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temeculaguy.
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July 23, 2007 at 5:31 PM #9574July 23, 2007 at 5:40 PM #67303
Reality
ParticipantYour post makes a lot of sense and the rent vs. buy calculation, above anything else, is what convinced me several years ago of the magnitude of the bubble.
For instance, if “everybody wants to live here”, rents would reflect that. They don’t.
If “there’s a housing shortage” were true, rents would reflect that. They don’t.
Why anyone would be buying today is beyond me.
July 23, 2007 at 5:40 PM #67368Reality
ParticipantYour post makes a lot of sense and the rent vs. buy calculation, above anything else, is what convinced me several years ago of the magnitude of the bubble.
For instance, if “everybody wants to live here”, rents would reflect that. They don’t.
If “there’s a housing shortage” were true, rents would reflect that. They don’t.
Why anyone would be buying today is beyond me.
July 23, 2007 at 8:34 PM #67337davelj
ParticipantDoh!! I got confused and posted this on the wrong rent/buy thread, so here it is again:
We actually had a decent-sized thread about this a few months back. I forgot what the general consensus was, but my argument, in summary, was that a rational person should be willing to pay at least a 20% premium to comparable rents in the form of monthly ownership costs (mortgage interest + HOA + taxes + insurance, etc.). The logic is that there is some benefit to the interest deduction (although often less than people think) and, more importantly, over the long term you don’t have to worry about paying a higher rent each year, which is the norm, particularly in California. This really adds up from a present value standpoint. Once you factor both of these issues into the equation you come up with a decent-sized premium. Then many people would add in a “peace of mind/settled” intangible premium to the dollars and cents premium – this will vary from person to person. I think sdrealtor thought a 50%+ (total) premium was in order (which for some people might, in fact, be the case) while I was more in the 20%-30% range. The bottom line is that the average, rational person (absent special circumstances) should be willing to pay some premium over the comparable rent in order to own. The issue is what the premium should be and it will vary from person to person. For the most part, in my opinion – and most here obviously agree – that the “ownership premium,” as it were, is waaaaay too high.
July 23, 2007 at 8:34 PM #67402davelj
ParticipantDoh!! I got confused and posted this on the wrong rent/buy thread, so here it is again:
We actually had a decent-sized thread about this a few months back. I forgot what the general consensus was, but my argument, in summary, was that a rational person should be willing to pay at least a 20% premium to comparable rents in the form of monthly ownership costs (mortgage interest + HOA + taxes + insurance, etc.). The logic is that there is some benefit to the interest deduction (although often less than people think) and, more importantly, over the long term you don’t have to worry about paying a higher rent each year, which is the norm, particularly in California. This really adds up from a present value standpoint. Once you factor both of these issues into the equation you come up with a decent-sized premium. Then many people would add in a “peace of mind/settled” intangible premium to the dollars and cents premium – this will vary from person to person. I think sdrealtor thought a 50%+ (total) premium was in order (which for some people might, in fact, be the case) while I was more in the 20%-30% range. The bottom line is that the average, rational person (absent special circumstances) should be willing to pay some premium over the comparable rent in order to own. The issue is what the premium should be and it will vary from person to person. For the most part, in my opinion – and most here obviously agree – that the “ownership premium,” as it were, is waaaaay too high.
July 24, 2007 at 8:11 AM #67375jyurasek02
ParticipantI like that way of thinking about it, however it doesn’t explain the way that people make money on rental properties. Typically in any market there are a number of properties that are not owner occupied and the owner generates an income off of these rental rates. It is understood that for a primary residence there is a premium to pay, however, if these prices stay too high, will the rental market be choked off becuase nobody see it plausable to purchase a rental property? What could be other outcomes of this gigantic delta of rental payments versus ownership on both primary and investment property. I refuse to believe that there is no way to make money on rentals in San Diego. Maybe it will just take more time for the market to get back to equilibrium.
Another thought I guess is that the premium of ownership is the money that must be put down to reduce the mortgage and in turn make in profitable to rent a property out. That would be a typical mortgage loan historically to put down 20-30% and pay on the remaining 70%. Maybe when you factor that out of the costs it could make you money.
July 24, 2007 at 8:11 AM #67440jyurasek02
ParticipantI like that way of thinking about it, however it doesn’t explain the way that people make money on rental properties. Typically in any market there are a number of properties that are not owner occupied and the owner generates an income off of these rental rates. It is understood that for a primary residence there is a premium to pay, however, if these prices stay too high, will the rental market be choked off becuase nobody see it plausable to purchase a rental property? What could be other outcomes of this gigantic delta of rental payments versus ownership on both primary and investment property. I refuse to believe that there is no way to make money on rentals in San Diego. Maybe it will just take more time for the market to get back to equilibrium.
Another thought I guess is that the premium of ownership is the money that must be put down to reduce the mortgage and in turn make in profitable to rent a property out. That would be a typical mortgage loan historically to put down 20-30% and pay on the remaining 70%. Maybe when you factor that out of the costs it could make you money.
July 25, 2007 at 9:27 PM #67800jyurasek02
ParticipantNobody else has anything to add??? I thought on this post there would be plenty of people that are real estate saavy and could give an opinion on the rent vs. buy analogy. Just because somebody else posted a similar link AFTER mine doesn’t mean mine is any less important…
Seriously, I am very interested to hear the thoughts of this issue. Please, experts…let us hear your analysis.
July 25, 2007 at 9:27 PM #67867jyurasek02
ParticipantNobody else has anything to add??? I thought on this post there would be plenty of people that are real estate saavy and could give an opinion on the rent vs. buy analogy. Just because somebody else posted a similar link AFTER mine doesn’t mean mine is any less important…
Seriously, I am very interested to hear the thoughts of this issue. Please, experts…let us hear your analysis.
July 25, 2007 at 10:47 PM #67821temeculaguy
ParticipantQuote taken from forbes/msnbc today
“Consider house hunters in San Diego. There, the single-family home market is experiencing a significant price correction. In 2006, the market dropped 4.5 percent. Renters pay 38 percent of the cost of an owner’s mortgage payment, according to data from Torto Wheaton Research, a research firm owned by CB Richard Ellis. That’s compared with 79 percent nationwide.”
The context was ten tips for first time buyers and never buy when rents are out of line with prices, the assumption is S.D. prices are twice what they should be but most of the country is fine.
I posted that quote on another thread and I think the reason there isn’t much action on this one is that this theme is running through about ten threads and is routinely rehashed, read through some of the older ones. The El Cajon condo blowout thread has a alot of pretty in depth analysis of rent to price ratios. It’s easier to get into specific situations. In that situation, rents are about 1k and prices just broke through below 200k but most feel 150k isn’t too far away. The more desirable areas are holding stronger and are futher in time from when they will feel the pinch so it’s hard to give a pure number in all areas right now. Good rule of thumb is the national average, 20% premium over rent makes people buy, even with rent makes most buy, but more than double rent should make you rent.
July 25, 2007 at 10:47 PM #67887temeculaguy
ParticipantQuote taken from forbes/msnbc today
“Consider house hunters in San Diego. There, the single-family home market is experiencing a significant price correction. In 2006, the market dropped 4.5 percent. Renters pay 38 percent of the cost of an owner’s mortgage payment, according to data from Torto Wheaton Research, a research firm owned by CB Richard Ellis. That’s compared with 79 percent nationwide.”
The context was ten tips for first time buyers and never buy when rents are out of line with prices, the assumption is S.D. prices are twice what they should be but most of the country is fine.
I posted that quote on another thread and I think the reason there isn’t much action on this one is that this theme is running through about ten threads and is routinely rehashed, read through some of the older ones. The El Cajon condo blowout thread has a alot of pretty in depth analysis of rent to price ratios. It’s easier to get into specific situations. In that situation, rents are about 1k and prices just broke through below 200k but most feel 150k isn’t too far away. The more desirable areas are holding stronger and are futher in time from when they will feel the pinch so it’s hard to give a pure number in all areas right now. Good rule of thumb is the national average, 20% premium over rent makes people buy, even with rent makes most buy, but more than double rent should make you rent.
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