The Smart Consumer Rents

In a previous blog entry, You'd Be Smarter to Rent, I looked at the startling rise of the average monthly mortgage costs to the average monthly rent. With such a disproportion between rents and housing prices, the person who's "out of the market" would be wise to stay there, and continue to rent. More proof of this can be found in a recent SFGate article:

"The average monthly rent for a one-bedroom apartment in the San Francisco-Oakland-Fremont metropolitan area was $1,070 for the three months that ended June 30, up 3.3 percent from the same period a year ago and up $14 from the first quarter, according to Novato research firm RealFacts, which tracks large rental properties. The average monthly rent for any type of apartment in the nine counties hit $1,290 in the second quarter, up 1.1 percent from last year.

...

While rents have stagnated or risen only slightly, the median price for a single-family home in the Bay Area vaulted 18 percent in June from the same month last year, hitting $644,000, research firm DataQuick said this week. The company also said the typical mortgage payment for Bay Area buyers in June was $2,651."

And with housing prices poised to, at best, stagnate, but more likely decline, buying now is an even less attractive option. The smart money doesn't buy at the top of the market. I'm no financial genius, but I know that the worst time to buy is when everyone else is wanting to buy; instead, the smart money buys when everyone else wants to sell. With the rapid growth in the real estate market over the last 5-10 years, it's a bit hard to believe that we'll ever get back to a point in time where everyone wants to sell, but markets are cyclical and what goes up must come down.

More great commentary from the same SFGate article:

"Ed Leamer, an economist at UCLA's Anderson Forecast, has illustrated the discrepancy between rents and median sale prices by calculating a price/earnings ratio for real estate.

The ratio, which is more frequently applied to stocks, shows how much investors are willing to pay for a dollar of earnings. With stocks, one divides a company's share price by its annual earnings per share to arrive at the ratio. In housing, the price of the home is divided by the annual rent it could bring in.

The higher the ratio, the stronger the fervor for that particular type of asset. Last year, Leamer calculated, the P/E for a house in the Bay Area soared to 13.8 in the first quarter, compared with 7.2 in 1999 and 2000. Just as the price/earnings ratio for stocks jumped before the stock market crashed, Leamer and others worry this could signal that housing values are overinflated and due for a slowdown."

And I leave you with an 1875 depiction of economic bubbles, Currier & Ives's The Way to Grow Poor, The Way to Grow Rich (found via the blog post Quite a Salesman, Indeed over at Ben Jones's The Housing Bubble blog):