San Diego Housing Bubble News and Analysis

Perhaps if someone had data that goes back far enough, a couple of hundred years, it may indicate that purchasing was cheaper? It makes sense. It's more risk to drop big capital on something than to rent it. Before govt interventions and homeownership policies influenced housing, I think most mortgages reguired 50% down, if you could get one. Imagine what the prices would be now, with that kind of loan? And you couldnt deduct mortgage interest payments. But there wasnt always income tax, either. Hey, go back far enough and only royalty was allowed to own real estate.

That is an unfair comparison. Because over the long term, house resale price keeps up with inflation while automobile does not. So if the landlord can make positive cash flow right now, imagine how much money he would make when inflation triple the rent income 30 years from now.

You left the inflation out of the picture and you give yourself a wrong picture of the realistic world.

How many people who bought at "break even" , were not in a better cash flow situation a little bit down the road?(if they didn't take out equity for junk)?

Landlords often turn intitial cash flow by enterprise and sweat as much as anything. Then as carlsbadworker says, it's hold time going to work.

Since you asked there are plenty of cases where renting is cheaper than buying. Here are some examples :

1. Renting a seat on an airplane is much cheaper than buying the aircraft for all my trips.

2. Renting a car when I travel is cheaper than buying one. (Same with the hotel room, etc)

3. My tux for my Junior prom.

4. Rent for the hall where we had our wedding reception was cheaper than buying it.

5. My company's lease (so far after 5 years) is much less expensive than purchasing a similar building.

6. I rented an RV several times. Cheaper than buying.

7. We take a boat to Catalina at least a couple times a year. Renting one is cheaper than buying.

8. U-haul truck.

9. Internet access.

10. Movies on DVD.

No. all of those things are way more expensive to rent than buy for the amt of time you're using it. you're paying extra to rent the car, the plane seat, for all the convenience of pick up and drop off when you don't want it. By the hour, you're probably paying many multiples of its actual value. For instance, if you wore a tux to work every day, it'd be insanely expensive to rent (maybe 20k a year) versus a few hundred to buy. you only need the plane seat, the rv and the tux for a couple hours, or days, so you pay an exorbitant price so you can dump it when you're done...

the difference is you have to live somewhere, I guess, at all times.

Since you asked there are plenty of cases where renting is cheaper than buying. Here are some examples :

10. Movies on DVD.

All of these things (with the exceptions of #8 and #5) are one-time or rare-use cases. A house is used every single day. If you wore your tux every day, would it be cheaper to rent it or buy it? What about your boat to Catalina if you sailed it every day? As for #8, there is no way to "buy" internet access forever, so that comparison doesn't really work. And as for #5, there will be a time (after 10, 15, 20 years) where it would become cheaper to purchase that building than rent.

I'm not sure that purchasing a home should be cheaper than renting the equivalent in a nice place like SD, but I don't think it should be significantly more expensive. I would be willing to pay $100/200 more a month for the privilege of owning an equivalent place to the one I currently rent, but unfortunately that's still not possible.

You're over-analyzing things. It's pretty simple.

Buying is cheaper than renting IF the following apply:

(1) You assume that your exit price will be greater than your entry price (whether that's 5 years or 25 years down the road); and
(2) The after-tax cash outlay related to owning is at or below the cost of renting the same housing; and
(3) Rents generally increase - whether 1%/year or 5%/year - over the time you own the property; and
(4) Transaction costs don't completely offset 1-3 above.

If over the term of your "investment" in the home, prices are generally increasing (however modestly), rents are generally increasing (however modestly), your cash outlay is fixed at or below a similar rental, and transaction costs don't eat up the economics... buying is better than renting from an economic standpoint.

I'm sure I'm missing a few nuances, but that's pretty much it in a nutshell.

The trick is getting a price that engenders a high probability of 1-4 being true over time.

Actually, there was a long debate on this topic a couple of years back on this site and the range of opinions, as I recall, was that a "rental premium" of 10%-50% was justified, depending on the person. All agreed that 200%+ - as we saw during the crazy times - was not.

However, this is an apples-to-bowling balls comparison.

A perfect market involves goods that are interchangeable and not too costly.

Real estate goods are generally rather distinct, immobile, extremely expensive.

Also, usually those with higher risk tolerances are the ones who gain greater reward potential so it should not be a surprise that desire and demand maintain strength. Whether that reward potential is realized is really a product of the skill of the investor.

i dunno. those tract homes look about the same to me.

It's cheaper to lease a car vs buying a car when comparing over a 5 year span if you get a loan to buy the car. Please don't say it's cheaper to buy because you get to use the car well past 5 years. Else, I can say the same for any house on the market today. You can live in the house until you die.

If you don't need a car, it's cheaper to rent a seat on a subway to get to work everyday, instead of buying a subway system.

It's cheaper to rent DVD from Netflix vs buying all the DVD you would be watching.

It's cheaper to rent (subscription service) music (Zune pass, etc) vs buying all the music (iTune, etc).

It's cheaper to rent a space in the server farm vs buying and maintaining your own server farm.

It's cheaper to rent a storage space vs buying and maintaining your own storage space.

For people that like to change out new cars every few years AND don't put a lot of miles on their cars - leasing a car *can* be cheaper than buying. But if you plan to hold on for the long haul - buying makes more sense.

The same can be true in housing. If you think you might be relocating within 5 years, buying may not pencil out because of the costs of transactions. But if you plan to live in the house long term, and pay it off, then it makes sense to buy.

I have friends who live back east in big cities. (Philly and NYC). They do car shares because the cost of owning the car is too high - parking being a big factor. For the 2-3 times a week they need a car, they use the carshare. They all take public transit to work or work from home.

I lived in DC and Chicago for a total of about five years and didn't have a car. I just rented one when I needed one and otherwise used cabs, the El and the Metro. It was great. Can't do that here, however.

3. Rents generally increase....

Now we're talking.

I used to project rental increases in proformas when I was buying...now I'd have to project rent decreases, just destroys feasibility.

What is a fair risk premium to invest in a depreciating rent market?

I agree with Scaredycat: I would need a risk premium (= 10 CAP at least) before I would buy an investment rental, market now offers maybe 5-6 CAP.

As for personal residence, yes it's nice not to have my landlord threaten to list my rental home for sale, I'll probably bottom fish something sooner or later.

Future real estate markets may bear little relation to what we have grown accustomed to so watch out and good luck to all!

Depends on where you live. If you live and work in Downtown you could probably get by with a carshare set up. Same if you live in UTC and work at UCSD - you could take the shuttle bus for the daily commute. I have a friend who lives in Encinitas and commuted to Sorrento valley by coaster, daily.

http://www.zipcar.com/sandiego/find-cars

I will agree that the infrastructure of public transit is much better back east. I lived outside of Philly but was on the R-1/3/5 lines. It was great, I could take the train to downtown or even the airport. (No long term parking on vacations!) I had neighbors that had big families with one car. The parents commuted by train to work. (And location near the train line added value to my resale.)

But, San Diego public transit stinks for the most part.

Hey, you asked for examples. I gave examples.
Some folks are applying extra conditions (such as normalizing by time or use) or trying to make examples that are analogous to a house.

The problem is that there are probably no other analogues. Food, shelter and clothing are very basic essentials. Food and clothing are typically consumed over much shorter time frames than shelter. These facts and the presence of inflation make finding an analogue to rent/purchase of housing very difficult, if not impossible.

I actually live and work downtown. But I still couldn't survive comfortably without my car. Too much to do and too many friends off the public transportation grid. San Diego's a big county.

I'll agree that rents are currently declining (who here didn't expect some degree of declining rents?). But do you really believe that rents are going to be lower in ten years than they are today?

is it possible that rents could be lower in 10 years? it's difficutl for me to imagine it. what are the odds?

And, in fact, such odds are almost exactly as high.

Its all about population. If San Diego experienced something like detroit is experiencing now, where whole sections of the city were abandonded and deteriorating then sure, rent could decline fast and for a long time.

So the question is what do you think population will do. It is a pretty safe bet that housing and rents will move in the same direction as population, even if not in the same maginitude.

#11. Wives

Keep in mind that the biggest demographic in our country is transitioning into net consumers from net producers. This will have a profound effect on our macro economics for the next few decades. Add to this that global wage arbitration is gaining every year. Oh, and we seem to be going through debt deflation at the same time. If ever there was a time for downward pressure on price movement, I think this is it.

As a wise old curmudgeon I know likes to say, "If it flies, floats or fucks... rent it."

First of all, cars don't ALWAYS depreciate. Watch Mecum for a while. Try buying a '68 Camaro.

Enzo has not depreciated in value either.

TG - I scrolled to the bottom of the page before starting this post and saw
"#11. Wives" and thought it has to be TG, scroll back up, sure enough. Funny. You have to talk to Spitzer about that.

Spitzer tried to be an owner and renter at the same time, when he couldn't afford to do both on a government salary. In other words, he made the same mistake many Americans do time and time again....He overleveraged

Not at all. Spitzer was smart. It's the morality squad that got him. Economically, he made the right decision.

I disagree...Because obviously he felt a need to rent after he bought. Unfortunately, he probably overpaid on the first for something he really didn't want and realized this after seeing another market "bubble"......But he was unable unable to "chase the market down" to sell the first.

You are correct peterb.

I studied some history of appraisal. Back before WWII, real estate was depreciated. The comparative sales approach to appraisal did not take hold until prices started consistently increasing.

Before FHA, residential real estate were balloon payment loans.
http://en.wikipedia.org/wiki/Federal_Hou...

I think that in Germany it is cheaper to own. It's perfectly acceptable to rent over there.