Housing Rent Values and Rates Drive Home Pricing

Read this Article from Top to Bottom and see the results of our analysis:

Article From RealTrends.com

It may not be the most widespread measure of housing prices, but if you want to follow a powerful driver, look at rents.  Specifically, it’s the rents Americans pay on condos, apartments or houses that are about the same size, and share the same neighborhood as your ranch or colonial, that in the end determine what your house is worth.

In recent reports, Deutsche Bank demonstrates how steady or even falling rents have pulled down housing prices, to the point where in many markets it costs about the same amount to own as to lease. That’s a golden mean that America hasn’t seen in almost a decade. The DB research also offers convincing evidence that the wrenching adjustment in housing prices is finished for much of the nation, with a bit more pain to come in selected areas.

In normal times, people won’t pay much less to lease a house than to own it. After all, if you’re paying rent instead of a mortgage and taxes, you still get to enjoy the same rec room, chef’s kitchen, and casita for visiting grandparents. So the surest sign of frenzy appears when owning becomes far more expensive than renting. That’s precisely what happened during the last bubble.  And the surest sign that prices have fully adjusted arrives when the ratio of what people pay in rent versus what owners spend on the same property returns to its historic average.  That brings us to the Deutsche Bank studies. Its REIT research team first established a benchmark for a “normal” ratio of rents to ownership costs — what it calls ATMP, or after-tax mortgage payment — for 53 U.S. cities.

On average, DB found that families across America were spending about 87% as much to rent as to own in 1999. Hence, they were traditionally willing to pay a premium as homeowners, though not a big one.  Given that analysis, it’s likely that prices will fall another 5% or so nationwide. The drop could even be slightly greater. One reason: Rents, the force that govern housing prices, are still falling.

http://www.realtrends.com/go/view_media.php?mp_id=9207&cat_id=1429

Source: Forbes, Shawn Tully, (2/12/10)

Now for our Take

A great article about how the Rent Values of homes determine where the pricing is headed.  We have always maintained that market values and pricing of real estate will be tied to the price that an owner can rent for.  Would you buy a home that was 200% more monthly then the rent on the same home??  Many would say No!  There are obvious Tax Benefits of buying and to own your own home has many other percs.  It appears to us that those benefits add value but not enough value for someones monthly payment to be $3000 on a home that could be rented for say $1500.00.  It appears that in Portland, Oregon where we live that a 3,000 SF Home would rent for about $1,700 dollars in a nice area.  That same homes appears to be worth about $450,000 in that same area on the market.  The payment on that home is about $2500 dollars.

So to us it appears that someone might be willing to pay about 30-40% more to own Monthly then to rent.  But of course there are benefits right?  If you own you can deduct the mortgage interest, taxes, and Insurance.  So some of that additional that you would pay comes back to you in there very real financial benefits.

Let’s take that a step further.  If that $450,000 home was bought with $50,000 down and on a 30 year Mortgage at 5.5% we can start to decide what the values are in a rent versus buy world.

We made some assumptions applicable to Oregon.  The Property Taxes on the Home would be $4000 a year, The Maintenance is $2000 a year, and the Insurance was plugged in at $650.00.

Other assumptions are a 3.5% annual inflation rate and only a 1% rate of appreciation and a 1% rate increase rate.  We also assume that our potential buyer is in the 30% marginal tax bracket and could make 5.5% annual on his/her investment if they would invest it in sticks and bonds instead.  This measures the opportunity cost of buying a home as you are putting money into the home that you could have invested elsewhere.

Ok.  We ran the financial’s.  The Results are RIGHT HERE:

Financially you would come out $151,000 dollars a head by renting… or about $3700 a year.  But now that is just financial comparisons.  What you get too is piece of mind, a sense of ownership, and a the ability to paint a room pink if you want!  That and no one can kick you out.  The after Tax Monthly cost between the two is really only about 12 or 13%….if you compare the rent in our story of $1700 to the after tax monthly payment of about $2,000.

Now what is rents actually track up with inflation at say 3.5% and Appreciation returns in Oregon to lets say 4% which it had been for many years during the normal markets we had from 1988 through about 1998?

Well in that scenario… which appears more likely then not we find that you would have financially been rewarded a total of $258,160 dollars….  see the results here. Results

In reality in Portland, Oregon rates for rentals are flat or maybe a bit soft.  Home prices are flat or a bit soft.  If we assume home prices will never ever rise and that rents will always stay flat we are foolish at best.

The point is as you approach your buying decision you must look at the rent versus buy options.  It is certainly one way…if you are on the fence and could care less if you buy now or later….to make a decision.

There are a lot of variables.  Interest Rates are the biggest one in this analysis.  If they climb…then these numbers get pushed all over the place.  There is reason however based upon this and to find a conclusion that in Oregon the bottom appears to be here.

Do with it what you will.  When your ready to try and make a move on some of these short sales, foreclosures, and bank owned or just well priced homes in Oregon make sure to hire a professional.

Dirk and Todd are ready to help you get started. 503-799-8383