Home Prices Must Fall Far To Be In Sync With Rents

http://online.wsj.com/article/SB119931831334463571.html

"The study tracks rents and home prices back to 1960 and found annual rents fluctuated at around 5% to 5.25% of home prices until 1995. At the end of that year, the average monthly rent was about $553 (or about $6,600 a year) and the average home price was about $134,000.

But starting in 1996, home prices started to grow much more rapidly than rents. By the end of 2006, they had more than doubled to an average of $282,000, while the average rent had risen 48% to $818. That drove the annual rent/price ratio down to 3.48%.

That means the rent/price ratio is about a third below its long-term average. To return to normal would require some combination of falling prices and rising rents. The paper suggests house prices would need to fall about 3% a year, if rents grew in line with their 4% average annual growth this decade.

Of course, the link between house prices and rents can remain out of whack for years."

Just found this interesting.

That is the nice thing about moving somewhere else and seeing what is so weird about the city you live in. I knew it was expensive, yes, but I had no idea how whacked rents were as well. I just assumed it was always cheaper to own than to rent. ISn't that why home ownership is #1?

So I did a little research on Craigslist and Zillow, and down memory lane as well.

I'd say historically in the Bay Area rents were closer to 10% of home prices (well when we were renters anyway).

Today it looks like 5%. Rents have kind of stagnated, but home prices are absolutely through the roof. (Like they weren't already).

OF course thinking about averages, my ideas of home ownership would change greatly if we lived in an average city.

It has been interesting in sacramento where there is so much overbuilding and so many propertied snatched up for investment. As such rents have been very low. I am just amazed at how little you can rent for here. (Though still glad we snatched up property before it went crazy).

The interesting thing is there are whipserings of increasing rents while all these homes foreclose. Less available for rent in the interim. I think in the long run there is probably too much property. But then again, as prices fall, we will once again attract many many people from the rest of the state. So it is hard to say.

I guess kind of the interesting thing with falling prices. If prices fall and rents rise, we'll be in a good spot. Because our payments won't rise.

Anyway, as such, you see why I am totally lost on renting as an avenue to build wealth.

I have mentioned my parents probably pay around $5k/year for property taxes and insurance on their million dollar home. Sure they have repairs and maintenance, but they have kept it up well. Certainly no large, looming expenses. They have an older, paid for home (That cost merely $100k 25 years ago) with 2000 square feet. Dh's parents have a smaller house but their expenses are probably very similar. They have a lot more work to do on their house though. Houses were both built in the 70s.

Likewise, grandma sold her house and pays $2500/month to rent a closet. It is a retirement community with food and maid service. So she gets more than just a space. But the renting costs are just crazy. She has been really stressed. We keep telling her to really consider moving closer to us. Lower rents.

OF course, back in 1999 it cost $25k-$30k annually to rent the condo that we paid $260k for. Yeah, we were never going to waste those dollars renting. I rented a room (found a STEAL) for $400/month and dh lived with his parents while we saved the down. But to get a place together would have been at least $1k/month to live on the other side of the railroad tracks. So we just waited a bit. We never saw how we could save up for a house otherwise. Well, more slowly on the wrong side of the tracks perhaps. But not many other options. Likewise I always have thought about the dollars we would save in the long run with a paid off house and no rents to pay!

Reading this article I see a little more why people don't get so excited about that. LOL. Or why they think I am insane to believe owning cost less than renting. But I Am not insane. Just live in bizarro world. IT has it's pluses and minuses.

As such, rents here boggle my mind. I guess I could still be happy to say our expenses are in line with rents, if not lower. Somehow, some way. & might get more in our favor in future years.

For the long run I figure inflation will blow rents out of the water. Which is where it leaves dh's grandma. She obviously never had a $2500 house payment. she's 80. No wonder those rents stress her out so! But I understand why she rents. No longer wanting to upkeep a house.

You can't help but wonder if she would have been better off buying an apartment and hiring a personal chef and a maid. ! I really don't know. But rising rents won't help her. *sigh*