Comments on: The state of the housing market(s)

By: Les Cargill

Les Cargill — Tue, 18 Jul 2017 02:07:20 +0000

“The ratio of rent to price is comparable to an interest rate.” No, its’ a tax on people with bad credit or income inadequate to buy in expensive areas.

By: Handle

Handle — Sun, 16 Jul 2017 23:58:21 +0000

“Not all pecuniary externalities are negative.”

By: Kevin Erdmann

Kevin Erdmann — Sun, 16 Jul 2017 20:22:36 +0000

In most cities, many middle class renters could buy affordably if they could get a mortgage. In the high priced cities, middle class families haven’t owned homes in any quantity for a while. The drop in ownership in the expensive cities was in young households in the top two income quintiles. Huge drop. Double digit %s. They can’t get conventional mortgages because the mortgage amounts and DTIS are above the ones we consider normal. So we are basically preventing workers with 6 figure incomes who spend 40% of their incomes on rent from spending 45% on a mortgage. The CFPB worries about mortgage affordability, not rent affordability. It’s politically popular to keep people from being owners (for their own good, of course), but not so popular to keep them from being tenants.

By: asdf

asdf — Sun, 16 Jul 2017 18:36:54 +0000

House prices for Baltimore in general aren’t going anywhere, but because I happened to pick the neighborhood where all the hipster coffee shops showed up over a five year period I hit the gentrification jackpot and cashed in a big gain.

At the end of the day real estate is nothing more then figuring out where NAMs are going to move into and out of. Everything else is secondary.

I don’t think cities are in a rush to pop their bubbles. As rents rise it drives out undesirables. Places like SF and DC are actually shedding blacks and replacing them with young urban professionals. This sets up a positive gentrification feedback loop where high rent creates the environment that justifies the high rent.

By: Various

Various — Sun, 16 Jul 2017 18:00:19 +0000

Good question. The math looks like this. Average rent in San Jose is about $2,700 per month. This assumes an average annual NOI of about $22,680 ($2,700 per month x 12 months x average NOI margin of about 70%. The average class B apartment property in San Jose sells for about $400k per unit. Therefore, this implies an annual NOI yield of about 5.7%. In the industry this number is known as the capitalization rate, or cap rate.

Now let’s compare to Merced. The average rent there is about $750. At a 30% NOI margin, this implies annual NOI of 12 x $750 x 30% or $2,700. The average apartment property in Merced sells for about $45k per unit. So the implied Cap Rate is $2,700 / $45,000 or about 6%. There are other reasons, both quantitative and qualitative reasons that the cap rate in San Jose is higher than that in Merced.

Anyway, you can see that the Cap Rate is a much better measure of equivalency across geographies than the revenue multiple. In this example the revenue multiple for San Jose is 12x and the multiple for Merced is 5x, but these multiples are misleading.

By: Handle

Handle — Sun, 16 Jul 2017 17:10:31 +0000

All real estate is local (or, “location, location, location”) I suspect that the details of the compositions of renters and owners differ substantially from place to place, in a way that is masked by using these aggregate numbers., making the utility of direct comparisons suspect. It looks like we’re comparing apples to apples, but drilling down may reveal some oranges.

By: Octavian

Octavian — Sun, 16 Jul 2017 16:43:52 +0000

Maybe a naive question, but if one factors in the cost of buying the building you’re renting out, how well does that account for the difference between cities?

By: Various

Various — Sun, 16 Jul 2017 16:06:06 +0000

Regarding your arbitrage question, as a principal in real estate private equity shop, I can tell you that you are ignoring a critical part of the investment equation, and that is that profit margins on rentals in high cost urban areas are much higher than in lower cost markets. For example, a typical NOI margin (with NOI standing for net operating income, a real estate financial measure roughly equivalent to EBITDA) is about 70% for a Class B apartment complex in San Jose, about 65% in Midtown Sacramento and about 35% in Merced. This is because although San Jose rents are 4x those in Merced, operating expenses are not 4x. So…..looking at a price to rent ratio is useful for comparing prices across time, but terrible for comparing across geographies.

To put this another way, price to revenue ratios for publicly traded tech and pharmaceutical equities are much much higher than for auto parts distributors. But this is because the tech and pharma companies have much higher EBITDA and profit margins. One would never compare public companies across industries using a revenue multiple. One would use P/E or EBITDA multiples instead.

By: Ryan

Ryan — Sun, 16 Jul 2017 14:24:56 +0000

The only way I can think of to do the arbitrage is to live in a high price-to-rent area as a renter, then to buy a house in a low price-to-rent area and rent it out.

By: Michael Moran

Michael Moran — Sun, 16 Jul 2017 14:12:21 +0000

On why you can not make money investing in REITs, remember most REITs do not rent housing to individuals. Pretty small part of universe. You have REITs owning retail space, and they are being hurt by Amazon. You could by a multifamily REIT, but the market has the good news you report already in the stock price (and in price of underlying apartment properties they own.
You second question is why the rent to buy ratio is different in different parts of country (in fairness, you do not really ask question). But it is function of expected appreciation of housing unit. In Ada Oklahoma, you can expect zero appreciation for as far as eye can see, so a housing investor (which includes an owner occupant) must get 100% of his return from current rent. So if he wants a 10% return, the rent is 10x the price (I have excluded costs of ownership). On the other hand in LA, you may expect 7.5% appreciation a year, so investor only needs to charge 2.5% of cost of house to get 10% return. Thus, the rent to price ratio is 40.