Will rents create a price floor despite the mini rental bubble?

[gdcox]

The normal relationship is illustrated by the national Owners’ equivalent rent of primary residence in the CPI which accelerates whenever house prices are under pressure for the obvious reasons that many choose to rent because they decide to wait to see what happens with house prices.

What you report rather flies in the face of this: ie a deceleration in rental growth whilst the OC real estate situation worsens. If true, there may be other local factors over-riding. For example the employment situation may have worsened significantly in the last year enough to outweigh the normal pattern; but I doubt it.

But frankly rental is a poorly researched subject everywhere because big business is not involved or interested, it is not a major cog in economic models and the data sources are poor.

It is one of those few areas in which an individual amateur analyst could make a big impact.

[bjensen]

Sorry, I’m quite incoherent tonight.

I meant to say that many consider a property affordable when monthly rent for a similar property and monthly mortgage costs on a potential purchase are equal.

I promise not to post again until I come to!

[bjensen]

Sorry, I’m quite incoherent tonight.

I meant to say that many consider a property affordable when monthly rent for a similar property and monthly mortgage costs on a potential purchase are equal.

I promise not to post again until I come to!

[bjensen]

Sorry, I’m quite incoherent tonight.

I meant to say that many consider a property affordable when monthly rent for a similar property and monthly mortgage costs on a potential purchase are equal.

I promise not to post again until I come to!

[bjensen]

Sorry, I’m quite incoherent tonight.

I meant to say that many consider a property affordable when monthly rent for a similar property and monthly mortgage costs on a potential purchase are equal.

I promise not to post again until I come to!

[bjensen]

Sorry, I’m quite incoherent tonight.

I meant to say that many consider a property affordable when monthly rent for a similar property and monthly mortgage costs on a potential purchase are equal.

I promise not to post again until I come to!

[EconProf]

BobS
Good points gdcox.
It is common and easy to judge whether housing prices are above or below their “correct” level by comparing the rent of a property–or all properties–to their monthly cost of ownership. Easily grasped, easily measured, easily graphed over time, and a common starting point for deciding whether to rent or buy.
Right now one can rent a given house or condo for about half to two-thirds the cost of owning it. Depends heavily on neighborhood, with the fraction rising in lesser neighborhoods, falling in better areas.
This suggests that prices have quite a ways to fall (or rents to rise), before we get back to historical norms.
A complicating factor is expected appreciation or depreciation in housing values. Optimistic price expectations fueled the distortion in this ratio to historic lows recently. Perhaps the coming pessimism about future prices will cause the ratio to overshoot on the upside.

[EconProf]

BobS
Good points gdcox.
It is common and easy to judge whether housing prices are above or below their “correct” level by comparing the rent of a property–or all properties–to their monthly cost of ownership. Easily grasped, easily measured, easily graphed over time, and a common starting point for deciding whether to rent or buy.
Right now one can rent a given house or condo for about half to two-thirds the cost of owning it. Depends heavily on neighborhood, with the fraction rising in lesser neighborhoods, falling in better areas.
This suggests that prices have quite a ways to fall (or rents to rise), before we get back to historical norms.
A complicating factor is expected appreciation or depreciation in housing values. Optimistic price expectations fueled the distortion in this ratio to historic lows recently. Perhaps the coming pessimism about future prices will cause the ratio to overshoot on the upside.

[EconProf]

BobS
Good points gdcox.
It is common and easy to judge whether housing prices are above or below their “correct” level by comparing the rent of a property–or all properties–to their monthly cost of ownership. Easily grasped, easily measured, easily graphed over time, and a common starting point for deciding whether to rent or buy.
Right now one can rent a given house or condo for about half to two-thirds the cost of owning it. Depends heavily on neighborhood, with the fraction rising in lesser neighborhoods, falling in better areas.
This suggests that prices have quite a ways to fall (or rents to rise), before we get back to historical norms.
A complicating factor is expected appreciation or depreciation in housing values. Optimistic price expectations fueled the distortion in this ratio to historic lows recently. Perhaps the coming pessimism about future prices will cause the ratio to overshoot on the upside.

[EconProf]

BobS
Good points gdcox.
It is common and easy to judge whether housing prices are above or below their “correct” level by comparing the rent of a property–or all properties–to their monthly cost of ownership. Easily grasped, easily measured, easily graphed over time, and a common starting point for deciding whether to rent or buy.
Right now one can rent a given house or condo for about half to two-thirds the cost of owning it. Depends heavily on neighborhood, with the fraction rising in lesser neighborhoods, falling in better areas.
This suggests that prices have quite a ways to fall (or rents to rise), before we get back to historical norms.
A complicating factor is expected appreciation or depreciation in housing values. Optimistic price expectations fueled the distortion in this ratio to historic lows recently. Perhaps the coming pessimism about future prices will cause the ratio to overshoot on the upside.

[EconProf]

BobS
Good points gdcox.
It is common and easy to judge whether housing prices are above or below their “correct” level by comparing the rent of a property–or all properties–to their monthly cost of ownership. Easily grasped, easily measured, easily graphed over time, and a common starting point for deciding whether to rent or buy.
Right now one can rent a given house or condo for about half to two-thirds the cost of owning it. Depends heavily on neighborhood, with the fraction rising in lesser neighborhoods, falling in better areas.
This suggests that prices have quite a ways to fall (or rents to rise), before we get back to historical norms.
A complicating factor is expected appreciation or depreciation in housing values. Optimistic price expectations fueled the distortion in this ratio to historic lows recently. Perhaps the coming pessimism about future prices will cause the ratio to overshoot on the upside.

[Bugs]

I agree with gdcox that the analysis of the rental market is tough due to the lack of published studies by outside observers.

I actually perform rent surveys in many of my assignments, although most of those involve commercial properties. However, I’ve been watching the residential rental market, too, by which I mean the apartment market. I only follow the rents for detached homes on an incidental basis.

What I can say is that apartment rents are weak, regardless of what you may be reading in the newspapers. Compared to apartment rents, the rental structure for detached homes seems to be somewhat overpriced.

To a dedicated renter (someone who can/will only purchase if there is no risk of downside) there is no reason to pay twice as much rent for a home as for an apartment or condo of similar size. A detached home is worth more rent, no doubt, but at most that premium is only going to add another 30% to the rent, all other things being equal.

If I can rent a 2bd apartment for $1000 in North Park (and I can, all day long), then based on the historical trends a 2bd house on its own lot would only be $300 more than that. Except right now it’s not – at present it’s more like $500 or $600 extra.

A household earning $68,000/year can comfortably spend (at 30%) about $20,400/year in housing. That’s $1700/month. Renters have no incentive to spend more than 30% of their income on housing if they can at all avoid it. There aren’t very many 3bd homes in the county that you can rent at $1700/month; and certainly none in any neighborhood you’d feel safe in walking to the local 7-11 after dark.

A $75,000 annual household income puts you into the top 30% of households in the county – that equals less than $1900/month rent potential.

I think there’s some room for rents to come down. I don’t know about there being 30% extra, but I’d imagine 10% is a sure thing.

[Bugs]

I agree with gdcox that the analysis of the rental market is tough due to the lack of published studies by outside observers.

I actually perform rent surveys in many of my assignments, although most of those involve commercial properties. However, I’ve been watching the residential rental market, too, by which I mean the apartment market. I only follow the rents for detached homes on an incidental basis.

What I can say is that apartment rents are weak, regardless of what you may be reading in the newspapers. Compared to apartment rents, the rental structure for detached homes seems to be somewhat overpriced.

To a dedicated renter (someone who can/will only purchase if there is no risk of downside) there is no reason to pay twice as much rent for a home as for an apartment or condo of similar size. A detached home is worth more rent, no doubt, but at most that premium is only going to add another 30% to the rent, all other things being equal.

If I can rent a 2bd apartment for $1000 in North Park (and I can, all day long), then based on the historical trends a 2bd house on its own lot would only be $300 more than that. Except right now it’s not – at present it’s more like $500 or $600 extra.

A household earning $68,000/year can comfortably spend (at 30%) about $20,400/year in housing. That’s $1700/month. Renters have no incentive to spend more than 30% of their income on housing if they can at all avoid it. There aren’t very many 3bd homes in the county that you can rent at $1700/month; and certainly none in any neighborhood you’d feel safe in walking to the local 7-11 after dark.

A $75,000 annual household income puts you into the top 30% of households in the county – that equals less than $1900/month rent potential.

I think there’s some room for rents to come down. I don’t know about there being 30% extra, but I’d imagine 10% is a sure thing.

[Bugs]

I agree with gdcox that the analysis of the rental market is tough due to the lack of published studies by outside observers.

I actually perform rent surveys in many of my assignments, although most of those involve commercial properties. However, I’ve been watching the residential rental market, too, by which I mean the apartment market. I only follow the rents for detached homes on an incidental basis.

What I can say is that apartment rents are weak, regardless of what you may be reading in the newspapers. Compared to apartment rents, the rental structure for detached homes seems to be somewhat overpriced.

To a dedicated renter (someone who can/will only purchase if there is no risk of downside) there is no reason to pay twice as much rent for a home as for an apartment or condo of similar size. A detached home is worth more rent, no doubt, but at most that premium is only going to add another 30% to the rent, all other things being equal.

If I can rent a 2bd apartment for $1000 in North Park (and I can, all day long), then based on the historical trends a 2bd house on its own lot would only be $300 more than that. Except right now it’s not – at present it’s more like $500 or $600 extra.

A household earning $68,000/year can comfortably spend (at 30%) about $20,400/year in housing. That’s $1700/month. Renters have no incentive to spend more than 30% of their income on housing if they can at all avoid it. There aren’t very many 3bd homes in the county that you can rent at $1700/month; and certainly none in any neighborhood you’d feel safe in walking to the local 7-11 after dark.

A $75,000 annual household income puts you into the top 30% of households in the county – that equals less than $1900/month rent potential.

I think there’s some room for rents to come down. I don’t know about there being 30% extra, but I’d imagine 10% is a sure thing.

[Bugs]

I agree with gdcox that the analysis of the rental market is tough due to the lack of published studies by outside observers.

I actually perform rent surveys in many of my assignments, although most of those involve commercial properties. However, I’ve been watching the residential rental market, too, by which I mean the apartment market. I only follow the rents for detached homes on an incidental basis.

What I can say is that apartment rents are weak, regardless of what you may be reading in the newspapers. Compared to apartment rents, the rental structure for detached homes seems to be somewhat overpriced.

To a dedicated renter (someone who can/will only purchase if there is no risk of downside) there is no reason to pay twice as much rent for a home as for an apartment or condo of similar size. A detached home is worth more rent, no doubt, but at most that premium is only going to add another 30% to the rent, all other things being equal.

If I can rent a 2bd apartment for $1000 in North Park (and I can, all day long), then based on the historical trends a 2bd house on its own lot would only be $300 more than that. Except right now it’s not – at present it’s more like $500 or $600 extra.

A household earning $68,000/year can comfortably spend (at 30%) about $20,400/year in housing. That’s $1700/month. Renters have no incentive to spend more than 30% of their income on housing if they can at all avoid it. There aren’t very many 3bd homes in the county that you can rent at $1700/month; and certainly none in any neighborhood you’d feel safe in walking to the local 7-11 after dark.

A $75,000 annual household income puts you into the top 30% of households in the county – that equals less than $1900/month rent potential.

I think there’s some room for rents to come down. I don’t know about there being 30% extra, but I’d imagine 10% is a sure thing.

[Author]

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