Tuesday, August 26, 2008

Rent vs. Buy Part 2 - The Rent vs. Buy Calculator

Last time we covered some of the misconceptions about renting and/or buying. Today I want to cover both the qualitative and quantitative benefits and drawbacks of renting vs. buying.

QUALITATIVE ADVANTAGES OF RENTING

Let's start with the qualitative advantages of renting or buying, starting with renting.

Renting has a number of advantages that many people often forget about:

1. Lower upfront costs
All you typically need to move into an apartment are 2 months rent and a security deposit. No closing costs, points, inspection fees, etc.

2. Lower switching costs
When you want to move, you give notice, hire movers (or bribe your friends and family) and move out. No Realtors to hire, no 6% commission to pay.

3. Flexibility
Choose a month to month lease which typically requires only 30 days to move out, or sign up for a year lease to protect your payment and provide security

4. Save time (or money)
Let your landlord fix that leaky toilet, mow the lawn, paint the house and clean the gutters. Spend your Sundays at the beach, not working on the house. Sure you can pay someone to do this work, but can you afford to?

5. Live in a nicer neighborhood
If you can't afford a house in a "better" neighborhood, or one with good schools, chances are you can afford to rent there

6. Free up your money for other uses, such as for investments, starting a business, paying for school, daycare, whatever else.

Don't forget that renting doesn't have to mean a small apartment in a big complex. You can rent an apartment, house, houseboat, in-law unit, duplex, whatever you can find.

QUALITATIVE ADVANTAGES OF OWNING

Now on to owning. The overwhelming opinion in the USA and many other places is that owning is better than renting, which is evident by the belief that "renting is throwing your money away." Owning has a number of benefits as well.

1. You can do anything you want to the house, without needing landlord or property management approval. Put that couch on the porch? Sure! Car doesn't run? Push it in the backyard! Want a purple house? Paint it! Want to knock out a wall and expand the living room? Bring on the sledgehammer!

2. Lock in your monthly payment, hedging against inflation.

3. Security. You don't have to worry about a landlord evicting you on a whim.

4. Pride of ownership. You're more likely to take good care of something you own, vs. something you rent.

5. Over the long term the costs for owning are typically lower than renting. And once you've paid off the mortgage all you have to worry about are taxes, insurance and maintenance.

6. You can borrow against your equity to start a business, pay for school, cover an emergency, and the loan payments are tax deductible.

6. The government will give you a tax break for your interest payments.

So that covers the qualitative advantages of both renting and owning. Obviously some of these are weighted more highly than others, and each person will have a different ranking of importance. But at the end of the day it's the supposed financial advantages of owning that convinces most people to plunk down their hard earned (or borrowed) cash for a house. So let's look at the qualitative advantages to both renting and owning.

QUANTITATIVE ANALYSIS - RENT VS BUY CALCULATOR


First off, here are a few guidelines that I believe when it comes to creating forecasts like this.

1. Your forecast is only as good as your assumptions. And this tool has a bunch.
2. Always triangulate your forecasts i.e. look at it from 2 or 3 different angles to confirm your assumptions and results
3. Does it pass the gut check? Does your gut say that the results is close, or way off?
4. Don't tweak the assumptions to get the outcome you want - that's my job!

OVER THE NEXT 5 YEARS, IS IT BETTER TO RENT OR TO BUY IN PORTLAND?

For my calculations I used the house we are renting, since I had both the sales price and real world rental rates. Knowing what a house will rent for is one of the major assumptions that can skew your results badly. The house we're renting sold for $350k just before we moved in, and we pay $1400 a month in rent.

I also assumed that the money you would have used for a down payment could be invested at a 6% rate of return.

The basic methodology behind my calculations is to take the equity or value you would have at the end of the forecast period (5 years) and subtract all the relevant expenses over the five years (this can also be used to decide if you should buy a new car, etc). For the house we'll take the equity paid in through the mortgage payments as well as from any positive appreciation at the end of 5 years minus all expenses including closing costs, maintenance, taxes and insurance. For the rental we'll take the cash you save by not needing a down payment and invest it, then subtract the total rent payments from the invested amount and accrued interest.

One notable exception that I have not included yet is the mortgage tax break. In my experience the tax break is not nearly as high as the online calculators would have you believe, mostly because they ignore your standard deduction ($5k for singles, $10k for married couples). You'll need a lot of interest to overcome the standard deduction, plus the deduction declines as you pay down the mortgage. The best way to estimate your deduction is to take the interest calculation from my spreadsheet, and plug this into your most recent tax return, then multiply by your tax rate. I will work to add this in to a future calculator.

ASSUMPTIONS:
There are 3 major assumptions that drive the calculations:

1. How long you will be in the house/apartment: For this case assume 5 years
2. Cost to rent vs buy the same property: (see below)
3. Overall home price appreciation rate

Other significant assumptions include:

Annual maintenance: 1% of purchase price
Annual taxes: 1% of purchase price
Closing costs: 2% of purchase price
Annual rent increases: 3%

So using the above assumptions, over are five scenarios, only changing the expected home price appreciation rate from -5% to 5% annual appreciation.

Over 5 years, we would need to see 4% annual home prices appreciation to be better off buying vs. renting. If the market stays flat we will be $65k better off by renting over the next 5 years.

Over the past few years with 5-10% increases on average it was a no-brainer that owning was better than renting, but as the above chart shows the high costs of owning and the effects of leverage also make any decreases potentially devastating.

If you would like a copy of the spreadsheet please click here and download it or send me an email (on right navigation bar) and I will send a copy over. (Edit - I changed where the file is hosted, you can now download it and play with it at will.)

But please take a copy and play with it to see what your situation looks like. My best guess for price appreciation in Portland is that we will be flat over the next 5 years, if not down 1-2% annually. If you have any suggestions for other features I will keep updating it and republish.

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42 comments:

Anonymous said...

I think your 6% rate of return on investment of down payment is ambitious. In today's market, it's probably more like 3.5-5% depending on what you're investing in. Money markets are nowhere that close; a few CDs are found at 5%, but only for 12-18 months. To hope for equities to yield that much over five years is really hit-or-miss.

How about recalculating at 4.5% and see what you come up with?

Anonymous said...

The idea that owning allows you to do whatever you want is one reason I don't own anymore. For one, many places have rules and they're getting stricter all the time. For instance, there's a condo complex near me that won't allow you to own a dog. 'Scuse me? I own this dwelling and I can't have a dog?? WTF?

Then there's the problem of others doing what they want on their property and you being stuck with it. Face it, we live in a coarse, trashy culture. Even the higher end areas contain residents with bad behavior. And then what can you do, keep moving?

As I've said before, the main reason to own is if you have a family or are a single person with a need to project higher status. Like driving a BMW.

What I don't get is the condo concept, particularly conversions. Here you are paying double to "own" the unit you could have rented for 1/2 the price. And it's still an apartment except now you're stuck maintaining it. Yikes.

Anonymous said...

Very thorough analysis, and I can't fault the math. I would agree with anon. #1 though-- a 6% return seems a bit high for the foreseeable future. And the (very real) possibility of significant inflation seems like a real wildcard here. Any thoughts of how the math might change if we found ourselves in a 70s/stagflation scenario?

Anonymous said...

This analysis leaves me wanting. How do you put a value on several of the qualitative benefits of homeowning? The ones you mentioned include: security, pride of ownership, and being able to do what you want to your property (in most cases that is).

This reminds me of economic discussions about our national parks and other scenic areas. How do you put a value on their aesthetic beauty when you don't reap an economic benefit? do we just allow oil drilling and sprawl to occur? clearly no. there is a different kind of benefit that exists that isnt quite measurable. this is what puts homeownership in the minds of so many even when economic times might prove that renting is a better idea...

eln said...

Yeah, the idea of owning because it's "what you should do" to:

be grown up- that's what everyone else is doing.

not waste your money- just hold on long enough and it will all come out in the wash.

have that special warmth of "owning"- you bought your slice of the American dream, now you two can be a champion of living in one place for the rest of your life.

Annie said...

I think for most folks lookin' for a so-called "starter home", the rent vs. own math looks different, and at this time in the market the question is moot.

Many of the renters I know (including myself) could maybe, possibly scrape together $10,000 in savings, gifts and cash-advances for down-payment, closing costs, and the initial repairs that always crop up in the first few month.

In other words, a lot of folks are still going at buying a house as if it's a different kind of rental with a really steep deposit. As long as someone's looking at a house like that in today's market, it almost never makes sense to buy... hence the different math.

Further, banks are no longer letting those kind of folks qualify... hence the moot point.

Anonymous said...

Owning is great. Just not at the expense of eating or otherwise living a normal life. That's where today's prices have taken us.

PDX Outsider said...

"How about recalculating at 4.5% and see what you come up with?"

I chose 6% because I assumed that you wouldn't leave all the money in a money market fund for 5 years. I assume you'd put at least some in the stock market and earn more than 3-5%.

But if I recalculate with 4.5% at 0% appreciation the gap closes from $64k to $58k. Still pretty poor.

If you want to try more assumptions go download the spreadsheet and play with it!

PDX Outsider said...

"What I don't get is the condo concept, particularly conversions. Here you are paying double to "own" the unit you could have rented for 1/2 the price. And it's still an apartment except now you're stuck maintaining it. Yikes."

I think condo's have their place. We're trying to convince my mother-in-law to buy one so she won't have to worry about maintenance and yard upkeep.

But so many of those recent conversions were selling on the promise that you'd soon be swimming in easy money through appreciation. Now that the empty promise has broken, those 60's apartment/condos aren't looking so great. And thankfully most aren't selling.

Personally I have heard too many nightmare stories about HOA's to ever buy into something with HOA dues. Why pay to own when you can't do what you want to the property AND have to pay someone a monthly fee? I'll take my neighbors with the couch on the porch over an HOA anyday.

PDX Outsider said...

"Any thoughts of how the math might change if we found ourselves in a 70s/stagflation scenario?"

I'm not an economist (nor do I play one on TV) but I can only assume that would suck for pretty much everyone.

I assume stagflation would depress housing prices due to higher interest rates. But it would also drive up rents due to increases in prices.

Which would be worse? Probably renting, assuming as an owner you could ride it out. But if you had to sell in the middle of it due to job loss or other situation and you'd likely lose your shirt on the sale. I have a coworker who experienced this in the early 80's and jokes that she's the only person that ever lost money in California real estate.

PDX Outsider said...

"This analysis leaves me wanting. How do you put a value on several of the qualitative benefits of homeowning? The ones you mentioned include: security, pride of ownership, and being able to do what you want to your property (in most cases that is)."

I can't put a price on how much YOU value those things. But I can tell how much you'd currently give up financially for those benefits.

For example, I'm a car nut. I typically have one or more projects in the garage at any time. Our current rental doesn't allow me to work on the a car on the property so I don't have a project at the moment. If I bought the house I could obviously get that project, but if I know that buying the house will cost me over $50k over 5 years I'm more than happy to rent a garage for $100 to $200 per month.

I believe the qualitative and emotional benefits of owning have been greatly oversold, so this is my way of helping people put a price on those benefits.

PDX Outsider said...

"Many of the renters I know (including myself) could maybe, possibly scrape together $10,000 in savings, gifts and cash-advances for down-payment, closing costs, and the initial repairs that always crop up in the first few month.

In other words, a lot of folks are still going at buying a house as if it's a different kind of rental with a really steep deposit. As long as someone's looking at a house like that in today's market, it almost never makes sense to buy... hence the different math."

Good comment! This was me back in 1995. I scraped together $10k to buy an $89k house in Michigan. I paid PMI, a 7.25% mortgage and taxes that ran closer to 5% per year not Portland's 1-2%. But my monthly payment was still 1/3 cheaper than renting the same house. So to me it made sense to buy, lower my monthly payments, and build some equity.

I think the current prices show how far out of whack things have gotten. Given that anyone could buy if they borrowed 100% instead of saving for a down payment, this extra demand drove up prices beyond their rational, sustainable levels.

Anonymous said...

I think there's a lot of wishful thinking reflected among those waiting to buy. It's probably unrealistic to hope that home prices in the PDX area will sag down to where they were even ten years ago. They may come down more, but not by as much as many hope. Consider that even a 20% price drop for a $250,000 house will bring it down to $200,000. If you're looking at your downpayment of 10% -- that's only $5K difference.

By way of comparison, the Bay Area market in California has declined significantly, from roughly 7% in San Franicsco to 30% in the outlying suburbs. That said, the desireable close-in areas (like the City itself), even with a 10% decline will be out of the reach of most homebuyers. (big deal, so the $700K condo comes down to $630K) Why? the population of the state has grown tremendously (by roughly 17 million people) since the 1950s.

Consider that populations are growing (dont' confuse a stabilizing RATE of growth with a stablizing absolute population size.)

As we head forward, this area will be more attractive to those living in desert regions as climate change advances. Moreover, even the greenies in Oregon still believe in adding to the population of the earth. This growing population can be housed by spreading up or out. I see a lot of bloggers on this site still holding out for the cute single-family home, resisting the notion of high-density condo living, and lamenting that the world isn't as they expect it to be.

Think long-term -- 10 or 20 years out. Every cute toddler or grade school kid you know will also be out there looking for a cheap house. How many babies do you know? As the Oregonian recently noted, there's a baby boom in the works among the 20-30 crowd. We'll be feeling the effects in another decade or so. (Because older people are living longer too.)

Sure, wait another 6 months or 12 months, but don't hold out for a crash of such proportions that your $200K dream house can be had for $50K. If such a crash occurs, you likely won't have a job or even savings anymore.

Anonymous said...

If population increases could forestall a real estate crash, Japan wouldn't have suffered one. Either would Vegas or Phoenix both of which have much higher in-migration rates.

No one is expecting that 200K house (if you can find one that's livable) to drop to 50K. But paying the more realistic 300K for a 2BR 1BA dwelling that requires 50K worth of work and then having to live a much curtailed life to afford the payments isn't smart. Is home indebtedness so exalted that sacrificing your life to a mortgage worth it?

No one knows the direction of things. This crash could end or accelerate, though history indicates an acceleration.

Obviously the state economist agrees with you, though. In today's Oregonian, an article has the economist predicting a bottoming in early 09 for Portland RE. Of course he could join the ranks of the many economists before him that predicting a bottom and were/are wrong. I'll bet he also believed (back in 05)that Portland wouldn't be affected at all.

For years people said we were immune. Then they said we wouldn't drop much. What will they say next?

happy renter said...

It was wishful thinking in Sacramento 2 years ago when bubble-bloggers were saying we could see a 35% drop in prices. What happened? 2 years later prices are 50-55% below peak. But remember, Portland is special. It could never happen here with our toy trolleys and condos.

Anonymous said...

Don't be silly. Sacramento hasn't got nearly the number of overpriced restaurants as we do. That alone will keep real estate prices aloft.

Anonymous said...

Sacramento is a huge region and price declines depend on which suburb, which neighborhood, which county.

With the larger Bay Area, they're facing overall a 30% decline, but if you break it out region by region some areas are declining only 7-10%, others 30%. Might it decline further? Sure, but no one knows how much. Knowing what I know about the Bay Area, it will depend on neighborhood -- things like schools, proximity to transportation, and general desirability. Want to live 60 miles from SF in Gilroy? You probably could get a real deal on a McMansion. Similarly, here in PDX if you want a great deal on a McMansion, check out Happy Valley or Bend.

It's easy to dismiss any reasoned argument as real estate hype, but look at the stats. In PDX the price declines are greatest in outlying areas. Some of the "hot" PDX neighborhoods are also coming down but less rapidly. The Hawthorne was a hotbed of speculation and is now sliding down, but the west side, which had more stability isn't declining as fast except among the highest-end flippers, and then neighborhood by neighborhood. Condo prices are significantly down, but the reality is that even with significant reductions, they may not be enough for many buyers.

I've been watching PDX prices for a year and they are coming down. I've seen west-side properties marked down 15-20% from the original list prices. There's also a lot of sellers who aren't dropping prices and their properties aren't moving. And some people are still willing to pay at list price for houses they like (which by my estimate were priced at only 5% below 2007 comparable prices -- go figure.)

I'm not a realtor or even an investor. Here's a reality: the affordability gap is widening everywhere and until there is a transformation in our culture, it will continue to, especially since every home buyer on this blog seems to regard a home as an investment, which means selling it at a HIGHER price to the next buyer.

Given that the gap is widening, the pragmatic question for each individual buyer isn't when will housing prices fit into what is defined as affordable, but whether they want to own. If so, what sacrifices and trade-offs are required to do so? Maybe it's living in a condo, maybe it's living farther out, maybe it's living in a junk heap in the neighborhood you like. Or maybe it's moving to a region where housing is cheaper.

The clever comebacks about PDX restaurants and real estate hype are, by the way, becoming stale.

Anonymous said...

Another thing becoming stale is the paradigm that affordability is destined to decrease. If one believes in a market economy and if prices are to remain stable, affordability must increase otherwise fewer buyers will drop prices.

Or do I have that wrong? Does housing in Portland defy the laws of supply and demand?

PDX Outsider said...

I don't think Portland defies the laws of supply and demand.

But what I am curious about is how much of the price increases in Portland are due to neighborhoods gentrifying, houses being fixed up, and the resulting increase in demand vs. speculation and increases in demand from a new pool of 0-down buyers that previous (and currently) were locked out.

I believe the more limited supply of older homes in the inner areas will help prop up prices, or at least slow the declines. So then the question is how much true demand (people who can and will buy the houses, not just want to) will there be over the next few years.

It doesn't surprise me that newer construction (Happy Valley) is faring the worst, as it's easy to build another new house, but you can't recreate a vintage house.

PDX Outsider said...

Oh, and I'd really like to see people pick a screen name, even if you change if for each post. I don't want to require it and don't plan to, but it's difficult to keep track of who's commenting on what (and makes the comments "I've said it before" completely worthless), and just makes me a little sad that people are afraid to use any identification.

Leo said...

“In my experience the tax break is not nearly as high as the online calculators would have you believe, mostly because they ignore your standard deduction ($5k for singles, $10k for married couples).”

I’m not quite sure why you say this. For the first five years, almost all of your mortgage payment is interest. So even if your mortgage payment is only $1000/month, you’ll be sure to pay more than $5k in interest. Only for married people might it be close to even. But then, at today’s prices, whose mortgage payment would be $1000/month? Most likely, it would be at least twice that.

You should add the 6% realtor commission to the calculator. At the end of five years, the renter and the owner are not comparable until the owner has sold his house and has equivalent mobility as the renter.

Leo said...

“Think long-term -- 10 or 20 years out. Every cute toddler or grade school kid you know will also be out there looking for a cheap house. How many babies do you know? As the Oregonian recently noted, there's a baby boom in the works among the 20-30 crowd. We'll be feeling the effects in another decade or so. (Because older people are living longer too.)”

True. But I invite you to finish this line of reasoning instead of stopping halfway.

Thinking long-term goes both ways. 10-20 years ago, the population was also increasing, and people were beginning to live longer. Yet, throughout that time period, home ownership went *up*, not down.

If population growth intrinsically made homes less affordable, fewer and fewer people would own their home every year. History shows this is untrue.

The very fact that home ownership has continuously grown over the long-term tells you that it must be getting cheaper and cheaper, in terms of real cost.

(Since we're talking long-term, temporary anomalies such as the current bubble are excluded).

PDX Outsider said...

"I’m not quite sure why you say this. For the first five years, almost all of your mortgage payment is interest. So even if your mortgage payment is only $1000/month, you’ll be sure to pay more than $5k in interest. Only for married people might it be close to even. But then, at today’s prices, whose mortgage payment would be $1000/month? Most likely, it would be at least twice that."

I purposely excluded it because it's a complicated formula, and each person's situation is different. I will create version 2.0 and include a tax advantage which will help close the gap for owning a little, but I doubt it will flip the results.

"You should add the 6% realtor commission to the calculator."

The 6% commission is already included.

sophie said...

First, thanks for the lively discussion. I get a kick out of following it, and it does expand my perceptions.

Second, I am a Realtor and I want to interject a couple of thoughts.

An element to values in PDX that I haven't seen mentioned is our urban growth boundary. While it is occasionally expanded, for the most part it has a huge impact on limiting supply. Unlike the markets in California that have been previously discussed, new construction in our area is very limited. And that holds down supply, and that goes back to Econ 101. I do think that PDX will fair better than markets elsewhere and that it will be in large part because of the Urban Growth Boundary.

Secondly, it is not all doom and gloom. What I am seeing is that houses that are in nice condition, and priced about 5% under the competition, are selling quickly. Buyers want a deal and houses that look like deals are snapped up. That doesn't mean that sellers are not getting good prices. They are, for the most part, realizing a great return on their original investment.

Lastly, I want to mention that there are parts of town that are still hot. In the last 6 months I have been involved in 5 multiple offer transactions where the house sold at or over asking price within just days of going up for sale. These properties were in close-in SE and North Portland. They were in the $275,000-$350,000 price range.

Anonymous said...

There is plenty of land inside the UGB that remains undeveloped. That's why several big developers were backing Measure 49. They knew that Measure 37 would reduce the value of their inside-UGB land.

The UGB is a red herring. Otherwise San Francisco and Japan would never see price reductions and they have.

As for places still selling, people bought Pets.com the day before its value dropped to zero.

PDX Outsider said...

Ack, a Realtor, run run! Just kidding....

But seriously, I agree that the UGB will help prop up prices as you can't just develop land into the sunset like Phoenix, LA and Las Vegas have done.

But right now we have a demand problem. Lots of houses on the market (supply) but the pool of eligible buyers (demand) has shrunk back to pre-bubble levels, or worse as many have been priced out or are waiting out a decline.

Anonymous said...

(Call me ANON1)
In response to Leo

Re: population growth. "True. But I invite you to finish this line of reasoning instead of stopping halfway."

Your points are well-taken. I see PDX as being where the Bay Area was 40 years ago. The space into which new housing could expand was limited. Despite this the Bay Area is still growing (and predicted to add millions in coming years) But the growth is increasingly shifting the population toward well-educated high-income earners who can afford the housing. It isn't necessarily that property doesn't sell (it does), but that "workforce housing" disappears, forcing low-wage earners into distant cities where housing is affordable.

Children born in the Bay Area can't stay there; they move out and higher-educated more privileged people move in. Visit any high-tech, biotech company and you'll encounter very few people who were born anywhere in California. This means that you get population stability or gradual increase in growth, but a decline in quality of life, because you have distant towns with commuter populations who end up being the service sector for the close-in communities.

The UGB will limit growth within PDX, but not the areas beyond. The price of gas and climate change may well alter this scenario completely -- some of this can't be predicted.

My point about population growth isn't about affordability per se, but density and UGB. If you keep adding people to a space that is limited, the only way to create more housing is by increasing density.

We can't have it all: single family homes, limited growth, affordable prices, and big families. There have to be some tradeoffs in the equation.

Anonymous said...

"Or do I have that wrong? Does housing in Portland defy the laws of supply and demand?"

See my previous comment to Leo. The supply/demand model works if the population is fixed, that is, if the people who can't afford a home today stay here and no one who can afford the higher prices moves in.

To what extent has the recent boom been fueled by people moving in, who have more money than those already here?

So let's say prices drop a bit, not to the level that locals can enter, but low enough that outsiders with money see an opportunity. They then buy at the still slightly inflated prices, thereby establishing a new baseline. When they sell, it will be at the higher baseline+profit.

Meanwhile, those who can't afford here move to someplace more affordable and buy, thereby helping to boost prices in their new home town. That's how the affordability gap expands.

Now if it were a closed economic system and we were not so mobile, sure the supply/demand scenario might hold. With our global economy, even if citizens can't buy at the high prices, there are foreign interests that can. That's what's happening in Manhattan and to some extent in the Bay Area.

Anon1

Anonymous said...

If higher income people were moving in to displace lower we would be seeing a distinct rise in median income. I don't believe we are.

Portland is not Manhattan nor San Francisco. Foreigners will not save the housing here. It's not even saving SF or Seattle.

Any more myths you'd like dispeled? So far we've covered the UGB, the rise of the creative class and foreign investment. You still have "Portland is the cheapest west coast city" and "we were under-valued" to go.

Anonymous said...

"Any more myths you'd like dispeled? So far we've covered the UGB, the rise of the creative class and foreign investment. You still have "Portland is the cheapest west coast city" and "we were under-valued" to go."

I think you're responding to the wrong person here. I was commenting on theoretical assumptions made in a previous post, not arguing for PDX as a buying opportunity.

I don't have an opinion on whether PDX is overvalued or not. Value is measured as how much someone is willing to pay. Let the sales speak for themselves. My point is that it's tough to guess at where the market will go. Even looking at comparable markets isn't reliable because there are too many confounding factors. You can look at our market 10 different ways and get 10 different opinions. Many posters here are looking for the right answer: when is the time to buy?

Maybe you can provide an informed opinion.

Anon1

Leo said...

"Your points are well-taken. I see PDX as being where the Bay Area was 40 years ago. The space into which new housing could expand was limited. Despite this the Bay Area is still growing (and predicted to add millions in coming years) But the growth is increasingly shifting the population toward well-educated high-income earners who can afford the housing. "

I see many similarities between the Bay Area of the past vs. Portland today. However, I also realize that there are dozens of cities around the country that believe they will be the next Bay Area or the next Vancouver, BC. The argument that one's own city has finally "arrived" is in fact a common delusion during real estate bubbles. Historically, the odds are against Portland "arriving."

I don't get the impression that immigrants to Portland tend to be high-income earners. Certainly, there has been a rash of "equity locusts" in Portland, which has helped to drive up prices here. However, they do not tend to have higher incomes than locals. Now that prices are flat or declining in many areas of the country, the flow of equity locusts has stopped.

The key difference between Portland and the Bay Area is that Portland has much lower income. In 2007, the median income for a family of four was only $63,800 in Portland and $80,319 in San Francisco. The median income in San Francisco is 25% higher than Portland. Frankly, I don't see where that type of income growth will come from in Portland. In fact, median income actually *dropped* by $3100 from 2006, so there is no evidence at all that income is rising.

The UGB argument is half-baked. With a fixed amount of land and a growing population, it would seem at first like prices will have to go up, always and forever. But this type of argument can be applied to every natural resource on earth. There's a fixed amount of oil, a fixed amount of iron, and while prices for these commodities have shown steep increases, they have also shown steep drops, thus demonstrating that this type of argument does not describe reality. The hidden assumption of this type of argument is *All things being equal*, with a fixed amount of land and a growing population, prices will have to go up, always and forever. In reality, all things do not, in fact, remain equal. Tokyo is the clearest demonstration that land constraints do not mean increasing prices - it is arguably one of the most land-constrained cities in the world, and prices have been flat or declining for more than a decade.


"They then buy at the still slightly inflated prices, thereby establishing a new baseline. When they sell, it will be at the higher baseline+profit. "

What you are describing here is a bubble. Only in a bubble do high prices lead to higher demand which lead to still higher prices. In a normal market, when people buy at inflated prices, demand decreases and pushes prices back down. I'm not saying it can't happen the way you describe. Bubbles do occur, but they do not last.


"You can look at our market 10 different ways and get 10 different opinions. "

There's one metric that is quite clear: rent vs. buy. You can argue all day about UGB, Portland as the next San Francisco, but if any of those things are actually pushing housing prices higher, they'll push rents higher, too. This has not happened. Recent rent increases are just barely enough to make up for the flat to declining rents in Portland from 2000-2005, especially when you correct for inflation.

Emerson said...

Excuse me, good people. My name is Emerson Winchester Bouvier III and I've recently made my home in your fair city. I assure you I have amassed a great personal fortune and am ruminating over the possibility of purchasing some of your highly undervalued properties for my personal portfolio. Could nay of you peasants please firect me to one of the more charming neighborhoods in which for me to invest my vast personal holdings?

Jugdish said...

Please to tell me as my English is not so good, where this very very rich with the money man can , how is it you say, invest in real estate of the kind that is not so very much money. My family abroad interested with the Portland to collect the houses. We money have plenty the wealth that comes from many many plantations factories and such items as make the big pile of the money.

To what such localities we should purchase the many houses in your Portland?

strum40 said...

Everybody is forgetting that the Urban Growth Boundary only extends South, East and West. Increased development in Vancouver was part of Portland's plan all along.

http://www.usatoday.com/news/sprawl/portland.htm

insomnibus said...

LOL!! I haven't cracked up from reading about real estate in a while.



"It's also happening north over the Oregon line in the state of Washington. The city of Vancouver, Wash., is getting the suburban sprawl that Portland has kept at bay."

Vancouver has fallen right into our little sprawl trap! bwaha!

squuezed said...

Google base/maps census data shows that average income in close-in PDX neighborhoods is in the mid 40s. Ouch.

"In today's market, it's probably more like 3.5-5% depending on what you're investing in."

This is just one example:

http://www.mlnbank.com/EN/services/premcds.htm



Wachovia and Capital One also offer ~5.4% on 5-7 year term accounts. IMO, despite FDIC insurance investing real money in a US bank is risky.

BB said...

.

When...

Prices < or = 3X Median Household Incomes

...we will be near the bottom.

When inventory = 3 or 4 months of supply we'll start to see price increases in some of those areas.

Until then, this sort of story will be told over and over and over. Inventories will continue to climb. And prices will continue to drop. Like a rock. Simple math.

.

nitsuj said...

Would be interesting in reading some input on average rents in Portland (maybe by neighborhood). I'm considering moving back right now and LOL at the rents I'm seeing asked on Craigslist. Many of them seem, ehh, ambitious, and I'm finding it hard to believe landlords are getting what they are asking in many cases.

PDX Outsider said...

nitsuj, have you tried Zilpy? www.zilpy.com is run by the same folks that run Zillow, and should help you target what median prices should be to rent in different areas. And don't forget, just because they are asking for a certain rent doesn't mean you can't offer something else.

nitsuj said...

Haven't checked out Zilpy, thanks for the heads up!

Anonymous said...

Why are you counting inflation as an expense for buying but not also factoring it into rents?

Also, I have never seen a landlord raise rent at a 3% rate every year. Most try to minimize increases for long-term tenants.

PDX Outsider said...

"Why are you counting inflation as an expense for buying but not also factoring it into rents?

Also, I have never seen a landlord raise rent at a 3% rate every year. Most try to minimize increases for long-term tenants."


The 3% rent increase is basically the inflation rate. You might not see if year after year, but if you move to a new place it might happen all at once as you're resetting to the current market rate.

On our last place the rent didn't increase at all over 18 months, then they raised the rent 10% for the next tenant.

The place before that had a 2% increase baked into the contract.

YMMV, this is just my best estimate, you can play with the numbers to suit your best estimate.