Rent, Don’t Buy? Still?!?

posted on October 18th, 2008 filed under: Real Estate News

Yep.  Hard to believe, but in some of the real estate markets that have declined the most, it is still much cheaper to rent than to buy.  From the New York Times:

In Miami . . . home prices are about 22 times annual rents, according to an analysis by Moody's Economy.com.  The average figure for the last 20 years is just 15 times annual rents.  The difference between those two numbers suggests that a home valued at $500,000 today might be worth only $341,000 based on the long-term relationship between prices and rents.

The Times story jibes with my own research on the Miami real estate market.  In 2007, I analyzed a sample of Coral Gables real estate listings in the Miami Herald going back to about 1980.  It wasn't hard to find comparable houses in the sale and rental listings, and as usual, some properties were listed both for sale and for rent.  My conclusion was that during the 1980s and 1990s, real estate prices in Coral Gables were about 12 to 14 times annual rent.  For the last few years, that ratio has been about 20 times.

My sense is that a vanishingly small number of real estate agents think in these terms, much less do the research.

Worse, real estate agents have a big disincentive to advising customers to consider renting.  The commission on a sale is about 10 times the commission on a rental.  An agent will typically get about 2% of a sale price, compared with about 3.5% of annual rent.  With prices at 20 times rent, a home in Miami or Coral Gables that would cost $1 million to buy would cost $50,000 to rent.  The commission on a sale would be about $20,000, while the commission on a rental would be less than $2,000.

The saddest thing is that in a falling market, buyers lose vastly more than agents gain.  In a market that falls 10%, an agent who sells $10 million in property makes $200,000 in commissions, while customers collectively lose $1 million in equity.  (And the market in Miami and Coral Gables has fallen a lot more than 10%.)

Does your real estate professional put honest, capable advice above personal financial gain?

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posted by // This entry was posted on Saturday, October 18th, 2008 at 1:57 pm and is filed under Real Estate News. You can follow any responses to this entry through the RSS 2.0 feed.

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