January 29, 2011

Rent versus Buy, Take 117

Trulia has yet another view of the perpetual Rent versus Buy debate, and they’ve got lots of colored bubbles to help.  Bubbles are great.  They lead to high housing prices and if you own the house, you get to paint it any color you want (as long as you don’t live in a fascist HOA community).

imageThe map at right is from Trulia’s Rent vs Buy tool.  The rent ratio is calculated by comparing the median list price of a 2 bedroom condo or townhouse listed on Trulia to the average monthly rent, for the 50 largest cities in the United States.

You see the problem right away, don’t you?  2 bedroom condo or townhouse.  Excuse me, but who the heck wants to buy a 2 bedroom condo or townhouse?  Maybe some of us have to (if we want to own anything), but for those who can buy a single-family detached house, the ratio we want is the cost versus the rent of a three bedroom, two bath house with a yard.  Those are difficult to find in San Francisco, and almost nonexistent in New York City, but for everywhere else, such a thing is not only possible but highly desired.

So who cares if Trulia says San Jose has a price to rent ratio of 15 (which puts it right over the line for the BUY column)?  That means BUY don’t rent the condo.  The question is whether to buy the house, and they aren’t helping with that decision.

Here are Trulia’s Rent vs Buy numbers for some cities of interest.  Remember, under 15 means buy, over 20 means rent, and in between, it depends.  Maybe that means live somewhere else.

City Avg List Price Avg Rent Price to Rent Ratio
Fresno $90,446 $936 8
Sacramento $152,696 $934 14
Oakland $278,245 $1,625 14
San Jose $298,621 $1,691 15
Los Angeles $491,055 $2,460 17
San Diego $396,409 $1,670 20
San Francisco $774,728 $2,996 22
Portland $307,858 $1,145 22
Seattle $461,330 $1,546 25
New York City $1,383,612 $3,538 33

The biggest surprises on the full list?  Omaha, at 26 and Fort Worth at 30, although Trulia notes the Fort Worth sample size was insufficient. These numbers don’t show whether attached housing is seen as a city norm or not, and if not, at what discount does attached housing go for compared to detached.  I suspect the odd results for Omaha and Fort Worth are for that very reason.  There may be so few attached units that the results are meaningless.

So where does San Jose fit on the scale of urban to suburban?  Given the name of this website, perhaps San Jose house price rent ratios are in the thirties.

Comments (33) -- Posted by: madhaus @ 5:05 am

33 Responses to “Rent versus Buy, Take 117”

  1. SEA Says:

    But renters don’t risk capital in hopes for that automatic 7.2% annual housing price appreciation. We can see how that worked out for so many who have lost 50%, or more, in market value over the last few years. Even if you just locked in that low, low interest rate, the guy who just bought the place next door at half-price is most likely paying much less per month, even if his interest rate is higher.

    I know, I know. The guy who purchased at 50% off only gets 7.2% on half as much. And really, who wants to enjoy a $400,000 place when you could have enjoyed the same place for $800,000. If nothing else, you can always suggest your wife made you do it.

  2. Alex Says:

    Wow. Almost $1700 rent on a $300,000 property in San Jose? (erroneous conclusion, I know)

    Show me how. I would love to be a slumlord.

  3. The Gilroy Alex Says:

    I’ll say again, anyone’s an idiot to buy right now. It basically amounts to taking a pile of your money and putting it out on the driveway and watching as little kids, crows, the wind, etc. make the pile smaller. To buy you have to put a few years’ rent up front, then move into a place that’s constantly depreciating – in the few years’ rent your down payment represents, you”ll lose $50k-$200k. You’ll pay what a lot of people pay in rent just to keep the lights on, the water running, the HVAC going, and the tree roots under the sidewalk out front under control.

  4. madhaus Says:

    I am sure there’s Census data showing types of housing stock by region, city, zip, and etc. The one item that’s hard to find is rental costs for SFHs. Rental rates are always overall. But I think I am on to something here.

  5. nomadic Says:

    Yeah, I don’t doubt that availability of what Trulia was measuring plays a big role. In flyover land, there’s not much point building two bedroom units to sell. Where I come from, you’d be crazy to do it unless you’re in an urban area. It’s kind of like the rarity of a three bedroom apartment in any place except the most urban.

    Reminds me of the “Selling New York” TV show commercial where a realtard is saying an extra bedroom will cost an extra million dollars. In flyover land, it might cost $10k-20k.

  6. Real Estater Says:

    So according to this index: buy Fresno, sell NYC?

    Not! In fact, one should read it the opposite way. The places where the index is highest are where you want to buy, because it means that’s where appreciation exists and persists.

  7. bob Says:

    “I’ll say again, anyone’s an idiot to buy right now. It basically amounts to taking a pile of your money and putting it out on the driveway and watching as little kids, crows, the wind, etc. make the pile smaller.”

    Kind of depends on the buyer and what their motive is. If you’re buying only because you think of a house as an investment then you’re probably buying for the wrong reason anyway.

    If you’re buying because you want a house to live in and do so probably for a long period then it comes down to your financial situation. If you have a substantial down payment, have a stable job, 6 months to a year worth of savings to tie you over in case of a job loss, and can find a home that fits your needs to under 30% of your income then you’d probably be ok. Whether most who buy actually meet that criteria is another matter altogether.

  8. The Gilroy Alex Says:

    Bob I understand your argument and it’s a good one. But there’s been comparison after comparison, showing that if X buys, and Y rents, at the end of 10 years, X has a house to live in and Y has a house to live in and $100k or so. That was before RE was falling. Now it’s falling.

    I would expect a house to not be an investment, but I’d expect it to retain some value. Right now, you can buy a given house, and pay a downpayment, do maintainence, fix stuff, and pay a mortgage thtat’s 2X-3X what renting the same place would cost you. Plus the house is constantly decreasing in value, while your mortgage is still based on the higher value at the sale date. It’s a real loser of a deal.

    In a normal market, you’d buy a house, live in it for 20-40 years, then when it’s time to sell, you’ve kept up with inflation. That’s where your reasoning comes from. It was good sound advice, and out-of-date.

  9. bob Says:

    It depends on where you live. If we’re speaking in broad terms then in many areas of the country its actually cheaper to buy versus rent. For example, its still pretty easy to find a decent house in most major TX and Southeastern cities for $150k or less. Assuming the now almost required 20% down payment, that leaves you with a $650.00 monthly payment. That’s actually cheaper than what a home typically rents for in a city like Austin.

    On the other hand- as we’re all well aware, rent in the Bay Area is typically much cheaper than buying and in some cases there’s a gross disparity. My rent is currently about 1/3rd that of buying the same property. Thus in the Bay Area there’s a strong argument to rent.

  10. * Says:

    the “like or dislike” is most excellent.

    it actually quantifies how retarded RealEstater is.

  11. Reloguy Says:

    I’m with Bob. Between Cragslist and Redfin, it’s fairly easy to get a view into the disparity in the RBA. (3x in my hood)

    However, any of these rent vs buy analysis efforts eventually run directly into a complete lack of public data sets for rentals. The best anyone can do is rental list prices – which rarely reflect reality or only reflect what a landlord hopes to get as they refresh a tenant… not what the 5yr+ tenant is actually paying.

  12. anon Says:

    lol @ real estater being censored.

    Your ratings show how much your input is appreciated, RE.

  13. SEA Says:

    #8- I don’t avoid buying things that go down in value, but the financial impact of such purchases is far less than the impact of being over-leveraged on a house purchase.

    Let’s say one could buy a house for $25,000, and I know a guy who did just that. Sure it needed an additional ~$20,000 in repair, but his income was high enough to support the purchase even if the value goes to zero. Yes, it’s in flyover land, but does it really matter when he’s happy with the area and price is right? He could have rented, and given he expect his market value to go down, the total cost of renting versus buying was quite close, even if the rent seemed higher based wholly on short-term cash flow (i.e. no maintenance expenses, such as a roof). If you can buy cheap enough, does it really matter if it is cheaper to rent?

  14. nomadic Says:

    If you can buy cheap enough, does it really matter if it is cheaper to rent?

    Obviously not. That’s what makes Zuckerberg’s rental so amusing. He could buy several Palo Alto houses for top dollar and give them away when he’s finished and never notice. Just like the $100M or so he donated to NJ schools won’t put a cramp in his lifestyle – even if he lived more extravagantly.

  15. The Gilroy Alex Says:

    Bob you are correct. In a lot of areas, even with a mild loss, the ability to do much more with the property, and the fact that you get at least some of the money back if you sell, have something to leave to the kids, etc outweigh renting. In those areas buying is the way to go.

    Man someone really sank RE’s battleship!

  16. SEA Says:

    “and the fact that you get at least some of the money back if you sell,”

    This ignores the rent alternative.

    Option 1 (buy):
    Take $1M of your cash and buy. Pay the monthly expenses that are normally included in the rent (taxes, for example). Sell a few years later for $500k. Now you’re happy to have $500k.

    Option 2 (rent):
    Take $1M and invest it for a yield of 5%. Rent at the same unit for $50k per year, so after a few years you have $1M left, plus you’ve avoided all the added costs that were included in the rent.

  17. madhaus Says:

    Option #3, buy in P*** A***:

    Take $1M of your cash and borrow another $1M to buy a house in P*** A***. Pay property tax (twice as much as in option 1), maintenance, plus you’re paying 5% interest on the borrowed million (at least it is deductable). After a few years, realize you want to die in your house and take cyanide. Leave your family a house worth $1.8M.

  18. madhaus Says:

    This is a record. I don’t think anyone managed to garner 16 dislikes before. Guess being a Leader isn’t all it’s cracked up to be.

    But that said, the comment itself isn’t out of line with stuff I posted a while ago: buy where it’s expensive because it’s desirable. Don’t buy where it’s cheap because everybody who wants to buy already has. See, for example, the piece on SF being the smartest city.

    Must have been the way he said it.

  19. San Jose Craig Says:

    I actually think RE’s got a point there. The ratio is one thing, but how it’s interpreted is another.

    By the way, for those who like to say I’m RE, it’s not hard to check the IP address.

  20. Jane Says:

    I think RE is right too. It’s risks vs. rewards. Buy a low ratio place, and you may be catching a falling knife. The higher ratio areas are more desirable.

  21. madhaus Says:

    And yet, negative votes for the regular posters only appear when RealEstater (or his sockpuppets) post. Quite a coincidence that there’s another round of them with your arrival, “Craig.” Quite a coincidence.

  22. PerfectAngel Says:

    I thought after coming back from vacation I would see everybody is asking for “help” from RE. Instead he got 16 dislikes. You guys are so mean.

  23. PerfectAngel Says:

    Quite a coincidence that there’s another round of them with your arrival, “Craig.” Quite a coincidence.

    Browsing some of the older threads in last three weeks it looks like regular Sunday ritual after “real” mass.

  24. Jane Says:

    Who are you calling sockpuppet? I don’t know who RE is. As a matter of fact, I’m not even in the Bay Area.

  25. madhaus Says:

    Awfully defensive, aren’t you, “Jane.” I was calling “Craig” a sockpuppet. But it’s quite a coincidence, yes, quote a coincidence that so many of RE’s socks all have email addys that have never ever seen the light of day, or even the light of Gravatar.

    Not too many regulars on this site post this late, “Jane,” but guess who does? Go on, just guess.

    Feet nice and warm?

  26. Jane Says:

    Truly awful. I’m not supposed to defend myself. Worse yet, I’m not allowed to have an opinion. Why even let people to post here?

  27. madhaus Says:

    For someone who doesn’t know who RE is, you sure seem to have learned well from him. You got subject changing and playing the victim down pat.

    Good night, “Jane.” Give my best to “John.” And remind “SV Shopper” that now is the time to buy.

  28. SEA Says:

    The simple way to say, “I agree,” is to click the little green Thumb Up button.

  29. Web Cruiser Says:

    It’s not wise to make your buying decision based on an artificial ratio. I won’t buy Fresno, Sac, or Oakland no matter what the ratio says.

  30. Juno Says:

    Don’t we all wish we can buy a house in SF for the average price of $774,728?

  31. Juno Says:

    Look at the number of pink marks in this thread!

  32. madhaus Says:

    Pink. It’s the new yellow.

  33. Mike Says:

    I think the whole notion of a price to rent ratio is to help simplify all the time-value of money concepts that the average person does not understand.

    Once you find a home you like then you can focus your efforts to see what actual rented homes in the area are going for. You don’t have to go crazy, if you can find a couple of real rent prices nearby for a similar home that is fine.

    So once you do that then divide the yearly rent by the price of the home and hopefully you come to less than 15. You CAN pay more than 15 but you have to understand that now you are paying a premium purely for the right to own the same home that you could rent more cheaply. If it is less than 15 then you are getting the home for less than you’d have to pay for rent.

    Granted this isn’t a rock solid rule. Property taxes factor in as do things like unusually high repair expenses (that you would not have to worry about as a renter) and the future direction of home and rent prices. Ideally if you know how to calculate things like future value using a discount rate (and you are one heck of a forecaster) then you can attempt to really nail down what option will leave you in a better place financially in 20 years (it is counter intuitive to most people that renting can actually leave you better off financially). But since most people are not equipped to do that, the price/rent ratio is a decent approximation that at least gives some sense of whether the price is reasonable in the context of the current market.

    A separate issue I struggle with is whether the prices make sense in the context of the median salary of the area. Where I am looking the price/rent isn’t bad but the average price of homes compared to median gross salary is still about 5 times.

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