Monday, April 05, 2010

Sacramento Real Estate Market - April 2010 Water Cooler

Post off-topic links, observations, and stories about the Sacramento real estate market here. Please read the comment policy before posting.

57 comments:

husmanen said...

Looks like the treasury rates are abruptly going up.

Date 5 yr 10 yr
4/1/2010 2.59 3.89
4/2/2010 2.67 3.96
4/5/2010 2.75 4.01

Could interest rates be far behind?

Lucky said...

It looks like The Bee are reading this blog... who can blame them? Sacramento Landing gets a direct shout out in this Bee blog.

Is anyone going to give them some info on their experiences? I think it would be great to get some coverage on scummy realtors.

www.sacbee.com/static/weblogs/real_estate/archives/2010/04/is-it-ok-for-sa.html"


Is it OK for Sacramento-area real estate agents to double dip?

We are getting more reports from the bank repo front about real estate agents who are double dipping on sales commissions. The allegation is that they represent the bank and also represent buyers looking for those kind of houses - usually investors.

So.... maybe you put in an offer, even a really good offer. But the listing agent ignores it so she can sell it to her own buyer - and make two commissions.

Apparently this is causing houses to sell for less than they would otherwise, which drags down neighboring property values that much more. The bank gets less because it was never informed it could have gotten more. And a lot of first-time buyers are getting shut out of good deals.

I have calls in to see if this is illegal, or merely unethical. Reports on other blogs like Sacramento Landing indicate that it's widespread.

I am looking for a little help getting to the bottom of this. If you have insight please call me at 916-321-1102, or send an e-mail to jwasserman@sacbee.com. Thanks in advance.

husmanen said...

Just put this on AB's site, but thought I would share here too.

El Dorado County Secured Property On-Line Tax Bills

http://main.co.el-dorado.ca.us/CGI/WWB012/WWM432/T

You just put in a parcel number and you get a breakdown of the taxes. Not as nice as Sac County's with their map, but it is great info.

I just found it, man it makes my comparison between Folsom and EDH much easier.

inpd said...

ANOTHER Problem with Buying REOS
================================


I think this is extremely important for REO buyers
to know about this.

I bought two REOs in 2008/2009 and worked through
the well-known problem of understanding the
legal and physical state of the property given
the bank is an absent owner.

However, in a recent transaction, another
***new type of problem*** arose, that my
friends (also buyers) have run into and
my broker says is becoming common.
Here is the typical situation.

We were the only buyers, offer was above
asking price (we were in a hurry). Inspector
found a problem, so we called in a specialist
who said there was a simple fix. This added
a two day delay to the entire process (but we could
still close on time) so we asked for a two day
extension.

The bank then throws everyone for a curve ball
and says they no longer want to sell us the house
and we are taking too long. Whoa! Drops us like
a cold fish, two weeks later the property is still on
the market, no buyers.

This is VERY serious problem with buying REOs
since you typically have to invest 40-80 hours researching
them and then to have a bank drop you is a huge waste
of time.

Personally, I'm going back to the stock market.
Vanguard never turned down one of my checks!

Note, the good faith deposit was returned, no problems
there. It's though they were unhappy we were doing due
dilligence and researching the property. This is something
you need to do when buying an REO hence the big problem.

Roy said...

Seems government is going to use our tax money to reduce the principles of those who are being foreclosed. What would be the impact of current trend. I can see house price is going down now.

husmanen said...

Wow that was quick, wonder what happened with the treasuries, back down again.

Date 5 yr 10 yr
4/1/2010 2.59 3.89
4/2/2010 2.67 3.96
4/5/2010 2.75 4.01
4/6/2010 2.71 3.98
4/7/2010 2.62 3.89

Louie said...

General question about home listings: What fraction of homes for sale are on the MLS, like on ZipRealty.com? I saw several homes with signs outside recently, and when I looked online, they didn't show up. I'm assuming homes being listed with Help-U-Sell aren't on there, as well as homes being auctioned. Any other segments of the housing market not on sites like Zip? Thanks in advance!

husmanen said...

Louie. Excellent question. I too have noticed this but have not come across a definitive reason. Some MLS are on Zip others not.

You could always email Zip and ask with examples :-)

norcaljeff said...

Looks like the treasury rates are abruptly going up.

Date 5 yr 10 yr
4/1/2010 2.59 3.89
4/2/2010 2.67 3.96
4/5/2010 2.75 4.01

Could interest rates be far behind?


Hus,

Those are the interest rates. Mortgages are pegged fairly well to the 10-year Treasuries. Until investors flee equities, rates will continue to climb.

Right now I'm really amazed at how well banks are manipulating the RE market. Going into the close of the Federal tax credit deadline, inventories in the area I'm looking has dried up. They now realease 1-2 properties a week. I wonder how long they can hold back that inventory. I'm still amazed that the govt allows this manipulation. If I were to control a market like this I'd be in federal prison.

norcaljeff said...

Louis,

I've also noticed this. I use 3 seperate sites and they all show different properties and when I do find a property on all 3, I typically get a different status for each. It's a mess. But I don't like MLS because they don't give you all the details and history of the property. Redfin and Zip seem to be the best, but as I mentioned above, those don't include everything and sometimes their data is a few days behind.

norcaljeff said...

Roy, I disagree. If the govt comes in and takes $200k off your mortgage, you now have less reason to bail on the property. REOs and short sales will slow down and home prices won't dump like they should. It's more manipulation. You can't fight the feds!

Jacob said...

Or the feds take $200k off your home cause you can't pay and your 10 neighbors that were paying just stop to get some of the action...

STOP ROSEVILLE CRIME said...

Or the feds take $200k off your home cause you can't pay and your 10 neighbors that were paying just stop to get some of the action...

Well, one would be borderline stupid not to pull the plug and leave the house behind.

husmanen said...

April 10th is deadline to pay the biannual property tax. Today, the 12th I checked the SacCounty database. I have collected data on specific areas of Folsom for four (4) tax cycles (Dec2008, Apr2009, Dec2009 and Apr2010).

The initial number of tax delinquent homes has increased dramatically.

I say initially because historically over 50% cure their payment with penalties and/or the County has a lag in updating the data. I did call the county and they said the data is updated as of today, but when I check back on the data and a lot of homes fall off.

My findings for Apr2010 show a greater than 100% increase in the initial number of homes that are delinquent compared to Dec2010. Delinquency can occur for a number of reasons, (1) not paying your mortgage and your escrow account does not match county expectations (2) those not using an escrow account are just late (3) the County is late in processing and updating their databases (reassessing property values can also cause a wrinkle, but this area does not have many homes purchased in the last four (4) years). There are probably more reasons.

Again, this adds validity to the ‘shadow’ inventory issue and I use this as a potential flag for future Short Sales or REOs. Last year I good number of homes flagged attempt sales.

Remember, if you don’t pay on your mortgage, and the bank ignores this for a variety of reasons, the escrow account to pay the taxes is not filled. The county does not accept partial payment, payment has to be what is expected. If you don’t pay for six (6) months trying to do a loan mod, the county still expects to get paid the exact same amount.

Funny though, I have heard stories of the bank kicking in the taxes for delinquent owners. I have seen this in a couple cases, but not a lot, in my areas.

The last caveat is that it takes five (5) years of not paying your taxes before the County puts a lien on your house for sale. Of course, you accrue the 10% penalty. Less than 2% of the houses I identified are delinquent for greater than two (2) years.

Interesting. Very interesting.

sacramentia said...

Hus - The deadline was April 12 for taxes since the 10th fell on a Saturday.

husmanen said...

Thanks, I thought about that later. I usually have to check back anyway because there are updates. I'll report back when I can.

husmanen said...

Tax wise. I was able to update one area in Folsom that has a little over 100 homes.

In December 2009 there were 5 homes not paying property taxes on time.

On 13 April 2010 there were 15 homes not paying taxes on time (on Monday(12th) it was nearly 50 homes).

There are 3 homes that have not paid prop. taxes for the last 3 years. Only one of homes is a Short-Sale on the MLS today.

There could still be some delay in updating the data. When I get time in the future I will check again.

husmanen said...

Prices keep dropping in the areas the I track and some are getting close to rental parity.

This is happening even without a large flood of REOs. I watch the data for bank auctions at the court house steps and I have not seen a house get canceled, sold to a 3rd party or go back to the bank in a long while (couple of weeks). They are just getting postponed. Weird.

One explanation is that they are trying to mod the loans. True, but all of them?

ash said...

anyone have luck with short sales recently - I hear of people putting in dozens of offers - sometimes full price or more- just to wait months and get denied.

lots of big money homes in el dorado hills that I like- but listed as short sale- not sure its worth my timer perusing.

Any insight?

Megan said...

this blog used to be dynamic and fun. now it is just the husmanen "rental parity" show.

waiting_for_the_fall said...

I think most people are still waiting for the bubble to deflate.
All the government intervention is dragging this out years longer than it should have.
I want to buy a house, but I don't want to buy when I know the price still has 10 to 15% left to drop.

patient renter said...

I think most people are still waiting for the bubble to deflate.

Yep. The bubble is indeed still deflating and the effects of government intervention still need to play out. In the meantime, I'm just living life and renting.

husmanen said...

I think the nature of this blog has changed due to a number of different reasons, including but not limited to:

* Major contributors buying houses; lander, max, deflationary jane and average buyer to name just a few.

* Lack of contrarians; there used to be a few contributors that presented their best arguments for bubble prices. That does hasn't happened in a while.

* Market rate of deflation; Gov't intervention into the market has been unprecedented which has dramatically slowed the rate of market correction, like watching a train wreck in slow motion.

* Life; I think a lot of us have found other interests. I hang around because I have learned so much from this blog and try to give back when I can.

smf said...

Another reason that these blogs have changed are because of stupidity. We made our contributions, the facts of what happened are out there, and yet...

...stupidity is still prevalent out there...

Over-investing was one cause of the bubble, and per the latest reports, the same amount of excess investors are out there as during the height of the bubble.

Go read the Housing Bubble Blog today, and tell me how all those countries are not different than the US of a few years ago.

Can't the majority of people not learn the lessons of the last few years?

BTW, Husmanen, have you taken into account maintenance costs in your rental calculations?

Typical repairs can easily wipe out years of rental earnings. I don't see many discussing the costs of maintaining a home.

norcaljeff said...

Well the greedy banks are finally letting go of their REOs. After turning the spicket completely off to try and raise panic in front of the tax credit deadline, I'm finally seeing tons of properties getting released back on the market.

husmanen said...

@SMF. Great observation, and no I have not included maintenance since I was shooting for the bare bones level of rental-parity. For my current situation I maintain the house up to a point, say $400. But a ‘real’ investor must include maintenance, vacancy and a whole lot more.

@norcaljeff. After weeks of not seeing much I have seen changes in pre-foreclosures and auctions in the last few days.

Personally, our rental has just re-entered foreclosure. Could be a change is in the wings. I will contact the ‘owner’ of our property in a few weeks, she has received some bankruptcy mail as well as foreclosure/loan mod mail lately. I’ll keep you guys informed.

smf said...

And you can tell that a lot of these amateur investors are not doing their homework in the maintenance department.

Real investors appear to be those who see a house and flip it rather quickly for minimal profit.

Amateurs appear to be the ones looking at a home, getting a $1000/month mortgage, renting for $1200/month, and calling that a 'positive' rate. That $2400+ profit can disappear pretty quickly under normal conditions, let alone if the tenant trashes the place.

And still really no one talks about the excess of housing units out there. Even under the best circumstances, if you can't rent out your place, those expected profits can soon turn into monumental debt.

Too many are expecting a windfall once the market 'comes back'. But as prior history tells us, bubble prices NEVER come back.

As I read, even the prices from the 1926 Florida bubble never returned even during the latest bubble.

You still see too many stories where a statement is made that a person got a $700K house for 'only' $300K. In reality, they bought a $250K house for $300K.

This thing will be over once the majority of people realize that the prices are returning to normal, and that homes are not underpriced right now.

husmanen said...

"You still see too many stories where a statement is made that a person got a $700K house for 'only' $300K. In reality, they bought a $250K house for $300K."

In Folsom and EDH people crow over "...bought in 2005 for $600k now only $450k..."

In reality, they are buying a $300k house for $450k. This is happening all the time.

An example, I just contacted an agent regarding a potential bid on a house. They said the bank would not entertain my bid, and they have an approved buyer at 25% over my bid.

WOW! I wished them the best, just as I did a few months back when I discussed this property with another agent who had an approved buyer at a higher price.

Overbuying is not a good short/long term strategy, buying to live in or for a rental. It just becomes immediately apparent when exposed to the rental market forces.

Deflationary Jane said...

'And you can tell that a lot of these amateur investors are not doing their homework in the maintenance department.'

You aren't kidding about maintenance. I am finding this out the hard way.

However all the stories of construction workers having a hard time are a myth. I'm still having the worst time with contractors. They have lost all sympathy they ever received from me.

smf said...

'The hard way'

Those with little memory forget. Our first had was built in 1978. By the time we sold it in 2003, we had painted the exterior 2X, repaired the roof, changed all exterior windows, added laminated floors, tiled one tub, added two ceiling fans, garage door with opener, new dishwasher, new range, replaced the entire A/C system, fixed a falling front facade, painted the entire interior, changed the kitchen sink and disposal, and many other little repairs.

This was done from 1999 to 2003 and were required repairs.

We bought a new house in 2003, and by the time we left in 2008 it was starting to show its age.

sacramentia said...

Rents up in Sac according to the Sac Bee...what do you think, Hus? Will it stick or find it's way into the suburbs.

husmanen said...

Sacramentia. Interesting. I was thinking about this too.

“Why” was asked by Wasserman and the response was an improving economy. Then he correctly states that doesn’t seem to work in our area as we have a 13.1% unemployment rate. When more info or reasons are available he will share.

I’ll be listening, but if this is true and a leading indicator it would naturally push up house rents in a normal market. On the other hand if there a surplus of homes to rent is may backfire and push the rent prices down again. Given the amount of investors in the entry level home sector renting them out the latter has a good chance of occurring.

Again, if this is a trend it should percolate through the housing market and could bode well for the market finding equilibrium.

There is no speculation in paying rents or rental prices, its based on old fashioned income and ability to pay.

Any one else have some ideas?

Reference data:
http://tinyurl.com/2a2uy8b

smf said...

The caveats are in the article itself:

But rising rents are bad news for residents struggling with wage cuts and layoffs. A report this week from the National Low Income Housing Coalition says 60 percent of renters live in counties where an average wage won't cover an average one-bedroom rental.

Even with the increase, area rents are still down 3.8 percent from the same time in 2009, said RealFacts. Overall, rent asking prices for new tenants are the same as they were in late 2005.

Many area apartments are still offering specials to entice new tenants.

Frederick said apartment vacancy rates are likely to remain higher than normal as more renters buy houses.

Those compensated for slight rent declines in Davis, Rocklin, Carmichael, Fair Oaks, Elk Grove and Rancho Cordova, it said.


These facts point to further weaknesses in the sector.

Jacob said...

I still want to buy but have been waiting for the tax credits to end since that is just artificially and temporarily holding up the prices. When if got exented I was very dissapointed, but now it is expiring again and I expect to see more homes on the market and less flipper activity so maybe the right time for me to buy will be coming soon.

In 04 and 05 people would ask why I wasn't buying and I would say that prices were out of whack and would come crashing down. Was either laughed at or ignored. Now while everyone admits that there was a bubble and prices were not justified, I am still surprised by most peoples' attitudes that prices will go back to what they were.

If the prices were not justified, why then would they go back to those rediculous prices.

Or the people that buy because the prices is $x off peak, but that peak price was imaginary...

No capitulation plus speculation is as hight or higher than it was during the bubble, so I wait...

anoop said...

What do you folks think about buying land? I was thinking of hedging myself for a potential boom in real-estate by buying a lot by Elliot Homes in Rocklin Highlands.

Is it a pain to get a custom home built?

husmanen said...

Anoop. Potential boom? Could you please elaborate if/why you may believe this ( data, trends etc)?

For personal use or a home sounds interesting if the numbers work out. I have tried this route with my wife for years and I have accepted defeat. She has lots of examples of divorce and severe stress on the family when building your own home, not to mention the financial risks and inevitable delays.

David said...

Is this a flipper?

8523 Via Gwynn Way FO 95628
MLS 10014143

This is far and away the worst house on the street and nowhere near move-in condition. Chock full of deferred maintenance and I smell a flipper, as no work has been done before putting it on the market. MLS says only cash or conventional, so you know it won't stand up to a home inspection.

Full disclosure -- we bought a comparably sized near-perfect house with same pool/spa/amenities/garage/lot size on this street in October for only $20K more than this property's asking price.

The price will not withstand an appraisal, and my guess is it will go for between $250K and $270K. No investor will buy it and nobody with half a brain will try to move in without spending fifty thousand dollars to make it livable. 270+50 puts the total move-in price comparable to what we paid, then you'll have a great house on a great street and the neighbors will love you. Until then, it's one step removed from blight.

Anyone?

luca said...

8523 Via Gwynn Way FO 95628
MLS 10014143

It is a foreclosure - Bank Owned

Good luck my friend

PeonInChief said...

On the rental market:

It does not operate according to the rule of supply and demand say, for flat screen TVs. You have a necessitous buyer and a non-necessitous seller. This means that the seller (landlord) can hold out a lot longer than the buyer (tenant). Vacancy rate, therefore, plays a small to non-existent role in rental costs, unless the vacancy rate is very high (above 20%), but then you often have other problems in your economy. Further there are a lot of corporate landlords and property management firms; can you say "price-fixing"? It appears that landlords are trying to eke out a bit more money, as the market won't support much more.

To husmanen: do you want to buy the place you're renting? It appears that lenders are trying to sell to sitting tenants in some situations, so if you do want to buy the place, you should contact your landlord's lender. But be careful--lenders are still slimy.

PeonInChief said...

Oh, one other factor in rental prices. A lot of tenants are very nervous about renting from non-corporate landlords--as they well should be. There have been too many horror stories of tenants renting from (a) "landlords" who didn't own the property, either because they'd lost it to foreclosure or were scam artists, (b) landlords on the verge of foreclosure, whose previous tenants had found out about the default and moved.

I actually recommended that a tenant moving from out of state to Southern California park first in a large rental complex so she could check out a permanent rental carefully. Me, suggesting that someone rent in a large complex? The times, they are weird.

husmanen said...

PeonInChief. Thanks for the info and very informative blog you have.

I won't be persuing my current rental as it doesn't fulfill our needs and has one big drawback - traffic noise. According to my PITI calcs it us worth about $250k max. For me to be interested as a cash flow positive rental I would have to get it for under $200k.

Again thanks for the rental blog.

husmanen said...

Megan. Dr Housing Bubble takes up rental parity, good examples. 

http://www.doctorhousingbubble.com/santa-monica-housing-rent-buy-price-metrics-valuing-real-estate-in-westside-los-angeles

Megan said...

Hus, I looked at that article and it has little value in my opinion.

No address were disclosed. How do we know those two houses are really comparable? Same condition? Same location?

Not all buyers are first time home buyers; many have lots of equity to roll over. I know this might be hard for you to believe, but some people have lived in their homes for decades and have no debt. This is mostly true of older established neighborhoods and highly desirable locations--not run down suburbs full of ticky tacky houses.

The 15 year average price to rent ratio for Sacramento is 19.4. The average single family home rents for about $1300 in Sac. That equates to a $300,000 home price. I think the median is currently around $230,000.

There is generally some premium to be a land owner. The owned homes are generally nicer and more desirable than the "comparable" rental.

How long have SF and NYC been out of wack with parity? How come Detroit is at parity?

My thought is rents will rise to match home prices before home prices fall to parity in Santa Monica. The long-term owner of a house can afford lower rents because they do not owe much. They have no reason to sell, so inventory is low, thus keeping prices high. Again not the case in Elk Grove or Natomas.

sacramentia said...

"What do you folks think about buying land? I was thinking of hedging myself for a potential boom in real-estate by buying a lot by Elliot Homes in Rocklin Highlands.

Is it a pain to get a custom home built?"

Anoop. I like land and building homes. I enjoy the process and don't find it painful at all.

Given the oversupply, every home you build would have to create a vacant home, so I'd be very careful about location and uniqueness buying property since supply is so high. For example, I would not buy any land in a remote suburb.

husmanen said...

Megan, hmm, little value from Dr. Housing Bubble, not sure what you mean here. His track record is good, brings lots of data and combines micro and macro views of housing together. Although addresses are not disclosed a few of us have done something similar in our four county region in the past, let the data speak for itself.

Agreed that all buyers are not first time buyers and ‘unique’ locations and houses can demand a premium on the market, but we have very few areas that fit that description.

I have personally looked up data on over 100 homes in the last few years. The number of homes that put down a considerable amount of equity, >20%, can be counted on one hand. One specific example stands out where a house put down $450k cash in 2007 only to sell in 2010, knocking out over $250k in cash. Puff GONE.

If you love your house and you don’t want to sell but have to move, you only get the current market rent. The rent better cover the monthly nut or you better have deep pockets.

Once, my realtor said that I cannot compare rents because of people living in the area are almost all home owners and most have lots of equity. So I looked up the data on two older custom home areas. About 20% of the houses appeared to have a lot of equity based on when they bought the house versus current prices, the other 80% were recently purchased with <10% down or had equity until they started to HELOC the houses. Oh, and about 25% were nice, beautiful RENTALS.

Rents in this exclusive area have not changed and have remained the same since about 2005. The change in the prices in these areas dramatically changed the price to rent ratio, bubble making it go up and vice versa. BTW, if you exclude bubble years I am not sure the long term trend. Do you have price to rent ratio data from say 1970-2001?

Remember rents are not speculative, you don’t get options like pick-a-payment, pay only a portion or can ‘cash out’ to pay up. Rents are based on income and supported by the general economic well being of the area. There are areas where it makes sense to buy a house, others not so.

I don’t see rents rising in any of our Sac County areas in the next year or two, and thereafter not more than inflation. But you never know.

smf said...

I live in an area with a lot of long-term owners with gobs of equity. At this stage in life, these long-term owners are not really ready and even willing to move up. If anything, a move to a retirement community or care facility would be more in the cards.

But guess what?

If you want to purchase a house from a long-term owner, be ready to shell out $$$ for repairs and updates.

Our next door neighbors are in their 90s. Their roof is in urgent need of replacement. They have the money for it, but no intention of spending it. Ditto on other appliances and flooring.

Recently, the home in front of us sold for about $75K less than what we paid for a smaller home because it was in need of so much cosmetic fixes.

sacramentia said...

"Recently, the home in front of us sold for about $75K less than what we paid for a smaller home because it was in need of so much cosmetic fixes."

Not to mention the fact that the market prices are still declining.

husmanen said...

SMF. Funny I was just thinking about that. We currently live in a newer rental and I do all the repairs that don't cost a lot.

My wife and I really like the older homes and maintenance is on our list of things to watch. I find myself steering towards newer homes just because of this.

My parents live in a house they bought in 1977 or so. In the last five years, they have replaced the roof, HVAC, patio, back yard landscaping, one bathroom, paint inside/outside etc. And that does not include things they did before 2005!!!

I have an account for such things when we buy depending on the house.

What do people do when they don't have money saved?

smf said...

What do people do when they don't have money saved?

Wait till they have the money or not do it.

All sorts of people talk about rental parity, but that maintenance can be a killer.

We have several things around the house that will have to be replaced soon.

husmanen said...

SMF. Or could they take out a second for big ticket items like a roof (>10k) or a new HVAC system (>3k)? Given they have equity (could borrow against their 20% down - paying interest and possible PMI too).

I don't mean like in the bubble years where it was used as a cash machine but to get cash for major repairs.

Otherwise, basically save by reducing costs somewhere and defer the costs until critical and continually look for a 'deal' (you do part of the labor etc.)

Yeah, those were the old days, pre 2001, and may have arrived again.

RV6Flyer said...

Husmanen:

What do you consider a reasonable P/R ratio for Sacramento?

SLG said...

SMF, I've been looking for some time now in the 300-350k range, and have passed up several houses just because they have not been updated, at all.

My most recent house in Roseville has 60 DOM, no other offers despite several open houses, but almost all original from 1986. Yet the owners refuse to sell for less than what they paid in 2003 (325k) despite having a 2nd mortgage to pay on their new house. (/boggle)

What do people think is "long" in terms of DOM for this price range of homes?

husmanen said...

The formula I use for House price to Rent ratio =

House Price/ (Mon Rent x 12)

According to a NY Times article using data from Moody’s Economy. Com the Sacto area price to rent ratio hit 33.5 in 2005 and in 2009 it is at 16.4.

Sounds like a huge drop. But when we look at pre-bubble say 2000 the ratio for Sacto is approximately 12. These number average all areas and are not specific to a given community. I have friends in that have bought rentals in some areas of Sacto that have p/r of around 10.

Now if I take my current rental, when it was purchased in 2006 it has a price to rent of 23. The same model just sold, given my rent the current p/r is 17. To cover the PITI with 20% down on a 30 yr loan at 5.25% the p/r ends up around 12 (remember NO maintenance costs included). Funny, that is the pre-Bubble number mentioned above.

A p/r like 19 would make my rent -33% given the assumptions above.

I would go with an average of 12 based on my antidotal data and historical references that exclude the bubble. We have many areas that fit this bill today, others that do not and may have historical p/r of say 14.

One that does not is 1716 Santa Maria in EDH, sold 2005 for $759k, rents for $2400/mon. a p/r of 26 at the time but at p/r of 14 would put it at $420k – about right.

References:
http://www.frbsf.org/publications/economics/letter/2004/el2004-27.html

http://www.nytimes.com/2010/04/21/business/economy/21leonhardt.html

http://sacramento.craigslist.org/apa/1710157098.html

http://www.zillow.com/homedetails/1755-Santa-Maria-Way-El-Dorado-Hills-CA-95762/18615235_zpid/#image=imgId%3DX1-IAqrs90d7p5lsh_ev6ju

RV6Flyer said...

Husmanen:

A couple of things to consider. What discount rate you are choosing to come up with a P/R of 12 and future expectations. The risk free rate of return is very low and this can drive risk assets higher. Also, future expectations of appreciation I think are still elevated, so the market will price in a higher multiple. Whether those expectations are correct, I have no idea and don't care to speculate.

I don't really pay much attention to what is going on in real estate outside of my local area, so I will not talk to that. You seem to know what things rent for in EDH and what proper values are. In East Sac and Midtown, I see much higher P/R multiples.

Take my neighbors house:

http://www.sacrentals.com/goinside/1315-42/

He gets $4000 a month, but I think his house is worth much more than a 12 P/R. He also owns it free and clear.

A couple of streets up zillow says this house is worth $1.9MM, but I don't think he would be able to get the $13,000 a month rent a 12 P/R would require. The owner also paid cash and owns it free and clear, so I guess he could take less if needed.

Basically, averages are made up of highs and lows, and I think it is unsafe to apply the average to all situations.

RV6Flyer said...

Also, when it comes to maintenance costs, the tax savings should cover average repairs.

Say I file jointly and make $160,000 AGI. That puts me in the 28% federal tax bracket. This works out to about an 24% average tax rate between state and federal.

Now assume I purchase a $300,000 house and depreciate it over 20 years. Annual depreciation expense is $15,000. Assume also I put 20% down and have a 5% interest rate. My annual interest expense is about $12,000. Average annual maintenance costs are $3000. Total expense is $30,000 per year. At a 24% tax rate, this is an annual savings of $7200 in taxes. I would say that pays for most maintenance costs on a home.

Breaking even is much more than breaking even when you factor tax savings in. With 3% average inflation, 30 years from now one could have an asset owned free and clear giving a nice rate of return. Unless you are purchasing a Walgreens with a 30 year lease and no rent escalations, few investors expect to get huge amounts of cash flow in the first few years.

Houses may not increase at the same insane rate we saw last decade, but they do historically increase in value. People were getting rich in real estate long before the bubble and they will continue to do so.

It is all about location.

husmanen said...

RV6Flyer. I appreciate your examples, especially the long term rental. With regards to p/r, I agree there peanut buttering the averages and applying them to all areas will and should not work.

Location, location, location.

During the bubble I tried to help a friend locate a rental similar to your link. My friend wanted to sell his house in Land Park at bubble max prices and rent in Land Park or East Sac. During the timeframe we never came across a house that fit his family's needs. This one would have been great.

If the house in the link was going to sell, what do you think he could get for it?

Queer by Choice said...

Can anyone here comment on the credibility of this prediction and how it might influence the real estate market?

http://www.ibtimes.com/articles/21693/20100430/gold-silver-currencies-hyperinflation-oil-social-security-medicare-money-supply-recession.htm