Comments on: Austin Rental Market Update – March 2009

By: Dave

Dave — Fri, 01 May 2009 19:44:32 +0000

Regarding sales/rent price ratios, I wonder if interest rates need to be factored in to “normalize” this ratio. You would imagine that the COST of buying a house vs the rent ration might hold steady while the SALES price vs rent price might be increasing. Interest rates have been trending downwards, also, I understand that texas property taxes have been go down percentage wise (is this correct?).

Here in San Diego many believe that rents will be starting to decline. They have been steadily increasing the last several years but now when you look at the cost to buy vs. cost to rent it is much cheaper to purchase many SFH and Condos when compared with renting. I believe that in certain segments of our market housing cost is definately undervalued when compared with rents (meaning rents could be on the way down, at least when you adjust for inflation).

-Dave

By: Steve Crossland

Steve Crossland — Fri, 01 May 2009 14:23:22 +0000

> I personally know they have been increasing every year on average with the one exception of the dot com collapse year.

Hi Ray. Thanks for the comment. In fact, rents did fall in all areas of Austin for 4 or 5 years. No area was immune. I don’t have the stats handy, but I do know we had homes in Central Austin that rented for $1800 in 2000/2001 that were renting for less than $1500 in 2003/2004. So, the stats will not support your notion.

I do agree with you that the outskirts tend to skew the total stats downward.

Steve

By: Ray

Ray — Fri, 01 May 2009 13:05:51 +0000

Any city experiencing tremendous population growth generally outwards into former suburbs and fields will likely have stats for the entire city that show average rents flat to slightly up. That makes sense mathematically since as the city grows outwards the proportion of distant rentals increases relative to more expensive closer in rentals in a squared law relationship. If you consider rents in desirable close in neighborhoods then I personally know they have been increasing every year on average with the one exception of the dot com collapse year.

By: Robert

Robert — Wed, 29 Apr 2009 02:28:23 +0000

Steve,
How do you compare 2000 to now?
Rent was crazy in the Dot Com days. At least the rent was crazy for San Francisco.
Robert

By: Steve Crossland

Steve Crossland — Tue, 28 Apr 2009 19:12:02 +0000

Hi Dave,

I divide the monthly rent into the market value of the home. For example, if a $120,000 home rents for $1200/mo.m the ratio would be:

1,200 / 120,000 = 0.01, or 1%.

At present, in Austin, you have to pay about $150,000 for a home that will rent for $1,200/mo. So the ratio is 0.008, or 0.8%.

So, when I talk about investors “chasing cash flow” out into areas like Hutto, Manor, Kyle, etc., they do it because the ratios out there are better than the ratios in South Austin.

I own homes in Leander that rent for $1275 and would sell for about $145K. That would be an 0.88% ratio.

It’s just a form of gross rent multiplier, though many do use annual rent divided into market value, which give GRM of around 9 to 11 in Austin for the typical rental stock.

Stay tuned. The graph is looking good and I’ll post it either today or tomorrow.

Steve

By: Dave

Dave — Tue, 28 Apr 2009 18:25:41 +0000

Steve, When you talk about Sales/rent price ratios, are you referring to annual rent or monthly rent. Say a $100,000 property that rents for 900/mo, would this ratio be 11 (100000/900) or 9.2 (100000/10800 or do I need to be looking at Rent/sales price for annual of .9% (900/100000). I have heard of this metric before but never have understood what the “standard” is. I imagine rent price/sales price are higher in Texas vs other states for cashflow properties becuase of the higher property tax rate. Look forward to seeing your analysis on the historical trends of this ratio over time. Thanks for the stellar blog, I read it all the time! -Dave