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Higher Price to Rent Ratios May Be Justified in Certain Neighborhoods
2011 Jul 15, 1:39am 6,890 views 28 comments
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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