(Crain's) — Last year, apartment landlords worried that downtown Chicago would soon have too much rental housing. By next year, it may not have enough — much to landlords' delight.
After surviving a big development boom, downtown apartment owners will soon have the upper hand over tenants, allowing them to hike rents by as much as 8% to 10% in the second half of 2011, says Ron DeVries, vice-president at Appraisal Research Counselors, a Chicago-based research and consulting firm.
“I think we are poised for some rent spikes next year because demand is so high,” he says. “Everyone wants to rent.”
Demand for downtown apartments has outpaced supply, even as developers have built nearly 5,600 units over the past three years amid the worst economy since the Great Depression. That combination would normally make life miserable for landlords, but the depressed condominium market and shaky economy have saved them by encouraging more people to rent instead of buying.
“Renting just allows for flexibility in your life, and when people are uncertain, they want flexibility,” says David Lynd, president and chief operating officer of the Lynd Co., a San Antonio-based developer that recently completed EnV, a 249-unit apartment tower in River North.
The occupancy rate for Class A downtown apartments rose to 94.7% in the third quarter, up from 94.5% in the second quarter and 91.1% a year earlier, according to a recent report from Appraisal Research.
The average monthly net effective rent, which factors in concessions such as free rent, was $2.22 a square foot, unchanged from the second quarter but up 5.7% from third-quarter 2009.
But the most surprising indicator of demand is absorption, or the change in the number of occupied apartments. Downtown landlords have rented out an additional 2,076 units since the end of 2009, an 11.7% increase, according to Appraisal Research. At the current rate, 2010 will go down as the best year for absorption since at least 2001, the earliest year for which figures are available.
And that's despite a weak job market, usually the most important driver of demand for apartments. The Chicago area still had 69,300 fewer jobs in September compared with year earlier, but jobs are coming back, a good trend for landlords.
Developers have added 2,324 apartments to the downtown market in 2010, the most since at least 1999, the result of a construction boom that began before the financial crisis choked off development. With no new projects under way, it could be two years or more before apartment supply increases again, which could shift the market even more back in landlords' favor.
“It's a pretty tight market,” Mr. DeVries says. “It's going to tighten down next year.”
The weak condo market remains a competitive threat, as condo owners rent out their units. And two condo projects in the South Loop — the 333-unit Lexington Park and 248-unit Astoria Tower — could go rental, adding more supply in the coming months.
Given the strength of the market, developers are itching to build again, but securing construction financing remains a challenge. Appraisal Research predicts that plans for two or three downtown projects comprising 800 to 1,300 units will come to fruition over the next six to nine months.
Mr. Lynd says his firm is eyeing two downtown properties for future development. He likes Chicago because of its status as the capital of the Midwest, drawing young professionals from nearby states who want to work and live in a big world-class city.
“If you're in the Midwest and you're looking for opportunity, where are you going to go?” Mr. Lynd asks. “You're going to go to Chicago.”
Rents at EnV, Lynd's first Chicago project, are slightly higher than the company's initial projections, he says. The 29-story building at 161 W. Kinzie St., which opened in July, is about 40% occupied and is averaging about four to eight leases a week.
“By the time spring rolls around,” Mr. Lynd says, “we'll be full.”
By Alby Gallun for Crain's November 15, 2010
Wednesday, November 17, 2010
Monday, November 15, 2010
Knowing your rights and responsibilities is key to a good rental relationship.
Rents Right
The City of Chicago, in partnership with organizations that represent both tenants and landlords, has formed the Chicago Rents Right campaign to educate Chicagoans about the right way to rent. Chicago Rents Right provides information on the legal responsibilities and the rights of tenants and property owners.
With more than 60% of Chicagoans living in rental housing, Rents Right provides landlords and tenants with assistance in meeting their legal obligations and exercising their rights. This resource service provides mediation for landlords and tenants to resolve disputes in an informal and non-adversarial manner.
The Residential Landlord and Tenant Ordinance governs the majority of residential rental agreements in the City. Knowing your rights and responsibilities is key to a good rental relationship. Be sure you know what's expected of you and what you can expect in return. Whether you're a tenant or landlord, there are laws that spell out your rights and responsibilities.
See the Residential Landlord and Tenant Ordinance Summary and fall 2008 updates to the Residential Landlords and Tenants Ordinance for related information.
Rents Right provides:
Education on rental rights and responsibilities
Resources for conflict and problem resolution
Referrals to needed programs, services and training
A commitment to work together for a greater Chicago
Also see information on security deposit interest rates and sample calculations.
For more information go to www.cityofchicago.org
-from cityofchicago.org
The City of Chicago, in partnership with organizations that represent both tenants and landlords, has formed the Chicago Rents Right campaign to educate Chicagoans about the right way to rent. Chicago Rents Right provides information on the legal responsibilities and the rights of tenants and property owners.
With more than 60% of Chicagoans living in rental housing, Rents Right provides landlords and tenants with assistance in meeting their legal obligations and exercising their rights. This resource service provides mediation for landlords and tenants to resolve disputes in an informal and non-adversarial manner.
The Residential Landlord and Tenant Ordinance governs the majority of residential rental agreements in the City. Knowing your rights and responsibilities is key to a good rental relationship. Be sure you know what's expected of you and what you can expect in return. Whether you're a tenant or landlord, there are laws that spell out your rights and responsibilities.
See the Residential Landlord and Tenant Ordinance Summary and fall 2008 updates to the Residential Landlords and Tenants Ordinance for related information.
Rents Right provides:
Education on rental rights and responsibilities
Resources for conflict and problem resolution
Referrals to needed programs, services and training
A commitment to work together for a greater Chicago
Also see information on security deposit interest rates and sample calculations.
For more information go to www.cityofchicago.org
-from cityofchicago.org
Saturday, November 13, 2010
Housing market rising from ashes of the great recession
The residential real estate market in the Chicago-area and across the nation is gradually rising from the ashes of the Great Recession, experts say.
The highly respected S&P/Cash-Shiller Home-Price Indices released in early November shows home prices have increased for eight consecutive months for the first time since the spring of 2006.
While prices are still slightly negative over the nearly four-year period, the annual returns are close to being in positive territory for the first time in three years.
“Now that there’s a gradual upward trend in both home sales and home prices, it’s a positive sign that we’ve moved past the bottom of the hear estate market, and are now moving towards a fully recover,” noted Dr. Mark J. Perry, professor of economics and finance in the School of Management at the University of Michigan.
A new RE/MAX Northern Illinois network analysis of transactions gathered by Midwest Real Estate Data shows home sales activity in the metropolitan Chicago real estate market registered a solid gain of 11 percent for the first nine months of 2010, compared to the same period in 2009.
The average sales price for homes in the metro area during the January-September period was $255,684, a decline of only 1 percent from $258,354 a year earlier, said Jim Merrion, regional director of RE/MAX Northern Illinois.
Developers of new condominiums in downtown Chicago say the market has hit bottom and demand is slowly returning sparked by affordable pricing and rock-bottom mortgage rates.
“We have had a good sales year in 2010 and are highly optimistic about the new-construction condo market in 2011,” said Scott Hoskins, president and managing broker for CMK Realty, the exclusive marketing agent for 235 Van Buren, a new 47-story condo tower in the Loop’s Financial District.
“With both mortgage rates and condo prices at the bottom, we are anticipating good condo sales in downtown Chicago during the first quarter of 2011,” said Keith Giles, president of Weichert, Realtors—Frankel & Giles, the exclusive broker for several South Loop projects.
Meanwhile, apartment owners also are enjoying a rebound in the rental market with occupancy levels improving and concessions being phased out.
Judith Roettig, executive director of the Chicagoland Apartment Association, said forecasts indicate many Chicago-area landlords are planning catch-up rent increases of up to 8 percent in 2011, after seeing rent declines since 2007.
“If apartment rents rise a hefty 8 percent that will make condominium ownership more desirable,” predicted Giles. “Chicago historically is a condo town. People like to own their real estate here.”
Once resale values start to rise again, pride of ownership will return as owners start to enjoy the investment benefits of income-tax deductions for mortgage interest and real estate taxes, experts say.
“While the new-construction condo development market may not come roaring back at full capacity for a few more years, we expect to see condo conversions begin again in 2011,” Giles said.
“As the market revives, the first rental buildings to be converted will be the broken condos—the properties that were built to be sold as condos but failed during the recession,” Giles predicted.
Don DeBat’s weekly real estate column is syndicated by DeBat Media Services. For more home-buying information visit his website at: www.dondebat.net.
DON DeBAT
chicago journal
www.chicagojournal.com
The Home Front
11/10/2010 9:55 PM
By STARCHY from Eagle Rock
Posted: 11/11/2010 12:06 PM
The highly respected S&P/Cash-Shiller Home-Price Indices released in early November shows home prices have increased for eight consecutive months for the first time since the spring of 2006.
While prices are still slightly negative over the nearly four-year period, the annual returns are close to being in positive territory for the first time in three years.
“Now that there’s a gradual upward trend in both home sales and home prices, it’s a positive sign that we’ve moved past the bottom of the hear estate market, and are now moving towards a fully recover,” noted Dr. Mark J. Perry, professor of economics and finance in the School of Management at the University of Michigan.
A new RE/MAX Northern Illinois network analysis of transactions gathered by Midwest Real Estate Data shows home sales activity in the metropolitan Chicago real estate market registered a solid gain of 11 percent for the first nine months of 2010, compared to the same period in 2009.
The average sales price for homes in the metro area during the January-September period was $255,684, a decline of only 1 percent from $258,354 a year earlier, said Jim Merrion, regional director of RE/MAX Northern Illinois.
Developers of new condominiums in downtown Chicago say the market has hit bottom and demand is slowly returning sparked by affordable pricing and rock-bottom mortgage rates.
“We have had a good sales year in 2010 and are highly optimistic about the new-construction condo market in 2011,” said Scott Hoskins, president and managing broker for CMK Realty, the exclusive marketing agent for 235 Van Buren, a new 47-story condo tower in the Loop’s Financial District.
“With both mortgage rates and condo prices at the bottom, we are anticipating good condo sales in downtown Chicago during the first quarter of 2011,” said Keith Giles, president of Weichert, Realtors—Frankel & Giles, the exclusive broker for several South Loop projects.
Meanwhile, apartment owners also are enjoying a rebound in the rental market with occupancy levels improving and concessions being phased out.
Judith Roettig, executive director of the Chicagoland Apartment Association, said forecasts indicate many Chicago-area landlords are planning catch-up rent increases of up to 8 percent in 2011, after seeing rent declines since 2007.
“If apartment rents rise a hefty 8 percent that will make condominium ownership more desirable,” predicted Giles. “Chicago historically is a condo town. People like to own their real estate here.”
Once resale values start to rise again, pride of ownership will return as owners start to enjoy the investment benefits of income-tax deductions for mortgage interest and real estate taxes, experts say.
“While the new-construction condo development market may not come roaring back at full capacity for a few more years, we expect to see condo conversions begin again in 2011,” Giles said.
“As the market revives, the first rental buildings to be converted will be the broken condos—the properties that were built to be sold as condos but failed during the recession,” Giles predicted.
Don DeBat’s weekly real estate column is syndicated by DeBat Media Services. For more home-buying information visit his website at: www.dondebat.net.
DON DeBAT
chicago journal
www.chicagojournal.com
The Home Front
11/10/2010 9:55 PM
By STARCHY from Eagle Rock
Posted: 11/11/2010 12:06 PM
Chicago renters, condo buyers could get protections
Daley proposal would increase conversion warning from 4 to 9 months.
Renters and condominium buyers in Chicago would get more protection from developers under a plan unveiled Thursday by Mayor Richard Daley, who acknowledged that it comes too late to protect people who had problems during the real estate boom that preceded the recession.
The proposal, which Daley will introduce at Wednesday's City Council meeting, would increase the forewarning developers have to give renters if they plan to convert apartments into condos from four months to nine months. It also would require landlords to give renters at least $1,500 to relocate if their building is going to be converted.
Developers also would have to give condo buyers a standardized "disclosure summary" about taxes and assessments on the property and the condition of the building before purchase, Daley said.
Though developers aren't doing much conversion work now because of Chicago's glut of condos and the depressed housing market, Daley said the proposal will be important when the city's real estate market heats up again.
"It's going to come back, and we want to be able to learn by mistakes, let's be realistic, things that did not take place in order to protect people, simple as that," the mayor said during a news conference at a park in the Belmont Cragin neighborhood on the Northwest Side.
"These proposals will serve residents and neighborhoods now, and when the housing market begins to rebound, so there's no better time to enact them into law," Daley said.
The proposed ordinance is based on the recommendations of the Condominium Conversion Task Force. The mayor appointed the group of aldermen, real estate agents, developers and renters' rights advocates in 2007 to recommend stronger standards. The group released its report Thursday.
jebyrne@tribune.com http://www.chicagotribune.com/news/local/ct-met-daley-0902-20100902,0,4498761.story
Renters and condominium buyers in Chicago would get more protection from developers under a plan unveiled Thursday by Mayor Richard Daley, who acknowledged that it comes too late to protect people who had problems during the real estate boom that preceded the recession.
The proposal, which Daley will introduce at Wednesday's City Council meeting, would increase the forewarning developers have to give renters if they plan to convert apartments into condos from four months to nine months. It also would require landlords to give renters at least $1,500 to relocate if their building is going to be converted.
Developers also would have to give condo buyers a standardized "disclosure summary" about taxes and assessments on the property and the condition of the building before purchase, Daley said.
Though developers aren't doing much conversion work now because of Chicago's glut of condos and the depressed housing market, Daley said the proposal will be important when the city's real estate market heats up again.
"It's going to come back, and we want to be able to learn by mistakes, let's be realistic, things that did not take place in order to protect people, simple as that," the mayor said during a news conference at a park in the Belmont Cragin neighborhood on the Northwest Side.
"These proposals will serve residents and neighborhoods now, and when the housing market begins to rebound, so there's no better time to enact them into law," Daley said.
The proposed ordinance is based on the recommendations of the Condominium Conversion Task Force. The mayor appointed the group of aldermen, real estate agents, developers and renters' rights advocates in 2007 to recommend stronger standards. The group released its report Thursday.
jebyrne@tribune.com http://www.chicagotribune.com/news/local/ct-met-daley-0902-20100902,0,4498761.story
Rise of the renting class
By Nin-Hai Tseng, reporter July 28, 2010: 9:33 AM ET
FORTUNE -- Modern America has long paired the "American Dream" with home ownership. The idea of staying put, paying property taxes and periodically mowing the lawn belonged to citizens who were somehow more American than the poor saps who could only afford to rent the place they called home.
The notion isn't accidental. Ownership and the American Dream are deeply linked in government policies that favor mortgages over rent payments, dating back before Herbert Hoover was elected president in 1929. As secretary of commerce, amid the Red Scare, Hoover trumpeted homeownership, believing that if one had an equity stake in the country, they'd less likely fall under the spell of Communism. What followed during the Great Depression were a spate of federal measures to help troubled homeowners, at a time when half of all mortgages were in default.
CommentMassive government programs supporting ownership still exist today, but record home foreclosures and spiraling prices have forced a redefinition of the American Dream -- one that includes renting.
In today's weak housing market, ownership has ceased to be an investment vehicle that millions used to trade up into the houses of their dreams in the boom years. And it's not an ATM machine for constant refinancing, either. Instead, for the past four years, ownership has been a culprit of distress. In June, one in every 411 housing units received a foreclosure filing, according to RealtyTrac Inc. Between 2006 and 2009, home prices fell more than 32%, according to the S&P/Case-Shiller Home Price Index.
Renting on the rise
With homeowner markets stressed, it appears renting has become more appealing than owning. Between 2004 and 2009, the number of renter households rose nearly 10% or by 3.4 million, according to a 2010 study of the Joint Center for Housing Studies of Harvard University. The rise was most dramatic in the Midwest, where growth of renter households swung upwards by 15.4% between 2004 to 2009. The South added the biggest number of renter households with a 1.2 million increase from 2004 to 2009, the study states.
All that has made Capitol Hill rethink its definition of the American Dream. As recently as the Clinton and George W. Bush administrations, the mantra of homeownership was almost synonymous to civic duty, but top policymakers now say that homeownership isn't necessarily good for everyone.
In May, U.S. Housing and Urban Development Secretary Shaun Donovan testified before a House committee that the financial crisis proved the need for a better balance between ownership and rental housing. And HUD senior official Raphael Bostic last week told the Washington Post: "In previous eras, we haven't seen people question whether homeownership was the right decision. It was just assumed that's where you want to go," Bostic said. "You're not going to hear us say that."
Owning a home wasn't always as easy as the liar loans of 2000's made it. When the economy went bust during the Great Depression, legislation intended to stimulate plummeting housing starts and defaulting mortgages laid the foundation for a bigger role of government over the housing market. Hoover signed the Federal Home Loan Act, and in 1933, Franklin D. Roosevelt created the Home Owners' Loan Corporation to provide low interest loans.
And the government was just getting started: a flurry of legislation was passed over the ensuing decades, helping veterans, minorities and the populace as a whole secure mortgages. But it appears the pendulum has swung.
"The government shouldn't blindly encourage homeownership," says Joe Gyourko, real estate finance professor at University of Pennsylvania's Wharton School. "If the government does anything the government should encourage people to make the right decision."
Gyourko says that he's not entirely against the idea of homeownership. After all, as a father of two, the 53-year-old professor owns a home. But he stresses that ownership should be looked at more broadly -- beyond any kind of long-term investment or cost benefit over renting.
Owners don't pay the landlord, but they pay taxes and maintenance costs on their house, and Gyourko says those costs can end up being roughly the same.
As far as buying a house as a smart long-term investment, Gyourko says that's not always true. He says between 1975 and 2008, the price for houses of similar quality and size appreciated an average of about 1% per year after inflation. Investors could have earned more by buying Treasury bills.
The post-crisis role the federal government decides to play in the housing market remains to be seen. In response to plunging home prices and record foreclosures rates, the Obama administration is pursuing an overhaul of policies that could put much less focus on homeownership. The administration could also scale down government support of home loans and put more focus on affordable rentals, but it isn't clear what direction officials will take.
The issues with Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), the mortgage-finance giants seized by the government in September 2008 amid huge problems with bad loans, remain a touchy topic with lawmakers.Their combined bailout, according to some estimates, could reach $1 trillion -- a figure some might pin as the ultimate cost of generations of policies geared to favor home ownership.
Many blame the agencies' loose lending practices for contributing to the financial crisis. Republicans wanted the mortgage giants' fates to be addressed in the recently approved Dodd-Frank bill overhauling the nation's financial regulations, but that didn't happen.
However lawmakers define the government's role in the housing market, consumers have already begun redefining the American Dream: One where it has become socially OK to mail in a rent check rather than a mortgage coupon.
FORTUNE -- Modern America has long paired the "American Dream" with home ownership. The idea of staying put, paying property taxes and periodically mowing the lawn belonged to citizens who were somehow more American than the poor saps who could only afford to rent the place they called home.
The notion isn't accidental. Ownership and the American Dream are deeply linked in government policies that favor mortgages over rent payments, dating back before Herbert Hoover was elected president in 1929. As secretary of commerce, amid the Red Scare, Hoover trumpeted homeownership, believing that if one had an equity stake in the country, they'd less likely fall under the spell of Communism. What followed during the Great Depression were a spate of federal measures to help troubled homeowners, at a time when half of all mortgages were in default.
CommentMassive government programs supporting ownership still exist today, but record home foreclosures and spiraling prices have forced a redefinition of the American Dream -- one that includes renting.
In today's weak housing market, ownership has ceased to be an investment vehicle that millions used to trade up into the houses of their dreams in the boom years. And it's not an ATM machine for constant refinancing, either. Instead, for the past four years, ownership has been a culprit of distress. In June, one in every 411 housing units received a foreclosure filing, according to RealtyTrac Inc. Between 2006 and 2009, home prices fell more than 32%, according to the S&P/Case-Shiller Home Price Index.
Renting on the rise
With homeowner markets stressed, it appears renting has become more appealing than owning. Between 2004 and 2009, the number of renter households rose nearly 10% or by 3.4 million, according to a 2010 study of the Joint Center for Housing Studies of Harvard University. The rise was most dramatic in the Midwest, where growth of renter households swung upwards by 15.4% between 2004 to 2009. The South added the biggest number of renter households with a 1.2 million increase from 2004 to 2009, the study states.
All that has made Capitol Hill rethink its definition of the American Dream. As recently as the Clinton and George W. Bush administrations, the mantra of homeownership was almost synonymous to civic duty, but top policymakers now say that homeownership isn't necessarily good for everyone.
In May, U.S. Housing and Urban Development Secretary Shaun Donovan testified before a House committee that the financial crisis proved the need for a better balance between ownership and rental housing. And HUD senior official Raphael Bostic last week told the Washington Post: "In previous eras, we haven't seen people question whether homeownership was the right decision. It was just assumed that's where you want to go," Bostic said. "You're not going to hear us say that."
Owning a home wasn't always as easy as the liar loans of 2000's made it. When the economy went bust during the Great Depression, legislation intended to stimulate plummeting housing starts and defaulting mortgages laid the foundation for a bigger role of government over the housing market. Hoover signed the Federal Home Loan Act, and in 1933, Franklin D. Roosevelt created the Home Owners' Loan Corporation to provide low interest loans.
And the government was just getting started: a flurry of legislation was passed over the ensuing decades, helping veterans, minorities and the populace as a whole secure mortgages. But it appears the pendulum has swung.
"The government shouldn't blindly encourage homeownership," says Joe Gyourko, real estate finance professor at University of Pennsylvania's Wharton School. "If the government does anything the government should encourage people to make the right decision."
Gyourko says that he's not entirely against the idea of homeownership. After all, as a father of two, the 53-year-old professor owns a home. But he stresses that ownership should be looked at more broadly -- beyond any kind of long-term investment or cost benefit over renting.
Owners don't pay the landlord, but they pay taxes and maintenance costs on their house, and Gyourko says those costs can end up being roughly the same.
As far as buying a house as a smart long-term investment, Gyourko says that's not always true. He says between 1975 and 2008, the price for houses of similar quality and size appreciated an average of about 1% per year after inflation. Investors could have earned more by buying Treasury bills.
The post-crisis role the federal government decides to play in the housing market remains to be seen. In response to plunging home prices and record foreclosures rates, the Obama administration is pursuing an overhaul of policies that could put much less focus on homeownership. The administration could also scale down government support of home loans and put more focus on affordable rentals, but it isn't clear what direction officials will take.
The issues with Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), the mortgage-finance giants seized by the government in September 2008 amid huge problems with bad loans, remain a touchy topic with lawmakers.Their combined bailout, according to some estimates, could reach $1 trillion -- a figure some might pin as the ultimate cost of generations of policies geared to favor home ownership.
Many blame the agencies' loose lending practices for contributing to the financial crisis. Republicans wanted the mortgage giants' fates to be addressed in the recently approved Dodd-Frank bill overhauling the nation's financial regulations, but that didn't happen.
However lawmakers define the government's role in the housing market, consumers have already begun redefining the American Dream: One where it has become socially OK to mail in a rent check rather than a mortgage coupon.
Should You Buy or Rent?
Renting may be smarter if home prices in your area will fall further.
By Pat Mertz Esswein, Associate Editor
From Kiplinger's Personal Finance magazine, April 2010
If you're a renter, you may be champing at the bit to buy a house after watching prices fall for four years. Is it time to jump? It may well be, especially if you want to capture the home buyer's tax credit (you'll need to have a contract by April 30 and close by June 30). But before you leap, you need to go beyond calculating the impact on your monthly budget and figure out how much home-price froth is left in your local housing market.
Encouraging signs. A key number to consider when switching from renter to homeowner is the price-rent ratio. This figure compares a city's median home price with its median annual rent. At the housing market's peak in 2005, the national median home price had inflated to nearly 21 times the median annual rent. By the third quarter of 2009, however, the ratio had deflated to 15, returning to the historical norm, according to Hessam Nadji, managing director of Marcus & Millichap, a commercial real estate brokerage company in Encino, Cal.
If the price-rent ratio where you're looking to buy is 18 or higher, your market may still be in the bubble zone, with a greater probability that home prices will fall after you buy. That could put you underwater -- meaning your home would be worth less than what you owe on the mortgage. If the ratio has fallen below 15, there's less chance that home prices will sink.
The table on Rent or Buy below shows the ten cities in which home prices are least likely to drop further, as well as those most likely to fall further, based on price-rent ratios. We also show the gap between median monthly apartment rents and median monthly mortgage payments. Five years ago, the difference between monthly mortgage payments and rent was $745 nationally; by the end of 2009, it was just $181.
To get a rough estimate of your local price-rent ratio, divide the average list price of several homes that meet your criteria by the average annual rent of several rental units with the same number of bedrooms and comparable amenities.
Weighing the decision. A year ago, the price-rent ratio in Phoenix was 14 -- down from almost 19 a year earlier. Home prices had fallen by half, and mortgage rates were at historic lows. Financial planner Brendan McNamar decided it was finally time for him to buy. He had rented since moving to the city in 2006, just after the housing bubble peaked, and was sitting on a nice nest egg from a home he had sold in 2004.
McNamar shopped for a long time, made offers on several houses and eventually bought a ten-year-old, four-bedroom, three-bathroom short sale listed for $219,000. (In a short sale, the sellers get permission from the lender to sell for less than the mortgage amount.) The house had sold for $355,000 in 2007. McNamar offered the full price, which the bank eventually accepted after 90 days. He put down 20% and took out a 30-year mortgage with a low fixed rate of 5.25%. He pays $1,176 a month (including taxes and insurance), which is more than twice his former monthly rent of $550. But because he hadn't owned a home in the past three years, he was able to snag the $8,000 first-time home buyer's tax credit.
From an investment perspective, McNamar wanted a house that would allow him to break even or earn a profit if he sold in three years. But given that prices have fallen even further in Phoenix since last spring -- the price-rent ratio is a rough guide, not an infallible one -- he reckons that his break-even point now may be four years away. But it's not a big financial setback to him because he has no plans to move.
Good deals for renters. Renting can be a smart strategy while waiting for this choppy housing market to settle down. Consider Jeremy Portnoff and his wife, Heather, of Edison, N.J. By mid 2009, the median home price in Edison had fallen a healthy 19%, to $317,000, from the market's peak in mid 2006.
The Portnoffs had their heart set on a home with three or four bedrooms to accommodate the family they hope to have, plus an office for Jeremy. The house they could afford was a starter home, probably a small townhouse -- which, on an after-tax basis, they figured would cost them about the same as renting.
But the Portnoffs also figured that if they sold it in three years, real estate commissions would consume any gains they could reasonably expect. Plus, Jeremy believed that the price of their ideal home in that area would continue to decline.
So they took a pass on buying and got a great deal on renting a two-bedroom townhome -- $1,550 a month, $300 less than when they looked at the same development three years before. The couple prudently plan to continue to pay down debt and save for a larger down payment on their next home.
In some markets, rental prices have dropped as supply has increased. By the end of 2009, the vacancy rate nationally had grown to 8.2%, a 30-year high, according to Nadji, of Marcus & Millichap. Meanwhile, rents had fallen 5.8% from the year before.
Markets with the highest vacancy rates include Jacksonville, Fla. (forecast at 14% in 2010), Atlanta, Houston, Las Vegas, Orlando, Phoenix, Tampa and Tucson. Renters in such markets can afford to shop around and negotiate hard. A building's leasing manager may be willing to lower the rent to attract or keep your business.
Nadji expects the vacancy rate nationally to tighten up a bit (to 7.8%) by year-end and start a rapid recovery beginning in 2011, with very strong rent growth between 2011 and 2015. Demographics (five million people will enter the peak renter age range of 20 to 34 over the next decade) and plummeting construction starts in 2009 and 2010 drive his forecast.
Not all cities have an excess of rental units, though. In some large cities, such as New York, downtown Chicago, San Francisco, Los Angeles and Washington, D.C., vacancy rates have remained tight -- and home prices have remained stubbornly high.
By Pat Mertz Esswein, Associate Editor
From Kiplinger's Personal Finance magazine, April 2010
If you're a renter, you may be champing at the bit to buy a house after watching prices fall for four years. Is it time to jump? It may well be, especially if you want to capture the home buyer's tax credit (you'll need to have a contract by April 30 and close by June 30). But before you leap, you need to go beyond calculating the impact on your monthly budget and figure out how much home-price froth is left in your local housing market.
Encouraging signs. A key number to consider when switching from renter to homeowner is the price-rent ratio. This figure compares a city's median home price with its median annual rent. At the housing market's peak in 2005, the national median home price had inflated to nearly 21 times the median annual rent. By the third quarter of 2009, however, the ratio had deflated to 15, returning to the historical norm, according to Hessam Nadji, managing director of Marcus & Millichap, a commercial real estate brokerage company in Encino, Cal.
If the price-rent ratio where you're looking to buy is 18 or higher, your market may still be in the bubble zone, with a greater probability that home prices will fall after you buy. That could put you underwater -- meaning your home would be worth less than what you owe on the mortgage. If the ratio has fallen below 15, there's less chance that home prices will sink.
The table on Rent or Buy below shows the ten cities in which home prices are least likely to drop further, as well as those most likely to fall further, based on price-rent ratios. We also show the gap between median monthly apartment rents and median monthly mortgage payments. Five years ago, the difference between monthly mortgage payments and rent was $745 nationally; by the end of 2009, it was just $181.
To get a rough estimate of your local price-rent ratio, divide the average list price of several homes that meet your criteria by the average annual rent of several rental units with the same number of bedrooms and comparable amenities.
Weighing the decision. A year ago, the price-rent ratio in Phoenix was 14 -- down from almost 19 a year earlier. Home prices had fallen by half, and mortgage rates were at historic lows. Financial planner Brendan McNamar decided it was finally time for him to buy. He had rented since moving to the city in 2006, just after the housing bubble peaked, and was sitting on a nice nest egg from a home he had sold in 2004.
McNamar shopped for a long time, made offers on several houses and eventually bought a ten-year-old, four-bedroom, three-bathroom short sale listed for $219,000. (In a short sale, the sellers get permission from the lender to sell for less than the mortgage amount.) The house had sold for $355,000 in 2007. McNamar offered the full price, which the bank eventually accepted after 90 days. He put down 20% and took out a 30-year mortgage with a low fixed rate of 5.25%. He pays $1,176 a month (including taxes and insurance), which is more than twice his former monthly rent of $550. But because he hadn't owned a home in the past three years, he was able to snag the $8,000 first-time home buyer's tax credit.
From an investment perspective, McNamar wanted a house that would allow him to break even or earn a profit if he sold in three years. But given that prices have fallen even further in Phoenix since last spring -- the price-rent ratio is a rough guide, not an infallible one -- he reckons that his break-even point now may be four years away. But it's not a big financial setback to him because he has no plans to move.
Good deals for renters. Renting can be a smart strategy while waiting for this choppy housing market to settle down. Consider Jeremy Portnoff and his wife, Heather, of Edison, N.J. By mid 2009, the median home price in Edison had fallen a healthy 19%, to $317,000, from the market's peak in mid 2006.
The Portnoffs had their heart set on a home with three or four bedrooms to accommodate the family they hope to have, plus an office for Jeremy. The house they could afford was a starter home, probably a small townhouse -- which, on an after-tax basis, they figured would cost them about the same as renting.
But the Portnoffs also figured that if they sold it in three years, real estate commissions would consume any gains they could reasonably expect. Plus, Jeremy believed that the price of their ideal home in that area would continue to decline.
So they took a pass on buying and got a great deal on renting a two-bedroom townhome -- $1,550 a month, $300 less than when they looked at the same development three years before. The couple prudently plan to continue to pay down debt and save for a larger down payment on their next home.
In some markets, rental prices have dropped as supply has increased. By the end of 2009, the vacancy rate nationally had grown to 8.2%, a 30-year high, according to Nadji, of Marcus & Millichap. Meanwhile, rents had fallen 5.8% from the year before.
Markets with the highest vacancy rates include Jacksonville, Fla. (forecast at 14% in 2010), Atlanta, Houston, Las Vegas, Orlando, Phoenix, Tampa and Tucson. Renters in such markets can afford to shop around and negotiate hard. A building's leasing manager may be willing to lower the rent to attract or keep your business.
Nadji expects the vacancy rate nationally to tighten up a bit (to 7.8%) by year-end and start a rapid recovery beginning in 2011, with very strong rent growth between 2011 and 2015. Demographics (five million people will enter the peak renter age range of 20 to 34 over the next decade) and plummeting construction starts in 2009 and 2010 drive his forecast.
Not all cities have an excess of rental units, though. In some large cities, such as New York, downtown Chicago, San Francisco, Los Angeles and Washington, D.C., vacancy rates have remained tight -- and home prices have remained stubbornly high.
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