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(former)FormerSanDiegan
ParticipantOK, I think we generally agree on the valuation method.
However, the multiple you pay will be higher for “better” areas because the Premiums for rent in “better” areas are much smaller than the Premiums to buy. I learned this in the 90’s when trying to find investment property.
And, you pay 60% more in rent for the privelege of better schools, cool breezes, and peeks of the ocean.
According to rent slicer the avg rent for a house in La Jolla is $2242, for Clairemont it’s $1783, a 25% premium.
OK so the numbers may not be accurate but they are probably within 10-20%.The purchase premium for La Jolla versus Clairemont is about 150% based on median price. To be fair, if you compare similar properties it’s more like a tad over 100% to purchase (3/2 1500 sf CLMT house for 500K versus starter homes in LJ for 1M+).
So, the premium you pay to rent in a nice area is considerably less than the premium you pay to purchase there. This was true in 1995 and will likely be true in 2009.
As for outmigration and where rents go, that’s another matter. Last year there were 40K who moved out of SD compared to those who moved in form other areas within the US and what happened to rent ? Did it go up or down ?
WHEN prices fall enough, you may even see a lot of former outmigrators (like me) moving back. Some of us miss it there.
ParticipantSure compared to higher altitude and coastal portions of La Jolla, Bird Rock is ordinary (or even downright guetto, if you ask the Jacobs). But they have the schools and the coastal breezes/climate. That makes it a premium in my book. Maybe I’m too blue collar?
Participantrentslicer is a collection of advertised pricing. So it is biased to the high side for 2 reasons:
1. places with recent vacancies are higher than places where you’ve had a steady tenant
2. It’s not necessarily the final agreed-upon rent. Savvy renters ask for about 5-10% of the asking price.ParticipantI would actually consider Birdrock more of a premium neighborhood than ordinary. I think you need to go across the I-5 to Bay Ho or Caliremont to get to “ordinary”.
ParticipantYour approach is perfectly reasonable and along the lines of how I (and many people on this board) would value property. With a few minor issues.
Issue #1. A “typical” price-to-rent ratio of 10.
This means that if you purchased the house for cash, the rent would come in at gross yield of 10% annually.If, like today, other investments are paying 5-6% risk free, 8-10% moderately risky, and > 10% speculative, than this ratio is too low.
If (like in late 80’s), risk-free investments pay > 10% than this ratio is probably too high and you’d have to get down to a number like perhaps 8.
Here’s an historical example for what it’s worth:
A 3 bed/ 1bath in Clairemont sold for ~160 K in April 1996 (near the last bottom). Rent would have to have been 1333 per month to meet your ratio of 10. Rents in the area were about $1100 per month at the time, giving a ratio of ~ 12, 20% above your number. This is an equivalent gross yield of about yield of about 8.3%. Guess what the interest rate on a 30-year mortgage was in 1996 ? (Ans: ~8-8.25%).Issue #2. Prices must fall 45%.
Actually using your analysis the price-to-rent ratio needs to fall 45%. Not just the price (unless the change were instantaneous) Since there are two factors 1) price and 2) rent, there are many ways for this to happen:
One extreme: 10% reduction in price and 35% rent increases over the next 7 years (<5% annual increases).
Sensible guess: 25% reduction in price and ~4% average rent increases over 5-6 years.
Another extreme: 50% price reduction and 5% decrease in rents over some time period.Participant25. When you spend 10 hours a day on Bubble blogs … HERE IS A SIGN
26. If you know what an expert sign spinner is … HERE IS A SIGN
27. When the Santa Barbara Million Dollar Home Raffle is a 2-Bedroom 700 sq. foot cottage on a 5K sq foot lot … HERE IS A SIGN
28. When you have to keep re-editing your response to this post to re-number your comments … HERE IS A SIGN
ParticipantI’ll do what I’ve done the last three times I’ve purchased: Use the web (ZipRealty.com) to find what I want AND have my agent take care of the rest. I don’t mind having an agent when I’m on the buying side. The seller pays the cost.
(I know, you can theoretically save by buying direct from a seller without an agent, but if I find what I want I’d prefer that the deal actually gets closed. Agents looking for their commissions tend to help make sure things follow through).
ParticipantI agree most of Dent’s specific and short-term forecasts are hogwash, but I like to consider the general demographic trends he outlines.
I think keeping an eye on the Gen-Y’ers will pay off. Attention on Boomers trends for investment advice seems to permeate media and will be known to all, so not much of a chance to get ahead of others in general.
I too feel really young/old sometimes. e.g. – I feel young when I play softball, but I feel really old the next morning.
ParticipantPS –
Thanks. I noticed on his chart he has OFHEO, BEA, and BLS as references. I poked around those web sites for about 15 minutes and couldn;t nail it down. Thought it might be available somewhere else here with easier access.
Anyway, I’ll have to work to get my attention span to longer than 15 minutes on those sites, but it’s hard since they are Gov’t sites.
ParticipantPerry –
Me too … still an owner for both lifestyle and investment diversification purposes.
Regarding demographics, sounds like you are familiar with Harry Dent, who predicted a long slide in RE starting in 2011 or thereabouts, based on boomer demographics.
I want to know is what impact the group he called the “echo-boomers” are going to do. This generation is nearly as large as the boomers.
Since I am very near the null in US births between the boomers and echo boomers (I’m 39) I feel like I am almost always in a different stage than the rest of the poulation and naturally am counter-trend.
What impact do you think the echo boomers (~”gen Y”) will have on the next RE cycle ?
I think you and I are probably both between these large demographic popoulation peaks.
ParticipantI remember renting my first apartment. It did not make economic sense. I could have lived at home for free and munched on food, watched cable, used electricity/water/gas subsidized by my parents. But instead I chose to pay $250 per month to share a townhouse with three other guys, plus utilities, food, etc for a total of about $400 per month in 1989 dollars. Why didn’t I consider the future value of that money ? If I instead invested in Microsoft, I would have made a fortune.
If you are currently renting a SFR, doesn’t it make more economic sense to move into a 2-BR apartment or a trailer park in East county. Sure it does. Are you going to do it ? Well someone might, but most won’t.
My Point :
Everybody has their own threshold of pay(n) that they are willing to sacrifice for a place of their own, whether it’s owning or renting. davidpiece’s pay(n) threshold is just about 30-50% higher than other posters.Participantspeedingpullet –
Thanks for the info. I suspect that the reason is that that area will be the last area to finally pop.
Sorry folks about the LA-specific discussion, thought I could squeeze it under the topic of Manhattan Beach. I still own a prop in SD, visit SD every other month, root for the Padres, hate the Dodgers … but currently live in LA. Love SD. Plan to move back when I semi-retire … in 20+ years.
I follow SD real estate like a hawk. I’m probably the only person in LA who knows where Bay Park is located.
GO Padres!
ParticipantAnyone know of an LA-Westside bubble blogger ?
I think the wave will hit there last.ParticipantRaw Numbers, anyone ?
Anyone find the raw numbers that go into Rich’s famous Median price-to-per capita income chart ?
With those, it would be easier to play games with projections, such as Rich did in his VOSD article.
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