Vegas Goes One Way While The Rest Of The Country Goes Another

June 23, 2008

I’ve been frothing quite a bit about how important it is that Las Vegas sales are up month over month, compared to 2007. It’s important because most of the country is heading in the opposite direction, selling fewer houses than in 2007. Look at how different things are over in Southern California:

By ALEX VEIGA
AP Business Writer

LOS ANGELES —

Sales volumes for the region climbed about 8 percent from April but were down nearly 15 percent from May 2007.

In all, 16,917 new and preowned homes were sold in May, down from 19,874 in the same month last year, the firm said.

Only in a few other parts of the country are sales higher now than a year ago, and they’re all places where the downturn has been harshest, such as Sacramento. Here’s a report from Sacramento.


Committed Renter Buys House

May 28, 2008

This article, which is currently the most emailed business article in the New York Times, is interesting primarily for its analytical approach:

The case for renting has been simple enough. House prices rose so high in the first half of this decade that you could often get more for your money by renting. You could also avoid having a large part of your net worth tied up in a speculative bubble.

Over the last several years, I’ve come to like a simple, back-of-the-envelope way to compare the costs of renting and owning. You find two similar houses, one for sale and the other for rent, and divide the sale price by the annual rent. You can call the result the rent ratio.

The concept will probably sound familiar to stock market investors. It’s the real estate market’s version of a price-earnings ratio — a measure of how expensive an asset is, relative to the underlying economic fundamentals. Like a P/E ratio, the rent ratio provides something of a reality check.

Throughout the 1970s, ’80s and ’90s, the average rent ratio nationwide hovered between 10 and 14. In the last few years, though, it broke through that historical range and hit almost 19 by the time the housing market peaked, in 2006.

And while home prices — and rent ratios — have always been higher on the coasts, they reached whole new levels recently. In the Washington area, the ratio went above 20. In Boston, New York, Los Angeles and south Florida, it topped 25. In Northern California, it approached 35, higher than it had been in any city, at any point on record.

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In the neighborhoods where we were looking, two-bedroom condominiums were selling for $400,000 and being rented for about $2,100 a month, which makes for a rent ratio of 16. Four-bedroom houses were selling for $700,000 and being rented for almost $4,000, which makes for a rent ratio of 15. No matter the price range, pretty much every apples-to-apples comparison produced a similar ratio.

Historically, this is still a bit high. But it’s very different from where the market was just a couple of years ago. With house prices having fallen over the last two years and rents continuing to rise, the decision became a much closer call. We would now have to spend only a little more each month for the privilege of owning.

This article calculates Las Vegas’ Rent Ratio to now be 17.1. But if you look carefully for high quality locations that command higher rents, you can do better than that. At Manhattan Condominiums, for example, condominiums that command $1350 a month are being listed for $220,000. That’s a rent ratio of only 13.6. In a city with a rapidly growing population.


It’s Now Cheaper To Buy Than To Rent, In Some Parts of Vegas

May 23, 2008

Down at Manhattan Condominiums, one of the valley’s nicest communities (Frothing Developer should know, having developed it), it is now less expensive to own than to rent.

That’s the first time in the history of the community that it has been the case, and it’s not likely to last.

Average rent at Manhattan is $1400 per month for 2 bedroom condominiums.

Suppose you wanted to purchase, instead?

The MLS lists three 2 bedroom models for $240k. Assume:

  • 15% down
    6.5% mortgage, fully amortizing
    Homeowner Dues: $260 per month
    Property Taxes: $160 per month
    Insurance/Maintenance: $40 per month

From this, we calculate:

Monthly Mortgage Payment: $1289
Monthly tax savings from interest deduction:-$295
Net Cash Cost: $1454 per month.

But out of that $1454, $197 is paydown on principal.

So, the true cost of owning a condominium under these conditions is $1454-197 = $1257. Get a 10% down mortgage, and it’s $1306.

There are plenty of places in the valley that can’t generate $1400 per month in rent. In those places, it’s not true that it’s now cheaper to buy than to rent. What’s happening here is that location quality is starting to make a difference. All of the prices are getting beaten down, but the rents are NOT getting beaten down. These Manhattan Condominiums, because of their amenities, social life, location, newness, etc… are generating twice as much rent as lots of other Las Vegas condominums and apartments.

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