price/rent ratio

[Riverne]

I read in many places (e.g., http://www.npr.org/blogs/money/2011/04/14/135380539/should-you-rent-or-buy-contd, http://finance.fortune.cnn.com/2011/01/04/rent-vs-own-ratio-to-flip-in-2011/, http://www.fool.com/investing/general/2011/08/29/where-to-rent-where-to-buy.aspx) that the price-to-rent ratio in Orange county is about 26-28. (They define it as house price divided by 12 months' rent.)

However, every single property I checked had price to rent ratio of somewhere in the 10-15 range. Am I doing something wrong?

Examples (removing a couple outliers):

Watermarke

sale price per sq ft ranges from $300-330, median $318; rental $20-28/sq ft per year, median $23.5. So the price/rent ratio is about 13.5.

Marquee at Park Place

sale price per sqft $270-$365, median $327; rental $23-25, median $24.7. Price/rent ratio ~ 13.2.

What gives? Am I looking at the wrong numbers? Are these rents outright rip-offs? Is price/rent ratio in Irvine way lower from OC average (I'd be surprised, given how well it's doing)?

 

[usctrojancpa]

I read in many places (e.g., http://www.npr.org/blogs/money/2011/04/14/135380539/should-you-rent-or-buy-contd, http://finance.fortune.cnn.com/2011/01/04/rent-vs-own-ratio-to-flip-in-2011/, http://www.fool.com/investing/general/2011/08/29/where-to-rent-where-to-buy.aspx) that the price-to-rent ratio in Orange county is about 26-28. (They define it as house price divided by 12 months' rent.)

However, every single property I checked had price to rent ratio of somewhere in the 10-15 range. Am I doing something wrong?

Examples (removing a couple outliers):

Watermarke

sale price per sq ft ranges from $300-330, median $318; rental $20-28/sq ft per year, median $23.5. So the price/rent ratio is about 13.5.

Marquee at Park Place

sale price per sqft $270-$365, median $327; rental $23-25, median $24.7. Price/rent ratio ~ 13.2.

What gives? Am I looking at the wrong numbers? Are these rents outright rip-offs? Is price/rent ratio in Irvine way lower from OC average (I'd be surprised, given how well it's doing)?

You are not factoring HOA and Mello Roos into your calculations.  To normalize prices for different levels of HOA and Mello Roos, you need to annualize the cost and divide it by the 30-year fixed interest rate or at most 5% and add to the sales price then divide by the total square feet.  The HOA at Marquee is around $900/month and $350/month at Watermarke.

 

[Riverne]

You are not factoring HOA and Mello Roos into your calculations.  To normalize prices for different levels of HOA and Mello Roos, you need to annualize the cost and divide it by the 30-year fixed interest rate or at most 5% and add to the sales price then divide by the total square feet.  The HOA at Marquee is around $900/month and $350/month at Watermarke.

Wow! I didn't realize HOA can be that much. Yeah, with this adjustment, I'm getting price/rent ratio of about 18-19 (assuming 4.5% interest rate). Still quite a bit below the 26-28 I see quoted everywhere, but not the ridiculous 13-14.

 

[freedomcm]

then add in taxes and some money for repairs.

think of the total carrying costs of owning versus renting (where it is only your rent)

 

[Riverne]

then add in taxes and some money for repairs.

think of the total carrying costs of owning versus renting (where it is only your rent)

Oh, I know what you mean. But I'm just comparing these ratios against the numbers reported by analysts (Moody's in this case). They didn't add taxes and repairs in their calculation, and still they get 26-28 ratio (while I get under 18-19, even adjusting for HOA/MR).

 

[Liar Loan]

I think the issue with using countywide data is they take the median home price and median rent which are two separate populations that don't overlap very much.  It's like using the average lease rate on a Ford to decide whether it makes more sense to buy or lease a BMW.

According to Lansner's blog the average rent in OC is about 1,400 and the median home is 420,000.  So that would be a price/rent ratio of 25.  However, if you look at things on a neighborhood level, I doubt you will find that high of a ratio in most of OC until you start looking at high-end beach areas.

The areas I watch in North OC have price/rents for condos at 10-11x and houses at 15-16x.  These are distressed properties that need additional cash to get them livable.

 

[Riverne]

I think the issue with using countywide data is they take the median home price and median rent which are two separate populations that don't overlap very much.  It's like using the average lease rate on a Ford to decide whether it makes more sense to buy or lease a BMW.

According to Lansner's blog the average rent in OC is about 1,400 and the median home is 420,000.  So that would be a price/rent ratio of 25.  However, if you look at things on a neighborhood level, I doubt you will find that high of a ratio in most of OC until you start looking at high-end beach areas.

The areas I watch in North OC have price/rents for condos at 10-11x and houses at 15-16x.  These are distressed properties that need additional cash to get them livable.

Ah interesting - high end beach properties is where people think the futures price appreciation will happen, and so they buy at very high price/rent ratios?

As for distressed properties, I'm surprised. A renter wouldn't care to fix them, given that they only stay there for a short time. While a buyer could at least consider repairs. So wouldn't that make the rent really low relative to purchase, since the renter basically has to live in the place as is, while the buyer has a choice to fix or not?

And... My math isn't good enough to be certain, but it feels like taking median price and dividing by median rent would yield roughly the same result as taking the median of all the price/rent ratios for individual properties. If that was the case, we'd need to see just as many properties with P/R above 25 as below 25. Even with high-end beach areas, there's no way I can imagine this to be true.