A Fresh Look at Rent vs. Buy

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Bobby Stefano
Ascent Real Estate
http://www.americasfinestcity.com/





"Why on Earth would you buy down here when you can rent?" asked a friend of mine in Miami Beach not long ago. "Buying is so over."
He promptly moved to Manhattan for work reasons–and bought a $1 million loft on the Upper West Side.

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Note the typical behavior. People want to buy when prices are up, and turn more wary when they've collapsed. Logically it makes no sense. Research out Thursday adds some hard numbers.
Real estate website Trulia.com has looked at major real estate markets across the country and asked: Is it cheaper to buy, or to rent?
By Trulia's math my friend was moving in exactly the wrong direction.
Rent in Manhattan: Home prices there are way too high, says Trulia. (Ditto San Francisco.)
Buy in Miami. And Phoenix. And Las Vegas. And most of the other places that have been flattened by the crash. Homes there are cheap compared to rents.
The cross-over point is about 15 times annual rent, the company believes. In other words, as a rough rule of thumb, homes are probably fairly valued in a city when they cost about 15 times a year's rent. So, for example, if you're paying $10,000 a year to rent a place, think twice about buying a home that costs more than $150,000. Dean Baker, economist at the Washington, D.C. think-tank The Center for Economic and Policy Research, came to a similar conclusion in research on the subject in recent years. Fifteen times is the historic average, he said.
So what's the multiple in New York right now?
About 32 times, says Trulia. The average two-bedroom condo or townhouse in New York city costs about 32 times as much to buy as it does to rent. Other major markets over 20 times include Seattle (24 times), San Francisco (22 times) and Portland, Ore. (22 times).
On the other hand Miami list prices are now about eight times annual rents, says Trulia. Phoenix is about 10 times and Las Vegas about 11.
Trulia's data need to be taken with some caveats.
Trulia looked at list prices rather than actual transaction prices, so its figures for prices may be too high.
Furthermore drawing the cut-off point at 15 times rents may be on the low side.
Mr. Baker, in conversation yesterday, said that figure assumes that you're only going to stay in your home for the typical seven years. If you stay a lot longer, he says, the transaction costs of buying and selling become less and less important. That makes owning more attractive.
Nonetheless the Trulia analysis seems directionally correct. Work done by the C.E.P.R. last year came to similar conclusions: Namely that markets like New York and the California coast remained expensive compared to rents, while the hardest hit markets now look cheap.
And Trulia's research emphasizes two points that are absolutely spot on.
First, homeowners need to look first and hardest at present cashflow. The cult of homeownership made no sense. If renting is much cheaper than buying, think seriously about it.
Second: The markets that have fallen the furthest now look like good places to buy, while those that seem to be "safest" aren't. As the saying goes: There is no such thing as a "safe" investment, merely one whose risks are not yet apparent. It's a principle that a lot of people forget time and again.
Write to Brett Arends at brett.arends@wsj.com

Luxury home prices are still heading down? Based on a Los Angeles Times Story

While Southland housing values overall have rebounded from recent lows, those in the upper end of the market may not yet have hit bottom. Some experts don't see a turnaround for at least another year. On its glittering surface, the Southern California luxury housing market still has plenty of pizzazz.
A 48,000-square-foot Versailles-style estate in Bel-Air that sold for $50 million is believed to be the highest-priced sale in the nation this year. Actor Sacha Baron Cohen spent $18.9 million on a Mediterranean villa in the Hollywood Hills, a record for that area.
These trophy deals, however, are masking a larger malaise in the luxury market. Most mansions put up for sale are lingering for months without nibbles from buyers, real estate agents say. And although Southland home prices overall have rebounded from lows hit last year, the luxury market is still trending downward.
The troubles at the top may seem small compared with the huge housing declines seen in areas such as the Inland Empire. But a turnaround in the luxury market was the first indicator of recovery in the 1990s down cycle. And many experts say the housing market won't be healthy again as long as mansion prices are falling — which could be the case for at least another year.

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"Good locations will be the first out, and luxury is generally in good locations," said economist John Burns, who heads a real estate consulting firm in Irvine.
Why the continuing funk? Analysts say the foreclosures and short sales that depressed home prices in general are finally catching up with the high-end market. The day of reckoning just took more time.
"Formerly affluent people who borrowed far too much money" are running out of staying power, Burns said.
The Times examined monthly sales data in 20 Southland ZIP Codes with the highest home prices, from Beverly Hills to Solana Beach, using information provided by research firm MDA DataQuick of San Diego.
In 10 of those areas, home values are still lower than they were a year ago, suggesting that they have yet to hit bottom. Median prices were basically unchanged in five areas and showed modest gains in five. Overall, 19 of the 20 communities are still below their high points.
Anne Rice said she feels a little awkward complaining about the real estate market. As a bestselling novelist, she realizes she is far more fortunate than most.
Even so, Rice isn't thrilled that she has had to reduce the asking price on her primary home in Rancho Mirage, near Palm Springs, by $350,000.
She hopes the new price of $2.95 million will attract a buyer, but it means taking a greater loss. Rice bought the six-bedroom, seven-bath home in gated Thunderbird Heights for $3.6 million in 2005.
"The market has been hard on us," said Rice, who wants to downsize. "All my high-earning years, I invested in real estate.... I have lost money now on two — quite dramatically — selling an $8-million property in La Jolla for $6.5 million and a property in New Orleans for less than cost and improvements."
Southland home values plunged 51% from 2007 to 2009. But they've shown steady improvement over the last 18 months, gaining back about 15%.
In contrast, home values at the upper end have not fallen as far but have shown few signs of recovery, according to MDA DataQuick figures.
There are 44 ZIP Codes in Los Angeles, Orange, Santa Barbara and San Diego counties where median prices exceed $1 million. Prices in these high-end communities dropped nearly 26% from their January 2008 peak to April 2010. They have gained back 5% since then.
Prices in Rancho Santa Fe, ranked by Forbes as the third most expensive community in the nation, have fallen nearly 31% since their 2005 peak, and they have yet to turn the corner.
Through October, Beverly Hills 90210 had the highest median of these top-priced neighborhoods at $2.7 million. That's down a mere 18.7% from the 2008 crest, but it too has not shown any rebound.
While the overall drop in value has not been as severe as that at the lower end of the market, the fact that prices in many areas continue to fall acts as a brake on sales — as buyers hold off making purchases out of fear their investment will immediately decline in value.
Luxury real estate brokers are feeling the pinch, as fat commissions are fewer and further between.
"We're seeing a lot more sales in the $1 million and below range," said John McMonigle, president of McMonigle Group, an Orange County firm that specializes in selling luxury properties. "We had 121 homes close escrow in Newport Beach in September at an average of $1.15 million, but when you drill down, one thing is concerning: There was only one house over $5 million."
Malibu's Billionaires' Beach enclave can boast of a $37-million closing in October, one of the highest prices there ever. But that and other marquee sales can't make up for weakness elsewhere in the market.
"Malibu has taken the worst hit," said Sandra Miller, an agent who tracks $1-million-plus sales on the Westside. Less than a third of listed properties are selling, she said, and median prices are down about 25%.
When will the market turn around, and what will it take?
Burns, the economist, believes that the housing market overall is headed back toward 2002 price levels, on grounds that the gains seen over the last year or so will be reversed as a new flood of foreclosures and short sales hit the market.
That would mean a small retreat for the general market, in which prices are now at 2003 levels. It would be a more dramatic downturn at the high end, where prices are about where they were in 2005. He predicted they won't hit bottom till 2012.
Real estate agents say one reason the high-end market has taken longer to reach bottom can be summed up in one three-letter word: ego. Wealthy sellers may not need the money and refuse to reduce their price for fear they'll look like they are in financial trouble, said Bob Hurwitz of Hurwitz James Co. in Beverly Hills.
The message he tries to hammer into unrealistic sellers these days: "You wouldn't buy this house for this price yourself."
Holding firm on an asking price keeps up the illusion that the house is worth more, Hurwitz said. "Some sellers are dreaming."
Southern California's posh neighborhoods are littered with examples of properties stuck at outdated prices. The most noticeable on the landscape is Fleur de Lys, a 12-bedroom estate in Holmby Hills that was listed at $125 million for 940 days before being pulled off the Multiple Listing Service late last year. The French Beaux Arts mansion on 5 acres is still being marketed on agents' websites.
By comparison, its competition — the nearby $150-million Spelling estate — has been on the market only since March 2009. There has been no price drop on this 56,500-square-foot manse either, however.
The moneyed market of the Palos Verdes Peninsula is no different. Linda D'Ambrosi of Keller Williams had the listing on a turn-key ocean-view house that lingered on the market for more than a year with nary a price cut. Home prices on the peninsula are down 12.9% from their 2008 peak.
"The seller," she said, "just couldn't come to terms with today's value."
lauren.beale@latimes.com

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