It’s been about a quarter of a year since we last checked in on the Seattle-area’s price to rent ratio, so I thought I’d share an update of those charts.
As of January (the latest Case-Shiller data available), Seattle’s price to rent ratio is down to just 2.5% above the 1990-2001 average, hitting its lowest point since Q1 1998.
Here’s a different look at the same data, with prices and rents split up and each series indexed to January 1990 = 100 so you can see how each has been moving independently:
The difference between the price index and the rent index peaked at 83% in September of 2006. As of January, the price index sits just 9% above the rent index, the first time they have been within ten percent of each other since May 1998.
So, if you think Seattle homes were overpriced compared to local rents in 1998, then you probably think they’re still overpriced today. On the other hand, if you think that the economic fundamentals that I’ve been crowing about on this blog since I started it in 2005 are a good indicator of reasonable local home prices, perhaps you think that the era of overpriced Seattle homes is over.
00
well this is good news.
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“The era of ‘Seattle’ overpriced homes” is clearly NOT over. Not this week. Not last week. Not in the near future either.
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the first chart has a nice head and shoulders formation.
http://en.wikipedia.org/wiki/Head_and_shoulders_%28chart_pattern%29
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By ARDELL @ 2:
why the price/rent ratios are pretty much in line.
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Even as per graph there is a 12.5% delta. If both graphs need to meet in the middle, there is 6% more to go down for house prices. Although house prices can continue tank down faster compared to slow raise of rent
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Interesting. Back in the 2007 post, it was noted that up through 2005, rents were rising at a percentage lower than incomes were rising.How much you wanna bet that since, oh, 2008?, rents have been rising faster than incomes? I hear a lot of people complaining about increases in their rents. Rents are dfinitely higher. Are we experiencing a rent bubble? Renting is very trendy now, and people to react to traumatic events, like seeing the real estate market crash, like seeing the value of their houses worth 100,000 less than what they paid, like being unable to get home equity loans because there ain’t no ‘mo equity. The common “wisdom” now is that renting is safe, and that homebuying is for risktaking fools.
But they’ve also built a ton of apartment buildings, and they’re not all getting filled.
I really don’t see house prices moving up in any substantial way over the next couple of years, but it looks like rents are reaching their peak.
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What I have been saying is the value of a property is tied to the rental income potential, which right now is very high. You could publish the permit applications compared to starts for multi family construction over the past ten years. It shows we have a scarcity of rental units.
As more rental units come on line this year, and next rents will fall.
The second thing is that the mortgage payments are based on historically low interest rates, and are you using that 20% down as a mortgage payment criteria?
High rents, and low interest mortgage payments make the price of housing units still very over priced.
You would have to use complete economic factors to make comparisons.
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From http://www.homeinsight.com/home-value/wa/seattle.asp
Seattle median household income: $49,732
Seattle median home price: $308,329
Median home = 6X annual median income.
Overpriced homes over? Really?
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If the ratio is for like properties, it is almost double what it should be. The value of an investment property should be no more than 15 x annual rent, especially in this economic environment. For example, a property that rents for $20,000 year is worth about $300K as an investment.
Rents can go down, especially if wages drop or there are more unemployed. People double up and stay at home with their parents.
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“the era of overpriced Seattle homes is over”
Nah, not over. Seattle homes are still expensive relative to many areas in the country. But they are close to a historic equilibrium for the local market, and likely to stay there for the next several years. Ira’s correct in noting we may have a bit of a rent bubble going on, but it will pale in comparison to the coming inflation bubble (or greatest depression).
Still too early to hunt for investment grade properties, but if you’re looking for a place to live, can afford it, and are willing to put up with the frustration and required time commitment you might find a few GEMS out there. Especially if you’re willing to look south of I-90 or well north of Ballard- where the wild things and the foreclosures lurk.
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Third opinion:
The Seattle Rent Bubble has yet to burst.
There are so many over priced apartments and it’s just a matter of time before one or more players break ranks to fill places by offering deals and the whole thing implodes, bringing home prices down with them.
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Its Always Good to See Improvement
Even if its a moot point for most worker households in Seattle. Hades, in the 90s King County built modular HOAs so the middle class [not middle incomes] could barely afford to buy a home.
When was Seattle ever marginally affordable for housing? Probably before 1978, wake me when we get to 1977 levels.
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By David Losh @ 7:
Some people here have a tendency to look at things in a very limited way. For example, if they don’t have the income to support a $700,000 loan or the assets to make a $100,000 down payment, they don’t think many other people do either.
This is just another example of that. Thinking that because you’re primarily interested in purchasing something for rental that would be how everyone would value something (even though appraisals of SFR do not typically use the rental method of valuation).
Connecting the two points up, it’s totally absurd to suggest that the value of a $1,000,000+ home is in any way affected by its rental value.
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By John Bailo @ 10:
That’s what you would typically expect because the industry overbuilds. Unless zoning is a problem, high rents is a problem that eventually takes care of itself.
I wouldn’t really call it an implosion though. It’s a “problem” caused by not having a central planning organization (e.g. a communist economy). Many entities are making the same decision–build apartments. That leads to too many making that decision.
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RE: John Bailo @ 10 –
A Friend Told Me Last Night the New “Amazon.com Rentals” They’re Building in Seattle are Zoned for No Parking
There’s buses that travel those streets [hades, there's buses that travel almost all suburb streets too], so they don’t have to give the tennants any parking spaces. If a friend comes to visit and you’re renting a unit there, tell them they need to get a taxi, pay horrifying by the hour parking fees and/or ride the bus.
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My purely anecdotal evidence (being me and my friends) is that our rent increases are much higher than they should be. In my social circle, my last rent increase was the worst, at 19%. (I’m okay with my rent going up a little, but I’ve never had it increase more than 5-6%). I don’t know if it’s because of the area I live in (Redmond), but the management company says the increase is based on “current market value”. Whatever THAT means. (I should have demanded to see their data! LOL)
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By T. Y. Lee @ 15:
Huh? I’m not really sure what you’re judging that by.
If they have a high vacancy rate the rents are higher than they should be. Other than that, it’s the market.
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By John Bailo @ 10:
Why exactly would they do that when apartment-building vacancy is below three percent, its lowest point since early 2007?
Once a bunch of this new apartment inventory gets completed and comes on the market, rents will probably stop increasing, ans possibly dip a bit. But we’re probably at least a year or two from that point.
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RE: T. Y. Lee @ 15 –
You are exactly right, that “data” comes from an organization called http://www.rha-ps.com/AM/Template.cfm?Section=Home Rental Housing Association.
This year was the worst I have ever seen for rent increases.
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RE: The Tim @ 17 –
Why?
What data would you have to support that? I’d be interested to see how, or why rents are this high, this fast.
I would also like to see rent comparisons to surrounding areas that are filling up with people looking for cheaper rent.
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By David Losh @ 19:
He gave you the data! Vacancy rates are low. What more do you need to know?
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My rent is the same as it was when I moved in – 2005… probably not more than 25% higher than the late 80s. Do a little shopping around. And stay away from the trendy areas north of I-90 and anywhere near that Ballard place. If you want trendy, don’t complain about the prices.
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RE: Kary L. Krismer @ 12 –
OMG! Using your own example you would be concentrating on a residential sales market as a reflection of the entire Real Estate industry. That is absurd.
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RE: MacroInvestor @ 21 –
This comment is very much to the point that not all areas are seeing the rent increases.
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By David Losh @ 22:
We’re not talking about the entire real estate industry. We’re talking about SFR housing. Rather obviously rental rates are an important factor in valuing apartment buildings.
Determining the value of SFR housing by looking at what SFR housing is selling for is absurd? Of course it makes a lot more sense to determine the value of something by determining what it rents for. That’s probably why when Kelly Blue Book values used cars, they only look to data they collect on rental rates from Hertz. /sarc
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RE: Kary L. Krismer @ 16 – I grew up in apartments and rental homes, and out here in the Seattle area, I’ve been renting since 2007. I have never seen my rent increase like this before, and nobody else I know has had their rent increase nearly 20%. My friends were complaining about how their rent increase of 8-10% was too high, and then guffawed when I told them how much mine increased at my last renewal.
I say it’s higher than it should be, because I can buy a similar sized condo and my PITI would be $500 lower than my rent is.
Is that not the right way to be looking at this, rent versus mortgage payment +HOA fees on similar sized condo? (obviously I do not have a background in real estate or economics, I’m an average person who doesn’t understand why my rent is suddenly skyrocketing by several thousands per year)
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RE: David Losh @ 18 – thanks for the link!
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RE: T. Y. Lee @ 25 – The herd is spooked and on the move. The rentiers are more than willing to shuttle them into the pen.
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Tim,
That survey is only good for monitoring trends, not absolute vacancy rates or rents. The vacancy rate doesn’t count “buildings in their initial lease up”. The rents are artificially inflated by incentives. I know someone with a headline rent of $1600; after incentives, his effective rent is $1350.
If you’re in the market, you’ll find that there is a ton of supply at the high end. As soon as these new projects start opening for business the incentives will be back in a hurry.
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By T. Y. Lee @ 25:
That’s certainly a factor, but not everyone wants to buy (they want to stay flexible) or can buy (credit). Those numbers though will siphon off some tenants, however, like the booming condo market did in 2005-2007. Back then though the difference was some apartments were also being converted to condos, so the supply/demand on apartments didn’t change all that dramatically.
But the bottom line is that if vacancies stay low, rents will keep going up.
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RE: T. Y. Lee @ 25 – This is how markets work. Producers (in this case rental property owners) set prices. Consumers choose whether or not to buy from specific producers. Those who set their prices too high lose sales and often lower their prices. Those who set their prices too low sell out and often see that they can raise prices. You have (or had, if you signed a multi-month lease) an opportunity to prove to the owner that the price is too high – you move and if they can’t re-rent the place quickly at the same rent, they learn they asked too much. If you move and they re-rent it immediately for the same price, they learn that they were at or below the market rent for that unit.
Prices have little to do with the cost of production, but markets often push prices toward the cost of production because people choose to shift to lower price producers – who are pricing closer to their costs. However the speed with which the market can match price to cost is highly variable and dependent on things like switching costs, cultural forces, cartels, and lack of transparency as to comparative value. This last is exemplified by physician choice – you can’t tell which physician is the best, or even what you will get from them, or what they will be paid (through your insurance). When you don’t know the relative quality of what you are buying or the real price being paid, markets don’t work. Foreclosures can be a bit like that. Rental housing is usually not.
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By NESeattleSeller @ 30:
I would tend to agree with most of what you said. On this though I would say that the market moves toward the cost of production more due to supply increasing to that point, rather than consumers moving.
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By T. Y. Lee @ 25:
One more thing on that point. That the numbers are moving in that direction is a big part of the reason why the inventory of quality active listings is relatively low. They’re being snapped up not only by investors, but also by renters making those calculations. Many of the REOs are not even open to investor buyers before they become a pending listing.
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We have either had a huge influx of employed workers who need to rent(doubtful) or Grandpappy and Grandma are finally throwing their 35 year old children out on their own for this big change in vacancies that is supposedly justifying huge increases in rents. Something stinks. Me things those landlord are willing to promote any story about unit tightness to justify huge rental increases. Real wages for renters are flat at best, unemployment still stinks. Many REO’s are bought to rent, many condo conversions reverted back to apartments. Where is all this supposed “demand” for rentals coming from?
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By Pegasus @ 33:
Yes, landlords can just pretend vacancies are low and raise rents. That will work. /sarc
No wonder you think oil speculators can significantly affect the price of oil and gasoline. At least you’re consistent.
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By Pegasus @ 33:
Give one example of a condo going back to apartments in the past 18 months.
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By Basho @ 28:
Lucky for us, the P-I article gave us a trend reference right in the linked article. Vacancy rates, as measured by D+S’s standard, are lower than they have been in about five years.
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RE: ARDELL @ 2 –
Perhaps because my jaw is still dropped from a crazy multiple offer situation I saw this weekend where a home, not new on market, was overbid by 8% over asking and 20% over FMV. Not a new listing. On market awhile with priced drops of $10,000 and $10,000 again and again. So the market had already proven it wasn’t worth $10,000 more than asking…or even asking, and it bid up by $30,000 over asking.
I don’t think it will actually close that high:
1) Because it couldn’t possibly appraise.
2) Because the cap of 20% over FMV must have been (hopefully) so much higher than the others, that the end price is likely 2nd highest plus the increment. This in Bothell BTW and not “Swellvue”.
The rent ratio falls apart on the basis of diminishing returns. Rents are based on per square foot of $1.00 give or take. A 2,000 sf Split Entry might sell for $250,000 to $300,000 and rent for $1,750. A 2,000 square foot newer home might sell for $450,000 to $550,000 and rent for $2,000 or $2,100.
I have the same problem now as I did when I was taking Economics at Wharton in the 80s. The Professor said “Ardell, To understand this concept you must pretend the real world does not exist.” I have never have been able to adhere to that instruction.
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In the dozen minutes since I wrote the above comment. Home listed late Wednesday at FMV or a tad over based on comps. I have an appointment to see it tonight. Already has 2 offers. The mortgage payment if it were an FHA buyer would be $7,200 a year higher than the annual rental income before expenses. Sammamish. Newer home on a tiny lot. No view or “close in” considerations.
Maybe this all isn’t enough justification for my comment #2 above…but like I said…I can’t tune out the real world just because it is “anecdotal”.
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By ARDELL @ 38:
This would be a good market to sell a house with aluminum wiring.
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You have to combine the trend of “no stepping stone homes please” with the rental ratio issue.
Homes that make the most sense for rentals are not the homes owner occupants want to buy these days. No one wants a house they would plan to sell in 3 to 5 years. People are willing to pay more (too much even) for a house they can see themselves living in for many years…forever if need be.
They don’t want to depend on market conditions 3 to 5 years out. The homes most people want to buy…to live in…are not accounted for in rental statistics and vice versa.
Also I don’t believe the source as to only 3% vacancy rate. That’s like getting stats about home sales form NAR, or believing there are “only 17 students per class” as reported, while you are staring at the classroom with 35 students sitting in it.
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RE: ARDELL @ 37 –
I think this is a lot of what is driving the frustration of buyers in the middle range, where you can find single family homes to rent that are still much cheaper than buying (and in most cases FIXING extensively) a comparably sized and located home.
At the condo/apartment level the cost of owning probably does make sense at current prices though assuming more supply of apartments comes on (there have got to be 3-4 big projects just on 2nd and 3rd avenues in Seattle now and the 3 big ones in Ballard are all back to life as well) the rents and then prices could fall even more.
But on the higher end there is still a big premium built in for owning. It’s like at some point up the income ladder there is a sense that you have to own to be respectable and people become willing to overpay for the right to maintain 3,000 sq ft of glistening stone and steel rather than admit to their friends that they rent it. The only question becomes can you afford it not if it is a good price compared to renting.
We’ve actually been looking at trading down our rental while we wait for anything decent to buy but the cost savings in moving from a single family rental into a complex are way too small to make any sense when you look at the space you loose. Our rent went up less 2% last year.
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We’ve rented the same SFH for 7 years. We have had one increase in total of 5% and are still paying well under $2k/month for a 3000 sqft in a desirable eastside hood close to Microsoft. Similar homes on our street sold for ~$800k in 2007 and are now selling for ~$600k. A few quick sales has sold in the low $500k. Renting still makes a lot of sense and prices are still way inflated in comparison.
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By T. Y. Lee @ 25:
I got a 20% rent increase too, I wonder if we were in the same apartment? I looked at surrounding rent prices and the new rent was comparable to others in the area, and they had almost no vacancies, so I couldn’t negotiate it down. I did the rent vs own calculations and decided to buy a condo because it’s much cheaper than renting a similar apartment. That doesn’t mean rent prices are unreasonable, it just means people (like yourself) are choosing to rent even if it costs more.
As for rent prices stabilizing next year, has anyone seen new apartment construction in the Redmond/Bellevue area? I haven’t seen a single one.
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RE: ARDELL @ 38 – We very recently had a client do a pre-inspection and offer with strong escalator. Nonetheless, they lost to another offer and apparently by a large margin. The listing agent said there were 13 pre-inspections and 10 offers. WTF?
10 offers isn’t all that shocking as I’ve seen it numerous times before but 13 pre-inspections? That’s crazy. Something has to give and it’s either inventory or prices because buyers aren’t going away with an improving economy and low rates.
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RE: Mike @ 41 –
I pretty much agree with everything you wrote. For middle price and high end houses, it’s still way cheaper to rent, even if the gap has narrowed. It gets closer in the 300 thousand and below houses, and below that a lot of the rents are higher than mortgage payments. .
I will disagree with Ardell here. She says that the houses that make sense to rent are not the same houses that owner occupanys want to buy. That’s somewhat true, in that houses to rent don’t tend to have high end finishes, but the Seattle area does not have just one kind of house for sale, nor one kind of house for rent. There are million dollar houses for rent, and the rent for those is waaay less than what the mortgage payments are. Increasingly, people making the kind of money that can afford to buy it are more willing to rent, where just a few years ago it was hard to rent that kind of house out, because people with that kind of money felt a little more stigmatized by renting. Now renting is cool, even if you’re well to do. That’s always been the case in a place like New York City, but only in the last few years has it become the case in Seattle.
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RE: Lily @ 43 -Was your apartment within spitting distance of Woodbridge? :P
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RE: patient @ 42 – You’re presumably not dealing with a professional landlord. There are a number of good rental deals out there which are very hard to find, but when you find them, you should hold on as long as you can. I’ve seen both very nice properties rented very cheap, and some not so nice places rented for even less money, but still at a price that would be considered a steal.
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My rent is going up 12.5% in May. Granted, I am in a very high end and desirable building, and even with the increase, probably wouldn’t move to a different rental. The increase did push me to start looking at buying in ernest again. I’m currently pending on a SFH with comparable square footage (about 1000 sf finished), very nicely remodeled, that will be about the same monthly cost as my rent before this increase. The house also gives me a low maintenance yard that I’ve missed having with apartment living. Worth noting that I happened to stumble upon this house that has basically 95% of what I wanted after looking on and off for years, so the time and circumstances just happened to be right for me. If I hadn’t found the right place, I would have continued to rent and lived with the increase.
Maybe the rental market will drop again next year (I think it will). Maybe house prices will drop another 10% (I think also likely). I’m still comfortable buying a place I really like now, in a great location, for a price I consider fair value, and that I expect to live in for many years.
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RE: Kary L. Krismer @ 47 –
Correct, the owner is private and he uses one of the big real estate firms as middle man. Works perfectly for all parties.
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RE: patient @ 49 – On your “perfectly” comment, that might be exactly right. For professional investors the value of their property is dependent on the rental income over the past couple of years. If and when they want to sell every dollar is important to them, and it’s not something they can quickly change because the new buyer will be looking back in time.
For your owner that might not matter to them at all. They might be perfectly happy getting less rent than they could in return for someone staying for 7 straight years. And in any case, when they do sell the value of the house will probably have nothing at all to do with its rental value, and instead it will be the amount similar houses sell for nearby.
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oops…wrong post
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By The Tim @ 18:
Because the demand for apartments is simply masking a reluctance to commit to a falling house market.
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The era of over-priced homes in Seattle is over?
What if both real-estate and rentals are overpriced in Seattle?
I think the % of income that it takes to own a home is an important factor since this will impact savings and other quality of life issues. How does Seattle compare in this regard?
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RE: The Tim @ 37 –
I’m glad you brought this to the Twitter feed today. You also have to look at the Dupre Scott methodology. The survey property management companies, and owners.
If you called a hundred Real Estate agents, and Brokers to ask about Real Estate what do you think the answers would be.
What I know is that higher rents mean market churning. You get higher rents by people moving, Higher rents mean people will move. It’s a disruption of our work force, a work force that is in flux, that is driven by greed.
So what I see is a couple who moves here to work for Children’s Hospital, or Amazon, they rent until they settle in, and find a commute is much more cost effective. In the mean time land lords, and property managers gouge the consumers until they can’t gouge any more.
It’s much easier to manipulate rents, than housing prices.
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RE: Kary L. Krismer @ 51 –
Kary you should find something to do. None of your comments here are anything more than mean spirited.
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By David Losh @ 56:
Was that (Post 51) so far over your head that you totally misunderstood what I was saying? I was agreeing with Patient and explaining how his situation does in fact work very well both for him and his landlord. How do you possibly see that as mean spirited?
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RE: Ira Sacharoff @ 46 – Where do I find those million dollar houses for rent listed? ;)
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By me @ 58:
There aren’t a lot of them. There is currently a house for sale and also for rent in the North Beach/Blue Ridge area north of Ballard, with a big Puget Sound view. If you buy it, the current listing price is 1.279 million. If you rent it, it’s 4000 a month.
If you buy it, with the minimum down payment, monthly payments would be something like 8400 per month. It’s listed on the MLS, so contact an agent for more information, or to have them dig up more pricey houses for rent.
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RE: Ira Sacharoff @ 59 –
What are you using for “minimum down payment” and rate on a jumbo?
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RE: ARDELL @ 60 –
It was the secret, proprietary “pull numbers out of the top of my head” method.
But, it looks like 25% down would be required on a 1.279 million dollar house, and the current jumbo rate is about 5.625, the taxes on that house are a little over 12,000 a year, and I dunno about insurance, 1800? a year, so if that were all the case, the payments would be about 6717 per month, and that’s after you put 319,750 down as your down payment.
So let’s say you had 319,750 sitting in your desk drawer. You could rent the house for 4000, and invest the 319,750 in something very conservative and earn 500 a month on it( making the equivalent rent 3500, or use it all on the house, and have payments of 6717.
So, yeah, my secret, proprietary off the top of my head numbers were incorrect. instead of spending 4400 per month more on mortgage payments, you’d be paying about 3200 more.
Still a lot more than renting.
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Do you guys listen to what you are saying sometimes? Someone is complaining about his rent going up 20% (!) on the year and your reply is that “it’s just the market” or “this is how markets work.” Well, yeah I suppose it is, but I distinctly recall hearing the exact same phrase in the years 2003-2007 to justify excessive housing prices. Try to include historical norms when you speak of market prices because that is what people base their experiences on – not the wonderful economic definition where “it is what it is” Saying this is just market forces sounds glib as I will assume most people posting on this blog have a decent understanding of supply/demand.
I wont try to put words in his mouth, but I don’t think his point was that he was angry that his rent went up at all, it was the fact that it went up by an amount that most people would consider very excessive – perhaps indicative of a small bubble? Saying “it’s just the market” is rather mind-numbing as it implies that 20% increases are normal. Yes vacancy rates are very low, people don’t appear to want to buy houses, a large amount of new inventory is being built but wont be on the market for a year or two, which would make rents go up. But this sounds like a rather abnormal situation – which I believe is more in-line with the point of his post.
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RE: Ira Sacharoff @ 61 – I expect you to be more professional!
Answers are off the top of your head. Numbers are pulled from your butt.
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By billybeer @ 62:
The difference is that this increase isn’t being caused by a renters’ frenzy.
The similarity is too much building can cause both markets to crash.
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RE: billybeer @ 62 –
This is very abnormal, but the answer is in the Sunday paper. We have a lot of construction in South Lake Union that is attracting, or is supposed to attract, a lot of jobs. Boeing is delivering airplanes with a back log of work. Once again attracting people looking for work.
We have an influx of people looking for work, or who have already been hired.
When you have a vacancy rate of 7% it’s pretty easy to get that to 3% with more renters. What we are also seeing is those multiple offer situations because inventory is low. People are stuck where they are, and are willing to bite the bullet on rent increases because the alternatives are slim.
Land Lords have exploited the situation mercilessly these past couple of years. No one will remember this bubble. What will happen is that vacancy rates will rise, and rents will go down as more alternatives come up.
Seriously what can be done? I know people who are paying the same rent as six years ago, and the land lord is happy to have stable rental income. Others have raised the rent, the renter has moved, and they are in a panic, because one month of vacancy can wipe out profits.
There are a lot of idiot land lords out there, and the new crop won’t be any better. That’s why I hate renting. You just don’t know what is going to happen.
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By David Losh @ 65:
The six year comment is almost exactly what I was commenting on as being perfect, which you said was mean spirited.
I guess calling landlords “idiots” for pricing according to the market isn’t mean spirited, right? But hey, if you feel that way, send me a list of your assets, what you paid for them, and let me pick to buy an item from you for what I feel is a “fair” price unrelated to what the current market price would be. If you don’t agree to that, you will be both taking advantage of me, and also being an idiot by expecting to get current market prices for your assets.
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RE: Kary L. Krismer @ 66 –
There are a lot of idiot land lords out there. Twisting the words to say land lords are idiots is just something you do here daily.
I have yet to see where you have a point.
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RE: David Losh @ 67 – You’re the one who called landlords (or as you call them land lords) idiots. I quoted it.
Why are you being so mean spirited? Do you have a point?
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The ratio only looks so good because rents have risen so egregiously. If you applied ‘normal’ income-based rent increases, then the ratio would still look off. I think income is a more sensible comparison for both rents and housing prices.
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