patrick.net

Nomograph says

I don't see why the price/rent ratio should be different anywhere.

Except that they are different, and always have been.

When observation doesn't support theory, it's time to retool the theory; that's the basis of the scientific method. Clinging to a theory despite mounting evidence to the contrary because that's how it "should be" is the basis of ideology.

Another meaningless lecture from Nomo.

klarek says

Another meaningless lecture from Nomo.

Yes. You are right, of course. Forget historical data. Forget facts. If Klarek says so, then any other opinion is meaningless.

tatupu70 says

If Klarek says so, then any other opinion is meaningless.

He didn't have an opinion. That was the point.

klarek says

tatupu70 says

If Klarek says so, then any other opinion is meaningless.

He didn't have an opinion. That was the point.

I think he was saying that we should try to reconcile the difference between the theory (price to rent ratios should be the same everywhere) and the facts (price to rent ratios are very different across neighborhoods). This seems like a reasonable comment.

Nomograph says

A better question is "why ARE those two ratios different from each other."

I think it is a mix of emotion buying that Patrick referred to AND expected growth in rents. Google has a price to earnings ratio of 22, whereas Microsoft has a P/E of 11 because the market expects Google's earnings to grow faster than Microsoft's.

Similarly, I think the market has good reason to believe San Francisco rents will increase faster than Tracy rents, so a higher price to rent ratio is justified in SF. I am not sure what the equilibrium ratio in SF is through.

You can't expect to get $200 ppsf in high income neighborhood. You can certain get that in low-mid income neighborhood. So, of course higher price to tent ratio does exist.. Higher demand, lower rental supply equal higher price to rent ratio for those who want to live there. It just cost more. What's the mystery?

I like the rent/price ratio because that comes out to a simple percentage that you can easily compare to other investment opportunities. Price/rent ratio is too confusing.

So the rent/price ratio for Menlo Park, CA where I live is about 3%. Meaning that the gross annual rent is about 3% of the purchase price for the exact same house.

In the far East Bay (Antioch, CA and Pittsburgh, CA) the rent/price ratio is about 10%.

Why is that? I think the answer is mostly that people in those poorer neighborhoods have a harder time borrowing money to buy a house now that the bubble has crashed.

So the poorer people should buy because prices are now low compared to rent for the same thing, but they can't.

And the richer people shold not buy because prices are still too high compared to rent for the same thing, but they don't care. They prefer to own even if it's a financially dumb decision.

Landlords, however, know the score exactly, and they do buy in the poor neighborhoods now, and they stay away from the rich neighborhoods. And that's one reason it's difficult to find a rental in a rich neighborhood -- the landlord would lose money on it. That 3% is only enough to pay maintenance and property tax and not much else.

In my own case, the landlord has owned a long time and pays almost zero property tax because of Prop 13, so they're happy to rent out a house and skim off money as private profit that should have gone to the state as property tax.

I shouldn't complain though, because I benefit from that as well. I get to live in a rich neighborhood at less than half the cost of owning the exact same thing in the same neighborhood. At public expense, because of Prop 13.

PRIME says

Do you think the price to earnings ratio should be the same for all stocks?

No, but stock earnings vary a lot more than rents. Rents are fairly consistent and predictable from incomes.

Or to phrase it another way, yes, if stock earnings were consistent and predictable.

OK, if you could tell that San Francisco rents were going to skyrocket, then you would be justified in paying a very large premium for a San Francisco house to capture that future very high rent. I just don't think rents move nearly fast enough to justify current prices.

I don't see why the price/rent ratio should be different anywhere.

I don't see why they should be the same everywhere.

There are two populations (in the statistical sense) living sometimes in side by side communities. Since they are separate and distinct populations, it's not always right to presume the same behavior from them, because they are different.

I have been looking for a place to buy in the Bay Area. No matter how hard I look, I haven't found much houses or condo that has a good rent and buy ratio. I have been told if 15 * yearly rent should buy. Well, there isn't any house and condo to justify it. I don't this ratio works in the Bay Area.

looking says

I have been told if 15 * yearly rent should buy

Demand is willing but the supply is weak.

In my own case, the landlord has owned a long time and pays almost zero property tax because of Prop 13, so they're happy to rent out a house and skim off money as private profit that should have gone to the state as property tax.

I shouldn't complain though, because I benefit from that as well. I get to live in a rich neighborhood at less than half the cost of owning the exact same thing in the same neighborhood. At public expense, because of Prop 13.

Interesting way of looking at the situation!

PRIME says

Do you think the price to earnings ratio should be the same for all stocks?

No, but stock earnings vary a lot more than rents. Rents are fairly consistent and predictable from incomes.

Or to phrase it another way, yes, if stock earnings were consistent and predictable.

This is a fair point.

One thing to consider is the MID. More expensive houses will yield more savings and therefore have a different rent/price ratio parity.

My calculator does take the Mortgage Interest Deduction into account.

My calculator does take the Mortgage Interest Deduction into account.

right, but a simple rent ratio doesn't.

We have something inspired by prop 13 in mass..it's prop 2 1/2.

Property taxes can go up but by only 2.5%. If that isn't enough then they have an override if voters approve it (it is rare..but not as rare as it used to be)

But if they can't raise the taxes then can still raise the assessment. The 1990's saw valuations skyrocket as tax rates didn't go up..but assessments did. It is odd because technically people might actually be paying the same amount had taxes been allowed to go up...

The paradox is some believe that the market is good because after all assessment rates went up...but that's not really the case. It is almost as if a car insurance company called a '99 Corolla a antique to justify a massive premium.

I've also heard in some states that the state government gives significant amounts to their capitals for their budgets. This intern could create less of a need for property taxes which could lead to more development.