupid enough to do something that the bloggers would not have done. There’s nothing like three sides to every argument………………….

[shockg]

I agree Puckhead, They are slowly starting to realize that the crash is winding down, thus the anger.

[tarbubble]

misogyny appears to be alive and well. doubtless your wives are responsible for such rational purchases as sports cars, personal watercraft, and giant flat-screen TVs.

OK, i vented my disgust. Our magic price point is also $350k or lower. that's what houses in the neighborhoods i want to be in were going for in 2003. condos have already hit the 2003 mark here (a few are lower), and there are houses listed here for $399k now (that originally listed at $600k or so). it stinks to be patient, it really does. i understand the urge to buy. But patience will pay off in the long run.

[tealeaf]

Milla:

No fair: you need to give specifics on your mortgage before you suggest it is on par with renting. We can quickly craigslist other HP rentals and see what's what.

We're all coming from 20% down, 30 year fixed, just like Mom and Grandma and Great-Grandma.

So... what areas in LA are in line with renting, pray tell?

Challenge to puckhead, milla, shockg, and SFVRE: cherry pick a sale listing that is on par with comparable craigslist rental.

We've put up our numbers, let's see yours.

And don't give us the same "well, it's a home not an investment" line. We all know that's the case - we need to LIVE somewhere, as in feed, clothe, and educate our children, too. All within budget.

[BrantW]

The house I am renting ratios out at 27x!

What people do not understand, is how much you WILL lose if you buy a house too early. For instance, I fully expect, over the next 3 years, for houses like the one I rent to return to the roughly 20x ratio.

I did the math, in total detail, and If prices fall from 27x to 20x over the next 5 to 7 years...and then resume their traditional +2%-3.5% per year appreciation, I will take a bath by Buying now rather than waiting till prices stabilize. The difference is HUGE too. The delta is anwhere from $150,000 to $250,000 over 5-7 years.

Sounds like David Leonhardt, does not know how to do this sort of analysis. Either that of the wife unit had her teeth into him. My guess is the latter! Even small losses in the first few years make buying a real loser.

My advice? PATIENCE. The bottom will be easy to spot. Look at S. CA prices in the early to mid 90's. They went dead flat for 4 years. It will happen again...but on a wider scale. The bottom will be easy to spot. If it is not...then it is not the bottom.

[BrantW]

"the crash is winding down,"

What planet are you from. The recent 1Q YOY price drop is the largest ever recorded. These declines have momentum, and are generally symmetric. As such, we are at be 1/2 way through this game. Learn a little bit about price trends and RE pricing history. Prices do NOT drop by their most ever...then just go flat. Recent pricing drops create future price drops.

[tealeaf]

BrantW, a bit of history.

Shockg said the crash was winding down 6 months ago on Lansner's blog.

Shock, I defy you to go back and look at the trolling you did at the OC Reg site 6-9 months ago - amidst all of this.

Talk about damage control.

[puckehad]

Tealeaf,

The “challenge” that you proposed is basically a waste in time. I’m sure you’ll be able to pull a rental listing where it makes perfect sense to rent at that price rather than buy and I’m sure I’ll be able to pull a rental listing where the opposite happens. All that’ll prove is that in some areas rentals are in line with prices and other areas it is not.

The point of my post was that many here are rightfully critical of buyers/speculators that had no intention of owning their house and all they wanted to do was to flip their house and finance that house via voodoo loans. Recently we’ve had some examples provided by Peter of people who bought a house like; like LTL, Mila and writer of the NYT piece, who want to live in their house instead of flipping it and who appear to be able to afford their house and we’re STILL critical of them. I mean, what exactly do you people want? Do you want a stable housing market where people actually stay at their homes instead of flipping them like stocks or do you want a housing crash so that you can finally afford a house? The problem with this blog is that too many people want the later.

[shockg]

"What planet are you from. The recent 1Q YOY price drop is the largest ever recorded."

Old data dude. Stop looking backward and look at whats going on today. Sales are rising and inventory is flat, prices flattening out.

And please don't quote national data. We live in Southern ca.

[shockg]

Shock, I defy you to go back and look at the trolling you did at the OC Reg site 6-9 months ago - amidst all of this.

Talk about damage control.

Posted by: tealeaf | May 28, 2008 at 01:45 PM

And I've been right so far.

[tealeaf]

puckhead:
rentals are all over the map, but the reasonable ones are definitely out there - the rental market more closely reflects affordability and it is constantly fluctuating around a mean. Home prices are slow to move (except they have been plummeting as of late due to the mix of distressed sales). Rentals can move 10-20% in the span of 2 weeks.

My challenge is to find a SALES LISTING that is within, say, 10% prevailing comparable rents (PITI, 20% down, 30 yr fixed, market interest rates, craigslist comp).

Of course we want to live in the home as our residence, white picket fences, kids on bikes, dad washing the car, rocking chairs on the porch and all that stuff.

As soon as there is a reasonable premium for owning (not this 2x business we have today), I will buy. I'm not asking for the moon - just a nice 4/3 2000sf stucco box in Burbank that my $210k income can afford. I will accept a 10% premium over renting, and I'm sure most folks here match something analogous to those requirements.

The issue is that there is a discretionary income squeeze at today's still crazy prices - why are we going to sacrifice quality of life to make some homedebtor and RE agent rich ?

Still affordability.

[tealeaf]

shockg:

let's talk about leading indicators.

Mortgage starts?
NODs filed vs. traditional listings?

Yes, for so cal.

I can hear the crickets all the way from the Valley.

[tarbubble]

is nobody noticing that "puckehad" is posting, not "puckhead?"

[tealeaf]

Choice quote from Lansner's blog:

# shockg Says:
September 7th, 2007 at 9:54 am

The green arrow is still pointing upward.

Yeah, waaay up shock. Does the term permabull mean anything to you?

At least there's a point when I will turn the other direction, and I have outlined the circumstances as such.

Will you do the same?

Those darn crickets...

[tealeaf]

Judy/SFVRE, if you will have my sorry a__ as a client, I will even work with you to buy said stucco box!

[richard venti]

tarbubble, my magic price point is $350k too. Same with our neighbors, same with my co-workers, same with all the couples I know in their early 30's who make $150-200k a year. It's getting quite crowded out here on the sidelines. If prices keep dropping the way they do, it's going to be a frenzy. The bottom will be a distant memory before anyone even sees it. 2003 prices ? sure. 2002 prices ? maybe...but only not for long.

[sfvrealestate]

I second Milla, Puckhead and Shockg. Tealeaf and you others, if it makes more sense for you to rent, please continue to do so.

[E]

Oh Lord.

Another V shaped bottom caller.

350k?

Go buy a house in Highland Park. Just remember...you will NEVER get a house as nice as Millas.

NEVER

[puckhead]

Ha Ha Tarbubble

Same person, just bad typing.

[HulaGirl]

Austin, Texas comes in at 15. But property tax is 2.5 percent and can be raised ad hoc.

Home owner's and auto insurance vary from zip code to zip code. Add the price of gas and commuting costs to the "buy" places and let me know how "good" the deal looks.

Unless the NY writer factors all these variables into his formula, it's just more fortune-telling and masturbatory prognosticating.

[tarbubble]

it may be a frenzy. it's hard to say how many of us (the patient and ready) there really are vs. how many foreclosures will still hit the market over the next few years. plus we have to factor in credit scores, down payment requirements, where the funding will come from, interest rates at the time the prices hit our magic level... still lots of variables. i don't believe there will be a rapid spike in pricing once the magic point is hit, but unlike many commenters here i'm willing to admit i can't see the future and may be wrong. all i know is that taking on the monthly payments for a $400k mortgage is still more than i'm comfortable shelling out each month. i'm happy to continue putting $ in the bank every month.

[Wilson]

Richard Venti--Have you studied recessions? Recessions cause major job losses--especially amongst the middle class, whose relatively high-paying jobs can be eliminated quite seamlessly. Many of your sideline buddies won't have jobs and either won't be able to buy or will buy and then be in trouble of losing their homes.

During the last recession at my company, I remember nearly every Harvard and Stanford MBA being trotted to a room and layed off at the first hint of recession.

Having a number of friends at law firms and financial firms, I know there is a great deal of fear out there and a lot of belt-tightening. Again, it's a combination of factors that will devastate prices...

We are in the top of the first inning of this thing.

[tealeaf]

sfvre: sorry to hear you aren't taking the challenge.

Unfortunately, I am just not surprised.

A home, not an investment: At what price?

You, puckhead, shockg and the other have not presented objective, compelling rationale that a) supports the insane premium of ownership in our bubble market or b) that this bubble is done deflating.

We have presented countless references that support the very opposite: unless you are getting a place for a reasonable premium to renting, buying a home today near a So Cal job center means kissing your 20% down payment goodbye.

The challenge stands. And fair is fair: cherry picking is allowed.

[cassiopeia]

I ran the numbers on a house I looked at for rent last week. Nothing fancy, but good bones in the Westside, east of Beverly Glen btw Olympic and Pico. The asking rent was 4,900, dropped to 4,500. The Zestimate is 1.189 million, so the ratio is close to 22.
I have a question. If I multiply the rent times 120, the result is 540K. Does that mean the house should be closer to $540 than 1.2 million?

[Cal]

puckehad,

The numbers still have to work whether a home or an investment. Leonhardt says the numbers basically don't work but he can afford to make the mistake. If you choose to overpay but can service debt and not rely on things like appreciation (and can handle short to mid term appreciation) then you can buy. Many cannot but also don't realize they cannot.

Just saying "You should treat a house like a home not an investment" doesn't mean you throw logic out the window. Realtors want it to mean that, they want you to think about the emotional intangibles. That way the numbers that don't work won't matter and all the statistics pointing downwards are irrelevant. Certainly makes their job easier.

OT:"misogyny appears to be alive and well. doubtless your wives are responsible for such rational purchases as sports cars, personal watercraft, and giant flat-screen TVs."

SFV, you will note this was in no way directed at me.

That is all.

[Uncle Billy Climbs Mont Pelerin]

Hmmm... I've heard tell of some major NAR PR being pushed out lately. Lionheart's article coincides with this push, if it exists. Anybody interesting buying him lunch? I can't believe that a sane person who understands our economy would buy a house right now unless there was some other factor (could be the nesting thing, definitely).

Regardless of his rent vs. buy vs. intangibles, most people are just not interested in stepping onto a down elevator. Especially when there is a down payment involved. Why spend $100k now when its fairly certain that you can wait a year and buy much more or better located house with the same money.

[Milla]

tealeaf: i hope that when you do buy your stucco box, you don't rely on a single ratio or rental listing to push you over the edge, and that many other factors go into your decision. one of the better pieces of advice i received when i thought about purchasing was "buy when you're ready." of course, readiness means different things to different people, so i don't believe there is one magic number that should guide the masses.

i've admitted enough times here that i expect my house to lose value in the short term, but because i actually plan to live in it, i don't obsess over today's prices and clearly wasn't trying to time the bottom when i bought.

i also don't claim to know when the bottom will strike and don't buy into others' claims of clarvoiyance, though i do know one thing for sure: however low prices fall now, they will rise again later.

[Duke of Moral Hazard]

Here is Prof. Richard Green's take on buy/rent:

http://preview.tinyurl.com/6ekmx6

Incidentally, he's coming to L.A. soon to assume the Lusk Chair (Real Estate) at USC. He is coming from GWU where he sat very close to the grown-up table, so one would hope he will bring some valuable knowledge with him. He's a big thinker -- everything from urban living and transportation to the price of rice in china to the question of rent versus buy.

Hey, maybe he can put a little polish on the MBA program there too. (I'm sure some very sharp people have graduated from that program, maybe even some that are good for society as a whole, but my one personal anecdote involves a guy I knew who graduated from that program and about one year later, after working in a finance related field, he could not explain to me how to calculate an irr on his hp12c, or explain discount rates. Then we have our Laura Richardson example as well.)

[tealeaf]

Milla:

thanks for your comments. I have bought and sold 3 primary residence homes as circumstances changed (married, kids, jobs - no speculation shock). We relocated to LA from OC a few months ago (relo'd from the other blog too, Mr. Viles) and are figuring out the area. For our sitch, Burbank looks good - but that may change and so the rental at this stage makes sense.

Of course - one ratio doesn't make or break. I just can't find any compelling evidence to push me off the fence yet. I invite such evidence, thus the challenge. And yes, I miss home ownership. As I said before, I am willing to pay a premium, just not 2x.

[sfvrealestate]

Tealeaf, you mean you were serious? About which challenge? Okay, I'll bite on your ratios challenge: how about 415 N. Brighton, mls #F1768062, for $289,900. One bed, one bath, 748 square feet, but a single family home on a 5640 sf lot nevertheless. AND in a good school district.

Okay, on your compelling reasons to buy a house rather than rent challenge, here's one that might carry some weight (although, if you want to rent, by all means, rent): let's say you have two kids (I think probably most of the posters here are childless). Let's say one kid is a grade schooler and one is a middle-schooler. Let's say one is a boy and one is a girl, so they can't/won't share a bedroom. Plus, you have a cat and a dog. You want your kids to go to public schools, because private schools will cost you about $20,000 per year per kid. But you want those schools to be decent, with APIs of over 700. Here in LA county, your choices of areas with good schools in all three levels (elem, junior, high) are very, very limited. (I only know of three areas: Burbank, So. Pas, and La Canada.) Okay, so you'll rent in those areas. Good luck. Good luck in finding a 1) 3 bedroom, 1.5 bath 2) that will take your pets, and 3) that isn't a hell hole 4) in a school district with 700+ APIs on all three levels. I know you'll think this is far-fetched, but this is the choice that many families are faced with and why many of them opt to buy rather than rent -- because in some of these areas, there's actually a better selection of homes to buy than to rent.

Anyway, this is just one reason that it might be better for certain individuals to purchase. Just sayin'.

[amir]

Cassiopeia,

As I explained in an early comment, different areas have different ratios. The area you described could sustain a 15 ratio. So probably $700-$800 is a fair range for the house.

This does not mean the house can't drop in price to $540. Markets overshoot on the downside as well.

[tealeaf]

sfvre: I'm loving that you're dancing.

It's a solid listing - I did my share of homework on it, and here's what I've got:
With 20% down on $289,900:
- 6.5% interest rate, 30yr fixed = $1466.
- Insurance @ $500/yr
- Tax 1.1% @ $3190/yr
= PITI $1773.

Note I'm not including reserve for repairs, and I assume no HOA or mello roos given the example you provided.

Rental subject #1:
3911 Chandler, Burbank, 1.5 mi from Brighton. 1/1 SFR.
http://losangeles.craigslist.org/sfv/apa/696163177.html
$1375 asking rent (assume full price on both sides)
Add a 10% ownership premium, I'm getting to $1512.
Using a gross rent multiplier of 160 puts the value at $220k.

There are other less expensive apt options, but fair is fair - I found a 1BR SFR. Here are other craigslist: http://tinyurl.com/579nxo
(sift thru the NoHo, VN, and VV listings for the Burbank gold).

sfv, I hope you can appreciate my candor. I'm not stacking the deck. If I am wrong, I will admit it.

On a related note, your example fits me to a T. 2 kids, school starts next year for the elder. But there are a ton of 3-4br SFRs in Burbank - above Glen Oaks, etc., for around $3500. Check craigslist. We're paying same in Encino in a remodeled pool home.

Now for the other challenge: will you accept my sorry a__ as a client when the tide turns? In the mean time, I will enjoy your blog and form-emails!

[puckhead]

sfvrealestate,

You can also add Arcadia, Temple City and La Crescenta to your list of decent places to live with good schools. My wife can recite from memory every API score and demographic for every school in the districts you listed and the above. I hear ya about the ever shrinking pool of good places to live with good schools though. I have 3 kids, private schools K-12 will run me around $500K. $3K/month rent for 20 years will run me $720K. And those estimates are based on todays dollars. Suddenly that $750K 1200 sq ft house in South Paz doesn't look all that bad.

[Cal]

Milla: "i have friends whose rent for an apartment is $100 less than my mortgage, and they live in Palms -- an area comparable to Highland Park. sure, they don't pay maintenance, but they also don't have a yard, a view or a garage of their own. plus, they get no tax breaks."

Are we including your down payment, 50k silent second and the money used to make the place habitable in the equation or does all that stuff not matter either?

[Wilson]

Someone should start a blog called "TrackingMilla.com."

It would be an accurate account of how much Milla loses weekly on her home. This would show:
1) how financially foolish this purchase was;
2) how homes will NEVER in this lifetime reach the nominal price or rent ratios of her purchase.

[sfvrealestate]

Tealeaf, if you're serious, sure.

Puckhead, that's good to know. I didn't originally include La Crescenta because so much of it is actually in Glendale School District. Sorry!

[Milla]

Cal: as i already said, "sure, they don't pay maintenance." and i am including insurance and taxes in my monthly mortgage calculation -- and their rent is still only $100 lower, which isn't doing them any favors in saving for that down payment, which i had already saved for. luckily, rents were cheaper when i was saving.

[Cal]

Milla: So the answer is you aren't including the 50k silent second, down payment or costs to upgrade the house and make it habitable when comparing your living costs to your friends rent.

[Milla]

Cal: i'm not trying to dispute the fact that, in most cases, it's still cheaper to rent than to own. that's pretty self-evident. but i do think with rents rising and home prices falling, things are closer to leveling out.

as you know, the 50K soft (not silent) second came from the city so there's no reason to include it; it's a loan. my own down payment was obviously an expense that i was happy not to waste on flat-screen TVs and flashy cars so i could buy my house.

and my house was fully habitable when i bought it. but since i didn't want to wake up each day to a hot pink bedroom and ugly tile medallion in the living room, i decided to make changes. the only upgrades really required prior to move-in was the tenting for termites and some electrical work, which were relatively inexpensive. i did have to buy appliances (all used), but many rentals nowadays require that you bring your own fridge.

and while i know i won't see all of that money again, i do expect many years of tax time happiness, which i never experienced as a renter.

[Cal]

Milla: as you know, the 50K soft (not silent) second came from the city so there's no reason to include it; it's a loan.

You still have to include it, it's a cost of home ownership. You just got a handout and didn't have to pay for it. But to compare renting vs home ownership, not everyone is going to get a no-interest 50k loan and therefore you have to include it.

[tealeaf]

milla:

As you and sfvre point out, the delta in renting for starter homes is shrinking.

going through this exercise has been interesting from the standpoint of larger homes - there is a massive price jump going from a 1 or 2 bedroom place to a 3 or 4, even in the same area. But the curve in rentals is much more linear. I don't read your blog so I'm not sure if you can relate -- if you saw firsthand, as we are, the delta in a 2000sf place between buying and renting, you would be shocked.

there's a point at which you shut your eyes and sign, and for you, the delta is worth it. The correction hasn't been significant enough for homes that suit my family's needs.

I am still amazed that someone making $210 can barely afford an SFR in Burbank. That means the majority of people who live there can't afford their own stucco box.

[Milla]

Cal: oh, it's a handout that i don't have to pay back? weird, that piece of paper i signed said something about me having to pay it back plus profits from the sale of the house. thanks for clearing that up.

[Cal]

Tell you what Milla. If you promise to pay back everything that loan cost the taxpayers I won't call it a handout. Deal?

Might want to go look at the math in the Richardson thread first.

[Milla]

cal, rest assured that i will honor my obligation with the city and pay them back according to the terms of the contract i signed.

[Long time listener . . .]

SFVRE, you can easily rent a 3 bedroom house in south pasadena for 3500/month. Go to westsiderentals, and look for yourself. In fact, there are some such places in the 2500/month range. Please point to the real estate for sale listings that would have comparable PITI payments, even factoring in some form of ownership premium (a term that has only recently become part of the general real estate lexicon). While I appreciate your candor and comments on this blog, I think your rationale that a family with children would rather buy then rent because of schools is a little off. Its still much cheaper to rent in South Pas than to own. Same can be said for the South Bay, Manhattan Beach has great schools, but is still way too expensive given the relative rents.

[shockg]

"Tell you what Milla. If you promise to pay back everything that loan cost the taxpayers I won't call it a handout. Deal?

Might want to go look at the math in the Richardson thread first.

Posted by: Cal | May 29, 2008 at 01:01 PM "

The attacks continue. Such hatred toward buyers. I guess Cal has the little guys best interests in mind and not his own wallet.

[Milla]

tealeaf: when i moved out of the one-bedroom guesthouse i was renting in west hollywood and into my house, my old landlord raised the rent by $300. i'm sure in another few years when his next tenant moves out, he'll raise it by another $300.

so yes, i'm seeing more alignment in the apartment-starter home sector. i know plenty of folks, beyond the one anecdote i provided, who have two-bedroom apartments all around the city with rents that rival my own mortgage. i know i'm still paying more to own, but i'm also getting much more in both the short- and long-term. so for me, it made sense to buy. i don't know about how things look at the higher end. i'm sure i'll find out when i'm ready to trade up.

[tealeaf]

shockg:

silent on the lansner reference
silent on leading indicators
silent on any objective data refuting anything presented here
silent on the challenge to find any cherry picked properties that remotely touch a reasonable ownership premium to renting

yet the sniping continues.

a trolling permabull, that shockg. at least lefty has a sense of humor.

[Cal]

Shockg:"Such hatred toward buyers."

Hatred? Hardly, I take a side in a debate and defend my positions with facts and numbers. I'm still waiting on you to actually join the debate instead of just trolling. If you think we can have a return to rational lending and keep high prices please feel free to join the debate with some facts.

I was even considering getting Milla a house warming gift. She would have probably gotten it by now but I was busy this last couple of weeks. Plus I didn't get my stimulus check for some darn reason..

Maybe she'll get one, maybe she won't. But if she does, she has to promise to post a picture.

[Milla]

sure, Cal, i'll post a picture of the life-sized poster of yourself you had planned on sending me. i'm sure we all want to know if you are really warren buffett like pete had speculated. and try e-filing your taxes next time. that allows for refunds to be deposited directly into your bank account.

[Long time listener . . .]

Milla,

Look at what you just wrote. Your rent on an apartment in a nice area of town (WeHo) is approaching what your mortgage payment is in a very rough part of town. For apparently comparable digs.

I rest my case.

[Milla]

LTL: i moved from a small one-bedroom guesthouse to a two-bedroom house with a great view on a good-sized lot in the hills. not comparable at all. i was talking about friends i know who rent two-bedroom apts in various parts of the city for rents that come close to my mortgage.

[shockg]

Tealeaf, youre' a creep. I won't waste my time with your worthless comments.

[tealeaf]

Tealeaf, youre' a creep. I won't waste my time with your worthless comments.

Posted by: shockg | May 29, 2008 at 08:10 PM

Great to see you take it to that level, shockg.

Keep on trollin.'

[anon]

Okay, Peter.

This thread may be a little stale, but I'd like to show you a yearly rent to price multiple in bubbly San Diego of...7.8!

3/2 condo: $150K
http://sandiego.craigslist.org/csd/rfs/700486564.html

That place would easily rent for $1600/mo, maybe more.

Nose around rental listings in the area for a 3bd/2ba that takes pets and is in as nice of shape as that new-ish condo to see what rents are.

BTW: Lemon Grove is not "prime", but it's not that bad. And that place is about a two block walk from the light rail stop. Goes to downtown San Diego--work, ballpark, bay or Gaslamp restaurant row--in about 20 minutes. A nice convenience.

[tealeaf]

anon, great find.

dare i say it might be time to buy in that 'hood?