Buy vs Rent, a Study of Optima Biltmore Towers

I heard recently that historically Americans pay 26% more to own property than to rent it.  As I didn’t know whether this was true or not I did a little digging and found a site called www.economicpolicyjournal.com with the following:

“After two years of rapid home-price depreciation, the relationship between the cost of rental payments versus after-tax mortgage payments is tilting toward ownership in a number of metropolitan areas.

Over the past 18 years, after-tax mortgage payments have averaged 26% more than rent payments, according to Green Street Advisors, a real-estate consultancy based in Newport Beach, Calif. In 2006, at the height of the housing bubble, mortgage payments reached as high as 66% more than rent payments. But by the end of 2008, average monthly rent for the largest 50 metropolitan areas was $1,045, compared with after-tax mortgage payments of $1,300, assuming a rate of 5.5% on a 30-year fixed mortgage. That means mortgage payments averaged just 24% more than rent payments, the narrowest gap since 2001.

In more than half of the top 50 U.S. housing markets — including Los Angeles, northern Virginia and Las Vegas — the ratio is now below its 18-year average. In Los Angeles, for example, mortgage payments averaged 60% more than rent payments between 1990 and 2008. Now, those payments average 30% more than rent…

A separate report by Moody’s Economy.com also finds that home prices relative to rents are more in line with their historical relationship…The report notes that home prices relative to rents remain well above historical levels in 30 markets, including Philadelphia; Portland, Ore.; and Virginia Beach, Va.”

OK, so of course I had to check this out in relation to high rise condos in Phoenix.  I spent a large part of the day first trying to figure out how to pull relevant data from the MLS and then how to build it into a useable format.  I picked Optima Biltmore Towers because it was definitely a product of the boom, it has a lot of rentals, and it has enough sales to provide adequate data for the study.  A number of complications presented themselves.  For example  in 2006 property taxes hadn’t been established so I used the numbers from 2007 instead.  Also, since I relied on MLS data that means that my numbers are only as good as the data that was inputted into MLS by all the various agents.  In some cases agents did not list the square footage of their condo listings so I had to drop those properties, in other cases they did not include the HOA fees so I had to drop those.  Also, for two different quarters there weren’t any sales at Optima Biltmore Towers so there is no data point for those periods.  And finally, the article above mentioned that the rent vs. own difference was based on after tax dollars.  I adjusted the principal and interest “mortgage” amount by 20% to adjust for taxes.  Argue with me all you want about it; I just needed a number and I figure 20% is conservative.  And after all I’m just trying to see a trend not have a bullet proof statistical analysis.

In the first quarter of 2006 we see that purchases ran about 61% more per month (after any tax benefits of owning) than comparable rentals just like the article mentions.  But we see that the gap grew larger throughout the rest of 2006.  I’m not surprised by this.  Investors went really crazy for high rise condos largely because they liked the extended build time, thinking that they would “ride the appreciation” that much longer for extra profits.  Because of this sales prices of high rise condos probably “boomed” more than other market segments and will probably “bust” harder as well.

Eventually I’ll get around to posting more of the data but for now, know that the gap for the first quarter of 2009 is at approximately 25%, slightly better than “historical norms.”  And again, this number may be artifically high as I only used a 20% factor for the tax benefit.  Regardless, it seems that the gap between buying and renting condos at Optima Biltmore Towers is starting to make sense again and may warrant further looking into a purchase.