Rent-to-Buy Ratios Improve: Does it Make Sense to Buy Again?

If I lived outside of NYC, I'd think hard about buying, sure.

But I don't live outside of NYC, where the hude price declines were (almost) met by huge rent declines. The ratio isn't much better than when it was historically at its highest...

(and our declines started much more recently)

I have to say 12.5 to 1 in vegas - which always had some CHEAP rentals - does sound fairly interesting.

"Historically, the ratio of median sales prices to median annual rents have ran at around 15 to 1."

Yup, if you include the recent boom years it is for the country - though for NY, as JuiceMan so ably pointed out, it's around 12.

Get back to 12 and there you have it: BUY!

actually steve, if you read the underlying paper that the article was based on, you would see that they specifically looked at the ratio in the decades leading up to this boom.

more gems from the paper: we consider 15x to be 'equilibrium'

so there you go - wrong again, this time by professionals in the area

look printer.... I've got skin in RE and I'll call a bottom when I see one... it's the hardest thing to do in finance or any aspect in life is to distance yourself and really look at fundamentals and call a spade a spade.... It's amazing to me to see people who "know" RE is a terrible asset at this time and can't be honest... b/c they are homeowners, RE Brokers, Bankers, Tim Geitner, Greenspan, Obama, Pelosi, etc etc etc.... HONESTY and INTEGRITY, lessons so few have learned....

Arent we seeing 12 to 1 in certain areas of manhattan...i came close to buying an apt on park in murray hill for 525k...1 bedroom....average mtce.......these apts rent for lets say $3650...thats a 12 to 1 ratio.....everyone said WAIT,......it will go for under 400k in 2 yrs......but this ratio would then be...9....i remember in 1996 a 1 bedroom at 77park was 175k...needed 50k work...so lets say 225k...rents for 1 beds in the building were 1600 per month....thats close to a 12 ratio.....so maybe we are at the BUY phase for certain hoods in manhattan

Mhillqt, you are sadly mistaken if you think a 1BR in Murray Hill rents for $3650. Try knocking $1000 off that number, I would think, based on the markets I follow.

and then add in $1000 to the montlies on a purchase... RE tax is gonna go thru the roof! .. now where's your ratio?

mhillqt, i don't really buy into the rent/buy math calculation as such, although i strongly feel that the relationship between the two should, unless there are other factors reasonably determined, fall within some normal parameters. the question to me is what caused the increase in prices over time, were those increases justifiable, and without the forces that caused those prices where might prices fall. that latter portion of the equation is affected, obviously, by the inverse of the must-buy hysteria mentality, overshooting to the downside, the grim economic realities of overextended owners (yes, even in manhattan), unemployment, rising taxes, new development nightmare, etc.

rents were also inflated beyond simple supply and demand factors. excess money due to credit went many places. and rents are still falling. i posted a junior four on the UES, a generous 800sf, that just closed for, I believe, $455k. buying is a personal decision, but i don't think we are at the BUY phase anywhere. there are decent deals to be found now, but that doesn't mean that prices won't in all likelihood go lower. or that rents won't. if you find something you really like, it's trading at 2005 or even better 2004 prices, in an established neighborhood, your employment situation is secure, you have a decent cushion of savings left over after purchase, and you can hold the property for quite a few years, i think you'll be OK. but if there are any uncertainties in any of those variables, now is not the time to be gambling with a purchase. just my opinion, and i'll admit i'm conservative with personal finances.

It doesn't matter if it's 8x ....... if you think prices are going down by 50%. You ALWAYS have to factor in what you think prices are going to do. When you rent, you time horizon is only the length of the lease. If you overpay, you're only overpaying until the lease runs out. But to buy in a market which you honestly believe is headed downwards just because the rent multiplier is some number which you think is "right"....... well......

"I have to say 12.5 to 1 in vegas - which always had some CHEAP rentals - does sound fairly interesting."

But take a look at unemployment and vacancy rates: what's the multiplier on a vacant unit?

"now is not the time to be gambling with a purchase"

Hey, I'm always a buyer in any market. At the right price (or perhaps I should say the wrong price). I just went to contract on a unit last week. I just hope I can sell it fast enough before the market goes down to where my profit isn't zero or less.

w67thstreet, I think a 12x ratio is not bad (perhaps good even) even after accounting for monthlies.

aboutready, while rents do respond to supply and demand, especially on a local level, they are kept in check at a national level very strongly by the Fed. About 40% of CPI is housing, which is mostly made up of rent and owner's equivalent rent, so if that thing moves at a clip significantly different from 2-3% (in either direction), the Fed responds pretty strongly as it will stoke (or be a symptom of) deflation/inflation otherwise. Sure, you can discount the ability of the Fed to control such things, but given the nature of fiat currency, I'd put much more weight on the controller of the fiat presses. Rents have been falling nationally (small single-digit percent overall, I think), and you can bet that they'd be falling much faster were it not for the efforts of the Fed to pump liquidity in the system. Granted, the NYC market is its own beast that has little effect on nationwide rents: most of the rental stock is not subject to market rates and is effectively linked to CPI through declared rent increases, and the prices on the remaining market rentals are driven by ultra-low vacancy rates.

Must be nice not to have to pay a significant chunk in fees every time you buy/sell, REO. For the rest of us, we have to play Buffett and pay more attention to valuation and less to momentum.

Murray HIll rentals...
Rentals listings for this building
SAVE Active Listings (5)
↓ $3,900 77 Park Avenue 1 bed 1,200 ft²

$3,600 77 Park Avenue 1 bed 763 ft²

↓ $3,500 77 Park Avenue 1 bed 1,100 ft²

$3,500 77 Park Avenue 1 bed 1,200 ft²

$3,200

Mhillqt - the apartments in that building for sale with similar sq. ft. are asking between 900K and 1.4m - not 500K.

inonada - how does the Fed control rental rates?

Mhillqt, what unit did you almost get for $525k? There's no listing anywhere close to that.

Which unit were you going to buy for $525K? Apt 3-H that is asking $899K or something else? I don't know the unit/building you were looking at specifically and cannot comment on the quality, but there is a lot of inventory in the $2K-$3K range with decent square footage.

On the $899K 3-H unit, even that was on the market for rent at $3250 for months without any takers before it got pulled, so $3250 is clearly not the market rental price for something asking $899K. It's your money, but before getting fooled by high rental prices, realize that most of the rentals you are seeing are at prices no one was willing to take. Most well-priced rentals go away in a few weeks.

i couldnt find any rentals in the building that i was looking at but it was a few streets over on park avenue.....this wasnt the best exampe since this is a condo....i was looking at a coop and the 1 bedroom rentals would be equivalent...ie approx 3600 per month......but the 1 bed in that building was approx 525 after negotiations.

ChasingWamus, CPI (consumer price index) is a measure of what consumers are paying in aggregate for goods. Using a blend of people going out and writing down prices for stuff and asking people the price they pay for stuff (e.g., rent or the rent an owner thinks they could get on their home), they come up with a number. This number, excluding energies, is a major source of inflation information for the Fed when it comes to determining short-term interest rates and (much more so recently) various components of money supply. Because rents and owner's equivalent rent make up such a large poriton of CPI, if those things spike (say 10%), then this alone causes a huge increase in the overall CPI (say 4%) even if everything else remains constant. Warning bells go off (in reality, much earlier than the numbers I stated), and Fed tightens to control inflation. Prices go down, Fed does the reverse (as you are seeing now).

Obviously, the Fed is looking at things nationwide, not in specific markets, to determine overall monetary policy, so individual markets can differ. But the Fed is not going to sit around doing nothing if it sees 5% rent inflation year after year. I'm not saying it can't happen, but you have this very strong hand that will push in the other direction.

Asset prices (like home prices), on the other hand, are not something the Fed has historically looked at as a measure of inflation. The past 2 bubbles of the past decade may change that going forward.

Fair enough, Mhillqt. As a friendly piece of advice, just heed my comment about "prices at which no one is willing to rent" when you are looking about. Best thing is to look at something that was on the rental market that disappeared after 2 weeks, which is much simplified by SE.

I think what is difficult to absorn are the increases in costs/taxes that owners must pay versus rent which is decreasing... The ratio is getting worse in a status quo scenario -- THE PRICES MUST DROP to make it interesting...

"Must be nice not to have to pay a significant chunk in fees every time you buy/sell, REO. For the rest of us, we have to play Buffett and pay more attention to valuation and less to momentum. "

I pay plenty in fees: going in and out costs me well over 10%. On MOST of my deals, the numbers are EXACTLY the same as anyone else, because the partnership pays a 6% commission, and my partners don't do deals on the basis of subsidizing MY income, they do it because we all make money.

I see; didn't realize you had partners. Was this deal REO, or are you renovating it, or are you finding regular properties that are underpriced by appreciably more than 10%?

30yrs_RE_20_in_REO, have you by chance disclosed your private email on this board before? if so, what is it?

"look printer.... I've got skin in RE and I'll call a bottom when I see one... it's the hardest thing to do in finance or any aspect in life is to distance yourself and really look at fundamentals and call a spade a spade.... It's amazing to me to see people who "know" RE is a terrible asset at this time and can't be honest... b/c they are homeowners, RE Brokers, Bankers, Tim Geitner, Greenspan, Obama, Pelosi, etc etc etc.... HONESTY and INTEGRITY, lessons so few have learned...."

Ha! And you're on the same boat. Only reason you're posting is for your best interest.

So most of you missed the bottom and now crying foul.
Booohooooo..

Mhillqt

Don't forget to claculate the rent "after negotiations" as well.
Those are asking prices. Whether in the form of a lower rent or free month(s). Each month free is @ 8% less on the yearly rent.

"Buildings will trade much more on cash flow -- on current and contractual cash flow," explained another broker. "For the last few years, buyers were gambling that buildings would grow in value. And they did for six straight years. Now, the buyers want a yield going in."

http://www.nypost.com/seven/08122009/business/lost_leverage_sinks_owners_184092.htm

"30yrs_RE_20_in_REO, have you by chance disclosed your private email on this board before? if so, what is it?"

This be me: http://dgneary.com/BrokerWebsite3/Code/agent_detail.asp?brokerid=1919

Here is a great site that I found along the way that tracks the Rent vs. Buy via a heat map in various cities nationwide, including NY

http://hotpads.com/search/rent-ratio-heat-maps#lat=37.6790386010976&lon=-97.312608897686&zoom=12&previewId=rent-ratio-heat-maps&previewType=area&detailsOpen=true&listingTypes=sale,newHome,rental&loan=30,0.0525,0&visible=new,viewed,favorite&areaBorders=heatMapRentRatio

If you drill in on Manhattan you will see that some neighborhoods, especially the West Village, are still overpriced but overall many other areas of the city are getting better...