Saturday, October 07, 2006

Yearly Price vs. Yearly Rent in Marin

So I was reading some online news and was reminded of this graph from The Economist which shows the ratio of house prices to rents for the US, Britain, and Australia:

I decided to strip out everything except the US data so that I could see the US data more clearly:

And then I realized that I have similar data for Marin and wondered if I had shown it before on this blog or not. I don't think I did. So here it is.

Below is a graph of the yearly price of a Marin house (mean Marin SFR sale price divided by 30) divided by the mean yearly rent in Marin county for each year from 1995 to 2005:

The ratio of yearly sale price to yearly rent is roughly constant up to about 2002-2003 and then goes through the roof. IMO this graph nicely illustrates the bubble in Marin.

FYI: Taking the mean sale price and dividing it by 30 (years) vs. some other number would not change the shape of this graph and seems a whole lot safer than making assumptions about typical lending rates for each year, what sorts of mortgages people favored, etc.

Update 10-08-06: To understand that last graph, above, you need to understand that rents have not been getting consistently more expensive with time (but they are probably rising again now):


10 Comments:

Anonymous Happy Renter said...

Wha Happened?
Why did it go up so steep?
Who can afford this?
I think I'll rent a while.

Oct 8, 2006, 1:07:00 AM  
Anonymous Anonymous said...

Not sure I believe these numbers. According to your graph, the current ratio is about 2.8. Therefore, ratio of home cost to monthly rent is 2.8 x 360 mos. = 1,008. This would imply that you can rent a $1 million home for $992 per month. Not in Sausalito, or any other part of Marin that I know of. Did I miss something?

--Joel

Oct 8, 2006, 10:25:00 AM  
Anonymous Anonymous said...

Even at the 1.5+- ratio shown for 2002-2003, this would imply a monthly rent of $1,851 for a "$1 million" home. I'm a renter and I can't get anywhere near this much bang for my rent buck, even in today's market.

--Joel

Oct 8, 2006, 10:31:00 AM  
Blogger Marinite said...

Joel --

The ratios are probably too high because no attempt was made to equate rent/sq ft with sales price/sq ft. The graph just shows how the two (rents vs. sales price) change with time, one relative to the other. So the plotted trend line is correct but just needs to be shifted up or down a little as a whole (probably down).

IOW, if you wanted to use this plot to predict how much you would pay in rent for a house of a given price, then you would have to apply a scaling factor of unknown amount and that changes with time (see plot below).

When I was given the rent data (after begging a local agency for it; the sales price data comes from the Marin Assessor's Office by the way) it did not occur to me at that time (last year) to have it broken down by sq ft of rented space as I am only interested in trends.

You also need to understand that rents got cheaper relative to sales price...they were not getting consistently more expensive with time (but I believe they are rising now) like sales prices were. I posted that plot a long time ago. You can find it here:

http://tinyurl.com/egnph

I will alter the original posting with the above mentioned graph since it should satisfy the skeptics.

Thanks for that question.

Questions? Satisfied?

Oct 8, 2006, 9:50:00 PM  
Anonymous meltormay said...

Hey Marinite!
You are right about the better deal of renting.
I don't know what your charts are but it better by far now to rent.
I got enouff to buy 2 houese and I keep my dollar for a better deal.

Oct 9, 2006, 1:41:00 AM  
Blogger randolfe said...

The Economist clarified their graph in a subsequent issue. Those ratios are based on some pretty dramatic smoothing assumptions. That's why they seem "off".

The biggest distortion is that they used a dollar-weighted adjustment, which wasn't really necessary for ratio comparison (but was for other graphs they had in the same issue).

I really don't care about comparative purchasing-power-parity as an American buying a home in the US with USDs. That is, I don't care that weighing in European currencies in the 80s means that owning was cheaper than renting. It was not for people using actual USDs without foreign currency purchase power.

Oct 9, 2006, 10:27:00 AM  
Blogger mbarl said...

Finally the main stream meia has caught wind of the problem with liar loans! The following clip is a story that was done by CBS in San Francisco on a special called 30 minutes.
Could have gone a little deaper, but this is a great start!!!!

http://cbs5.com/30minutes/local_story_266005029.html

Oct 9, 2006, 11:46:00 AM  
Blogger marin_explorer said...

FYI, the Marin Heat Index™ is at 0.42 as of today. Go Marin!

Oct 9, 2006, 4:40:00 PM  
Blogger sf jack said...

"Update 10-08-06: To understand that last graph, above, you need to understand that rents have not been getting consistently more expensive with time (but they are probably rising again now):"

********

From my completely unscientific sampling, rents do seem to be rising in SF and in Marin. With a noticeable jump in the last six months in the City.

But in many cases they have to go up a good amount yet to reach what they were in 2000.

And, of course, rents should be rising right now - because it appears it is a very rare person that is a first time buyer candidate, who is also thinking about buying any time soon...

They are all waiting for the insanity to end. I say good for them!

It's an understatement to say it has a ways to go yet.

Oct 9, 2006, 4:48:00 PM  
Anonymous Anonymous said...

Marinite--Thanks for the explanation. I agree with the trend depicted in the graph. Leaving aside foregone appreciation of the past several years, renting has been a better deal for some time now.

--Joel

Oct 10, 2006, 8:57:00 AM  

Post a Comment

Links to this post:

Create a Link

<< Home

Terms of Use: The purpose of the Marin Real Estate Bubble weblog (located at URL http://marinrealestatebubble.blogspot.com/ and henceforth referred to as “MREB” or “this site”) is to present and discuss information relating to real estate and the real estate industry in general (locally, state-wide, nationally, and internationally) as it pertains to the thesis that recent real estate related activity is properly characterized as a “speculative mania” or a “bubble”. MREB is a non-profit, community site that depends on community participation and feedback. While MREB administrators do strive to confirm all information presented here and qualify all doubtful items, the information presented at MREB is neither definitive nor should it be construed as professional advice. All information published on MREB is provided “as is” without warranty of any kind and the administrators of this site shall not be liable for any direct or indirect damages arising out of use of this site. This site is moderated by MREB administrators and the MREB administrators reserve the right to edit, remove, or refuse postings that are off-topic, defamatory, libelous, offensive, or otherwise deemed inappropriate by MREB administrators. You should consult a finance professional before making any decisions based on information found on this site.

The contributors to this site may, from time to time, hold short (or long) positions in mentioned and related companies.