‘Rents Are Still A Bargain’
Some rent or buy articles. “According to survey data released Thursday, the valley remained a rental bargain compared with Riverside County, Southern California and the state as a whole in the first quarter of 2006. There’s always somebody else getting more for even less around the desert. ‘I have a friend who’s renting a four-bedroom, two-bath house near Twentynine Palms for around $600 a month,’ said Alex Bransdorf.”
“Riverside County’s average rent in the first quarter was $1,084 (up 6.7 percent from a year ago), the Southland averaged $1,355 (up 5.9 percent), and the state average was $1,288 (up 5.2 percent). Various research organizations report that home prices in the valley have recently risen at an annual rate of 19.6 percent.”
“‘I have had people say that they’re looking for homes, but then they come back and tell me, ‘My God, Todd, my house payment’s going to be this much money, I can’t afford that.’ So they’re finding out that maybe they’re just going to sit tight,’ said apartment complex owner Todd Wolfe.”
“Right now, the highest rent rates in the state are in Los Angeles, where the the average price is $1,485 a month. In Visalia, it’s $758, Fresno $747 and Merced $702. Local realtors say they’re finding some people who are selling their homes and moving into apartments temporarily, while the real estate market levels off.”
“One builder, who is building a complex off Shaw and 41, says construction is not even done and the half of the apartments are already leased.”
“Question: We are moving temporarily from the San Francisco Bay area to Europe. The market value of our house stands at $2.6 million, and we still have a $700,000 mortgage on it. We found pre-qualified renters who have agreed to commit to a two-year rental agreement at $9,000 a month, netting us a profit of approximately $3,100 after we deduct our mortgage, insurance, taxes and maintenance.”
“So if we rent out the house, it would be cash flow positive, although at a minimal level. But we are concerned that since we’ll be living overseas for at least three years, we may lose the $500,000 capital gains tax exclusion. Should we rent out the property, or invest the sales proceeds in the stock market?”
“Answer: What is more desirable in this day and age than positive cash flow in a softening housing market. But even though you’ve managed to find pre-qualified renters, you are wise to think twice about whether renting it out. You’re denying yourself immediate access to all of that money you’ve accumulated, which you could use to rent or buy a palais on the Champs-Elysee, as well as invest in stocks, bonds or other investments. You also take on the responsibility of long-distance landlording, or paying a property manager up to 20% of your monthly rental income.”
“So what to do? One simple way is to figure out the rate of return, also known as the capitalization rate, for your property…This gives you an investment yield, in this case, 1.4%. When this number is less than what you could receive on 10-year Treasury notes (currently hovering around 5%), you’re better off selling the property, at least financially.”
Rents are more a bargain now than they were last year, as an inventory crash is underway in pretty much all markets formerly known as frothy, and even California’s top industry economist Leslie Appleton-Young has covered her behind by suggesting that price decreases are likely to soon follow an inventory correction.
“Answer: What is more desirable in this day and age than positive cash flow in a softening housing market.”
How about positive cash flow and rising home values in a strengthening housing market?
Rents in New York City have been climbing for a while now. Not enough to be more than a mortgage plus expenses on a similar unit, but they have been climbing. Still home inventory is skyrocketing.
-x
BubbleTrack.blogspot.com
It is so simple. I have used the same RE agent for 20 years. I pay her 2/3rds month rent for a rental referal. I pay her several percent for a sale. Who benefits? Easy. Who brings a check to the table? They are losing.
Rents are not profitable compared to sales. In a few years as this shifts expect RAs (Rental Agents) to reign.
Robert, the whole rent vs. buy thing is irrelevant. I’ve copied this post, from a local blog, that proves it. So there.
“The whole rent/buy correlation is a crazy one. I think we like to think of them as related because on the surface they appear to provide the same “good/service/product”. But do they really? In today’s reality, a house or apartment bought is just as much an investment as it is a place to get shelter. Additionally, ones intentions when buying a house or apartment are usually long term … or at least “well I’ve locked in my future housing expenses and come hell or high water I have a place to stay at a pre-determined monthly price. (And yes I know this “bends” for those who have bought with variable rates.) An apartment rented is a whole different animal. It is by its very nature a temporary accomodation (except of course for those folks that have figured out that rental control can vest them with the benefits of ownership minus the responsiblities of ownership … But let’s not get started on this topic …) As such, what one pays for a house or apartment when buying is partially for the “shelter” element, partially for the “investment” element and partially for the “I’ve got a place to live no matter what happens” element (i.e., I’ve locked in what I can expect to pay out irrespective of whatever inflation or other unexpected events might occur.) This IS not directly relateable to renting a house or apartment where all you get is the right to reside at a place for the next month. You don’t even get the right to decide if you want to blow out the dining room/living room wall to make a great room in its place. It’s a very very different animal … And those economists or others using the correlation in prices between the two to determine if housing prices are correct are basing all their studies on a very flawed “correlation”. And actually, if their were a correlation between the two, I would argue it was an inverse correlation. I.e., The reason rents are so abnormally low now is that the market players know collectively that higher and higher prices are yet to come and as such renting a house or apartment becomes a less and less desirable substitute for buying a house or condo where one can “lock in” their future housing costs AND get “investment” benefits vs. throwing one’s cash down the toilet month after month. I still don’t think the correlation between renting and buying is a strong one, but if it does exist, it is an inverse one with low rents being the result of people shifting their dollars to purchase instead on the expectation of even higher purchase prices down the road. This is actually validated by the fact that rental rates were actually higher in the late 90s and only started nose-diving when house prices started to rise. Just my two cents …
Lance”
The reason rents are so abnormally low now is that the market players know collectively that higher and higher prices are yet to come.
While I totally agree with the desire to lock in a house payment (hence my dismissal of anything other than a 15 or 30yr fixed), I can’t believe that rents are “abnormally low” in SoCal. It took forever to find a reasonably acceptable SFH to rent, and I’m already paying 28% gross income. Over 2 grand for rent for an old tract home is not a great deal IMO, so I prefer to believe the purchase costs are abnormally high.
I just posted yesterday regarding this. In Los Angeles(good areas) and or Ventura (Conejo Valley) rents are not cheap . I am having a hard time finding a condo ,townhouse,small old house 1300-2000 square feet ,rent up to $2500. There is very little available.I can not move out of area and don’t want an apartment and I am extremely stressed looking really hard and not finding anything. My landlord is selling the house I’m renting and I must be out by July 1st. Hopefully I will find something soon but…..I strongly agree with East Beach. I think people here might be fooling themselves that rents are cheap and easy to find. Yes, they are cheaper than these outragous home prices with fixed mortgages but the rents are not cheap here.
Hey susan,
Yeah I turned down an otherwise decent offer in that area when I was unable find a decent rental. I was surprised too, as I’m up in SB which has its own problems with crappy overpriced places to rent.
Best of luck.
East Beach - the piece speaks to Washington, DC, not california - I posted it in jest, anyway. The rent vs. buy thing is relative, in any case. I’m not saying rent in LA is cheap, in an absolute sense, but I suspect it is “cheap” relative to the cost of buying. In a normal, balanced real estate market those costs should be reasonably close.
>I’m not saying rent in LA is cheap, in an absolute sense,
>but I suspect it is “cheap” relative to the cost of buying.
50% of buying, and getting lower (with rising monthly payments ala rising interest rates).
All the same, I am still amazed that ‘luxury’ apartments in Old Pasadena can go for $3100 a month.
Basically the article says that a housing investment is worth the price at any cost.
Gotta love dumb money, it’s what keeps me in business.
Exactly. There is no quantitative analysis on what is a good/bad decision. Like, owning anything is intristically better than leasing a marble and gold palace for a buck a month. Reduction to absurd, but that’s what the article says.
The argument is flawed on many levels.
1. Locking in the housing costs - wrong for countless reasons - ARMs, taxes, maintenance, incurred costs like extended driving to-from work. These are all subject to time.
2. Using “today’s reality” to infer about the future. If you throw a ball in the air, in “today’s reality” it goes up, but unless it was thrown with the escape velocity, it will come down. Future is uncertain. The only certain thing is that houses, whether rented or owned provide the same service - living in them. By definition.
3. The implication that renting is always a temporary solution that must give way to owning. Not valid, since the decision to own is not intristic. The author tries to use a trick to present the concept of renting and owning as unrelated, and not substitutable, but it is simply not true, and easily demonstrated. Suppose I can rent a Playboy mansion for $1K a month, versus buy a bamboo shack for $10 million. Everywhere mansions cost $1K to rent, and shacks cost $10 million to own. As is obvious, buying a shack is not desirable. If we were to follow the authors argument, we would still insist on buying the shack, and miss all the tanned chicks in bikinis. Reduction to absurd, therefore the argument is false.
$9K a month!!! I don’t care if I did have that kind of money, I still wouldn’t spend $9K a month.
Dude, it may have granite countertops so…
Suzanne researched this.
Actually, monthly PITI payment for that $2.6M home is more than $20K with a 30-year fixed rate mortgage, so it’s still a bargain to rent than own.
it’s probably a corporate account. like here in san diego, soem corporations lease a house (2-4 years) houses that are empty half of the time. they probably figured out its cheaper (and more impressive) for visiting executives to stay in a fully furnished house than stay in an expensive hotel room.
You should come back to that statment when you DO have that kind of money.
Why would you want to live with riff-raff if you were that rich?
The WSJ piece should be more widely read. If even a cashflow positve rent house should be sold, why would anyone want to take on a 100% financed property? If these folks did rent it, they would be speculating, IMO.
Speculating isn’t a dirty word in and of itself. If they have a good mortgage, don’t want to pay transaction costs (remember… the People’s Republic of California will take 10% of the capital gain no matter what the Fed does), and might return then renting it out is fairly smart even if things go down.
Besides, they just might want to leave it to their kids.
Selling your house to rent because you believe prices will drop is speculative behavior… which I happen to believe is smart in that case.
DUDE it’s a 1.9% cap rate. Do you know what that means? It’s like going to the bank and getting 1.9% and them defacating on your face for it.
The realtor takes 6% when you want to sell and the government wants another 10% after that. Actually lesse, realtors take 2.6M * 6% = $156K. Assume they paid $1M for the place California is going to want 10% * 1.6M = another $160K for let’s call it $320K total. And then later you have to buy another house with a new set of unknown problems. Don’t forget your property taxes will rise if you purchase again later on too.
Will the price “fall” by more than 15%? Probably. 25%? I’d still say yes but I couldn’t be quite as sure.
Unfortunately this is a damned if you do damned if you don’t situation.
The banks aren’t the only one that can defecate.
I don’t see how any an analysis can over look that they’ve got $1.9m locked up in the house. They may be “cash flow positive” vis a vis interest, tax, insurance and maintenance, but what about the lost opportunity cost of having that cash tied up?
A cap rate of only 1.9% makes this a no brainer. Sell and put the money in MM or CDs and get 4.5%. The $500K exemption is a nice kicker too.
OT, but someone mentioned in earlier comments that people were pawning things to buy gas in, I think, Boston. Take a look at this: http://news.google.com/news?hl=en&ned=&q=pawn+gas
Reports are pouring in from everywhere. Gas prices have finally reached the puke point. The recession will begin around December because we are still coasting on HELOC money. We will still be in recession when George Bush leaves office. This is the big one.
Puke point? I believe we will see $100/bbl ($4/gal) before the year is out. No matter how much oil (if any) the U.S. manages to conserve, China and India’s booming economies will suck in that amount and more. BTW, Saudi Arabia recently announced that their crude output is declining at 2%/yr as their major fields have begun to decline. There is virtually no spare production capacity anyplace on Earth. Sell your big SUV, pickup or guzzler while you still can.
When did Saudi arabia announce that? I thought they said they had plenty of oil. Just have to invest in more pumping.
Sell your big SUV, pickup or guzzler while you still can.
Better yet, live closer to work and keep driving your existing car.
I’m amazed at the smug types (not necessarily you) who act like their Toyota Prius grows up naturally from a sunflower field or something. It’s a large industrial product that needs lots of energy in its making, and the extra mpg you lose maaay just be less of an impact on the earth if you keep driving your existing car.
There are a variety of reasons why auto fuel is in short supply: conversion from oxygenation by MTBE to ethanol, lower-sulfur diesel requirements, high crude prices, and just bad planning. Check out theoildrum.com for better discussions of the issue.
People aren’t spending their HELOC money on extra gas… yet.
The Sierra Club and the Environmental Defense Terrorists have blocked building new refinerys as well as drilling off our coasts and in ANWAR. My bobsy twin senators (Boxer and Feinstein) wont even allow us to shoot the seals as they eat OUR salmon off our fising lines. But why worry ,the golf is good and trout fising season starts on April 29.
see you at crowley green banks 5am pismo ill share my chivas with you or do you drink patron at 5 am.
You should read the WSJ. Exxon made close to $30 Billion last year in profit! But they cant build a refinery for 3B or worst case 5B anywhere, including Puerto Rico and and the other islands? Duh, the reason is the don’t want the price to drop with higher supply. Please find where Exxon or any company has rejected building permits for a refinery? Blaming greens for all your problems is so convenient for neocons, et. al.
I am glad for this bubble, i have decided to be itinerant squatter forever and it has freed me to adopt a more bohemian lifestyle which includes working less, drinking more cheap wine, parking motorcycles in the yard and questioning the value of monogamy. yessss…
Hey, that’s my idea too. I’ve spent two years bumming around the tropics, Philippines especially, which has made me no *more* screwed than I would have been if I went “nose to the grindstone” and bought some crappy McMansion for $780K.
Seems to me that the price of admittance to the “American Dream” is far too high right now.
I’ll wait for a year for this bubble to burst, and if it hasn’t then, buy a home in the tropics and that will be that. I figure that I win either way.
Here’s another article with a little more information on rents and increases from the San Joaquin Valley.
http://tinyurl.com/ztlhd
“Were it not for the everyday joys of being a landlord, owners of apartment complexes in the Central Valley might find it almost as lucrative to put their money in a passbook savings account.”
“A new study by RealFacts, a Novato-based apartment investment research company, shows that average Central Valley apartment rental rates are $1.06 per square foot currently, up five cents from the average of 2003.”
(Do I detect a little sarcasm here?)
“Over the past four years, the Central Valley’s average asking rent has gone up 8 percent to $886. And while that rate of increase may seem paltry compared to other investments, the RealFacts figures show that there has never been a year-to-year decline in average rents since 1998.”
(And before that?)
” The highest average monthly rent is $1,233 in the first quarter of 2006 in Davis. The lowest average is $665 in West Sacramento, according to RealFacts.
By contrast, Los Angeles apartment renters are paying an average of $1,484 a month, according RealFacts.
The largest year-over-year rent increase, by percentage, is in Bakersfield and Modesto, both up 5.8 percent. Bakersfield’s average is now $818 a month while Modesto’s is $801.”
The article also goes on to talk about a perfect balance in rental occupancy rates. We’ll see how perfectly balanced things are as the housing inventory there continues to pile up.
More articles on Sacramento & Stockton rents:
Sacramento Bee
Stockton Record
Sacramento Land(ing) blog
Nice article on interest rates:
http://moneycentral.msn.com/content/P148490.asp#msnhp
That gas story s happening all over, including San Diego…”One very visible sign of the price of gasoline hangs outside a filling station in San Diego. It reads, $3.29 a gallon. A somewhat less visible sign is across the street, inside Harry Jernigan’s pawn shop. ”
By the way, rents here in San Diego are no bargain. I’m looking, again, and I’m seeing some real dumps in Hillcrest, Mission Hills and Normal Heights for more than $2000 a month. Anybody got a decent house for a couple with great credit, no kids or pets, for less than $2200/mo?
Actually I do. It isn’t a completely separate house, but it is a great deal.
We are in North Park.
E-mail me at snazzylad AT gmail.com if you are really interested.
San Diego rents are damn cheap compared to buying.
If you can’t afford the rent in San Diego, you got problems.
Try El Paso.
I just got a letter from my rental complex, my rent increase for next year is $10/month.
This is in Fort Lauderdale. So much for all the rentals are being converted to condos and there are no apartments so the rents will skyrocket story.
In San Francisco, renting is way cheaper than owning. For example, the house which was sold for 1.1M in Dec last year rents for 2900$. Even if you predict that the house will appreciate 3% a year for next 7 years, renting is still much better deal.
Am I wrong?
When I moved to NYC in ‘95 it was cheaper to own than to rent. Now it’s cheaper to rent than to own.
(for $ 1.9 million) …
You’re denying yourself immediate access to all of that money you’ve accumulated, which you could use to rent or buy a palais on the Champs-Elysee, as well as invest in stocks, bonds or other investments.
LOL, wake up! For that amount of money you can probably buy a big garage or a crappy home near the Champs Elysee (and get bankrupt from the first property tax bill). I have seen 1 million dollar apartments in Paris that I would NEVER want to live in.