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Monday, October 13, 2008
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45 comments:
a quiet couple of days here....
would like to share some findings on rent vs buy in 22207.
Property # 1:
walkable to metro by some, both for sale and rent.
3-lvl 2/1 TH 1,207 sf no parking
rent (AR6878408) is 2K; listed @ 429K.
i believe somebody here said rent * 1,600 is the break-even point with buy. if that's true then this home is still 100K too high. and that's probably why it's sitting for 164 days...
Property # 2
big lot, NOT close to metro, good schools. Owner/Agent.
3/2 Rambler 10K sf
listed @ 699K; rent is $2,590 (AR6877324).
$2,590 * 160 = $414400.
Property # 3
well this is an upscale home way beyond my range...
4/2/2 garaged Brick/Stone colonial, 7,540 sf
for rent at $4,250 (AR6866836); listed at $995,000.
$4,250 * 160 = $680K
Property # 4
this one is even higher so probably means nothing, but here goes:
Major Remodeled 4/5/1 6,359 int sf; lot 9,490 sf
for rent @ $8,995
List Price: $1,599,950
Original Price: $1,975,000
DOM 477
$8,995 * 160 = $1,439K
also, i'm pretty sure both of the homes below were on the market for sale not too long ago. might have been in the high 600K to 800K range.
3615 Albemarle St N - now for rent @ $2,600
$2600 * 160 = $416K
2707 Military Rd N - now for rent @ $2,400
$2,400 * 160 = $384K
MM: expect to pay top dollar for 22207. It's simply one of the nicest and therefore most expensive zip codes around.
n. Bruce, that isn't the point of what he was talking about.
The question isn't whether or not Arlington is "nice" or even whether or not it is "expensive."
The question is whether prices are in line with rents in that area. If these anecdotes are to be believed Arlington still has a ways to fall. (something we already expect from other analysis)
Hey Contrarian,
Good find.
My next blog might be my biggest fear that banks will stop making loans or rates will skyrocket to 7-9%.
Frank
McCain wants to buy all the bad mortgages and lower everyone's payment. Obama wants people to take money out of their 401K and freeze foreclosures. Pelosi wants ANOTHER "stimulus" package. Bush & Co sending hundreds of billions to all the irresponsible banks. The printing press is overloaded. Etc...
I've lost track of all the money being wasted. Can we just create one fund so i can keep up? Let's call it the:
Wasting
Trillions
Fund
Yeah... if the problem at its heart was irresponsible spending and lending... well then that must be the cure right?
I am getting the feeling that if this bailout succeeds in delaying the inevitable reckoning we are just going to make the whole situation worse when the day does come.
I can only conclude that there are no fiscal conservatives left in Washington. The solution to every problem seems to be to spend billions.
I am just waiting for someone to come out and say the truth. That this day was a long time coming because as a society we embraced an unsustainable level of spending and that the only possible answer is to spend less.
Nobody wants to hear tough love I guess.
(While I am on the subject of government... I am also waiting for the day when I hear someone say "______, isn't really a mission for the federal government. Why don't you take that up in your state legislature?")
I have friends telling me how smart they were to get in the market last week when it was at "bottom."
IMO, having the entire developed world required to bail out the global financial system is not a bullish sign - it means that we were (and still are) on the verge of collapse.
Novahog & Leroy, the idea is that the increase in spending will be to prevent an even bigger loss in tax revenues the govt will see from the downturn.
Even Nouriel Roubini, the canary in the coalmine when it came to seeing this bubble, proposes spending another 300 Billion we dont have on a new "new deal".
http://www.rgemonitor.com/blog/roubini
Once the crisis has passed, I agree 100% the US needs to restore fiscal discipline. Even with all the new spending proposed, our defecit as a percent of GDP is only a fraction of what it was at the end of the depression and WWII. If we can dig our way out of that hole, we can dig our way out of this one as well.
Checking in after not reading this blog for months, this is some funny stuff.
Roubini made an interesting point, that we need to only recapitalize the solvent, financially sound banks.
If instead we grant capital to the insolvent banks, and increase deposit insurance, they will respond by making even riskier loans with the hopes of covering losses from their souring debt.
I dont know about you but I got a letter in the mail from both WaMu and Wachovia last week begging me to open a credit card, offering 30k limit and 0% interest for 12 to 18 months.
Id have to be a f* idiot to go out and spend 30k on a credit card, and they would have to be run by idiots to even offer it to me.
Attended a trustee's sale this morning in Fairfax... Of 21 auctions, only 1 (one!) sold; all others "sold to the lender". I get the feeling a flood of bank-owned is on the way if this is happening every day.
The one that sold was for 280K for 1950's built SFH on 1/3 acre in Fairfax City (recently assessed at 480K, and assessed in 2007 for 560k)
"Novahog & Leroy, the idea is that the increase in spending will be to prevent an even bigger loss in tax revenues the govt will see from the downturn."
Oh I get the idea, I am just not sure I buy it.
The various politicians are crawling over themselves to find ways to throw billions of dollars at the same idiots we have spent years talking about on this blog.
In the short term this may be better, but if the lesson isn't learned (or if the wrong lesson is learned) this is going to prove to be a lot worse in the long term.
You can't spend your way out of debt. Even with the nutty spending our economy has been stagnant for the last several years. Sooner or later someone is going to have to show a little bit of actual leadership and tell the country that their grandparents weren't nuts afterall and that if they want to build wealth they are going to have to spend less than they make.
ng, I hope you're right on "a flood of bank-owned on the way". I have been looking for houses for 10 months and the prices are not going down that much - at least not to the level I want to pay for. Maybe some people are right, this area (due to government spending) is somewhat resistent to recession.....
Big Government Ahead
http://www.nytimes.com/2008/10/14/opinion/14brooks.html?_r=2&oref=slogin&oref=slogin
AND...now that DC is the temporary center of the financial universe:
http://www.denverpost.com/business/ci_10713290?source=rss
so much for a recession here locally:
http://3.bp.blogspot.com/_uen-Mi3EsG8/SPEfj2owpHI/AAAAAAAALYQ/C9P8aDUv6hA/s1600-h/MetroRecessionorGrowth.jpg
to continue my buy vs rent topic...
i went outside Arlington to see what other NoVa areas are like. so i picked 22101 (McLean).
below are the findings.
my conclusion? i'm doubting the rent*160=buy formula is applicable in NoVA....
4/2/1 Split Level on a 11173 sf lot.
rent: $2,600
List Price: $639,500
Original Price: $679,000
$2,600 * 160 = $416K
4/3/1 Colonial on a 10500 sf lot.
rent: $3,500
List Price: $850,000
Original Price: $895,000
$3,500 * 160 = $560K
5/3/1 Rambler on a 12283 sf lot.
rent: $3,495
List Price: $874,900
Original Price: $889,000
$3,495 * 160 = $559K
6/3/1 Split Foyer on a 15K sf lot.
rent: $4,000
List Price: $999,000
$4,000 * 160 = $624K
The rent*160=buy formula is accurate, it is just a much better deal to rent rather than buy in NOVA right now. Prices absolutely skyrocketed and haven't come down nearly as much as they need to for homes to be a good value again.
the anonymous,
The issues your links raise about more government workers coming into DC to manage the bailout are legitimate. However, I believe that in order to pay for it, there may be cuts in other areas like defense spending. Also, the Treasury Dept has many offices outside DC and a majority of the new employess may work out of those offices.
Without hard numbers, it is hard to say for sure what will happen. However, I am sure that in a severe recession, even the DC area will be affected, though not as much as other areas.
crt: Once the crisis has passed, I agree 100% the US needs to restore fiscal discipline. Even with all the new spending proposed, our deficit as a percent of GDP is only a fraction of what it was at the end of the depression and WWII. If we can dig our way out of that hole, we can dig our way out of this one as well."
I guess we'll see. Watching Paulson/Bernanke/Bair this morning, they kept talking about "restoring confidence in the system". Word count: "confidence" appears 22 times, "confident" appears twice: Statements by Paulson, Bernanke, Bair
How can anyone have confidence in a system requiring this level of government intervention?
What a mess.
MRIS.com has published the September 2008 data for 22207, and it reflects that the high end is being hit. During September 2008, there were 21 homes sold in 22207 and inventory of 152, yielding 7.2 months of inventory. By comparison, sales in September 2007 totaled 37.
More telling, however, is the type of home being sold. The average sales price for September 2008 has decreased by 11.66% compared to 2007, whereas the median sales price actually increased by 1.12%. This means that there are fewer high end sales to push the average well above the median. In this regard the average list price of sold homes in 22207 has gone from $1.006M in Sept. 2006, to $957K in Sept. 2007, and to $846K in Sept. 2008.
I expect that increased jumbo spreads and tighter lending standards are a primary cause of this trend. One month does not a trend make, since inventory in 22207 during August 2008 was less than four months. We shall see . . .
Attended a trustee's sale this morning in Fairfax... Of 21 auctions, only 1 (one!) sold; all others "sold to the lender". I get the feeling a flood of bank-owned is on the way if this is happening every day.
When the monthly home sales are reported, are these sales to lender counted?
DC used to be a government town and pretty much nothing else. In the last ten years that has really changed and I suspect DC's susceptibility to recessions has increased as well.
Still, the biggest question will be if, and how much, the new administration cuts contractor spending.
The vast majority of the most wasteful spending in DC goes to contractors and they are the logical place to start cuts if anyone was actually interested in controlling spending. The whole privatization trend in government has gone way too far and needs to swing back the other way if we want to control spending.
keithk: I suspect sales back to the bank are not counted, as I think they only count sales of homes that were listed on the MRS.
I think the rent/buy formula question is a good one, but I think even that generic formula is subject to some change with regard to zip codes. That's not to say I agree with n.bruce, but that I think it's not as simple as a 160 multiple.
For example, if you took my current rent and multiplied by 160, you'd get a price that is -substantially- higher than the asking price for any of the townhouses in the development we're renting that are currently for sale. $50K more in most cases. Reminder, I live in PWC.
That does not make buying these properties at those prices attractive. It does mean I'm overpaying for rent a little bit, but not a ton. Most rentals I've seen on the market are asking the same or more.
What this means is that my landlord is making out OK, and anyone looking to sell for that 160x multiple around here is in trouble right now.
"my conclusion? i'm doubting the rent*160=buy formula is applicable in NoVA...."
you can't just multiply by 160, the real factors are the interest rate of mortgage and tax bracket you are in. With that said, renting in most parts of NOVA probably makes sense, but you can't just use a formula like rent * 160, because it doesn't take into account two major variables.
In regards to rent to buy factors, you also have to include the expected losses due to further price declines, in which case a rent to own factor of as low as 120 can be needed to make buying a good idea. So, I would say that in PWC, you are not overpaying rent unless the purchase price is less than 120 times the rent. Let your landlord take that risk.
The fact that in most of NoVa rent to buy isn't even close to 160 just shows how much further we have to fall to make buying truly attractive again. (In the financial as opposed to the psychological sense)
cara,
Agreed, and the 120x is pretty close. Honestly, if I was in the market for a townhouse these prices might convince me to buy, though I'd probably still like another $20K off. And it would have to be in good condition. Luckily, there's plenty of properties, so one of them is bound to be in good shape.
I agree that price to rent is the best metric for measuring the value of houses. I'm not sure where the price to rent multiple of 160 came from, maybe somebody can cite the source. Everything I've seen points to a historic ratio of about 135 x monthly rent (or 11 x annual rent). Here are some sources:
This was an in-depth study comparing price to rent ratios by city on a pre- and post-bubble basis (by Fortune magazine and Moody's Economy.com):
http://money.cnn.com/2007/11/06/real_estate/home_prices.fortune/index.htm?postversion=2007110711
Here is some source data showing pre- and post-bubble price to rent data by city:
http://www.nytimes.com/2005/05/27/business/28home.moredata.html?_r=1&oref=slogin
Here is a graph of the US price to rent ratio since 1955:
http://www.cepr.org/pubs/PolicyInsights/PolicyInsight21.pdf
I've been using a formula of 150x rent. In coming up with this, the monthly cost to own a house will be 90% of rent. The assumptions are:
1% property tax
6% interest, 30-yr fixed
20% down
100 bucks a month for insurance (that may be high)
Of course, for a condo or some other place that has wacky homeowners fees, a lower multiple should be used.
Likewise, if interest rates go up, then the multiple should come down.
Keep in mind, that this is the *most* someone should pay. In many parts of the country, the cost to own was 70-80% of the cost to rent.
IHB rent versus own
JF, this may or may not be where others are getting their gross rent versus buy multiplier, but it's where I got it from. The historical trends are one good way of looking at it, and reflect people's actual decisions. Irvine housing blog's analysis is simply breaking it down on an estimated cost basis, and 160 requires both a 30 year mortgage and a historically low interest rate, as well as assumes no depreciation. (in fact it may assume prices keep up with inflation).
But the historical trends you cite show that in general people require owning to be cheaper than renting by this analysis.
Thanks Cara. Computing the "proper" price to rent ratio using abnormally low rates is problematic in that rates may not stay abnormally low in the future.
Therefore, when a person who buys today (at high price to rent multiples) goes to sell 5 or 10 years from now when rates are higher, they will be faced with buyers willing to pay a much lower price to rent ratio. That's why it's best to pay attention to the long-term historic average.
>I think that what's really needed at this point is some restructuring of the model for homeownership. Let's allow people to continue becoming homeowners, but find better ways to manage the risk around these investments. Perhaps we need to reconsider some of the tax benefits that encourage homeownership. We might also create new types of mortgages that reset depending on the ability of people to pay. We could also elevate the status of renting, by increasing the rights of renters relative to landlords.
Excuse the cliche about lipstick on a pig ...
I have been a landlord and the last thing I want is more rights for tenants. My last tenant, before I sold the place, didn't pay rent, forced me to hire an attorney to evict, and then damaged the place. The law today favors tenants more than renters.
In terms of renting, my last landlord decided to sell the place forcing me to move (at substantial expense) before I wanted to. So all those who think renting is a great lifestyle, enjoy it.
As as far as reconsidering tax benefits for homeowners, well, that's a nonstarter right now and forever. And resetting mortgages based on ability to pay? Whatever scheme they come up will be worse than a conventional mortgage. Better yet solution: Don't have a monthly mortgage cost more than what you can reasonably afford.
Bottom line: Buy a tent. The odds of an asset bubble on tents is pretty remote.
"I have been a landlord and the last thing I want is more rights for tenants. My last tenant, before I sold the place, didn't pay rent, forced me to hire an attorney to evict, and then damaged the place. The law today favors tenants more than renters."
KOB:
I am not an attorney but I am good friends with the local land barons in my community (small town about 50 miles from downtown DC), and NONE of them rent on a 1-year lease.
They ALL rent month-to-month, primarily for the reasons you cited.
If the agreement goes south after a month then you can begin legal action immediately....that's not the case w/ a 12-month lease.
Again, I am not an attorney but it might be worth your time to ask around and see what others in your community are doing.
Virginia law favors the landlord. Do not try spewing that junk here.
A few comments on the Landlord/Tenant issue:
Kob - FYI you happen to be in DC the most tenant friendly jurisdiction in the area - it is what it is.
Regarding your landlord kicking you out, had you recorded your lease with local land records, the Landlord probably could not do that. Landlords hate this, but if I was a tenant in a long term lease, absolutely I would record it.
Gold 2 ho. During the first 12 months there is (in my opinion) no practical difference in a year to year or month to month lease. In either case, if the tenant doesnt pay, you can kick him out - its a pain in the ass and often needs an attorney, but it doesnt matter if its a year to year or month to month.
That said, there is a minor difference after 12 months. Under a 12 month lease, if the tenant continues to pay, it may be presumed he has another year term. In a month to month lease, it is presumed he has no more than a one month term - this is the "advantage".
Either way, make no mistake about it, as a landlord it is a huge pain in the ass to kick out a deadbeat tenant - either on a one day, one year or 10 year lease.
John - thats a bit of a bold statement. Having been both a tenant and a landlord - and having dealt with both an asshole landlords and asshole tenants, I think my perspective is a bit more tempered than yours.
In relation to other local jurisdictions, yes VA is probably the most Landlord friendly of the bunch. That said, my experience is all jurisdicitons are Tenant friendly on the whole. I cannot tell you how often the same serial non-paying tenants appear in Landlord/Tenant court, constantly gaming the system and paying on average perhaps 2 out of every 12 months of rent on average for years and years and years. There are some real despicable landlords out there, but some real tenants who could give them a run for their money!
A renter in VA can sign away thier rights to a landlord. That is called favoring the landlord. Your perspective is another way of saying its your experience or your opinion. To know the facts visit valegalaid.org It is spelled out very clearly what rights a tennent does not have.
John, If your tenant stops paying the rent. Won't take your calls and forces you to go legal, you will be out thousands of dollars and with almost no hope of recouping it. That's the cold bottom line. The tenant/landlord laws are zero help once the tenant hits the nuclear button.
kob, crt, john
All of which is part of why the price to rent ratio needed to make being a landlord attractive is more like 100 times monthly rent.
Potential landlords (as opposed to real estate speculators) are not going to come in and scoop up the unwanted inventory of too small and too old townhouses and condos until prices drop alot lower. There are plenty of perfectly good potential rental properties on the market in Franconia Springfield, sitting unsold for months because home-buyers can't picture living in them for more than 2 years and they're way overpriced for landlords.
These are just the woes and expenses that come with dealing with people. There are bad apples in every barrel, landlord or tenant. Reducing the purchase price is how one deals with these contingencies.
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