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Rent/Own Ratios - A Tale of Two Cities

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  • Rent/Own Ratios - A Tale of Two Cities

    A comparison of rent/own ratios between Portland, OR and Cleveland, OH

    As many of you who have been around here a while know, I sold my house in Portland a couple years ago and have been renting since then. I decided to take a look at the costs of renting vs owning, though I knew from my own experience that renting in Portland is currently cheaper.

    The spaghetti is fairly simple, but the numbers behind the series are complicated. If you care about the details, read the text box; it tries to summarize the calculations I went through. These are all hypothetical scenarios for the imaginary median family buying the median house or in the median rental. Any individual real-world scenario would of course vary, including factors such as additional itemized deductions, differences in actual home maintenance costs and property taxes, actual mortgage rates and loan terms, etc.

    This chart shows the ratio between monthly ownership costs and monthly fair market rent. So a ratio of 1.0 would mean they are equal, a ratio of 1.5 would mean "owning" is 50% higher than renting, and so forth.



    As a further exercise, I created a second chart exploring three different buy-and-hold scenarios. The first series looks at buying a home in Portland in 1987, when the rent/own ratio was at its lowest point within the years surveyed. The second series shows buying in 2004, shortly before the final stages of the bubble. The third series shows buying at the peak in 2007. As you can see, only the first scenario is on par with or cheaper than renting, based on my calculations.



    For a comparison city I chose Cleveland, Ohio, which has a roughly similar metro population and median income history, but did not experience the exuberant run-up in home prices.

    A caveat on the home price data for Cleveland: The Portland RMLS publishes a detailed monthly report (this Oregonian article has a link to a recent example). Trying to find this kind of data for other cities, especially a consistent historical series going back more than a couple years, has always been a frustration for me. Therefore, I pulled Cleveland home prices from quarterly IHS Global Insight reports (here's an old thread with a couple of them) and combined them with the monthly Case-Shiller index for Cleveland to create a continuous series.



    For Cleveland, the first scenario also starts in 1987, a relative low point in the ratios but actually higher than the equivalent Portland scenario. I put the second scenario at the Cleveland peak in 2006, and the third scenario at the historical (in this range of years) low ratio point in early 2009.





    P.S. I apologize for not participating much in the past few months. My life outside iTulip has been somewhat derailed. That's all I care to say in a public forum. It is impossible to catch up on all the discussions when I do not visit the site regularly, so I have missed a lot.
    Last edited by zoog; February 24, 2010, 02:07 PM. Reason: relinked first chart

  • #2
    Re: Rent/Own Ratios - A Tale of Two Cities

    these are interesting charts, zoog. thanks for sharing them. welcome back, and i hope your re-appearance here means your life is back on track as well.

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    • #3
      Re: Rent/Own Ratios - A Tale of Two Cities

      Thanks Zoog, good stuff.

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      • #4
        Re: Rent/Own Ratios - A Tale of Two Cities

        great charts & analysis. kudos for acting on your conclusions. giood to have you back... hope the rest gets back on the rails soon.

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        • #5
          Re: Rent/Own Ratios - A Tale of Two Cities

          great info, no wonder apartment vacancies have been going through the roof, I had a consulting gig last year and I told the landlords don't raise rents. Keep them the same or lower them.

          What did they do? give back 1/2 of the security deposit because they got scared during the "economic crisis"

          Whats the problem now?, lots of renters being evicted with no security deposit to back it up. And they are forced to lower rents and give free months on leases just to get people in.

          What I have found amazing is the elasticity and how quickly renting has become expensive.

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          • #6
            Re: Rent/Own Ratios - A Tale of Two Cities

            Originally posted by chr5648 View Post
            great info, no wonder apartment vacancies have been going through the roof, I had a consulting gig last year and I told the landlords don't raise rents. Keep them the same or lower them.

            What did they do? give back 1/2 of the security deposit because they got scared during the "economic crisis"

            Whats the problem now?, lots of renters being evicted with no security deposit to back it up. And they are forced to lower rents and give free months on leases just to get people in.

            What I have found amazing is the elasticity and how quickly renting has become expensive.
            I agree, it can change quickly. I don't consider the HUD fair market rents to be the most reliable data, but they do show, in Portland at least, that rents ran pretty flat during the final years of the housing boom because so many people were buying instead of renting. I actually expected rents to fall as the bubble burst, figuring a flood of unsold houses and condos would be rented out, increasing the rental supply relative to demand. This did seem to happen for a few months, but then rents began to rapidly push up. People have to live somewhere, and when subprime lending disappeared and lenders tightened requirements, lots of people had to keep renting instead of buying. I think statistically the extra housing being put on the rental market is not enough to overcome the demand from the majority of people who for one reason or another can not or will not buy.

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            • #7
              Re: Rent/Own Ratios - A Tale of Two Cities - Shadow Real Estate Inventory

              In my area there seems to be large inventory of large unsold homes - some of which are empty. Sometimes, these empty homes are put on the Market to Rent at the same time that they are on the Market to be sold.

              I look at a few as potential homes to rent - many are old homes in desparate need of updating and cost more to operate than a modern townhouse or Condo.

              But, the Price to Rent these homes on a monthly basis is astronomical - for example there are lots of home available to rent from $2900/month - $8,000 per month.

              I don't think the average person with a home to sell has figured out that the value of Real Estate has fallen.

              The folks attempting to find Renters for these homes don't seem to understand that there is No Tax Deduction or itemization for the Renter....so, paying $3,000 per month or more per month is a real drain on the spendable cash for a Family or Individual.

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              • #8
                Re: Rent/Own Ratios - A Tale of Two Cities - Shadow Real Estate Inventory

                Originally posted by BK View Post
                In my area there seems to be large inventory of large unsold homes - some of which are empty. Sometimes, these empty homes are put on the Market to Rent at the same time that they are on the Market to be sold.

                I look at a few as potential homes to rent - many are old homes in desparate need of updating and cost more to operate than a modern townhouse or Condo.

                But, the Price to Rent these homes on a monthly basis is astronomical - for example there are lots of home available to rent from $2900/month - $8,000 per month.

                I don't think the average person with a home to sell has figured out that the value of Real Estate has fallen.

                The folks attempting to find Renters for these homes don't seem to understand that there is No Tax Deduction or itemization for the Renter....so, paying $3,000 per month or more per month is a real drain on the spendable cash for a Family or Individual.
                $8000 per month! :eek: Other than what surely must be a tiny minority of the population who frequent sites like iTulip and understand the housing bubble burst, who are the families that can afford rents like that but didn't just buy a house?

                Three-bedroom rentals in my area usually range $1500 - $2000, though I am paying less than that because my landlords really like me. By the way, rentometer.com can give you an idea of rents around a certain address.

                Landlords, especially reluctant landlords who can't find a buyer for their property, usually set the monthly rent to at least cover their mortgage and taxes. It is a natural expectation; if you can't recoup your expenses then why bother? Unfortunately, many of them payed too much, so the market rent should not be that high. What has surprised me is that renters seem willing and able to pay those rents... maybe not $8000/month but certainly $2000 or $3000. That overpriced rent may still be cheaper than buying though, as indicated by the charts I posted. And if the rent (or a mortgage for that matter) is only, say, 25% of their gross income, then perhaps it does not matter if technically the price should be less.

                As the bubble was peaking and then starting to burst in places like Vegas and Miami, there was a near consensus on the numerous housing bubble blogs that rents would soon plunge as the market was flooded with unsold housing to be rented out. The reality thus far has been muted and more complicated. In certain periods and in certain areas, rents have fallen or remained flat. In others, rents have actually increased. It is just another example of the volatility and uncertainty we are living through today. No one seems to have a firm grip on what fair market value should actually be for a given property, whether to sell or to rent. So the prices are all over the map.

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