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Housing Price Rules-of-Thumb


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2006 Mar 21, 4:17pm   21,675 views  183 comments

by HARM   ➕follow (0)   💰tip   ignore  

perplexed

Truism: while many --though by no means all-- of the regular Patrick.net bloggers are renters, at some point most of us JBRs would like to become homeowners (something the bulls/trolls frequently like to point out). Aside from that oh-so-powerful "ownership" psychology and pro-ownership cultural bias we discussed in previous threads, there are also valid reasons to choose buying over renting in a sanely valued market: it's generally easier to find detached houses for sale vs. for rent in many areas, or places with a big yard or garage, no pet restrictions, fewer restrictions on remodeling (excepting HOAs & condos) and you can't be arbitrarily evicted --unless you fail to pay your mortgage or taxes of course.

Some renters prefer renting to owning, even when the rent vs. buy equation is balanced, due to moving frequently, preferring more freedom/fewer maintenance headaches, etc. But for this thread, I will focus on renters who --for whatever reason-- would like someday to become owner-occupiers (as opposed to landlords or speculators). Personally, I'd be lying if I said I didn't like the idea of owning a nice, roomy tree-shaded craftsman with a big garden and workshop someday. I might be termed an aspiring "buyer-users" (coined by Mike Dwight). The way I see it, many of us Bubble-aware aspiring BUs are either: (a) looking to move out of Bubble-afflicted areas, or (b) waiting for prices to mean-revert. As I often like to put it, we are needing to see "housing prices reflect economic fundamentals" --namely rents and incomes-- before buying.

But how does one exactly determine when prices are "in line with rents and/or incomes"?

For the more financially saavy among us (Randy H, Peter P, Zephyr, etc.) this means feeding reams of housing data into your personal SPARC parallel processing super-computer and generating results using some insanely complex Black-Scholes stochastic risk valuation derivatives model, which would be virtually incomprehensible to the rest of us.

So what do the rest of us mere mortals use? How do we know when it's the right time/price to buy? How do we know when prices have "mean-reverted" enough to be safe?

Some of us use online Rent vs. Buy calculators. These are great, because they can calculate the P-E (rental) ratio of housing with decent precision. Condos and townhomes make direct buy vs. rent comparisons easy, because they are often physically identical/interchangeable with typical rentals units. Calculating the precise rental-equivalent for detached SFRs is a bit harder (unless you live in an area where many are for rent), but rough estimates are always do-able. Here are some good Rent vs. Buy calculators:

Dinkytown.net Rent vs. Buy
CEPR Rent vs. Buy

Others prefer using Cap-rates. Here's a good Cap-rate calculator:

Owner's Equivalent Rent Calculator

Some prefer even simpler rules of thumb:

  • median price is no more than 3-4X of gross median household income (or closer to 5-6X incomes in expensive coastal states)
  • buy when the local HAI (housing affordability index) is at or near it's historic mean value (whatever that is)
  • pay no more than 10X annual equivalent rent (cap-rate = 10 or better)
  • What are your favorite "sane housing price" rules-of-thumb?
    Discuss, enjoy...
    HARM

    #housing

    « First        Comments 146 - 183 of 183        Search these comments

    146   Peter P   2006 Mar 23, 10:25am  

    As a child of the welfare state and some less than stellar parents I say Nuke that MF’er to Kingdom Come! While morally I do support universal health care on some level. Hand outs need to die. If you can’t maintain in your local market MOVE and get a job somewhere else.

    Help should be available to those who seek personal development or those who have just suffered setbacks.

    Universal health care and education are good ideas, but they need to be executed correctly.

    147   Peter P   2006 Mar 23, 10:26am  

    Look at this Marina House. You guys think it’ll sell for its $2 million asking?

    I did not sushi in Russian Hill last weekend, but I did not find that particular restaurant. :( Nevertheless, it was very good. :)

    148   Peter P   2006 Mar 23, 10:31am  

    I was typing fast and had a few typos. I would really love to hear from Peter P and Randy about my viewpoint as they can think rationally.

    I don't know anymore. Currently, I care more about sushi than real estates.

    149   Peter P   2006 Mar 23, 10:32am  

    I did not sushi in Russian Hill last weekend

    not = have

    150   OO   2006 Mar 23, 10:42am  

    SGV Patience ,

    here is my Republican streak, this country is based on self-reliance. If government offers help, great, if not, fine, the only thing I gripe about is the government doesn't seem to have a lot to show for this much tax money. If they leave me alone and tax me less, excellent.

    My best friend went through the Kobe quake in Japan, over 4,000 people died within seconds. Guess what, nobody sat on their ass waiting for government aid, they self-organized, share food and water, and by the time the rescue team came, the local residents have long started well coordinated self-rescue effort mobolising all driveable automobiles and tools there is left. Well, if some of the Katrina victims chose to sit on their ass and wait for help, that was ok with with me too. But shooting rescue team and police with looted guns? WTF is that? I am paying my tax money to sustain sorryful asses like that?

    I always believe that god helps those who help themselves. If someone chooses to have 3 kids with three different guys when she is 15 and passes down this glorious tradition within the family, be my guest, just not on my tax dollars.

    151   OO   2006 Mar 23, 10:45am  

    wowowow is just MarinaPrime, he always uses the same website for his reference. Why are you guys repsonding to trolls? Just ignore them, save the breath.

    152   Peter P   2006 Mar 23, 10:48am  

    My best friend went through the Kobe quake in Japan, over 4,000 people died within seconds. Guess what, nobody sat on their ass waiting for government aid, they self-organized, share food and water, and by the time the rescue team came, the local residents have long started well coordinated self-rescue effort mobolising all driveable automobiles and tools there is left.

    This is why they deserve the BEST BEEF in the world.

    Kudo to the Japanese for bringing out the best of humanity in the face of a major calamity.

    153   Peter P   2006 Mar 23, 10:55am  

    wowowow is just MarinaPrime, he always uses the same website for his reference. Why are you guys repsonding to trolls? Just ignore them, save the breath.

    It's fine. Let's just try to make peace. We do not have to be confrontational. The truth will eventually assert itself over wishful thinking. He could be wrong, we could be wrong, it does not matter in the end.

    154   Peter P   2006 Mar 23, 10:56am  

    Owneroccupier, who the heck is Marina Prime? What kind of name is that?

    Too bad, I was planning to buy sushi for MarinaPrime. Oh well.

    155   HARM   2006 Mar 23, 10:58am  

    @Cheerful & wowowowow,

    I've read your comments, and think I can help clear up something for you: you have the wrong blog. This one is called Patrick.net, aka "SF Bay Area Housing Crash Continues" and, while we welcome intelligent contrarian debate, contributors here are generally bearish on the housing bubble.

    You might want to try out Condoflip.com or Craigslist. Or any site sponsored by NAR, CAR or MBAA. I think you'll find the people there a bit more sympathetic to your POV.

    Please also feel free to visit some of our more bullish past threads, such as:
    No Bubble, My Bad :-(
    Jealous Bitter Renters
    One for the Bulls

    Cheers,
    HARM

    156   Peter P   2006 Mar 23, 11:05am  

    And while I know no social program can fix their general malaise this villanising of the poor disgusts me.

    Overtime, education should help. On the other hand, we all need more spiritual lives.

    157   Peter P   2006 Mar 23, 11:13am  

    Hi Peter P - Why would I deserve sushi? I’m confused.

    I don't know. Perhaps you can buy sushi then. :)

    158   Peter P   2006 Mar 23, 11:24am  

    I would like prices to come down of course, but at the same time, I don’t want negative repercussions for the economy and jobs as a whole.

    Definitely. We can only hope. If a sustainable soft landing is at all possible, that is fine with me.

    159   Peter P   2006 Mar 23, 11:28am  

    As an atheist I still believe in human spirituality, I just don’t need a little black book to define it for me. I find many of the Righty Evangelical types to be decidedly NON spiritual.

    Did you mean that you are agnostic?

    Hey wait a minute wern’t we supposed to be talking about Real Estate.

    Real estate or sushi.

    160   surfer-x   2006 Mar 23, 11:39am  

    And, I was talking about the price that actually got closed and not the asking price but I know a dumb ass loser like you will not understand.

    Hmmm I be's mighty confused, you said above.

    My condo is appraised (actually a lot of them got sold) at 170k. So I gained 50k in 9 months. I am not selling as I am positive cash flow there.

    Ok asshole here is how it works, your "gain" is not realized until you sell, until you are just some fucking jerkoff that took out a NAAVLP, congratulations on your financial acumen.

    Randy perhaps you could shed some light on what a "gain" is?

    You first read your post learn how to spell.

    And, I was talking about the price that actually got closed

    And while we are at it, learn some fucking grammmemmemememr,

    There are blogs for you, kindly take HARM's suggestion and post your incomprehensible drivel there.

    161   Peter P   2006 Mar 23, 11:41am  

    I believe in human spirit and the unknowable power of the universe (universes?) I do not believe that power is embodied by a singular sentient being. So I would be an Atheist.

    Sounds good to me, although I do believe in an immortal being of infinite love.

    162   surfer-x   2006 Mar 23, 11:49am  

    cheerful, are you the same RUBEN GHOSAL that lives in Calcutta? Hmm funny above you list your age as 31, you list it here as 39, are you a moving star? do you live in Ballywood?

    tinyurl.com/j969p

    Anyhoo Ruben, enjoy your equity! You Sir are a money management wizard.

    163   surfer-x   2006 Mar 23, 11:50am  

    @ SGV Pat

    crap

    remove spaces for full effect.

    You friendly neighborhood low-rider.

    164   surfer-x   2006 Mar 23, 11:51am  

    whoops, sorry less than followed by i then greater than, close with less than, /i and then greater than.

    165   surfer-x   2006 Mar 23, 11:52am  

    Would a bar called "The Black Hole" work in Calcutta?

    166   surfer-x   2006 Mar 23, 11:54am  

    @Bap33, I too wish the very worst to happen, perhaps if we shot enough of the greedy ones, the nice ones might return.

    167   Peter P   2006 Mar 23, 11:58am  

    I want unethical loan writers getting fitted for chain bracelettes. I want developers that sold brand new homes to investors to be dragged through town behind a blind horse with the runs. I want house investors that rent their newly purchaced brand new home through the welfare program, Section 8, to be buried in an ant hill neck deep and honey smeared on their eyes.

    Perhaps karma will get them.

    168   Peter P   2006 Mar 23, 12:11pm  

    Hey guys, what do you guys think of Pleasanton? How would you rate and describe that area? It looks like there’s relatively good value homes there, but how long is the commute to Downtown SF?

    I do not know the area well. What do you mean by good value? Do you mean big house for 1M or super big house for 2M?

    169   surfer-x   2006 Mar 23, 12:15pm  

    1M haha is a lot of money.

    170   Peter P   2006 Mar 23, 12:22pm  

    Peter P, I guess on a price/sqft basis.. pleasanton seems to have houses at around $300-350/sqft?

    What kind of houses? (square footage, lot size, amenities, ...)

    I cannot imagine that the commute to SF can be enjoyable, unless you take BART, which may not be so bad. :)

    171   Phil   2006 Mar 23, 12:52pm  

    @Cheerful - thanks for posting your home deals and the money you made.. everyone wants to make money.. be it by saving real hard or by winning a lottery at the real estate game.. please do continue posting here.. I would like to read what happens in a year or so from now when the housing bubble goes bust or poof...

    I do want the housing bubble to burst... even though i have family around me who have a lot invested in RE.. I would definitely like to have the prices go down to what it was in the 1998's.. but that would require a huge recession and i do fear my job will be at stake... working in the IT for a mortgage banker, I am sure the i will be the first to be caught high and dry...

    someone mentioned about improving and tightening the lending process, yes it would reduce the time needed to buy a property in my opinion...

    172   surfer-x   2006 Mar 23, 1:26pm  

    @nancy, the lowest any company pays in the BA is 1HaHa, aka, 150K. Everyone at every company here gets stock options, you actually use your pets.com stock as legal tender at 120 establishments in Santa Clara. The average janitor at a BA company makes 1.7 million a year, plus countless stock options.

    173   OO   2006 Mar 23, 1:59pm  

    Nancy,

    The median household income is usually an ESTIMATE, not a hard data directly fed from IRS database. Also, it is a median number, not mean. Usually it is a product of the data obtained from the US Census Bureau, State's financial management office and the city's research group. It is mainly a derivation from a financial model that they developed and fine-tuned over time. Contrary to common belief, such data comes from SURVEY data, sampling method and respondents' integrity in answering questions may skew the final result.

    As for incorporation of stock options, it is INCLUDED in the estimate (at least I saw it mentioned in the footnote).

    Is the current median household income data truely reflective of the reality? I think it is as close as it gets, because they do cross check data with different sources.

    174   StuckInBA   2006 Mar 23, 2:39pm  

    Cheerful and wowwow...,

    Congratulations for making money in the RE, and good luck in the future.

    Do you have any suggestions / thoughts to make money investing in this economy / market from this point onwards ? Past performance is no guarantee of future results.

    If you have any ideas other than buying more RE in Idaho, please share with us.

    175   Randy H   2006 Mar 23, 2:47pm  

    Damn, I'm out for a few hours and the fireworks really go off around here.

    @SFWoman,

    OK guys, since I am somewhat new to blogs (this is my first)- how often do Realtors or other people with a vested interest in maintaining very high real estate prices come to this blog and simply pretend to be real estate purchasers who are doing well or who have hit it big? Do they ever get groups to do this? Does Patrick ever produce a list of visitors to this site (I believe I saw one on Athena’s Sonoma blog)?

    I don't think anyone here produces such lists. Athena a different blogging service (blogger I think); this site uses WorldPress which doesn't easily (so I can see) allow what you propose. I use Typepad on my own blog and it doesn't really support this user visits either, but does have a list of who the last few visitors were.

    I'm sure this blog has had at least a couple of colluding spinners, but nothing well coordinated.

    Coordinated blog attacks aren't all that common, but becoming more so over time. Mainly in political arenas, there are organized blogs which exist for the sole purpose of getting a bunch of partisans to all go pile on some influential other blog and skew the sentiment. Also, a bit more troubling, there are at least two startups I know of which have developed pretty impressive natural-language processing/artificial intelligence processes which can auto-blog but appear very much like real people. You can only tell they aren't real in that they appear for a short while, only respond to the thread comments a couple times -- usually only briefly engaging other comments (which are usually also collusive "bots") -- then disappearing. One of these guys is working on actually creating persistent, long-lived virtual blog personalities.

    In fact, maybe I am not real, just an advanced bot. Oh wait, I passed the Turing test because I've made far too many idiotic comments that can only be attributed to being human.

    176   StuckInBA   2006 Mar 23, 2:49pm  

    Wowwow... ,

    Pleasanton is a good area, the commute is bad to South Bay, and OK with BART to SF. In general, the area feels very much new, and clean compared to San Jose.

    But ... I don't think there are any houses in the range of $300-350/sqft there at all. That is simply way off. The "asking" price is in the range of $400-450/sqft. The $300 rate was in 2003.

    Pleasanton inventory is steadily climbing this year. It's not the core of BA, so will fall first.

    177   Randy H   2006 Mar 23, 2:56pm  

    @SGV Patience,

    Speaking for myself (Sans degree at the moment) I believe in my own social mobility as long as I need only care for myself. 27, no kids, no significant debt $20,000 in an investment garnering me 5% a month compounding interest that I can contribute to on the fly. I wonder what you might do in a similar position?

    I think you already know the answer. Invest in your own education and work experience so that you can rely upon your ability to earn an income. Then, once you know you can live life comfortably, react to unseen changes, and deal with unplanned events, invest wisely. I don't give specific investment advice -- not because I don't have an opinion, but because others here are far more capable at doing so than I -- I just try to focus on big picture stuff and how it is important to you.

    Just make sure your investment is diversified according to your own risk tolerance level. At your age, this should be aggressive and long-term. And, don't invest a penny until you've maxed out every possible tax-deferral available to you.

    Just my own perspective. I wouldn't really consider buying a home -- even if there were no bubble -- if I were in your shoes. It's probably worth far more to you to stay flexible. Consider it the price of a real-option. If you can move relatively quickly whether for job, for love, for family, you will probably be far better off than trying to be shrewd by buying a home anytime soon. Once you're tied down, rooted, or perhaps just happy being single and in one place for a longer while, then buying might make sense.

    178   Randy H   2006 Mar 23, 3:11pm  

    @Cheerful,

    Thanks for posting the details of your experience, and as others have said, please continue to post. You won't be labeled a Troll by most of us unless you purposefully incite things without being willing to engage in serious debate. Surfer-X has had a very long, bitter battle with genuine Trolls here for years, so his response is easy to understand. See how your post did bring out another much more "Trollish" response from another commenter.

    Anyway, as to evaluating your situation, all I can say is that ultimately all real-estate transactions are LOCAL. We talk a lot about averages and trends, but it is always possible to find exceptional deals in any market -- just harder in some than others. This is really what the professionals like Zephyr or FormerAptBroker here do well. They have the experience, intuition, and stomach to run profitable RE investment/income businesses.

    What you did was speculate (again, in my opinion), and got lucky. If you take your luck as such and use your gains to invest in learning how to run a RE rental business, then you stand a chance of doing well. If you think your luck was something else, more directly due to your own incredible prowess, then I'm afraid I'm not very optimistic about your future ability to generate returns. And, by the way, X is right that you have not *realized* some of the gains you are claiming. With RE, your gains are not realized until sale or asset restructuring occurs -- until then it's all book value. We don't do fair-price valuation on RE for tax or financial accounting in the US. So unless you're pulling out equity and restructuring the asset, it's still only worth the book value to you now (because you can't tell the future. it could drop to what you paid the day before you sell it).

    Remember this, for a RE income business, or any business for that fact, the value to you is ONLY based on the expectation of future FREE-CASH-FLOWS. This means cash in excess of all capital budgeting needs, operational needs, and working capital. What you have described doesn't give me enough info to evaluate whether you're doing this or not.

    180   Unalloyed   2006 Mar 23, 3:52pm  

    If you think your luck was something else, more directly due to your own incredible prowess, then I’m afraid I’m not very optimistic about your future ability to generate returns

    Another truly excellent post, Randy H.

    181   LILLL   2006 Mar 23, 5:07pm  

    SFWoman
    I think you've got it right. Trolls working together for their own benefit...like con men passing the mark's wallet...

    182   Different Sean   2006 Mar 24, 7:45pm  

    just to flog a dead thread... on the 10x rule, interestingly, there's a 'licensed boarding house' nearby on the market i was looking at, don't ask why – to do with one of my partner's hare-brained business schemes.

    the owners paid $657K for it 2 years ago (bought at the top of the market), have been making a loss on it ever since, prices have dropped, and it's back on the market for '$640K negotiable'. Even at that price, they have lost 17K + the stamp duty and conveyancing costs, so maybe another $20K. Plus the money they've lost every week in the repayment shortfall.

    When you calculate the actual annual rent gathered on it (assuming fully occupied) and multiply by 10, you get $426K. $640K asking is almost exactly 50% over the realistic rule of thumb for a sensible investment (to realistically be able to pay back interest and principal, and not be praying for capital gains to bail you out). Interestingly, a recent OECD report stated that Australian property was 50% overpriced on 'fundamentals'. Uncanny.

    183   ric   2006 Mar 25, 3:39am  

    Just want to note that Cheerful was in all likelihood quite confident that when his 1.2 haha stock market investment still existed, it was as good as "hahas in the bank" until it wasn't. If Cheerful could have predicted that crash, he would have 1.2 hahas plus interest more than he does now.

    Unless Cheerful's predictive abilities in terms of housing futures vis a vis stock market futures are dramatically superior, equivalent risk exists today.

    As pointed out by X and Randy, your hahas are not in the bank until they are.

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