Residential real estate prices

From investors' perspective From occupiers' perspective

Sensible unleveraged investment price for properties satisfactorily located Mortgage Cost

Rent means reasonably expected near future rent rising with inflation, ex utilities. Per Principal 1
Owner pays property taxes, management, maintenance and insurance in this view. No. Payments 360
AHP/ (AHP:
Annual amounts Pricey Decent Sound Good Grab Annual Annual Monthly Monthly Affordable
Interest Rate Payment Payment Payment Home Price)
Real pretax yield 2.0% 4.0% 6.0% 10.0% 15.0%
Property tax (note 1) 1.5% 2.0% 2.5% 3.0% 3.0% 4.00% 5.7% 0.48% 209
Maintenance (note 2) 1.8% 2.4% 3.0% 3.0% 3.0% 5.00% 6.4% 0.54% 186 mortgage
Property insurance 0.3% 1.2% 2.0% 3.0% 3.0% 6.00% 7.2% 0.60% 167 cost Affordable Home Price / gross monthly home cost given
Property management 0.2% 0.6% 1.0% 1.0% 2.0% 7.00% 8.0% 0.67% 150 Down payment: 10% 20% 30% 40%
Vacancy risk premium 0.2% 2.1% 4.0% 4.0% 4.0% 8.00% 8.8% 0.73% 136 136 151 170 195 227
Title risk premium (note 3) 0.0% 0.0% 0.0% 0.0% 0.0% 9.00% 9.7% 0.80% 124 plus tax, b 124 138 155 178 207
10.00% 10.5% 0.88% 114 insurance, 114 127 142 163 190
Gross annual rent / price 6.0% 12.3% 18.5% 24.0% 30.0% 11.00% 11.4% 0.95% 105 maintenance 105 117 131 150 175
Price / gross monthly rent 200 98 65 50 40 12.00% 12.3% 1.03% 97 97 108 122 139 162
15.00% 15.2% 1.26% 79
20.00% 20.1% 1.67% 60
Takeaway Affordable Home Price / gross annual income w/ 20% down
Assumptions and 30-40% of gross income spent on home before utilities:
For property finely located, purchase price + initial TLC for investors:
Monthly mortgage payment doesn't include property taxes, insurance, AHP/monthly AHP/annual AHP / gross income table
Sensible price range: 65 -- 200 times gross monthly rent maintenance or assoc. fees as applicable. If those costs total around home cost home cost 30% 35% 40%
Attractive price range: 40 -- 50 times gross monthly rent 4% of purchase price annually, assuming no future mortgage interest 170 14 4.3 5.0 5.7
deduction and provided 30-year-amortizing mortgages priced at 4-8%: 142 12 3.6 4.2 4.7
Notes 122 10 3.0 3.5 4.1
Takeaway
1. It may be dangerous to rely on the public sustaining property tax rates less than 1.5%. Suppose median can pay 30% of home price from savings.
2. Cf. yale.edu/investments/Yale_Endowment_06.pdf, p. 17. Affordable home price as multiple of affordable gross monthly rent Affordable Home Price / gross annual income w/ 30% down
3. Title risk premium: reasonably 0% in, only in, democracies with stable property rights. with no down payment: 97 -- 136 and 30-40% of gross income spent on home before utilities:

Based on rational home prices for an unleveraged investor and affordable home prices for an Affordable home price as multiple of affordable gross monthly rent AHP/monthly AHP/annual AHP / gross income table
occupier with 4-8% mortgage interest rates, for finely located residential property: with 20% down payment: 122 -- 170 home cost home cost 30% 35% 40%
Prices over 200x attainable gross monthly rent incl property tax: good luck. 195 16 4.9 5.7 6.5
Prices 60-200x attainable gross monthly rent incl property tax: expected. Affordable home price as multiple of affordable gross monthly rent 163 14 4.1 4.7 5.4
Prices 40-50x attainable gross monthly rent incl property tax: call me. with 30% down payment: 139 -- 195 139 12 3.5 4.1 4.6

If the median homeowner pays maximally 30% down, even

if mortgage rate is as low as 4-5%, assuming tax, insurance
and maintenance cost annually averages minimally 3-4% of
home price, then a median home price to median nominal
normalized homeowner income multiple near

5.7 looks bubblicious

4.9 looks dangerous

If the median homeowner pays 20% down and annual

PITIM (principal, interest, tax, insurance and maintenance)
8.8-12.3% of home price, and is content to spend 30% of
gross income on PITIM, then a median home price to the
median normalized nominal homeowner income near

4.3 is maybe not nuts

3.0 is affordable
 Dec08 update -- US Metro Data
CBSA code 31100 41740 41860 14460 16980 19740 29820 31540 33100 33460 35620 38900 42260 42660 47900
Table Metro area LAX SAN SFO BOS CHI DEN LAS XMD MIA MSP JFK PDX SRQ SEA DCA

Home price
www.realtor.org/research/research/metroprice
Median single family home sale price in the noted metro area during:
2005 529 604 716 413 264 247 305 218 364 235 445 245 354 317 426
2006 585 602 753 402 274 250 317 223 371 232 469 281 334 361 431
2007 589 589 805 396 277 245 298 227 366 225 470 295 311 387 431
2008.II revised 419 430 685 366 258 225 235 227 310 211 453 286 266 381 370
"2008.III" 2008.III preliminary 391 377 616 373 251 225 212 231 288 205 453 279 237 350 333
Change from 2007 -34% -36% -23% -6% -9% -8% -29% 2% -21% -9% -4% -5% -24% -10% -23%

Madison chugs along.

Income
www.ffiec.gov/cra/censusproducts.htm#MSAincome
HUD estimated 2004 median family income 47 54 75 63 60 61 51 61 40 65 50 53 49 64 71
"HUD08" HUD estimated 2008 median family income 60 72 94 80 71 72 64 78 49 81 63 68 60 81 97
B25099 Owner-occupied w mortgage - Median income (~2006) (highest category) 87 88 104 94 80 78 72 80 66 81 97 75 65 84 103

Home price / income

2008.III / HUD08 median family income (Grantham-type multiple) 6.5 5.2 6.5 4.7 3.5 3.1 3.3 3.0 5.9 2.5 7.2 4.1 4.0 4.3 3.4
2008.III / B25099 2006: highest median income category in US census 4.5 4.3 5.9 4.0 3.1 2.9 2.9 2.9 4.4 2.5 4.7 3.7 3.6 4.2 3.2
(Rising unemployment and lower interest income might offset 2yrs inflation)
(Conditional formatting: over 5's red, under 3's green) Suggestions on accompanying spreadsheet: 5.7's bubblicious, 5.0's dangerous, 4.3's maybe affordable, 3.0 is affordable.
Denominator, unlike others measure it, may informatively be median income of households with mortgage (second one).
Affordability
My definition of gross rent: w property tax, insurance, maintenance, not util's
"H/GI" Tenably affordable gross rent (or "H": fixed home cost) / gross income 30% 30% 35% 35% 30% 30% 30% 30% 35% 30% 35% 30% 30% 30% 30%
"TAMMH" B25099 multiplied by H/GI divided by 12 (a/k/a tenably affordable 2.175 2.200 3.033 2.742 2.000 1.950 1.800 2.000 1.925 2.025 2.829 1.875 1.625 2.100 2.575
median gross monthly fixed home cost using B25099)
Sale-leaseback median home price at sale multiple of TAMMH
50 109 110 152 137 100 98 90 100 96 101 141 94 81 105 129
65 141 143 197 178 130 127 117 130 125 132 184 122 106 137 167
97 211 213 294 266 194 189 175 194 187 196 274 182 158 204 250
136 296 299 413 373 272 265 245 272 262 275 385 255 221 286 350
151 328 332 458 414 302 294 272 302 291 306 427 283 245 317 389
170 370 374 516 466 340 332 306 340 327 344 481 319 276 357 438
195 424 429 592 535 390 380 351 390 375 395 552 366 317 410 502
2008.III p. median sold SFH price advance/decline to sale-leaseback price:
50x -- investors should buy -72% -71% -75% -63% -60% -57% -58% -57% -67% -51% -69% -66% -66% -70% -61%
65x -- investors should consider -64% -62% -68% -52% -48% -44% -45% -44% -57% -36% -59% -56% -55% -61% -50%
97x -- tenably affordable with 0% down -46% -43% -52% -29% -23% -16% -18% -16% -35% -4% -39% -35% -33% -42% -25%
136x -- tenably affordable with 0-20% down -24% -21% -33% -0% 8% 18% 15% 18% -9% 34% -15% -9% -7% -18% 5%
151x -- tenably affordable with 10-30% down -16% -12% -26% 11% 20% 31% 28% 31% 1% 49% -6% 1% 4% -9% 17%
170x -- tenably affordable with 20-40% down -5% -1% -16% 25% 35% 47% 44% 47% 14% 68% 6% 14% 17% 2% 31%
195x -- tenably affordable with 30-50% down 8% 14% -4% 43% 55% 69% 66% 69% 30% 93% 22% 31% 34% 17% 51%

NTS: await 50-100x (gross monthly rent including property tax, insurance, maintenance) in desired locations for investment.
NTS: await 100-150x (gross monthly rent including property tax, insurance, maintenance) on desired beachfronts for abodes.
Futures Update
Nov 2011 futures c. Oct 2007 222 187 155 119
Nov 2011 futures c. Dec 2008 155 147 130 120
Change -30% -21% -16% 1%

Thesis for macro cowboys: good after one year.

At Oct07 Data source: factfinder.census.gov (from 2006 in 2006 USD)
(all figures in US$000), data definitions: tinyurl.com/2cjoea
Tables grabbed: B01003, B250- 21, 58, 77, 88, 91, 99, 119

CBSA code 31100 41740 41860 14460 16980 19740 29820 31540 33100 33460 35620 38900 42260 42660 47900
Table Metro area LAX SAN SFO BOS CHI DEN LAS XMD MIA MSP JFK PDX SRQ SEA DCA
B01003 Total population (millions individuals) 12,950 2,941 4,180 4,455 9,506 2,409 1,778 543 5,464 3,175 18,819 2,138 683 3,263 5,289
B25091 # Owner-occupied housing units with mortgage 1,693 461 694 792 1,723 522 326 111 943 730 2,483 412 136 641 1,101

Housing Price / Income -- based on 2006 figures

B25099 Owner-occupied housing units - With mortgage - Median income (highest category) 87 88 104 94 80 78 72 80 66 81 97 75 65 84 103
B25077 Owner-occupied housing units - Median value 605 572 703 404 252 245 231 218 313 242 459 267 269 348 454
"MSFHP" Median 2006 single family home sale price 585 602 737 402 274 250 317 223 371 232 469 281 334 361 431
Median 2006 condo sale price 398 369 603 298 223 - 202 168 292 - 330 - 315 - 294
B25077 / B25099 7.0 6.5 6.8 4.3 3.2 3.1 3.2 2.7 4.7 3.0 4.7 3.6 4.1 4.1 4.4
Home Price / Income -- based on latest single family home futures
Nov07 futures price 256 225 204 169 164 139 213 252 203 228
Avg single family home value in 2000 323 328 465 299 212 230 172 167 270 235
Implied avg single family home value at Nov07 828 738 948 506 348 319 367 421 548 536
That / B25099 inflated 3% 9.2 8.1 8.8 5.2 4.2 4.0 4.9 - 6.2 - 5.5 - - - 5.1
Home Price / Income -- priced into Nov11 futures *roughly*
Nov11 futures price 222 187 155 150 155 119 180 188 182 201
Priced in declination -13% -17% -24% -11% -5% -14% -16% -26% -10% -12%
Roughly priced (tho avg) MSFHP priced in 716 613 719 449 329 274 310 - 314 - 491 - - - 472
Inflating B25099 highest income cat 3%/year 98 99 117 106 90 88 81 90 74 91 109 84 73 95 116
Nov11 multiple priced into futures, *roughly* 7.3 6.2 6.1 4.2 3.7 3.1 3.8 - 4.2 - 4.5 - - - 4.1

Provisionally attractive for macro cowboys: short LAX, SAN and SFO Nov11 & long DEN Nov11 to hedge inflation rendering nominal prices fine
Change from 2006 home price to durably doable for new prime buyer
B25088 Owner-occupied housing units - median selected monthly owner costs - W/ mortgage 2.233 2.300 2.658 2.118 1.777 1.637 1.655 1.585 1.730 1.624 2.363 1.564 1.470 1.840 2.113
B25088 Owner-occupied housing units - median selected monthly owner costs - No mortgage 0.430 0.404 0.468 0.680 0.580 0.420 0.407 0.562 0.565 0.478 0.824 0.446 0.482 0.536 0.576
Median owner-occupied housing unit mortgage cost (monthly) implied 1.803 1.896 2.190 1.438 1.197 1.217 1.248 1.023 1.165 1.146 1.539 1.118 0.988 1.304 1.537
Median housing unit price that would buy with 6% 30-year mortgage with 20% down 376 396 457 300 250 254 261 214 243 239 321 233 206 272 321
Change from MSFHP to price affordable for new buyer with standard mortgage -36% -34% -38% -25% -9% 2% -18% -4% -34% 3% -31% -17% -38% -25% -26%

Renters
B25119 Median household income - renter occupied 37 41 46 36 31 31 37 32 31 31 37 30 33 37 47
B25058 Median monthly contract rent among renter-occupied units paying cash rent 0.961 1.052 1.111 0.939 0.728 0.692 0.822 0.675 0.843 0.724 0.894 0.670 0.788 0.758 1.042
"Rent%" Median contract rent as % of median renter-occupied household income 31% 31% 29% 31% 28% 27% 27% 26% 33% 28% 29% 27% 29% 25% 27%
B25021 Housing units occupied - median number of rooms - Owner occupied 5.8 5.9 6.0 6.5 6.3 6.8 6.0 6.5 5.5 6.8 6.3 6.3 5.5 6.5 7.3
B25021 Housing units occupied - median number of rooms - Renter occupied 3.6 3.9 3.7 3.9 4.1 4.0 4.2 3.8 3.9 3.8 3.7 4.1 4.1 3.9 4.1

NAR uses 25% P&I/income (principal & interest of mortgage) as its affordability threshold.
That might approximate mid-30s% PITIM/income housing cost (principal, interest, taxes, insurance and maintenance).
But housing cost and transportation should be considered together; housing/income can be affordably higher the nearer work centers.
Change from 2006 home price to doable for sale-leaseback
Median household income among owner-occupied households with a mortgage 87 88 104 94 80 78 72 80 66 81 97 75 65 84 103
Median monthly gross rent that supports at average of above Rent%s 2.054 2.078 2.455 2.219 1.889 1.842 1.700 1.889 1.558 1.912 2.290 1.771 1.535 1.983 2.432
100x thumbrule price of median owner-occupied home: 205 208 246 222 189 184 170 189 156 191 229 177 153 198 243
Change from MSFHP to value supported by fair sale-leaseback -65% -65% -67% -45% -31% -26% -46% -15% -58% -18% -51% -37% -54% -45% -44%