[quote author="IrvineRenter" date=1222772712][quote author="columbussquare.com" date=1222756599]
If that's your benchmark then it will be rare for you to find a buying opportunity in the OC. Try South Carolina or Missouri. Demand exceeds supply. Demand is not just from renters but also investors, high net-worth individuals, people who know that ownership is a hedge against increasing housing costs, etc. Value in housing is based on perception of value and the recent transactions that represent that.</blockquote>
I know the concept of <a href="http://www.irvinehousingblog.com/blog/comments/what-is-a-bubble/">irrational exuberance</a> is difficult to convey, but it is important because periodically prices fall to fundamental valuations and stay their for extended periods of time before people "buy in" to the nonsense of perpetual appreciation and foolishly bid up prices again. At some level I sense that you get this, or you wouldn't have noted that "Value in housing is based on perception of value and the recent transactions that represent that." That is the essence of irrational exuberance. The real value of housing is based on comparative rents. That is a measurable valuation technique. The amount that someone pays for housing based on foolish ideas is not "value," it is current pricing. When prices crash, they fall until they reach the true value. If you think it is a good time to buy based on perceived value, what happens when perceptions change? You see, underlying rental value doesn't change with the psychology of the market. Perceived value does.</blockquote>
There are many other assets that sell at their "perceived value" like stocks. The assumption is that in a market with perfect information the perception will represent an accurate future value of the asset. New events occur that change perception are said to be "priced into the market" once an adjustment has occured. One analyst's opinion (like the one quoted by JP Morgan recently) is not enough to validate a trend since they are other analysts with opinions that differ. <strong>To accept your theory rent rates equals "real values" would be like saying that book value is the "real value" for stocks. </strong>
Would buying a house at the rent rate generally be a good buy? Yes, assuming that the property is a quality building in good repair in a good location that is neither excessively larger or excessively smaller than the neighborhood. Yet, wouldn't the value be higher to an investor who could receive not just the rental rate but also real tax savings from depreciating the cost of the building? Or would that same property be worth more if the rent rate could be increased by marketing the property to college students who collectively could pay more than a middle-income family and are willing to do so because it is in close proximity to their school?
Occasionally stocks trade at their book value. Generally the ones that do are bad companies that either don't have positive prospects or haven't been able to communicate that to the investment community. It's not irrational exuberance to acknowledge that a standardized method for valuing SFR homes is to look at recent "comps" and adjust them to match the property that you're reviewing. I've said before that in addition to the adjustments for similar attributes but you should also adjust for financing costs.
What you call the "real value" I consider the "minimum value". A "rational value" can and should be higher than the rental rate. At the recent peak rental rates were about 50% of the "comparable market price". With prices down approximately 25% because of the short-sales, foreclosures, and strong competition from new home sales that would put rental rates at 67% of the "value". When you consider that the "holding cost" doesn't increase as quickly as rents the longer you own the property it will gain a competitive advantage compared to the same neighborhood over time.
If we were both real estate analysts at Wall Street firms, then you would most likely post a SELL recommendation and I would post a HOLD recommendation (<em>yesterday I would have had a BUY rating but congress is adding a lot of uncertainty to the market right now by saying they're doing something then failing to get the votes</em>).
If you were my adviser knowing that I subscribe to the higher than rental rate viewpoint... what range would you approve in protest? What would you say the current ratio is?
