Housing prices vs. rental prices

[SSSnail]

Since housing prices are dropping, I notice that rental prices in most places stay the same. Now, isn't there suppose to be a direct correlation between the two? I understand that they don't have to lower the prices, but what would cause rental prices to fall?

 

[shocksyde]

Are you kidding?

Rental prices would only come down if demand went down. The cost of new homes doesn't have anything to do with what you're paying for rent.

Maybe a newly-built home that's immediately made available for rent will show up in the market a bit lower than it would have in late '06, but established rentals have no reason to lower their rates.

 

[VTHodge]

Rental prices fall when interest rates fall and when home purchase prices go down.

Lower interest rates and lower home prices make more people buy homes and leave rental properties. But the bigger issue is the total economic stability of an area.

New jobs -> more people -> more housing needed -> higher prices
Loss of jobs -> people move away -> empty housing -> lower prices

 

[JS80]

Too many Micro factors to make a Macro statement.

 

[dullard]

Long term, they are directly correlated. Inflation will push the price of both up. If a town is deserted (ghost town) then both go down. Long term, rental prices can be, should be, and usually are a bit lower than buying. Buying gives you benefits and they are priced in.

Short term, they are inversely correlated. People move in droves from one to the other. Right now housing demand is decreasing - house prices are going down in many areas. But that means rental demand is increasing - an increase in demand without a match in supply (apartments cannot be instantly built) means prices go up.

 

[SSSnail]

Well, what I do see are a lot of new sub-divisions being built or were being built with no buyers. Those will probably become rental properties shortly, and will probably cause a chain effect. I remember rental prices shot up due to house prices ballooned within recent years. Of course rental prices didn't have to raise with it, but it did because of greed (or demand, whatever you want to call it). I guess this would be the same reason why we won't see a fall in rental pricing.

 

[VTHodge]

Originally posted by: shocksyde
Are you kidding?

Rental prices would only come down if demand went down. The cost of new homes doesn't have anything to do with what you're paying for rent.

Maybe a newly-built home that's immediately made available for rent will show up in the market a bit lower than it would have in late '06, but established rentals have no reason to lower their rates.

Are you kidding? You totally contradict yourself. Cost of homes for sale leads to a change in demand for rentals.

Also, OP doesn't refer to new homes. Just anything for sale.

 

[nageov3t]

at least in NJ, rental prices tend to be directly related to property taxes.

 

[radioouman]

Rental prices go down when fewer people are around to rent.

If interest rates are low, house prices are high, but renters jump to buy a house. Less demand and rental prices fall.

However today, house prices are dropping, interest rates are high, so rental prices are high because there is more demand. (Fewer people can afford to buy.)

 

[IGBT]

..areas with rent control have fewer available rentals because of nuisance litigation so builders don't invest in rent control areas. Rents and fees are higher too.

 

[SSSnail]

Originally posted by: radioouman
Rental prices go down when fewer people are around to rent.

If interest rates are low, house prices are high, but renters jump to buy a house. Less demand and rental prices fall.

However today, house prices are dropping, interest rates are high, so rental prices are high because there is more demand. (Fewer people can afford to buy.)

That was opposite from what I saw a few years back. When house prices shot up, rents started to shoot up as well. I think the logic was that the renters didn't have the means to purchase a house, and that a lot of people were buying houses as rental investments. They had to charge high prices to cover for the mortgage.

Other landlords saw that as an opportunity to raise their rents as well, and the ensuing snowball. Now, as a lot of people are unable to afford their mortgage and their second, foreclosure is inevitable and they can't afford to lower the rent. The rental prices stay the same regardless of house prices are dropping. Keep in mind that a lot of the rental properties already have their rates set, and the mortgage on those properties are not anywhere as high as the rent they're charging.

I don't know if there are any rental control in effects, seems like once the prices are up, they stay up.

 

[Vic]

Strong correlation in regards to 1st time homebuyers. Otherwise, not so much.

 

[shocksyde]

Originally posted by: VTHodge

Originally posted by: shocksyde
Are you kidding?

Rental prices would only come down if demand went down. The cost of new homes doesn't have anything to do with what you're paying for rent.

Maybe a newly-built home that's immediately made available for rent will show up in the market a bit lower than it would have in late '06, but established rentals have no reason to lower their rates.

Are you kidding? You totally contradict yourself. Cost of homes for sale leads to a change in demand for rentals.

Also, OP doesn't refer to new homes. Just anything for sale.

Yes, I was kidding. No, wait, I'm just an idiot.

 

[radioouman]

Originally posted by: SSSnail

Originally posted by: radioouman
Rental prices go down when fewer people are around to rent.

If interest rates are low, house prices are high, but renters jump to buy a house. Less demand and rental prices fall.

However today, house prices are dropping, interest rates are high, so rental prices are high because there is more demand. (Fewer people can afford to buy.)

That was opposite from what I saw a few years back. When house prices shot up, rents started to shoot up as well. I think the logic was that the renters didn't have the means to purchase a house, and that a lot of people were buying houses as rental investments. They had to charge high prices to cover for the mortgage.

Other landlords saw that as an opportunity to raise their rents as well, and the ensuing snowball. Now, as a lot of people are unable to afford their mortgage and their second, foreclosure is inevitable and they can't afford to lower the rent. The rental prices stay the same regardless of house prices are dropping. Keep in mind that a lot of the rental properties already have their rates set, and the mortgage on those properties are not anywhere as high as the rent they're charging.

I don't know if there are any rental control in effects, seems like once the prices are up, they stay up.

Hmmm.. That's possible too.
I guess that if either housing prices go up or if interest rates go up, there is more demand for renting. But in the past 7 years, housing went up because interest rates were low, and lots of people renting jumped and bought a home. I don't know if this is isolated or not.

 

[bennylong]

Rental price and mortgage is completely out of whack in CA.

1 BR Condo in LA
Rent -$1,500
Mortgage/Association Fee/Property Tax- $2,500

Who the hell would buy now? Dumbass subprimers only.

 

[dullard]

Originally posted by: bennylong
Rental price and mortgage is completely out of whack in CA.

1 BR Condo in LA
Rent -$1,500
Mortgage/Association Fee/Property Tax- $2,500

Who the hell would buy now? Dumbass subprimers only.

Lets use your numbers. Lets also make six assumptions.

1) Assume rent goes up over time. In my experience rent has been going up well over 5%, but lets just assume 5%.
2) Assume $1000/year is needed for repairs/extra costs due to the home ownership.
3) Lets assume tax benefits are nothing. Yes, this assumption really gives an advantage to renting.
4) Lets assume $10,000 in closing costs for a 30 year fixed loan.
5) Lets assume you never move into a more expensive condo whether you buy or rent.
6) Assume of that $2,500/month figure, $500/month was property tax.

Year 1: Buying is $10,000 + 12*$2,500 + $1000 = $41,000.
Year 1: Renting is 12*$1500 = $18,000.

Year 2: Buying is 12*$2,500 + $1000 = $31,000. Total paid: $72,000.
Year 2: Renting is 12*$1500*1.05 = $18,900. Total paid: $36,900.

Year / Total paid buying / Total paid renting / Savings for buying
1 / 41,000 / 18,000 / -23,000 lost by buying now
2 / 72,000 / 18,900 / -35,100 lost by buying now
...
5 / 165,000 / 99,461 / -65,539 lost by buying now
...
10 / 320,000 / 226,402 / -93,598 lost by buying now
...
20 / 630,000 / 595,187 / -34,812 lost by buying now
...
30 / 940,000 / 1,195,899 / 255,899 saved by buying now
...
40 / 1,010,000 / 2,174,396 / 1,164,396 saved by buying now
...
50 / 1,080,000 / 3,768,294 / 2,688,264 saved by buying now

So, assuming your numbers are correct, this "dumbass" paid 3.5x less over his lifetime for buying now than you did for renting. True, that dumbass may be better off waiting before buying. True, that dumbass had better be able to pay for that mortgage. But if those two things are met, buying now is smarter long term.

Add in the tax savings, and watch that 3.5x savings soar.

 

[shortylickens]

Originally posted by: JS80
Too many Micro factors to make a Macro statement.

True.
I moved from an area with very expensive houses and pretty reasonable rent to an area with high rent and cheaper houses.
It depends on a lot of things.

 

[JS80]

Originally posted by: dullard

Originally posted by: bennylong
Rental price and mortgage is completely out of whack in CA.

1 BR Condo in LA
Rent -$1,500
Mortgage/Association Fee/Property Tax- $2,500

Who the hell would buy now? Dumbass subprimers only.

Lets use your numbers. Lets also make six assumptions.

1) Assume rent goes up over time. In my experience rent has been going up well over 5%, but lets just assume 5%.
2) Assume $1000/year is needed for repairs/extra costs due to the home ownership.
3) Lets assume tax benefits are nothing. Yes, this assumption really gives an advantage to renting.
4) Lets assume $10,000 in closing costs for a 30 year fixed loan.
5) Lets assume you never move into a more expensive condo whether you buy or rent.
6) Assume of that $2,500/month figure, $500/month was property tax.

Year 1: Buying is $10,000 + 12*$2,500 + $1000 = $41,000.
Year 1: Renting is 12*$1500 = $18,000.

Year 2: Buying is 12*$2,500 + $1000 = $31,000. Total paid: $72,000.
Year 2: Renting is 12*$1500*1.05 = $18,900. Total paid: $36,900.

Year / Total paid buying / Total paid renting / Savings for buying
1 / 41,000 / 18,000 / -23,000 lost by buying now
2 / 72,000 / 18,900 / -35,100 lost by buying now
...
5 / 165,000 / 99,461 / -65,539 lost by buying now
...
10 / 320,000 / 226,402 / -93,598 lost by buying now
...
20 / 630,000 / 595,187 / -34,812 lost by buying now
...
30 / 940,000 / 1,195,899 / 255,899 saved by buying now
...
40 / 1,010,000 / 2,174,396 / 1,164,396 saved by buying now
...
50 / 1,080,000 / 3,768,294 / 2,688,264 saved by buying now

So, assuming your numbers are correct, this "dumbass" paid 3.5x less over his lifetime for buying now than you did for renting. True, that dumbass may be better off waiting before buying. True, that dumbass had better be able to pay for that mortgage. But if those two things are met, buying now is smarter long term.

Add in the tax savings, and watch that 3.5x savings soar.

shouldn't you technically add the difference between rent and mortgage payments for the renter into an investment account until the rent surpasses mortgage payment and then amortize the "cash" saved over the future payments for it to be more accurate?

also, left out appreciation of housing.

I'm pretty sure the homeowner still comes out ahead, assuming renter's saved cash earns risk free rate (assume 5%).

 

[SSSnail]

And shouldn't the Buying number disappear after 30 years? Assuming that's when your mortgage is paid off, and you didn't refi. There are no doubts that buying will have its long term benefits and short terms (taxes), but there are a lot of headaches you will have to deal with. Aside from the mortgage, there's association ffees, mello-roos, utilities to include everything from electricity, water to waste management, insurance, etc... Then there's land scaping and general upkeeping. Can we factor in all those cost too?

 

[JS80]

Originally posted by: SSSnail
And shouldn't the Buying number disappear after 30 years? Assuming that's when your mortgage is paid off, and you didn't refi. There are no doubts that buying will have its long term benefits and short terms (taxes), but there are a lot of headaches you will have to deal with. Aside from the mortgage, there's association ffees, mello-roos, utilities to include everything from electricity, water to waste management, insurance, etc... Then there's land scaping and general upkeeping. Can we factor in all those cost too?

I added assumption that MTG holder after his mortgage continues to save at the mortgage payment rate (and $3500/mo tax/upkeep which is probably too low)
I did some excel work and this is what i came up with:
End of
yr 30 homeowner ahead $21k (not including assets), and has a house that's appreciating
yr 35 homeowner ahead $433k (not including assets), and has $157k cash, and has a house that's appreciating
yr 40 homeowner ahead $964k (not including assets), and has $361k cash, and has a house that's appreciating

this also does not take into account tax benefit

 

[sygyzy]

Originally posted by: shortylickens

Originally posted by: JS80
Too many Micro factors to make a Macro statement.

True.
I moved from an area with very expensive houses and pretty reasonable rent to an area with high rent and cheaper houses.
It depends on a lot of things.

Like what? I think that's what people are trying to figure out?

 

[JS80]

Originally posted by: sygyzy

Originally posted by: shortylickens

Originally posted by: JS80
Too many Micro factors to make a Macro statement.

True.
I moved from an area with very expensive houses and pretty reasonable rent to an area with high rent and cheaper houses.
It depends on a lot of things.

Like what? I think that's what people are trying to figure out?

1. Job Market - Rents were going through the roof in the Bay area during the Tech Boom. Rents crashed after the crash.
2. Interest Rates - Rates go down, demand for housing increases. However, if the fed is lowering rates to boost economy, it may mean the economy is shvt => a shvtty economy means shvtty job market, see #1.
3. Real Estate Boom - Demand for real estate causes prices across the board => home prices go up, apartment complex prices go up and landlords raise rents to make up for loss. However, during the boom, if in a small growing town a developer comes and develops tract homes/condo complexes, etc, supply increases and existing rental property demand drops => rent drops.

 

[Miramonti]

In Chicago I came across a very soft if not desperate rental market because there were so many new home buyers and fewer renters.

Monthly rent simply couldn't keep up with the housing market appreciation because renters were sorely needed (especially good ones.)

Rents are definitely not going to go down with recent lower housing costs.

 

[dullard]

Originally posted by: JS80
shouldn't you technically add the difference between rent and mortgage payments for the renter into an investment account until the rent surpasses mortgage payment and then amortize the "cash" saved over the future payments for it to be more accurate?

also, left out appreciation of housing.

I'm pretty sure the homeowner still comes out ahead, assuming renter's saved cash earns risk free rate (assume 5%).

Sorry, internet was broken for the last 5 days and I couldn't respond.

Of the renters I know, maybe 10% actually save that money, and of those, half save it in an account that earns them next to nothing. But yes, technically, you could invest the savings and earn interest. This would make renting better than appears in that list.

I also didn't include inflation. With buying, most of the money is up front, with renting most is back loaded. Inflation makes that back loading cheaper than it appears. This would make renting better than appears in that list.

I left out housing appreciation, because I only compared payments and nothing else. True, the ~2% historical housing appreciation should be included. Although it isn't much. This would make buying better than appears in that list.

There are just too many variables (inflation rate, interest rate on investments, if investments are actually made, appreciation of the house, tax bracket, etc.) to actually do all the details. I left out all the details to keep it simple. Otherwise, I'd just have a dozen people bashing the details I used. The point is the same, even if buying is far more expensive now than renting, doesn't mean that buying now is stupid.

Originally posted by: SSSnail
And shouldn't the Buying number disappear after 30 years? Assuming that's when your mortgage is paid off, and you didn't refi. There are no doubts that buying will have its long term benefits and short terms (taxes), but there are a lot of headaches you will have to deal with. Aside from the mortgage, there's association ffees, mello-roos, utilities to include everything from electricity, water to waste management, insurance, etc... Then there's land scaping and general upkeeping. Can we factor in all those cost too?

My buying number kept increasing because I included property tax and $1000/year maintenance costs. In CA, if I recall correctly, property tax never increases if you don't sell. Thus that number could be easilly included in the numbers. I suppose with inflation, I could have upped that $1000/year cost.

 

[kgokal]

Problem with this analysis for buying, is that you must stay in that home for 30years+. Figure in the increasing cost of maintenance and the tremendous portion of your payments are in interest. Its a truely lose/lose situation.
Especially taking into account the increase in utilities for a larger house vs. smaller apartment. I couldnt argue for either side, because the cons are on both sides.