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Tuesday, May 01, 2007

Renting in Seattle "may make economic sense"

Finally some semi-useful information out of Dupre + Scott. Mr. Cohen reports on the "1-19 Unit Report" just released by Dupre + Scott in this terrifying tale of skyrocketing rents and plummeting vacancies:

Rental houses get scarce, expensive

The good news for people who cannot afford to buy a house in Seattle is that it may make economic sense to rent for the moment.

The bad news? Rental houses are a lot harder to find and pricier than they were a year ago.

The typical Seattle rental house now costs $1,604 a month, up 4.6 percent from a year ago, according to data that Dupre + Scott Apartment Advisors released Monday. House rents for all of King and Snohomish counties were up 6.5 percent from a year ago.

Dupre + Scott did not release vacancy rates just for houses, but among all King County rental buildings with one to 19 units, including houses, the rate declined from 3.7 percent a year ago to 3.1 percent now. The house trend is similar to that for apartments in general, according to Dupre + Scott.
It should be noted that even this report excludes homes or condos rented out by individuals. According to the Dupre + Scott website, the 1-19 Unit Report is derived from a survey of "apartment owners, professional property managers, and on-site property managers." Given the logistical complexity of such a task, you can't really blame them for not surveying individual owners, but it's important to keep in mind what this data is and is not telling us.
Dupre + Scott's April apartment report asserts that people would make more money renting, and investing the money they save elsewhere, than paying current prices to buy a home.

"There are a lot of reasons to own a home," Dupre + Scott co-owner Mike Scott said. "From a purely financial perspective I'd say no, it doesn't make sense. But if home prices go up 10 or 15 percent in the next year, I'll have to eat those words."
That makes about as much sense as the following: "There are a lot of reasons to visit a casino. From a purely financial perspective I'd say no, it doesn't make sense. But if you make 10 to 15 percent profit on your next visit, I'll have to eat those words."

No words will in fact need to be eaten, because even if home prices go up another 10 to 15 percent next year, it still doesn't make financial sense to buy a home right now. To put it another way... Just because a reckless decision paid off in the short term doesn't mean that it wasn't reckless, it just means that you were lucky.
Bob Melvey, assistant manager of Windermere Real Estate's Ballard office, said renting and investing the savings might pay off "if someone is very, very disciplined and they truly do put that difference in the stock market and they do a good job of managing their stock portfolio."

But most people would end up spending the savings on other things, Melvey said. "Owning your own home is, to a degree, a forced savings plan."
A "forced savings plan" where 80% of the money you "deposit" in the first five years simply vanishes (the interest portion of the payment), and from which you can only withdraw money by paying a 6-9% fee (not on the amount you have "saved" mind you, but on the total sale price) and relocating. Wait, that doesn't sound anything like a savings plan.

To give these figures a bit of perspective, let's say that the average single-family home at $1,583 (King/Sno) is comparable to the median home, which sold for $454,950 last month (King), resulting in an approximate PITI payment of $3,400. We will assume the homebuyer had 20% (almost $100,000) to put down, and we will ignore maintenance, HOA, utilities, and tax deductions in order to keep this simple. Right off the bat, the renter's monthly payment just 46.6% of the buyer.

It would take 13 years of 6.5% rent hikes before the renter's payment exceeded the homeowner's. Of course, during that time, the renter's $90,000 in liquid investments will likely have doubled or tripled, and that doesn't even consider that they're adding the monthly savings to the investment. If they bank the difference, their $90,000 could quite easily become $500-$600k. Also, if you think that rents will increase steadily at 6.5% per year for the next 13 years, I don't think you have a very good grasp of history.

Suffice it to say that despite the scary language in the headline of Mr. Cohen's latest volley, renting still beats buying in the Seattle area hands down (financially speaking).

(Aubrey Cohen, Seattle P-I, 04.30.2007)

43 comments:

Finance said...

Tim, your calculation ignores leverage. In the stock market a margin account allows a max of 2:1 (or 100%) which most people don’t use due to high borrowing rates (~10%), while an 80/20 mortgage would be 5:1 (or 500%). Thus if the average house appreciation is 4% going forward then you have a 20% return per year (better than the avg S&P 500 return). 3% appreciation in house prices = 15% nominal return (due to leverage)

Under these circumstances (from the provided assumptions) you would be better off buying after 13 years, this seems reasonable.

It was a breath of fresh air for Dupre + Scott actually confess that renting is more economical, yet it is true that if prices go up 10 – 15% you would have been better off…it is a risk, but a calculated one at that.

Finance said...

REAL LIFE EXAMPLES:
I was looking at recently sold condos in within a few blocks of me and noticed that a unit in a significantly older 1965 (and less quality) building sold for $245K with 527 sqr ft on 12/21/06. Then in my building a unit sold on 12/13/06 for $260K with 545 sqr ft. Today a unit in the older building across the street went up for sale for $265K with 500 sqr ft (with comparable views with my unit). I put money down at the end of June last year and my purchase price was $239,990 with 552 sqr ft…you can do the math, yet the market would have to crash hard in downtown Seattle in order for my condo to revert to the purchase price!

I have noticed in the Eastlake, Capital Hill, QA, First Hill, and Downtown condos (in the lower market (200k – 350k)) just exploding upwards…My prediction for the year was prices to rise about 5% this year and going forward (-5% in my worst case scenario and 15% in the best case estimate).

Lionel said...

I bumped into an old friend at my college reunion this weekend. He works real estate in Seattle, both residential and commercial. He wouldn't budge much on my assertion that Seattle's going to take a hit soon, BUT he said condos are going to get hit hard, especially on the high end.

Grivetti said...

finance...

Check this CNNMoney article...

Stocks vs. Real Estate

Stocks win the bout four rounds to three, with one round a draw. But the fight is in truth considerably more lopsided.

Stocks roll up large margins of victory in performance, costs, diversification and effort you need to expend as an investor.

Real estate's only big win is in leverage.

Leverage is mentioned here, but its a pale shadow compared with Stock investment.

I figured Dupre + Scott wouldn't be able to capture the true rental market. Personally, I find it rare that anyone would be renting a home via a property manager. I rent directly from the homeowner and its seems that's more the norm than not... dunno.

Grivetti said...

But talk about hype...

Rental Houses? Forget it

I got one for you Mr. Cohen..

P.I. Job security? Forget it

Right back at ya there Mr. Cohen. Talk about scare tactics. Who has to Forget it? necessarily... Once again, there's never any link to fundementals...

For starters, pop growth in KingCo/Seattle is not creating a housing 'crisis', there's plenty of homes to go around. If you really wanted to gauge this you'd poll the number of empty units/homes in the area and monitor thouse over the years... you'd find empty home numbers have skyrocketed (I'm sure)

Finance said...

Grivetti - I completely agree with you about Stocks & Real Estate, yet was mainly stating that leverage was not taken into account in The Tim's calculatons.

QUESTION: In the article you referenced it probably took into account the entire US RE market. What would the returns be for Commercial and Residential RE in larger cities? My guestimate would be that there are higher rates of appreciation the denser a city becomes...seems like a resonable theory.

B said...

I spent the better part of the last month house shopping.

Every calculator I can find is now telling me that without at least 4-5% annual appreciation consistently, *forever*, I can't break even for at least 10 years..

There's an article in the Times today about how "finding rental houses is expensive, boo hoo" with a byline of "but renting makes financial sense in Seattle". I don't know where they're looking, but I'm seeing plenty of condos, townhouses, and SFH's owned by speculators that are for rent, and I haven't even dug deeper than a 30 second craigslist search.

Eleua said...

Is the 'American Dream' worth bankruptcy? Is it a financial thing, or a pride thing?

The following quote sums it up well. It is from a short article on The Fool:


Now that it's becoming clear that a pulse doesn't guarantee cash flow, lending is getting a bit tighter, and with the mainstream media reporting on the awful fallout, there are fewer and fewer suckers out there willing to pay two or three times equivalent rent to get in on "the American dream." This isn't a buyer's market yet. Just wait until the crummy loans of the last couple of years reset in 2008. Then find a property you like, and make a bid at 20% less than list.

Paying less than rent for more space in a place you want to live -- that's the real American dream. Sometimes you have to wait for it, though -- not to mention earn it.


Wait and earn...wait and earn...wait and earn...

That sounds like "don't buy in the bubble" and "don't borrow your way to wealth" to me.

wreckingbull said...

Yep,

The REAL american dream is being able to make the choice to pay 1/3 to 1/2 the cost of buying, work hard, sock away the difference, and have the money to buy freedom and a good night's sleep. (WTF is this nonsense about a 'forced savings plan'?)

To the rest in Seattle, it means suffocating on a ridiculous mortgage to pay for a dump-hole. Have fun with that.

Benjamin said...

For the record, the American Dream is to be better off than your parents were. This is why people from war-torn despotic nations come to America.

Mortgaging a home is NOT the American Dream. Owning a smaller home made from shoddier materials in a worst location than your parents is regression, not progress. Paying a higher percentage of your take-home pay than your parents did is just salt in the wound.

Unfortunately for most American's, even those on the upward-mobility-forever escalator of housing (escalator only available in Seattle or Portland), the American Dream is less possible than at any time in the last 230 years.

MisterBubble said...

"I completely agree with you about Stocks & Real Estate, yet was mainly stating that leverage was not taken into account in The Tim's calculatons."

Probably because Tim was focusing on finance, and not gambling.

Just because you can bet more of someone else's money on a house than a stock doesn't mean you're making a better bet.

Finance said...

Mr. Bubble,
You cant completely ignore leverage, however you can discount the return (NPV) due to a riskier investment.

So maybe instead of using 500% leverage ratio for a 20% down payment you could use 400% leverage due to the increased risk in calculating a nominal return. This seems reasonable for analytical purposes, BUT to refute the idea that it shouldn’t be accounted for is just as ignorant. Its not gambling since your return is not win it all or lose it all “bet”, as houses don’t lose 100% of their value…

Mike said...

Finance, why is it you can't leverage to buy stocks like you can to buy a house?

The way I see it is if I have say $100,000 of space on my credit cards, I can deposit that money into my Schwab account and buy stocks on a 2:1 margin. That's $200K of buying power with nothing down.

Or better yet, I could spend the $100K on put/call options or FOREX trading - I could easily control millions of dollars in shares with no actual cash outlay.

The only way to beat that with a mortgage is to deposit the HELOC in your broker account.

Finance said...

Mike - I mentioned leveraging stocks in an earlier post in this message stream.

You can leverage stocks with Margin accounts, yet can only borrow 50% (set by the FED) of the money you have depositied in your account. However the interest rates are very high on margin balances, somewhere in the range of 10% at scottrade.com (or about the same as a credit card).

Technically you are correct about leveraging stocks, yet is significantly more expensive than a 6% mortgage. Both margin interest and mortgage interest are tax deductible though.

Comrade Chairman Greenspan said...

'According to the Dupre + Scott website, the 1-19 Unit Report is derived from a survey of "apartment owners, professional property managers, and on-site property managers."'

None of whom, after all, would ever want you to think that rents are going up.

T,V & Mr.B said...

Finance Said "yet the market would have to crash hard in downtown Seattle in order for my condo to revert to the purchase price!"

don't think will happen? See San Diego. Condos on the market for two years. People selling for less than they paid.

Mike said...

Finance, you're seriously underestimating the amount of leverage available on stocks if you think it's limited by margin requirements.

The 10% in margin interest is a bit high. Credit card companies will loan you money at half that rate fixed.

If you do it over the short term you can put an even lower cap on the fees and interest on the debt.

The mortgage rate isn't significantly lower.

Deejayoh said...

Seems like the only people who consistently talk up the Seattle housing market on this blog are the ones who have bought in the last year or two.

Why do they spend so much time trying to convince the the rest of us that essentially, they are right and we are wrong? Why do they care?

If I was so sure that housing will only go up in Seattle that I took the plunge and bought recently, I don't see why the presence of this blog would even be the least bit interesting.

Just wondering

Comrade Chairman Greenspan said...
This comment has been removed by the author.
Deejayoh said...

Looking at historical PI headlines on rent in seattle is amusing and shows the pointlessness of discussing this issue based on what they write. The articles are like a random walk through up and down assertions separated by only a few months of time. There is no consistency whatsoever in what they are reporting. It's like they have reporters with dueling agendas.

I don't know who the credible source is on rental trends, but I am sure it isn't the PI.


Area housing market is white hot
Rock-bottom interest rates ignite home sales, up 30% in September in King County

Saturday, October 5, 2002
The trend toward home ownership is one of the factors contributing to rising vacancies in the region's apartment buildings. "We're seeing the rental market suffer," said Denny Bullock, vice president of sales at Prudential MacPherson's Real Estate.

Rents rise, despite city's efforts

2000 summit produced some changes that have helped, others that haven't

Monday, June 10, 2002

Apartment vacancy rate soars
With low demand in trendy Belltown, 'rents are going to fall like crazy'

Wednesday, December 12, 2001

The working renter gets squeezed out
Tuesday, October 30, 2001

B said...

DJ -
"Why do they spend so much time trying to convince the the rest of us that essentially, they are right and we are wrong? Why do they care?

If I was so sure that housing will only go up in Seattle that I took the plunge and bought recently, I don't see why the presence of this blog would even be the least bit interesting."


Good point. I'd add, why are they wasting their time on a bubble blog at all, and not seriously mortgaging themselves to the hilt to buy the golden asset that can only go up, now with 50% More Leverage?

I mean, to read some of the cheerleading by RE groups, you wonder why a single property goes to market without getting snapped up by financially oh-so-savvy realtors. If you had a line on sure-fire profits, would you make your living brokering it to others? or would you just invest with every cent you had in order to become wildly rich?

If I had a time machine, I'd travel back 20 years and leverage myself to the hilt to buy every share of MSFT I possibly could. On the other hand, if it was 2000, I'd make a career out of hyping stocks to others and making a handy commission.

MisterBubble said...

"You cant completely ignore leverage, however you can discount the return (NPV) due to a riskier investment."

Probabilistic analyses don't work if you're buying a single home.

If you're making 10,000 small investments, you can "discount" the return of some losers. If you're making a single investment, a loss is a loss, not a theoretical gain.

"Its not gambling since your return is not win it all or lose it all “bet”, as houses don’t lose 100% of their value…"

So, wait...if I go to Vegas, pull some money out of an ATM, and use it to play blackjack, it's somehow not gambling, so long as I don't lose it all?

That's news to me!

Tai said...

http://seattletimes.nwsource.com/html/localnews/2003688349_webmillionaires01.html

Top 10 richest county in the country excluding primary residence. Response to this?

Tai said...

It's on seattletimes.com, somebody else can link it.

Deejayoh said...

Tai said...
http://seattletimes.nwsource.com/html/localnews/2003688349_webmillionaires01.html

Top 10 richest county in the country excluding primary residence. Response to this?


actually, it says we are tp ten in # of millionaires - not top ten richest. And given that King County is the 13th largest in the country, and the seattle MSA has the 15th highest income per capita (which is concentrated in King County vs. Pierce and Snoho) and we have Microsoft - I'd be surprised if we WEREN'T in the top ten. Surprising to me that we just now cracked it.

Eleua said...

Finance,

Its not gambling since your return is not win it all or lose it all “bet”, as houses don’t lose 100% of their value…


Who says you don't lose it all in housing?

If you put down $50K on a $500K home, and the property rolls back in value 15% to $425K, and you have to pay 8% to close the deal, how much of your $50K do you get back?

I am not schooled in the finer points of high finance, so please explain how this very realistic scenario isn't a total wipe-out.

I will grant you that the lender gets some of his money back, but for the borrower...?

Eleua said...

BTW, I didn't include the money lost in taxes, interest, maintenance, and insurance.

Again, how much of your $50K is intact?

uptown said...

Finance:

I would use options to buy stocks instead of margins. You can lose everything when buying on margin and the stock goes the wrong way (kind of like speculating on housing). With options all you lose is the cost of the option.

synthetik said...

Finance: What are PUTS options? talk about leverage!

seattle said...

But guys Ardell thinks the "Microsoft" area sells 5 times faster.

http://www.raincityguide.com/2007/05/01/microsoft-area-selling-5-times-faster/

Finance said...

Mr. Bubble - A house is a physical asset that can be sold eventually. The value does not deteriorate, thus not gambling. You might call it speculating...or investing, but not gambling. Yes I do understand you could lose all your money if prices decline, but over time they (like stocks) have always appreciated in the long run.

Options are a way to leveraging for stocks, yet under Mr. B’s definition stock options would be “gambling” as they are worth nothing if the price of the stock isn’t higher/lower than your strike price. Options would be comparable to speculating since their time value of money declines gradually and can expire worthless.

The Tim said...

Microsoft Area selling 5 times faster.

AwaySooner said...

Without any data and spreadsheet, I've concluded that houses within two miles radius of Google in Mountain View, CA sell 3.5 times faster. Duh! Thank you very much.

MisterBubble said...

"A house is a physical asset that can be sold eventually. The value does not deteriorate, thus not gambling"

Uh...no. Houses can (and do) deteriorate in value. Don't pay for repairs on your condo, and find out how quickly this happens.

But, enough of this nonsense. Your original argument was that you can borrow more money at lower rates to get a home than you can for other investments. This is true, as far as it goes.

However, as usual, you've totally overlooked a common-sense fact in order to rush to a silly conclusion: it's simply riskier to buy a home than it is to buy most other investments, and the return is historically lower. The recent home market is a statistical abberation.

It's a bit like walking into a casino, and finding out that for the last hour, the pit bosses have been napping, and the dice have all been loaded: for the recent past, returns have been phenomenal. But...does that mean that it make sense to load up your credit cards with cash advances, cash out the 401k, and sell the car to put it all on the line? You don't know when the pit boss is gonna wake up.

From an investment perspective, borrowing money to buy a home in this market is equivalent to waltzing into the Narcoleptic Casino, putting the nest egg on seven, and throwing the dice really quietly. It might work for now, but won't you feel dumb if someone sneezes?

S Crow said...

I don't know for sure, but I think we just broke the 1,000 new listings within a 24 hour period for the first time in quite a long while. I'll have to confirm this with some friends in the business.

In any case, I just re'cd notice that Inventory numbers have broke the 1,000 (1,049 as of around 6pm)new listings threshold within the last 24 hrs; 530 Price Reductions; 764 Expired listings (wow); and 180 went inactive.....all within the last 24 hour period (NWMLS).

I was curious what the numbers were going to be this first week of May. We'll have to see how the rest of this week goes or whether or not this is construed as "seasonal" or whether this inventory will be gobbled up.

The price reductions are clear earmarks that sellers are adjusting to the market demand.

Mike said...

s-crow - Very Interesting. I assume that's for all areas covered by the NWMLS.

Mike said...
This comment has been removed by the author.
Lionel said...

Cool link: http://tinyurl.com/yr23wb

Statistical analysis: Seattle 31.7% overvalued.

Comrade Chairman Greenspan said...

http://www.bloomberg.com/apps/news?pid=20601206&sid=asLI7aWzN8Jc&refer=realestate

"May 2 (Bloomberg) -- The glut of U.S. properties for sale is about to hit the rental market.

A record number of homeowners who can't sell condominiums and houses are competing for tenants with the country's biggest apartment owners led by Chicago-based Equity Residential, said Jack McCabe, the founder of Deerfield Beach, Florida-based McCabe Research & Consulting LLC. Metropolitan New York, where demand for housing exceeds supply, may be the only place where rents increase, albeit at a slower pace, he said."

The usual line: everywhere but here. Although with NYC they might be right for once.

Deejayoh said...

Here's another article on the wisdom of renting in today's market

Why rent? To get richer
A contrarian's view: Houses don't appreciate any faster than the level of inflation over the long term, so forget about buying a home and put your savings into stocks.

Seems like this is getting to be less and less the "contrarian" view based on the number of similar articles I have seen (NYT, Motley Fool, MSN, etc)

BanteringBear said...

"A house is a physical asset that can be sold eventually. The value does not deteriorate, thus not gambling"

Completely false.

"Uh...no. Houses can (and do) deteriorate in value. Don't pay for repairs on your condo, and find out how quickly this happens."

Exactly correct.

Homes require maintenance and repairs; a cash outlay. Stocks don't. This is something which is intentionally and routinely overlooked by not only the spinmeisters of the REIC, but by the sheeple as well. I shudder to think of how many of these newly minted homedebtors cannot even afford a new hot water heater. Suckers.

softwarengineer said...

I WAS WRONG ABOUT THE STOCK MARKET IN THE MID NINETIES TOO

I remember the stock market bubble of the 90s and by 1995 or so I was telling everyone to sell, it can't go higher. It did. It also collapsed in 2000 and adjusted for inflation, those post 2000 investors still haven't re-cooped their losses.

The housing market is similar today. Most sound economists and bankers were writing about a housing bubble in 2003, but the prices still went up double digits through 2005, then the recent fizzle finally did occur, albeit late. 2006 was a grim year and 2007 looks grimmer yet for American real estate.

So, we're the sacred island of Seattle and immune from the bubble collapses the rest of the nation is currently reeling under? The answer is clearly no. Number One, no State or City in America is immune from the health of the rest of our nation [no matter how haughty and globalist you might be].

Who are Seattle's Microsoft and Boeing selling a lot of product to? A 3rd world country where they make $2000/yr per capita? No, they're selling to people with money, like Americans. Soooooo.....how can Seattle be immune?

Hmmmm...one way is creative financing and new outside buyers with money coming into Seattle in a steady stream, we have that to some degree, and prices [at least the data MSM prints] still seem rosey for Seattle, for now.

So, should we rent and not buy in Seattle when the local MSM tells us we have a possible 10.7% price increase the last year? Yes.

Why you ask? Its quite simple, take the fixed rate house payment [by the way, you'll owe the fixed rate after you sell or refinance, no matter what your mortgage type is] with property tax and insurance added in [I'll eliminate maintenance if you eliminate the interest income tax deduction] for each $100K ya borrow.

Its about $900/month, give or take a few rubles, for each $100K ya borrow. Now, go buy a $300K with nothing down and your home costs are actually $2700/month. Borrow $500K and put $100K down and you're looking at $4500/month plus $500 a month lost money market interest on the $100K down payment; that means about $5000/month actual total cost.

How do you rent the $300K one out for $2700/month, let alone the $600K one out for $5000/mo to recoop actual costs?????

The simple answer is, "ya can't". Practically any rentor that's gonna pay $2000/mo+ rent will simply buy a $250K condo or fixer upper in the subburbs instead to resell later.

Who do you rent your $300K-600K home out to to get your cost back?

Ya can't.

Shawn said...
This comment has been removed by the author.