Rents falling – sale prices follow?

They usually do, so news that, at least in Britain, rents are dropping is worrisome to those who have hoped to see a bottoming – out of home prices – that would be all of us property owners.

The rent/sales price ratio here in Greenwich have always defied national norms, presumably because most people prefer to buy, rather than rent here. But we are certainly witnessing a substantial drop in rental prices, if not rental activity. I know of no landlords who are looking for a rent increase these days – at best, they’re hoping they can get a tenant to renew at the current rent, and many tenants are balking.

Not yet close to being true in Greenwich

Wall Street Journal: Cost of owning draws closer to cost of renting (in some areas of the country).

 …[A]fter two years of rapid home-price depreciation, the relationship between the cost of rental payments versus after-tax mortgage payments is tilting toward ownership in a number of metropolitan areas.

Over the past 18 years, after-tax mortgage payments have averaged 26% more than rent payments, according to Green Street Advisors, a real-estate consultancy based in Newport Beach, Calif. In 2006, at the height of the housing bubble, mortgage payments reached as high as 66% more than rent payments. But by the end of 2008, average monthly rent for the largest 50 metropolitan areas was $1,045, compared with after-tax mortgage payments of $1,300, assuming a rate of 5.5% on a 30-year fixed mortgage. That means mortgage payments averaged just 24% more than rent payments, the narrowest gap since 2001.

In more than half of the top 50 U.S. housing markets — including Los Angeles, northern Virginia and Las Vegas — the ratio is now below its 18-year average. In Los Angeles, for example, mortgage payments averaged 60% more than rent payments between 1990 and 2008. Now, those payments average 30% more than rent.

“We’re not saying on an absolute basis that it’s cheaper to own a home, but on a relative basis…owning is looking much more attractive than it has in a long time,” said Andrew McCulloch, a Green Street analyst. While the shift doesn’t mean that renters will rush to buy homes soon, “it’s not a ‘no-brainer’ anymore if they’re going to rent versus own,” he said.

Buy or rent that mansion?

414 Round Hill Road

This is a pretty snazzy 2004 mansion on Round Hill that didn’t sell a few years ago even though it was marked down from $13.9 to $9.999 million. But it’s got everything a young executive eager to impress should have: 6.5 acres of great lawns, huge, sweeping staircase, marble everywhere, pool, pool house, etc. etc. As of today, you can rent it for $30,000 a month. Just for a lark, I ran some numbers through the rent vs. buy calculator to the right of this blog and tossed in some top-of-the-head assumptions: selling price, $10 million, taxes, $45,000, mortgage, $1 million at 6.15%, rent, $30,000 per month. The calculator’s conclusion:

If you assume a 5% appreciation in value, buying is a better deal than renting after 6 years. At 4% appreciation, it will take 14 years for buying to make sense and at any rate below that, buying never makes (economic) sense. Never is a long time.

So depending on how you guess the market will perform and what your feelings are towards owning a nice house versus merely occupying it, you can choose as you wish. What I find interesting is that until 2006, I don’t think anyone would conclude that renting was the better deal. Now it could be.

Some sellers are trying to adjust

52 Pecksland Road, a smallish, 3 bedroom, 2 bath house on an acre, sold for $3.495 million in November 2005, right at the height of the market. I suspect that a 3 bedroom house, even on Pecksland, won’t be fetching that kind of moeny again for awhile but the new owners were more optimistic than I and listed it this past September for $3.995. Wrong move.

But now it’s down to $3.1 million. That may still not move it but for those skeptical readers who didn’t like my suggestion that people rent, rather than buy, here’s one couple that probably wishes it had.

Why walk when you can fly, but why buy when you can rent?

The Wall Street Journal reports luxury rentals take a big hit.

A [Hollywood Hills mansion] view worth millions — that rents for much less. The three-story stucco is on the market for $5 million. But in the meantime Ms. Weinheimer pays $15,000 a month — about $12,000 a month less than the home would cost to own, assuming a 6.5% mortgage, 35% down, taxes, insurance and maintenance. She recently negotiated the rent down from $20,000.

In this recession, perhaps the only market falling as fast as luxury home sales is luxury home rentals. In Seattle, a waterfront home appraised by two agents at $15 million is for rent for $10,000 a month, down from $14,000 a month ago. …

While these rents could hardly be called low, in some cases they wouldn’t even cover the taxes and maintenance cost of the homes. “At least they’re paying the utilities,” says Richard Goodwin, of renters who recently snapped up his newly constructed Aspen home, estimated to be worth $5 million, for $4,000 a month. Mr. Goodwin, who had originally wanted $10,000 a month, says he’s hoping the renters will eventually want to buy the house.

New Canaan, Conn. real estate agent Lawrence Story has “been in the business 30 years and I have never seen anything like this.” He says there are 22 rental listings for $9,000-to-$20,000 a month, more than double the number a year ago.

It kills me to admit it – I’m in business to sell houses, not collect pissant rental commissions – but you can rent a damn fine house in Greenwich right now for far less than it will cost to buy it and if prices are going to keep falling, why don’t you?

Where are the buyers?

Renting, it turns out. I was astonished to see today that 64 Sound Beach Avenue, a house unlikely to sell for its asking price of $2.195 million, rented via a bidding war (!) for $6,000 per month (up from $5,900 asking). Intrigued, I looked up rental activity for the year and discovered that there have been 84 transactions since January 1st. Many of those are multi-family and condos but that’s still a heck of a lot more activity than we’re seeing in sales. 64 Sound Beach, by the way, seems atypical. More common is the fate of 22 Indian Head Road in Riverside whose owners were asking an improbable $3.399 million for an oddly renovated house backing up to a grave yard. That rented for $8,700 per month, down from an asked-for $11,000.

The owners of 64 Sound Beach paid just $1.050 million for the their house in 2000 so a $6,000 per month rent probably eases the pain of not being able to sell it. The Indian Head folks paid $2.4 million for theirs in 2004 and may not be so happy with that $8,700. I don’t know how many renters would have been buyers in better times but it wouldn’t surprise me to learn they were a lot of potential buyers who have decided to sit this one out.

UPDATE: Just for kicks, I ran this equation through the rent vs. buy calculator (also linked to on the right side of this blog). $6,000 per month rent on a $2 million house, assuming 0% appreciation and a 3% annual rent increase yields the conclusion that you are never better off buying the place  than renting it. Someone asked, “what are these sellers going to do in 2011?” I guess they’re going to drop their prices, a whole heck of a lot.