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Higher Price to Rent Ratios May Be Justified in Certain Neighborhoods
2011 Jul 15, 1:39am 6,908 views 28 comments
by PRIME follow (0)
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Patrick
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2011 Jul 17, 12:18pm
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.
B.A.C.A.H.
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2011 Jul 17, 1:24pm
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.
Â¥
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2011 Jul 17, 2:03pm
I have been told if 15 * yearly rent should buy
Demand is willing but the supply is weak.
PRIME
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2011 Jul 18, 1:33am
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
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2011 Jul 18, 1:34am
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.
tatupu70
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2011 Jul 18, 2:09am
One thing to consider is the MID. More expensive houses will yield more savings and therefore have a different rent/price ratio parity.
Patrick
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2011 Jul 18, 8:54am
My calculator does take the Mortgage Interest Deduction into account.
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.
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Certain categories of stocks have higher price to earnings ratios than others (technology P/Es are higher than utilities) and certain neighborhoods should have higher price to rent (P/R) ratios than others. The growth of rents is different in some neighborhoods than others.
Let's break down neighborhoods into the following categories:
1. Urban (like NYC or San Francisco, not crappy urban)
2. Prime suburbs (like Palo Alto in CA and Bronxville/Rye in NY)
3. Regular suburbs (Fremont in CA and Mount Kisco in NY)
4. Exburbs
I think the useful economic life of housing is different in these areas. We are running out of oil (geologists say we have already used 50% of total world supply), and the exburbs are only viable when gas stays below a certain price. Some say we will all be telecommuting and driving cars that get 200 mpg in a few years, but I am skeptical. I think rents and prices will eventually go to zero in the exburbs (so the P/R should be low now).
Regular suburb areas that are walking distance to public transportation should hold up ok/only suffer moderately, but the areas that resemble the exburbs (i.e. you need to drive to get anywhere) will probably suffer.
Prime suburbs will probably do just fine. Over my lifetime, I think it will be business as usual in these areas.
I think urban areas will flourish over the coming years. Face to face interaction is important and I don't think technology will overcome this. I agree with Paul Krugman that the best mass transportation invention ever is the elevator. I think people will move from the exburbs/regular suburbs to cities, so they can afford the commute. The denominator of the urban P/R should rise, so a high ratio at the moment may be justified.
Now we need Patrick to tell us what the P/R ratio should be in all these neighborhoods :)
#housing