Wednesday, February 16, 2011

housing thoughts

Back in 2005, I investigated buying a house. Specifically, I was filling out the offer paperwork for a townhouse, when my gut told me something wasn't right, and I went and did some more careful math, which told me that after the mortgage payment, I'd have about $1200 left each month, even at the lowball offer I'd planned on. And I also didn't really think it was worth the $475,000 they were offering.

To my unending glee, I was right. In 2005 it sold for $505,000, and then last year it sold for $299,000.

My favorite metric for a reasonable house purchase is the price-rent (P/R) ratio. It's not the most complete, but it's easy to calculate and it appeals to common sense; it also points to whether buying a rental property is a good investment or not. (Rental income only covers half the mortgage payment? Probably a bad idea.) Take the price of the house and divide it by the cost of renting that same house for a year.

I started thinking about this again because of a couple of foreclosed duplexes under $400,000 that appeared on Redfin. When I was living by myself, renting was a no-brainer: this lovely 1-bedroom apartment is an extravagant $1400/month, which is maybe a $250,000 house, which doesn't exist around here (certainly not near the train station).

Once you start looking at 3-bedroom rentals near the train, though, you're looking at rents over $2200/month. The rule of thumb is that for a P/R under 15, it's better to buy, and over 20, it's better to rent. With my rent going up, the denominator in the price-rent ratio, the ratio goes down.

Sadly, the housing crash is coming slowly to this part of the Bay Area: it's a nice place to live, and there are far too many people with lots of money, especially since we're in yet another tech bubble. I have faith, though. I think houses in this neighborhood have about 15-20% to fall before being in line with the pre-bubble trend.


  1. Around here it's a great time to buy a house, especially for first-time owners. My cousin bought his first house at about half price.

  2. I'm still choking on house prices here, after all these years, in part because of concerns about what happens if I end up with a lengthy unemployment again (which is a little silly, as long as I'm able-bodied). But with the rents we're looking at, it starts to make a perverse kind of sense.