This page has been archived and commenting is disabled.
What’s Your Home Worth?
This is a vexing question for millions of Americans. There
was a time when most people had a reasonably good idea of what they could sell
a property for. There were enough
purchases and sales to create comps. Not any longer. Homes that have been
foreclosed on come to the market at distressed prices. This is happening in
every neighborhood across the country. When one property sells at a distressed
price it influences all the properties around it.
So what is residential real estate worth today? The answer
to that question is, “About 15 times the annual rent”.
RE professionals are going to write me and say that this
simple calculation is wrong. They will say that the number is lower. Possibly
as low as 12 times rent. They might be right. However in areas of the country
that I watch the 15 times rent number is a pretty good indication of value.
Based on this calculation the following rent/price
guidelines can be determined:
|
HOME PRICE |
MONTHLY RENTAL |
|
$200,000 |
$1,100 |
|
$350,000 |
$1,950 |
|
$500,000 |
$2,800 |
|
$750,000 |
$4,200 |
|
$1,000,000 |
$5,600 |
|
$2,000,000 |
$11,000 |
It is still difficult for a homeowner to make a reasonable
estimate on what the rental value of a property will be. But I have found that
most people have a better handle on this number than they do on what their home
can be successfully marketed for.
There are regional considerations for rental values, by and large this
formula works well for metro versus rural properties as a valuation tool.
This analysis creates a tremendous problem. There are very
few homes for sale at 15 times rent. The only ones that come up for sale in
that price range are those that are in foreclosure and are being sold by bank
lenders. We know that there is demand for properties when those conditions are
met. That has been proven in just about every area of the country.
In my view the bulk of unsold homes on the market today are
trying to get sold at a multiple of rent that is at least 20 times. That is why
these homes are not selling. The implication is that on balance RE is still 25%
overvalued. The bad news is that rental values are dropping across the country
as homeowners are forced to rent properties that can’t be sold.
I would be interested to get comments on this. I would like
to hear from people around the country if they thought this pricing mechanism
was in the ballpark for their area. I would be particularly interested to get
comments from folks who live outside the US to get a look on how that stacks up
as well.
If my sense of this is correct we are in for a very rude
awakening. Those with $1MM+ homes will be particularly depressed by this
calculation. My sense is that high end RE is in the process of a massive
correction. The sheet rock palaces that were built with cheap money from 2002 to
2006 are worth half of what was paid for them. We just haven’t figured that out
yet. The impact on consumption will be very significant when that reality sets
in.
A back of the envelope analysis of the rental values of
American homes produces a capitalized value of $9 trillion at 15 times rent.
The mortgages on these same homes is equal to $12 trillion. We are missing $3
trillion in value based on this. That might be a decent estimate on how much
the RE mess going to cost us.
»
- advertisements -
This seems fully accurate here in the hinterlands of Oklahoma City. We never had the bubblicious price increases in the first half of this decade, and so, consequently, we've not seen any decreases in home prices (aside from a few more foreclosures than normal). In fact, prices have increased 5% in the last two years. Rents are stupid cheap, and so are the houses. My place (a nice 2100 sq. ft. house in a decent old neighborhood) would rent for $1200 and probably sell for $210-220k.
Irvine California. It seems we are closer to 22 times rent if not more.
Irvine is a well planned community with great schools and other infrastruure, low crime. However foreclosures are starting creep in as well as shorts sales and bank owned properties. It is interesting reading when MLS listings of homes state "Taking back up offers". This now translates to "bank owned" and we will tie your purchase up for six months before you get a simple response to your offer. Homes are slowly growing less expensive. Buyers should beware. The 20 % downpayment of a 600K home will vanish as soon as you close escrow. 120 K will fund college tuition for your children for a couple of years. Good luck to all in this serious problem.
Same thing a bit farther south in Laguna Niguel. I'm renting a house where a 12X multiple of the rent should sell for $480K but instead houses listed on the same street are asking for twice that (i.e. 24X+).
The pain has not even sunk in yet at many coastal SoCal affluent burbs yet I see more and more dads walking their kids to school each morning. It is becoming common neighborhood talk for many families to envolk "squatters rights", just riding out the next twelve months free of rent.
With the subprime rationalization behind us, most people think we are in the clear... not so because that was just a leading wave but the real tsunami is just now heading into the harbor.
Across the street in Laguna Hills (Nellie G) we're at 23x. Thanks for the cheap shelter, Stupid.
Houses can be bought using conventional investment valuation criteria, but I think it would be a mistake to overlook the simple fact that men buy houses at whatever price simply to keep peace in the household, under the "if mama ain't happy, ain't nobody happy" rule. (I see you all saying "amen to that" out there.) I have joked with my fellow matrimonial inmates how a very serious argument can be made that the bubble was due to the availability of credit but also the overwhelming need of wives to move up in the pecking order, as willing gatherers of "more stuff" with whihc to feather the nest. Left alone, men would live in trailers, wear old jeans and stained T-shirts, have a very expensive cable TV setup, and drink beer. Not much of a consumer society there.
Another way of saying the "rent" method does not explain all of the reasons to buy a home, and one should not necessarily be thinking about it as an investment anyway.
Agreed. It used to really annoy my wife when I said that Manhattan real estate was horribly overpriced. "What do you want to do, live in Ohio," she'd say.
So you are blaming the whole real estate crisis on married women then! Great. *rolls eyes*
so VERY TRUE....
i just sent your post to two more fellow matrimonial inmates....
i wish the heck my wife worked full time, she complains that with two little ones (in elementary school and there 'activities' that she has no time...but she sleeps late, spends 2 hours at the gym and everyday i see a bag of shit from another store...
f'n pisses me off
thanks for letting me vent
Ned....masterfully written, well constructed observation.
"if mama ain't happy, ain't nobody happy"....i burst into laughter!
"fellow matrimonial inmates"... I've never seen this phrase: absolutely Leno-esque!
And perhaps one of the truest statements that I have ever read: "Left alone, men would live in trailers, wear old jeans and stained T-shirts, have a very expensive cable TV setup, and drink beer."
Dude, you are SO right on, I would have NEVER bought my current house if it wasn't for the wife. We sold our last house at the peak, fall 2006 in our area, and of course we had to take our gains and plow them back into another overpriced house. We'll never sell this POS for what we paid for it. I would have rented in a heartbeat. Gains gone. Oh well, easy come, easy go.
That being said, I think Bruce's valuation chart is pretty close to reality in my area.
You nailed it Ned. Now there's a glut of McMansions. If men can't say No to their stupid bitches then they deserve what they get.
If she aint happy u aint happy. It is common knowledge that most household buying decisions are made by women. If you call her a stupid bitch, well you are just revealing much information about your ignorance and lack of joy.
Perfection.
She's not happy till I'm happy and that's why I married her.
The inverse is clear evidence that you settled for less. A true American pawn. Keep buying your McMansions for her(built with materials that provide the developer with the largest profit margin) and running on the Hamster wheel that is not in any way owned by you.
You're living the dream my friend.
Rule #1- real estate s/b bought on a relative value to it's neighboring properties and it's much cheaper to build or renovate a dump on a great site in a great location than buy a typical house in the 'hood. It's a new world now but that still applies. It takes patience. As for spouses, don't marry dumb ones who refuse to settle meanwhile. Guess I lucked out.
lol....i was thinking that exact same thought
but since i'm not married i decided to keep
my mouth shut until now....
I applaud this effort to supply some absolute valuation metric for houses, but as always I wonder where these magical multiples come from. Where does 15 time rent come from? What is the logical basis for this multiple? And even if the multiple had some logical basis, all multiples as in stocks, are a function of interest rates, taxes, growth, and several intangibles. They must take into consideration many factors and cannot be used in isolation.
So for example, to say (again if there is some justification for this) that houses should trade at 15X rent in a 8% interest rate environment, doesn't mean they should trade at 15X rent in a 5% rate environment. Multiples will fluctuate given many variables.
Overall, I think it is hazardous to just blindly apply a 15X multiple to determine the worth of your house, even if the multiple has some rational basis (which I don't think it has).
people people people....who said that 15x is an immutable law of nature? who said that it applied at all times in all places?
the man was trying to do some quick back of the napkin
calculations using a rule of thumb number to try
to gauge the state of re prices and financing in
broad coarse grained numbers to see if prices
made walking around sense and where they should
go from here....
he is not giving anyone personal buying advice,
he is not saying that this number applies in your
neighborhood, and he surely isn't saying that
it applies to your house....
roi takes many forms and parameters....please
apply some common sense and perspective
Agreed. As a renter and never a buyer as of yet, I found this to be very helpful information. Thank you.
As a broker in central Connecticut it is 10-12 times - absolutely!
I am in Fairfield Cty CT - it's probably more than 15x annual rent. I am not a RE professional.
Fairfield County CT is somewhat of an anomaly because rents are WAY too high.
Bruce said: "RE professionals are going to write me and say that this simple calculation is wrong. They will say that the number is lower. Possibly as low as 12 times rent."
Bruce: I've always thought you to be a smart guy. More proof.
Thanks for the article, I find it interesting.
I commented knowing that and I am one of the
pair of boots on the front line.
It might be wiser to believe the soldier over the politician, that the war is being won or lost.
:)
"I commented knowing that.."
And I had commented that Bruce was presciently aware that his comment would be commented on.
And I commented on knowing that you would comment on Bruce being aware. We can go on forever. Should we try? LOL
Bottomline 15x in Geithnerizing the numbers.
"Geithnerizing"
first time I have seen that term....brilliant I must say!
Same! I'll use it, if I may!
very good topic for an article....and it is so a propos....
i just went to a sale today at a home with a giant sign on the back of a pickup truck asking 695k or best offer with decorating allowance included....or 3995 per month rental...i felt that the bank vultures were swirling
so the asking price works out to 14.49 times rental...
this is in a mixed wealthy / affluent section of town with this home obviously being only in the affluent section but it is an established neighborhood - not one of the mcmansion hoods and located in dunwoody, ga (metro atlanta)....
In Miami, where I live, I've been looking around for a new rental trying to take advantage of the market conditions to get a really great place I could never have dreamed of affording otherwise. You wouldn't believe how easy it's been. I found the place I'll likely be taking in the next few weeks. Waterfront, new construction condo, 2250 sq. ft., two story on a 10/11 floor. Seriously gorgeous place. Originally put on the market for 1.295m. Since then it's been reduced to 850k. I'm renting it for $1850 per mo with a two year lease. That puts the "fair market price" based on your calculations of 15x yearly rental at 333k. Scenarios such as mine, I've found to be quite common here. Granted, Miami has been one of the hardest hit areas as far as RE values go. But, having moved back here from NYC a few years ago, and having become accustomed to paying 2500 for a LES five floor walk-up shoe box...Well...as Tom Waits once put it "ain't got no spare, ain't got no jack, don't give a shit I ain't never going back".
miami is littered with for rent and for sale signs like confetti after a ticker-tape parade. renters have the pick of the litter.
we're in the process of moving too. in miami beach, 4 blocks from the ocean, 2 stories and about 1500 sq ft, yard, appliances, everything. we easily negotiated the rent down as the landlord was visibly worried about renting it- the ad had been up for weeks and very few people had looked at it. i had been calling around other houses for rent and every landlord i talked to sounded desperate.
BEFORE we signed a lease we looked into the records in the courthouse to see when they bought it and what they paid, who the mortgage holder is (not a known subprime lender). as they bought before the bubble and everything else checked out we figured we won't be getting kicked out by the bank. we also questioned the landlord about his work to get an idea about his income and stability, and met his family to get a better handle on their situation.
http://www.youtube.com/watch?v=hk05Huz46NM&eurl=http%3A%2F%2Fwww.calcula...
stories abound about landlords collecting rent just before, during, and after forclosure. on many condos they're also not paying the association fees, just pocketing the dough because they know they're going to loose the place anyway. i've even heard about alot of people renting out empty/foreclosed places they never even owned to begin with- they just stroll into the bldg, find keys or make keys, and put an ad on craigslist. the banks, bld security, and neighbors are none the wiser. some enterprising 'landlords' are renting multiple units and collecting many thousands per month.
meanwhile, the condo associations are trying to declare bankrupcy, and finding out they can't because they're not-for-profit. with so many empty units and so many owners not paying fees, the water, cable, landscaping, security, garbage pickup, etc is being cut off. it's a clusterfook like nothing i've ever seen, and should get worse before it gets better. a well-timed hurricane would likely end it all.
you're right about miami being cheap. compared to any global city in the world, it's the cheapest that i know of, even those with no beach and horrible weather. the real estate mkt there has been crushed and will only get worse, but the mkt there, as well as the economy, is bouyed to a large extent by latin america, which has fared well so far. plus, europeans like miami and they are quick to respond to dollar devaluation.
still, compared to pre-bubble prices, miami asking prices are still high. i went to a REO auction at the courthouse a few months ago, just to take a look. it was a frenzy- people were paying way too much imo, and i heard one guy say to another that he's been buying alot but has yet to sell anything.
there was an article in the herald a few weeks ago about a large condo development just completed, surrounded by tens of thousand of unfinished/abandoned units nearby on brickell. the article said that the average units were pre-selling in the $450,000 range 3 years ago, and the developer is now selling them for $250,000 on average. the article said that people camped out the night before outside the sales office, that the line was around the block, the office was jammed and out of beverages- that it was a frenzy just like the good ol' days. the reason being the 50% price reduction. other nearby units, still listed at the old 'values' aren't even being shown.
in miami, given the high taxes and insurance rates, it's still cheaper to rent. and if you figure a 1% monthly decline in value, your landlord is paying you to live there. but when it gets cheaper to own, that'll be the time to start looking. i fully expect $25,000 decent condos and $150,000-$250,000 for a decent house- essentially i'm expecting to see values return to where they were 10+ years ago.
a few years ago i heard a 95 year-old lord so-and-so, a real estate baron in england, say that he's seen this before, several times. he went on to say that one shouldn't be buying until prices are 10% of what they were at the height. if he's right, then the suckers are buying all the way down and are either going to cause another wave of foreclosures, loose money, or be sitting on dead money for 10 years. maybe rents are inflation sensitive, which would make investment properties attractive, but that would depend on employment figures and workers getting raises that match inflation- not likely.
for now, i'm watching and waiting, hoping for the day smart money can load up on good property for pennies on the dollar.
Hello Bruce,
Under the topic Miami. Recently the wife and I pick-up another triplex close to Barry Univ. Bank owned, (3) 2 beds, 5 times rent, rents $750/mo, section 8 welcome(there's no money like gubbment money).
I live in Westchester Cty, NY, fancy schmancy town on the sound. As a seller last year we did well but had also owned since '99 and made quality but not over the top investments. We got to live there and enjoyed ourselves for nine years. We traded out at 2 1/2 times original purchase price so cleared a very nice sum just before things got really ugly.
The sellers here are still living in 2004 and frankly, some buyers don't seem to have much sense of value judging by where some of the properties have traded.
As buyers now we think there is more downside, no question. The problem with oversimplifying down to the rental equivalent is just what the realtors say...it depends. We've seen dumps for sale at $750K that aren't worth half that to us but sometimes they trade. We passed on a very nice property and thought the sellers wouldn't deal at our preferred price point. We were wrong.
It's a weird market but to be sure, the only thing moving inventory is lower prices but from modest reductions to 25% off asking. The supply is holding steady and my sense is things could go a lot lower if this phony baloney rally tanks. Wall St money is all around here but there have been casualties over the last couple years. There is definitely a more measured approach to people's spending habits.
Would suit me fine if the market dropped another 15-20%. Judging by the snails pace of activity, that might just be necessary. The higher end sellers can hang longer and so it may take a dead cold winter and another shock to put the fear of God into them. I think there could be a group of fencesitters waiting for the spring too...you know, when the green shoots appear. That could also drive prices down again if a bunch of new listings pile on top of the moldy inventory.
Who says lower prices are a bad thing? I like em now.