March 21, 2011

Zrent vs. Zbuy

Zillow, the website that brought you the Zestimate, now has a brand-new feature to make fun of.  We’ve all chuckled over how surprisingly off the Zestimate of a home’s value could be.  Well, in the words of Mr. Family Guy, “You think that’s bad?”

Zillow has just introduced the Rent Zestimate.  Yes, now we can compute the Zrent Zratio, using two estimates that may or may not have anything to do with reality!  Let’s try it with a few houses previously featured on Burbed!

image

Here’s Friday’s house, the Tangrams Set with the High-Tech name.  Once more, the Zestimate has no relation to real life, because if it did this place wouldn’t be sitting unclaimed for 113 days at $200K less than Zillow’s amazing valuation model’s prediction.  To compute the Zrent Zratio, divide the Zestimate by the annual Rent Zestimate.  For this house, $762,000 divided by ($3081 * 12) is 20.6, a number that says rent, don’t buy this house.  (A number above 15 says rent, a number below 15 says buy.)

Although I think the answer is really don’t rent or buy this house, so let’s try again with something a little more desirable.  So let’s stop and smell the roses.

image

Well, here’s a Zestimate a little more down to earth, as this Beautiful Specious Home is listed for $239,000.  The Zrent Zratio is $217,500 / (1345 * 12) or 13.5.  Buy!  Buy!  BUY!

And here’s our most recent run-in with MAWBUL CAWLUMS, it’s the Shrek House.

image

Ready?  Oh oh, this place has a Zestimate about 30% of the asking price.  I didn’t say 30% lower, I said it’s 30% of the asking price.  I’m sure the FBs will be happy to set Zillow straight on this.  And the Zrent Zratio is… $1,427,000 / (5587 * 12) = 21.3.  Rent.  Definitely rent.

Okay, now for grins, we’re going to compute the rent ratio using the wishing prices of all three homes, and Zillow’s Rent Zestimate.

  • Poinsettia: $575,000 / (2979 * 12) = 16.1 (weak rent, buy it if you love it)
  • Gibraltar: $217,500 / (1345 * 12) = 14.8 (buy or rent, it’s a wash)
  • Butch: $4,999,000 / (5587 * 12) = 74.6 (rent rent rent rent rent rent are you kidding me?)

So, what do you think of Zillow’s new made up numbers?  Do any of these rents have anything to do with reality?  And if you divide one invented number by another, does the nonsense cancel itself out?

Comments (80) -- Posted by: madhaus @ 5:11 am

80 Responses to “Zrent vs. Zbuy”

  1. Alex Says:

    *YAWN*

  2. madhaus Says:

    Math class is hard.

  3. A. Lewis Says:

    I checked the Zrent estimate on my own place, and while the value was too low, the ‘range’ covered it. As usual, they apply a simple statistical model to everything – in broad swaths they are somewhere near reality, but on any single home…they’re not adding much value. Unless maybe you have a tract of identical homes, none of which have undergone significant remodeling or damage, and all have the same views, parking, school proximity, etc. Then a comp is a comp. How often is that true in the BA?

  4. SEA Says:

    The terminal value is always missing in the simplistic purchase to annual rent ratio.

    That said, how much housing price appreciation would it take to make 2544 Butch Dr a buy?

    From the Zillow image:

    Monthly mortgage payment: $25,626
    Monthly rent Zestimate: $5,587

    That’s a $20,000++ monthly cash flow difference, but if the value of the home were sufficiently appreciating, then it’d still be a better deal to buy–if the difference in cash flow is not a problem.

    Usually people try and make the cash flow argument in the other direction: No matter what the total cost of ownership is, it’s better to find a zero down loan and make monthly mortgage payments that don’t include all the costs ownership.

    Generally, if you know the value of the home is going up at a rate much higher than the interest rate, it’s a good idea to buy. If you know housing prices are going down at high enough losses, it’s a good idea to rent. Then there is the middle ground, where the discussion is much more interesting.

    Of course if the cost of the house is low relative to your total assets, then it won’t be much of an impact to your financial situation, even if the market crashes and the property goes down by nearly 100%. (Assume the house is independent of all other assets, and the house value changes independently of all other assets.)

    What can I say about someone who purchases a home that is a very high percentage of total assets and a high multiple of household income? Yea, this might be good when the market goes up at a high rate, but it can be very devastating when the market goes down, as we have seen.

  5. sfbubblebuyer Says:

    The rents might be closer to real life. At least, they’re unlikely to be off by $100k plus, like zestimates. (Unless you multiply the rent by 360 to get the total spent in 30 years. But math IS hard!)

  6. SEA Says:

    “Picture the Bay Area 25 years from now with 2 million more people and 902,000 more apartments, condos or houses to accommodate them — and most of it built near rail stations, bus lines, walking paths or bike lanes.

    About a third — or 286,000 — of those new homes would be built in Oakland, San Jose and San Francisco as the big cities get bigger.

    Eighteen percent of the housing would be developed in mid-size cities like Concord, Berkeley, Hayward, Santa Clara and Fremont, and in transit-friendly neighborhoods.”

    Source

  7. SEA Says:

    “(Unless you multiply the rent by 360 to get the total spent in 30 years. But math IS hard!)”

    Present value = ?

  8. cardinal2007 Says:

    While generally a rule of thumb like that could work for investment properties I see two reasons that it wouldn’t work for low end condos.

    1. If you make a decent income in CA you will always itemize your federal taxes, so you can get the full deduction on your interest and property taxes if you buy, but if you don’t have such and income you cannot, so the ratio for which is better to rent vs buy is higher for lower incomes. Investors I think would almost always look at a lower buy-to-rent ratio than people looking to buy.

    2. Condos can have high HOA fees, specially in the peninsula, and can be so poorly managed that the owners have high special assessments that have to be paid, both of these would tilt it more toward renting, even if the ratio is 15 or less.

  9. SEA Says:

    #8- I’ve said this here many times: The tax benefits are included in the rent, and in fact, the tax advantages of renting are always better than owning, no matter how high or low the income.

    My simple example is to take two neighbors who are owners, each unit being exactly the same as the other, within statistical significance. Compute the tax advantage for both being owner-occupied, and then compute the tax advantages if each rent to the other. Simply put, the tax advantages of renting are far better.

  10. CB Says:

    The rental estimate for my house is spot on. But I’ve never been able to rationalize the Zestimate. It appears that Zillow weighs heavily on when the home was purchased, bubble years vs non-bubble years, as the two homes sold in 2005-2006 (mine included) are valued ~30% less than the others on a $/sq ft basis.

    I wonder if they account for a higher probability of a distressed sale on homes sold in bubble years?

  11. CB Says:

    SEA #9, I don’t follow. I can think of many situations where the tax advantages of owing result in net income above the net income that would result from renting a similar house.

  12. madhaus Says:

    The Zestimate for my shack has been continuously plunging since September, right in time for Spring Bounce. Say what? Seriously, Zillow thinks my place is now worth not only less than the million our soi-disant Sunnyvale “expert” says it is, but less than $900K as well. I think its value is somewhere between these two extremes. Then again, overall my place is down 18% from its 2008 peak, which sounds about right, maybe even a little low.

    Maybe they were valuing my ‘hood too highly for all of 2010? Double-dipping all the way! Across the graph!

    The Rent Zestimate seems a little low, but not ridiculously low. Then again, the bottom end of the rent range is insanely low: $2300.

    There’s not much I found in a Craigslist search for “Sunnyvale Cupertino schools” but there’s a 300 sf larger house than mine with Stocklmeier Elementary and Fremont High going for $3990. It’s an Ickler. Bwa-ha-ha-ha! The TOP end of the rent range for my house didn’t come near that.

    Meanwhile most Sunnyvale homes with 4 bedrooms are asking over $3000 a month and have been for a long time, and the ones that aren’t are in Santa Clara school district (not even SSD).

    I suspect my house isn’t the only one that’s wildly off. Well, the top end of the rental range is about right.

  13. nomadic Says:

    Spring bounce – you’re funny.

  14. SEA Says:

    #11- Let’s go one situation at a time. Pick the best one that makes your alternative claim.

  15. SEA Says:

    Oh, and I don’t think I made it clear in #9:

    The marginal tax rates are the same.

  16. CB Says:

    SEA, you said “the tax advantages of renting are always better than owning”. I am not sure what perspective or contingencies you are putting on that statement. Perhaps in PA or other overvalued markets this may be true, and perhaps it may be more typical in the Bay Area than I am willing to admit (seeing 3500 rentals selling for 1.5M makes me believe that’s true).

    But in my area, where a 450K home would rent for 2300, there is no tax advantage on a net income basis.

  17. The Gilroy Alex Says:

    OMG the DSH (Demented Smurf House) makes its appearance again. I still haven’t checked to see if it’s visible from one of our front gates. I need to do that. I swear, that house is on drugs.

  18. SEA Says:

    CB- My reasoning is quite simple:

    The deductions on all rentals include all the deductions on any owner-occupied unit, plus many more.

  19. SEA Says:

    Oh, and I guess I did say ‘tax advantages’ not ‘tax deductions,’ which was more what I meant.

    The case that the tax advantages of ownership are truly an advantage, all other things being equal, is that capital gain exclusion.

    On a rental there is depreciation, which reduces the book value. An owner-occupant does not get to reduce the book value (excluding those rare unusual cases, such as a casualty loss). But there is capital gains on the sale of a rental, but, within limits, not on the sale of an owner-occupied unit. This is not going to be easy to sort out, since one might want the tax benefit today, in the form of depreciation, yet another might want the tax free income later. I suppose there is a case to be made here.

  20. davious Says:

    The 200 poinsettia house was listed at 575k and actually sold for 707k; fairly close to the zillow estimate. As someone who has spent the last year looking at around 200 houses I can tell you the market between 800k and 1100k is red hot. If it is a compelling property it will sell in a few days; if not – it will sit. Most everything out there right now is crap. Lots of owners waiting for a sunny day to list the good stuff. Townhouse/condo market is dead, and above 1.1… good luck. I rented my old house… every single applicant was making over $200k in Sunnyvale. That’s what it takes to be a renter now. All nervous about buying, or couldn’t afford it (had no savings). I was blown away. I had no idea there was that much money there. IMO there is way too much doom and gloom…. justifiable in most of the country, but not in the bay area.

  21. nomadic Says:

    davious – that $707k price you’re looking at was the PRIOR sale in 2009. It was available to you just last week for the low, low price of $575,000! (It’s pending now.)

    Uh oh, now you’re priced out forever…

  22. madhaus Says:

    Wow, #20 must be living in SV Shopper’s house too! That place is crowded. I am going to have to call Sunnyvale code enforcement because I suspect they’re packing them in, probably sending all their brats to our schools my parcel taxes are funding. Wonder who else is living there? A few illegal aliens direct from their shipping containers?

  23. madhaus Says:

    Oh wow, Sunnyvale is red, red, red, red hot!

    With a Market Action Index as of March 20 2011 at 18.73, SUNNYVALE is currently a buyer’s market

    Also look at the 7-day demand, it fell off the cliff a month ago.

    Snicker.

  24. bob Says:

    Given I live in the East Bay but I’m paying a little more than 1/3rd the “calculated” rental comparison of the Poinsettia house above. $3,000 a month for rent? Cmon… Might as well buy at that point.

    As far as buying houses for getting some sort of tax deduction, That of course ignores the fact that unlike renters, you’re going to not only going to have home repairs, but property taxes as well. The only advantage is that you get to deduct your mortgage interest. Big whoopty-doo. In other parts of the country where rent is either the same or more than a typical mortgage perhaps doing so would make more sense. In a metro like SF where rent is usually considerably less than buying I don’t see any advantage.

  25. Real Estater Says:

    >>$3,000 a month for rent? Cmon… Might as well buy at that point.

    That’s what it takes to rent a very basic house right now. If you bought a few years ago, your mortgage payment is only a little higher than renting now. Renters are getting squeezed by low inventory as well. When a house comes up for rent, there are tons of applicants. Try finding any 3br Palo Alto house for rent on Craigslist right now. You won’t find any. Actually, make that 2 or 3 bedrooms.

  26. PerfectAngel Says:

    Try finding any 3br Palo Alto house for rent on Craigslist right now. You won’t find any.
    —-

    Craiglist found at least 16 (excluding 4BR+). Actually in past I never saw so many SFH rentals in Palo Alto.

  27. PerfectAngel Says:

    Renters are getting squeezed by low inventory as well.
    —-

    Nothing to worry, unless it is reflected in rental price. And rental price is going nowhere, unless of course it is Tracy.

  28. SEA Says:

    “When a house comes up for rent, there are tons of applicants.”

    Why are so many people looking to rent?

    “If you bought a few years ago, your mortgage payment is only a little higher than renting now.”

    We know that you have suggested that mortgage payments went down over the years, so rents must have gone down much faster, since one of the reasons for buying was the mortgage payment was less than the equivalent rent.

    But with all those people standing in line to rent, why aren’t rents going up?

  29. madhaus Says:

    #28: But with all those people standing in line to rent, why aren’t rents going up?

    Too many floplords, not enough homeless flippers.

  30. PerfectAngel Says:

    It’s despicable that those renters with $200K income are applying for homes with $3000 rent. They should have volunteered to pay $6000 per month.

  31. madhaus Says:

    #30, it is morally wrong to allow a sucker to keep his money. — W.C. Fields

  32. Real Estater Says:

    Pralay,

    >>Craiglist found at least 16 (excluding 4BR+). Actually in past I never saw so many SFH rentals in Palo Alto.

    You should change your name to PerfectIdiot. You obviously can’t tell the difference between a SFH and a condo.

  33. madhaus Says:

    #32, here’s what I found with neighborhood set to Palo Alto, checking 3 BR, and searching for “house”

    Mar 21 – $5200 / 4br – Beautiful furnished house – Available 08/01/2011-07/01/2012 – (palo alto)

    Mar 21 – $3700 / 4br – 4 bed/2 bath Spacious House – (palo alto) img

    Mar 21 – $5850 / 4br – charming 2 story house in Palo Alto – (palo alto) pic

    Mar 20 – $2850 / 3br – $2850 / 3br / 2Ba- House For Rent Top Schools – (palo alto)

    Mar 18 – $3200 / 3br – 3BR/2BA Eichler (Gunn HS) – (palo alto) pic

    Mar 18 – $4500 / 4br – Mid town cul-de-sac with study – (palo alto)

    Mar 18 – $3850 / 4br – Home in exclusive Crescent Park on quarter acre fruit garden – (palo alto) pic

    Mar 18 – $5850 / 4br – custom-build beautiful house in midtown Palo Alto – (palo alto) pic

    Mar 16 – $2950 / 4br – 2 Bth ***Spacious Eichler Home – Gardener**** – (palo alto) img

    Obviously you’re doing it wrong.

  34. Real Estater Says:

    Pre-emptive overbidding is now very common in Palo Alto, where buyers offer way over asking to close the deal before the first open house. Here are some examples:

    http://www.mlslistings.com/1321-BYRON-ST-Palo-Alto-CA~i19$1019524$RES

    http://www.mlslistings.com/3042-WAVERLEY-ST-Palo-Alto-CA~i19$1019070$RES

    http://www.zillow.com/homedetails/975-Stanley-Way-Palo-Alto-CA-94303/19468822_zpid/#{scid=hdp-site-map-bubble-address}

  35. Real Estater Says:

    #33,

    I wasn’t talking about 4 bedrooms.

    In any case, look at those prices. Is it cheap to rent these days?

  36. SEA Says:

    What’s the purchase price to rent ratios?

  37. Real Estater Says:

    #36. Purchase price doesn’t matter. Appreciation will take care of it.

  38. SEA Says:

    With all that appreciation, does the purchase price to rent ratio keep going up?

  39. Real Estater Says:

    You can buy just about any house on the peninsula and make money. It’s simple math: Typical house on the peninsula sells for between $600 to $1000 per sf. Construction cost is around $200 to $300. You can expand any house and make money due to the above cost difference. It costs the same to build in Palo Alto as in Sunnyvale. That’s why people would rather buy in Palo Alto. The more they improve the house, the more they make.

  40. PerfectAngel Says:

    You obviously can’t tell the difference between a SFH and a condo.
    —-

    Does this one read like condo, Real Fake Estater. In sqft it looks like your own home on Lincoln. Do you live in CONDO?

  41. madhaus Says:

    #39, that house you linked to has “stainless steal appliances.” I am very sure #32 (who can’t tell the difference between a house and a condo) did not steal his appliances. I suspect he paid top dollar for his and then told everyone how much they cost.

  42. PerfectAngel Says:

    Purchase price doesn’t matter. Appreciation will take care of it.
    —-

    Priceless! I thought people stopped talking like that couple of years back.
    Just call Warren Buffett and tell him the secret of investing – “Buy in ANY price in Palo Alto. It WILL appreciate”. :)

  43. SEA Says:

    “It’s simple math: Typical house on the peninsula sells for between $600 to $1000 per sf. Construction cost is around $200 to $300.”

    When I compute profit, I generally start with selling price, and then I subtract purchase price.

    Buying at $1,000 psf, and then selling at $833 psf (both within range) can yield to losses.

    Simple example:

    Buy 1,000 sf at $1,000 psf = $1,000,000 purchase price.

    Add: 200 sf at $200 psf = $40,000 in improvements

    Sell at 1,200 sf at $833 psf = $1,000,000, before selling expenses.

    Try again.

  44. madhaus Says:

    #42, no no no, you’re doing it wrong. Here’s how you do it.

    Buy 1 house in Tracy, for $225,000 put 50% down. Rent it for $1100 a month. Now you are cash-flow positive from day one.

    Repeat until you run out of down payment.

  45. Real Estater Says:

    SEA,

    If you buy at $1000/sf and sell at $833, there must be something wrong with you, because the market simply won’t allow it.

    Besides, what kind of dumb ass would expand by only $200 sf? What are you adding, a toilet?

  46. SEA Says:

    With all that housing price appreciation in Tracy, can one ever run out of down payment?

  47. Real Estater Says:

    Pralay,

    You are making the wrong comment at the wrong time. Go to some Open Houses in Palo Alto. The market is raging right now. Coincidentally, it happens every time after I buy.

  48. PerfectAngel Says:

    that house you linked to has “stainless steal appliances.”
    —-

    I forgot to mention another thing. With 1 CAR GARAGE, it just looks like the house on Lincoln.

  49. SEA Says:

    “Besides, what kind of dumb ass would expand by only $200 sf? What are you adding, a toilet? ”

    Oh, yea, instead of minimizing the loss, let’s add even more. I never considered maximizing losses.

    Back to the original claim: “You can buy just about any house on the peninsula and make money.”

    Isn’t there a nice counter example? Oh, that’s right, we can exclude any single house…

  50. PerfectAngel Says:

    The more they improve the house, the more they make.
    —-

    Should using Drano be considered “improvement”?

  51. PerfectAngel Says:

    Buy 1 house in Tracy, for $225,000 put 50% down. Rent it for $1100 a month. Now you are cash-flow positive from day one.
    —-

    Too bad! If you paid 100% as down, you would be cash-flow positive without renting your house. Nobody rents in Tracy anyway.

  52. SEA Says:

    That’s right after my observation:

    “Oh, I understand appreciation so much better now.

    You buy a home for $1M, put another $500k in, and if it sells for $1.4M, that’s $400k in appreciation.

    It’s a quick and easy 40%!

    Thank you.”

  53. Real Estater Says:

    >>I forgot to mention another thing. With 1 CAR GARAGE, it just looks like the house on Lincoln.

    On the wrong side of Middlefield, where our professional renter would never rent! He can’t tell the difference between condo and SFH, but he sure knows his Middlefield, his Lincoln, and his Alma.

  54. Real Estater Says:

    SEA,

    Are you really that stupid?

    Let’s say a house costs $1M. You add 800 sf to it.
    A fair price to pay for 94301 is $1000/sf. That means your house is now worth $800K more than before; however, you only spent 200*800 = $160K on the addition. Can you do the math now?

  55. SEA Says:

    Anytime you sell a product for more than cost, that’s called profit. Basically you claim that no matter what is added for $200-300 psf, you can sell it for two to five times that amount.

    While channel-surfing the other night, to the annoyance of my otherwise very patient wife, I came across a new television series on the Discovery Channel entitled ‘Flip That House,'” economist David Stockton said, prompting a roomful of laughter according to the transcript. “As far as I could tell, the gist of the show was that with some spackling, a few strategically placed azaleas and access to a bank, you too could tap into the great real-estate wealth machine. It was enough to put even the most ardent believer in market efficiency into existential crisis. [Laughter]“

  56. Real Estater Says:

    Pralay,

    Do you know your Kiely, Woodhams, and Benton?

  57. Real Estater Says:

    SEA,

    Are you just in denial or simply can’t do math? This is very easy to figure out. There’s a reason so many people are dying to get in. When you buy a house, you are really buying an opportunity to make money.

  58. SEA Says:

    There’s also a reason so many people are dying trying to get out.

  59. PerfectAngel Says:

    Do you know your Kiely, Woodhams, and Benton?
    —–

    Kiely or Kelly?

  60. PerfectAngel Says:

    When you buy a house, you are really buying an opportunity to make money.
    —-

    Realtor working hard!

  61. Real Estater Says:

    Pralay,

    Lincoln Ave. or Lincoln Street?

  62. Real Estater Says:

    SEA,

    >>There’s also a reason so many people are dying trying to get out.

    Does overbidding happen when more people are trying to get in or get out?

    Another very simple question requiring basic logic and elementary school level maturity.

  63. Real Estater Says:

    This is a day when logic triumphs over stupidity. SEA and Pralay are thinking real hard and they can’t come up with a reasonable response.

  64. madhaus Says:

    #62, I think they got bored and are watching “Flip this house.”

  65. PerfectAngel Says:

    This is a day when logic triumphs over stupidity.
    —–

    But the problem is that logic and Real Estater do not go together. It’s oxymoron.

  66. Kumar Says:

    This is my experience:
    – Rent prices are high
    – It costs less to build or remodel than to buy the finished product
    – Market is hot hot hot

  67. Kumar Says:

    PerfectAngel,

    You are so perfect, uh? Do you think it’s cheaper to cook dinner yourself or to have someone do it for you? Housing is no different.

  68. anon Says:

    If the market is hot, Kumar, then one would be wise not to buy.

  69. Kumar Says:

    I think folks are squeezed. Buying is quite expensive, but so is renting. If both options are getting more expensive, buying would be better.

  70. * Says:

    is kumar RE’s new alter ego?

  71. PerfectAngel Says:

    is kumar RE’s new alter ego?
    —-

    Anyone has doubt?

  72. SEA Says:

    “PerfectAngel, You are so perfect, uh? Do you think it’s cheaper to cook dinner yourself or to have someone do it for you? Housing is no different.”

    I don’t know about PerfectAngel, but if his time is worth something, it has to be cheaper to have someone else cook for him.

  73. Jane W Says:

    Too many people in the Bay Area. Not enough affordable housing. Prices are going higher no doubt. Just my 2 cents.

  74. anon Says:

    Too many people in the Bay area. Not enough affordable housing. People are leaving for greener pastures no doubt. Just my 2 cents.

  75. PerfectAngel Says:

    Jane Westater is worried about her his home value no doubt. Just my 2 cents.

  76. Real Estater Says:

    LOL. Anybody who doesn’t agree with Pralay must be RE’s alter ego. No matter chat volume has been going down here.

  77. anon Says:

    LOL. Anybody who writes with real estater’s style and is clearly bullish for no reason must be RE’s alter ego. No matter grammar correctness of other postings going down here.

  78. madhaus Says:

    No matter chat volume has been going down here.

    said comment #76. Yes, definitely going down from previous Monday article with 34 comments.

  79. SEA Says:

    “Any kid can chatter – few can inform” -Who

  80. Alissa Says:

    A colleague referred me to your website. Thank you
    for the details.

    Is your colleague also in the exciting spam industry? Hope he, she or it warned you that URLs don’t usually survive the trip from Australia. –ed.


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