Friday, August 12, 2005

Rent-to-Buy Ratio Out-of-Whack

A reader at www.TPMcafe.com in repsonse to Paul Krugman's op-ed piece from last week's New York Time's, as well as the recent Center for Economic Policy and Research rent v. buy calculator had this to say about Manhattan rents:

"As a Manhattan resident, my wife and I just went through the "should we rent-should we buy" exercise (we decided to rent with the expectation that the market will correct in a year or two). I should point out that, while Manhattan rents are much cheaper relative to purchase prices, there has been upward pressure on rents as potential purchasers, like us, have been completely priced out of buying a decent apartment in which we could raise a family, and are instead renting. Thus, a two-bedroom we were interested in renting exactly one year ago for $3,300/month, is now renting for $4,400/month.

Granted, that equivalent two-bedroom in today's market would likely sell for approximately $1 million to $1.3 million. Which brings me to the next point. Historically, the sale price-to-rent ratio in New York City (the sale price of an apartment vs. the yearly cost to rent that identical apartment) has been approximately 10-1 to 12-1. Today, that ratio stands at about 20-1 to 25-1. Thus, it would appear that the CEPR's calculator is pretty accurate. Your friend's parents could probably rent the apartment they just purchased (from the purchase price I deduce it is a 2-bedroom) for about $4,200 - $4,400/month in today's rental market, based on the current sale price-to-rent ratio. However, in "normal" times, the the fair market value of the apartment they just purchased is likely 1/2 to 1/3 its current purchase price."

Another reader added:

"The situation for much of Manhattan and New York City is even worse than it looks based on purchase prices. Those million-dollar apartments (if they're co-ops) typically come with a grand or two (or more) a month in maintenance fees. Some of that is just real estate taxes and other expenses you'd be paying anyway, but a substantial part may also be the underlying mortgage on the building, which is in effect tacked onto the purchase price. (And some of those underlying mortgages are balloons that make the consumer-grade versions seem positively friendly.)"

Full link:

TPM Cafe Comments

Also, here is the CEPR rent-buy calculator:

CEPR Rent or Buy Calculator

5 Comments:

Blogger U.E.S. said...

They seem a lot less out of whack in NYC than in California.

8:11 AM  
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5:46 PM  
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1:50 PM  
Blogger Mortgage Center said...

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9:42 AM  
Blogger Michael said...

Hey Mortgage guys! I have a site selling viagra, you should come check that out sometime.

but seriously, if the bots don't delete this comment, then I would like to say that this is a good post, but the question is what is a reasonable rent to buy ratio in Brooklyn? A higher than normal rent to buy ratio only makes sense if one expects rent to increase over the lifetime of the mortgage in the particular area than other places. Manhattan is already sitting at the high end of unreasonably high costs.

7:44 AM  

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