P/R Ratio

[not-so-average-joe]

I apologize if this topic has been discussed too many times, but …

According to the following article in Fortune

http://money.cnn.com/2007/11/06/real_estate/home_prices.fortune/index.htm

San Diego’s P/R ratio (the ratio of home prices to annual rents) is 34, compared to the 15-year average of 22.4. Based on this, it is projected that the home prices will fall 23.5% in the next 5 years while the rent will rise 10.6%, which will bring down the P/R ratio to the historical average.

Now I scanned rental listings for Carmel Valley 3-4 bedroom homes (say, priced at 750k) in Craigslist, and they rent around 3k per month, resulting in the P/R ratio 20.8.

So how should I interpret this?

(1) The historical average of 22.4 is way too high for that specific submarket,
or
(2) homes won’t depreciate that much,
or
(3) rents will rise even further,
or
(4) the whole analysis is totally off.

Any expert opinions (with supporting data)?

[Anonymous]

I’ve noticed this myself that the rents are not so far out of line with mortgage pymnts in CV assuming 30yr fx, 20% down. It’s definitely not positive CF, but it seems to be less out of whack than other areas. I think (1) is the likely answer. You should compare current CV ratios to historic CV ratios or similar areas, rather than regional or national averages that have too much noise. So, what is unique about CV that gives it strong rent demand? e.g. seasonal beach/del mar rentals, close to jobs, etc

[Anonymous]

I’ve noticed this myself that the rents are not so far out of line with mortgage pymnts in CV assuming 30yr fx, 20% down. It’s definitely not positive CF, but it seems to be less out of whack than other areas. I think (1) is the likely answer. You should compare current CV ratios to historic CV ratios or similar areas, rather than regional or national averages that have too much noise. So, what is unique about CV that gives it strong rent demand? e.g. seasonal beach/del mar rentals, close to jobs, etc

[Anonymous]

I’ve noticed this myself that the rents are not so far out of line with mortgage pymnts in CV assuming 30yr fx, 20% down. It’s definitely not positive CF, but it seems to be less out of whack than other areas. I think (1) is the likely answer. You should compare current CV ratios to historic CV ratios or similar areas, rather than regional or national averages that have too much noise. So, what is unique about CV that gives it strong rent demand? e.g. seasonal beach/del mar rentals, close to jobs, etc

[Anonymous]

I’ve noticed this myself that the rents are not so far out of line with mortgage pymnts in CV assuming 30yr fx, 20% down. It’s definitely not positive CF, but it seems to be less out of whack than other areas. I think (1) is the likely answer. You should compare current CV ratios to historic CV ratios or similar areas, rather than regional or national averages that have too much noise. So, what is unique about CV that gives it strong rent demand? e.g. seasonal beach/del mar rentals, close to jobs, etc

[kewp]

(4) the whole analysis is totally off.

Any expert opinions (with supporting data)?

I’ll vote for that, however I ain’t no expert!

My rationale is that the SD economy has largely been driven by RE over the last ten years. Once that starts running full speed in the reverse I expect a severe recession for the county.

[kewp]

(4) the whole analysis is totally off.

Any expert opinions (with supporting data)?

I’ll vote for that, however I ain’t no expert!

My rationale is that the SD economy has largely been driven by RE over the last ten years. Once that starts running full speed in the reverse I expect a severe recession for the county.

[kewp]

(4) the whole analysis is totally off.

Any expert opinions (with supporting data)?

I’ll vote for that, however I ain’t no expert!

My rationale is that the SD economy has largely been driven by RE over the last ten years. Once that starts running full speed in the reverse I expect a severe recession for the county.

[kewp]

(4) the whole analysis is totally off.

Any expert opinions (with supporting data)?

I’ll vote for that, however I ain’t no expert!

My rationale is that the SD economy has largely been driven by RE over the last ten years. Once that starts running full speed in the reverse I expect a severe recession for the county.

[(former)FormerSanDiegan]

I took a quick look. The reported Price/Rent ratios seem inflated. I would not have any confidence believing their metric of over-pricedness.

Take San Diego, for instance.
They computed a P/R = 34 as of June 2007.

I don;t have NAR median price of existing home for June, but I see that Sept was 593K.

593K/34 = 17441. This means 1453 per month.
No way a median priced home in San Diego rents for that cheap ! T

Take Clairemont, which is significantly below median price, somewhere around 500K. Those houses rent for about 2000 per month. This gives a P/R of about 21.

My guess is that their ratios are inflated both for the current situation and for the long-term average. Their general concept is correct. The quantitative predictions are suspect.

For what it’s worth, I think an additional 34% correction in San Diego’s nominal prices (not inflation adjusted) is too pessimistic. At some point, the media will be universally overly pessimistic to the downside.

[(former)FormerSanDiegan]

I took a quick look. The reported Price/Rent ratios seem inflated. I would not have any confidence believing their metric of over-pricedness.

Take San Diego, for instance.
They computed a P/R = 34 as of June 2007.

I don;t have NAR median price of existing home for June, but I see that Sept was 593K.

593K/34 = 17441. This means 1453 per month.
No way a median priced home in San Diego rents for that cheap ! T

Take Clairemont, which is significantly below median price, somewhere around 500K. Those houses rent for about 2000 per month. This gives a P/R of about 21.

My guess is that their ratios are inflated both for the current situation and for the long-term average. Their general concept is correct. The quantitative predictions are suspect.

For what it’s worth, I think an additional 34% correction in San Diego’s nominal prices (not inflation adjusted) is too pessimistic. At some point, the media will be universally overly pessimistic to the downside.

[(former)FormerSanDiegan]

I took a quick look. The reported Price/Rent ratios seem inflated. I would not have any confidence believing their metric of over-pricedness.

Take San Diego, for instance.
They computed a P/R = 34 as of June 2007.

I don;t have NAR median price of existing home for June, but I see that Sept was 593K.

593K/34 = 17441. This means 1453 per month.
No way a median priced home in San Diego rents for that cheap ! T

Take Clairemont, which is significantly below median price, somewhere around 500K. Those houses rent for about 2000 per month. This gives a P/R of about 21.

My guess is that their ratios are inflated both for the current situation and for the long-term average. Their general concept is correct. The quantitative predictions are suspect.

For what it’s worth, I think an additional 34% correction in San Diego’s nominal prices (not inflation adjusted) is too pessimistic. At some point, the media will be universally overly pessimistic to the downside.

[(former)FormerSanDiegan]

I took a quick look. The reported Price/Rent ratios seem inflated. I would not have any confidence believing their metric of over-pricedness.

Take San Diego, for instance.
They computed a P/R = 34 as of June 2007.

I don;t have NAR median price of existing home for June, but I see that Sept was 593K.

593K/34 = 17441. This means 1453 per month.
No way a median priced home in San Diego rents for that cheap ! T

Take Clairemont, which is significantly below median price, somewhere around 500K. Those houses rent for about 2000 per month. This gives a P/R of about 21.

My guess is that their ratios are inflated both for the current situation and for the long-term average. Their general concept is correct. The quantitative predictions are suspect.

For what it’s worth, I think an additional 34% correction in San Diego’s nominal prices (not inflation adjusted) is too pessimistic. At some point, the media will be universally overly pessimistic to the downside.

[hipmatt]

an additional 34% should be easy… I agree with kewp

[hipmatt]

an additional 34% should be easy… I agree with kewp

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