Housing blogger Michael Olenick demonstrates the rental bubble by comparing two homes in Scottsdale. The worse home is overpriced at $2,150/mo. while the better home is a steal at $310,000.
Situated on one side of one hole of the McDowell Mountain Golf Club, on a cul-de-sac, is a 3BR, 2 bath, 2,000 square foot home for rent for the price of $2,150/mo. On the other side of the hole, on a different cul-de-sac, is a 3BR, 2 bath, 2,005 square foot house for sale with an asking price of $310,000. Our rental, which doesn’t have a pool, is across the street from a house that sits on the golf course: it seems to have a small back yard that backs up to another house. Our house for sale sits on the golf course and seems to have a very nice pool. Public records indicate the house for sale was last sold to its current owners for $696,000 in February, 2006 whereas the house for rent was last sold for $250,749 in Dec., 1999. I’ve never been to Scottsdale but a quick check of other houses suggests both prices are reasonable. Some quick math shows that with a 30-year loan at 4% interest the nicer house, on the golf course, would yield a monthly P&I payment of $1,183.99 after a $62,000 down-payment plus closing costs. If a buyer qualifies for a 3-percent down-payment they’d have to raise $9,300 plus closing costs which would yield a monthly payment of $1,435.59.
There’s no ambiguity: even with taxes and insurance taken into account it costs much more to rent a mediocre home in the same neighborhood than to purchase a really nice house.
This little anecdote can be seen around the country. In Chicago, for instance, rental prices are up 10 percent in a year, while home prices are down 10 percent in a year, according to Zillow. In San Francisco and Detroit rents are up 5 percent while home prices are down 5 percent.
People are renting rather than buying because they’re afraid of getting in the housing market, a fear compounded by the uncertain labor market. Also people shy away from buying foreclosed homes, but they have less of an objection toward renting them.
How long will the bubble last? For now even Warren Buffett recommends buying foreclosed homes and renting them out.