Historic House Price vs. Rent Ratio

[Bugs]

One of the big changes in the 1970s was the passing of Proposition 13, which capped the rate at which property taxes could increase (2% per year). In most states, property taxes aren’t capped, which means that if a property value increases by 20% in a year the property tax due also increases by the same amount.

Without Prop 13 just owning a property would get more expensive if the markets increased. For the average $200,000 property in 1997, that property owner’s tax bill would having increased from $2,200/year to $6,600/year by 2006. The other $4,400/year would have debt serviced another $60,000 in mortgage encumbrance. That’s one of the changes in the tax laws.

The demographics factor is a knife that can cut both ways. From the late 1960s on the boomers have been a driving force in our economy. We took consumerism to new heights, and I don’t mean that in a good way.

The natural cycle of a person’s life has them consuming more when they’re in their 20s and 30s and they don’t even think of slowing down until they hit their 40s.

Now the boomers are starting to retire which means they’re also going to be retreating from their consumption. Sure, some won’t be in a financial position to retire, but a lot of them won’t really have the option. What are the job prospects for a 65-year old if they basically get forced out of their job?

San Diego is a nice place to live but it’s only a good place to retire if you have a LOT of money. I think a lot of local boomers are going to end up leaving because they won’t be able to afford to stay. Seeing as how we aren’t building the kinds of businesses that can support all these high dollar houses I question what economic changes can happen that will provide the impetus to sustain any extended pricing runs in the future.

Anyways, we just saw what happened when the investors got out of the RE market – it collapsed due to oversupply. If boomers really do start leaving town in any great numbers in the next five years it’s possible that we may end up with an oversupply situation for quite a while. My former partner once said that SD County has all the “move up” inventory it will need for the next 20 years. If we don’t build another 4,000 SqFt tract homes on 10,000 SqFt subdivision lot in the next 15 years we still won’t run out. What we really need are a lot of 1,200 SqFt starter homes.

[ltokuda]

Bugs, thanks for the explanation. The demographic factors make some sense to me. The passage of Prop 13 makes sense to me for the California market. But the increase in the Gross Rent Multiplier (from 0.4 to 0.5) in the 70’s happened at a national level. I’m not sure if there were any federal tax laws that could account for that. I’ll have to research and think about this more. Thanks again.

[ltokuda]

Bugs, thanks for the explanation. The demographic factors make some sense to me. The passage of Prop 13 makes sense to me for the California market. But the increase in the Gross Rent Multiplier (from 0.4 to 0.5) in the 70’s happened at a national level. I’m not sure if there were any federal tax laws that could account for that. I’ll have to research and think about this more. Thanks again.

[ltokuda]

Bugs, thanks for the explanation. The demographic factors make some sense to me. The passage of Prop 13 makes sense to me for the California market. But the increase in the Gross Rent Multiplier (from 0.4 to 0.5) in the 70’s happened at a national level. I’m not sure if there were any federal tax laws that could account for that. I’ll have to research and think about this more. Thanks again.

[ltokuda]

Bugs, thanks for the explanation. The demographic factors make some sense to me. The passage of Prop 13 makes sense to me for the California market. But the increase in the Gross Rent Multiplier (from 0.4 to 0.5) in the 70’s happened at a national level. I’m not sure if there were any federal tax laws that could account for that. I’ll have to research and think about this more. Thanks again.

[ltokuda]

Bugs, thanks for the explanation. The demographic factors make some sense to me. The passage of Prop 13 makes sense to me for the California market. But the increase in the Gross Rent Multiplier (from 0.4 to 0.5) in the 70’s happened at a national level. I’m not sure if there were any federal tax laws that could account for that. I’ll have to research and think about this more. Thanks again.

[EconProf]

BobS
Inflation rose throughout the 1970s, climaxing at 13.5% in 1980. House prices also peaked in 1980, along with gold. House prices fell somewhat in the early 80s due to ungodly tight money–mortgages were 16%.
The point is, inflation in house values became part of the reward for being a landlord. Cash flow–rent relative to price–became less of a factor. Thus the rent/price ratio changed permanently by ratcheting up. The same pattern repeated itself after 2000.

[EconProf]

BobS
Inflation rose throughout the 1970s, climaxing at 13.5% in 1980. House prices also peaked in 1980, along with gold. House prices fell somewhat in the early 80s due to ungodly tight money–mortgages were 16%.
The point is, inflation in house values became part of the reward for being a landlord. Cash flow–rent relative to price–became less of a factor. Thus the rent/price ratio changed permanently by ratcheting up. The same pattern repeated itself after 2000.

[EconProf]

BobS
Inflation rose throughout the 1970s, climaxing at 13.5% in 1980. House prices also peaked in 1980, along with gold. House prices fell somewhat in the early 80s due to ungodly tight money–mortgages were 16%.
The point is, inflation in house values became part of the reward for being a landlord. Cash flow–rent relative to price–became less of a factor. Thus the rent/price ratio changed permanently by ratcheting up. The same pattern repeated itself after 2000.

[EconProf]

BobS
Inflation rose throughout the 1970s, climaxing at 13.5% in 1980. House prices also peaked in 1980, along with gold. House prices fell somewhat in the early 80s due to ungodly tight money–mortgages were 16%.
The point is, inflation in house values became part of the reward for being a landlord. Cash flow–rent relative to price–became less of a factor. Thus the rent/price ratio changed permanently by ratcheting up. The same pattern repeated itself after 2000.

[EconProf]

BobS
Inflation rose throughout the 1970s, climaxing at 13.5% in 1980. House prices also peaked in 1980, along with gold. House prices fell somewhat in the early 80s due to ungodly tight money–mortgages were 16%.
The point is, inflation in house values became part of the reward for being a landlord. Cash flow–rent relative to price–became less of a factor. Thus the rent/price ratio changed permanently by ratcheting up. The same pattern repeated itself after 2000.

[ltokuda]

BobS, I hadn’t thought about the effects of inflation until you mentioned it … especially after we got off the gold standard. Since buying a house is a hedge against inflation, I would guess that it could affect the fundamental valuation of a house. I can see why the GRM might jump from 0.4 to 0.5 in high inflationary periods. But I don’t understand why it would stay at 0.5 for 25 years after that while inflation eased. I’m still thinking this one over.

[ltokuda]

BobS, I hadn’t thought about the effects of inflation until you mentioned it … especially after we got off the gold standard. Since buying a house is a hedge against inflation, I would guess that it could affect the fundamental valuation of a house. I can see why the GRM might jump from 0.4 to 0.5 in high inflationary periods. But I don’t understand why it would stay at 0.5 for 25 years after that while inflation eased. I’m still thinking this one over.

[ltokuda]

BobS, I hadn’t thought about the effects of inflation until you mentioned it … especially after we got off the gold standard. Since buying a house is a hedge against inflation, I would guess that it could affect the fundamental valuation of a house. I can see why the GRM might jump from 0.4 to 0.5 in high inflationary periods. But I don’t understand why it would stay at 0.5 for 25 years after that while inflation eased. I’m still thinking this one over.

[ltokuda]

BobS, I hadn’t thought about the effects of inflation until you mentioned it … especially after we got off the gold standard. Since buying a house is a hedge against inflation, I would guess that it could affect the fundamental valuation of a house. I can see why the GRM might jump from 0.4 to 0.5 in high inflationary periods. But I don’t understand why it would stay at 0.5 for 25 years after that while inflation eased. I’m still thinking this one over.

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