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Wednesday, Oct. 29, 2008

Real estate near bottom?

Comparing rent to sale value shows that now is time to buy, study says

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A new way of calculating the actual value of a house indicates that maybe, just maybe, Northern San Joaquin Valley home prices have hit bottom.

A national analysis on the cost of renting versus owning a home uses historic trends to determine a "floor" for home prices. That study, released Tuesday, predicts whether those who buy homes today will gain or lose equity during the next four years.

It's based on ratios comparing rental costs to home prices, dating back to 1895.

The formula determines that the right price for a house is roughly 15 times its annual fair market rental rate.

So if a Modesto home can be rented for $1,000 a month, its value would be about $180,000 ($12,000 per year multiplied by 15).

The median sales price for Stanislaus County homes fell to $179,000 in September. The county's median rental home rates, meanwhile, are more than $1,000 per month.

Therefore, the "theoretical and empirical underpinnings of the relationship between home prices and rents" could indicate that now is the time to buy.

That's at least one interpretation of the findings in "The Changing Prospects for Building Home Equity: An Updated Analysis of Rents and the Price of Housing in 100 Metropolitan Areas."

The study is by Dean Baker and Hye Jin Rho from the Center for Economic and Policy Research and Danilo Pelletiere from the National Low Income Housing Coalition.

"It is a very well-reasoned study," said Mike Zagaris, president of PMZ Real Estate in Modesto. "It's based on facts and historical evidence, and it uses a understandable rationale. I plan to send a copy to my banker to help him understand the market."

The study itself may confuse those who read it unless they realize it's based on June 2008 housing data. Four-month-old statistics may be reliable during a normal housing market, but Northern San Joaquin Valley home prices have been in free-fall.

The median sales price for Stanislaus County homes was $201,000 in June, but it has declined by $22,000 since.

Big decline in 4 months

Working off the June statistics, the study concludes that people buying modest Stanislaus homes would lose at least $21,000 in equity by 2012. The authors, obviously, didn't know Stanislaus home prices would drop more than that before they could publish their study.

"Based on their analysis, we're in the zone to buy something at a reasonable price today," said Zagaris. He and a group of investors are in the process of buying a large "portfolio of properties" for an average $210,000 each that he expects to rent for $1,300 a month.

According to the study, the current cost for rent and utilities of a privately owned, decent, safe and modest three-bedroom Stanislaus home is $1,248 per month.

The study's authors, of course, didn't do their analysis to help individual home buyers or investors decide whether to purchase a house. Their work was designed to provide facts for public policy-makers, who are considering more laws and programs to help the ailing housing market.

Their primary conclusion "is that policy-makers (nationwide) must be extremely cautious in intervening in housing markets, particularly either purchasing or encouraging others to purchase homes with the goal of increasing equity in the short term."

In July, federal lawmakers approved a $3.9 billion federal program to help local governments deal with abandoned and foreclosed homes. Of that, Modesto is expected to get $8.1 million and Stanislaus County's government should get $9.7 million.

The study argues against the government buying homes and directly intervening in housing markets nationwide.

"A top priority must be efforts to limit displacement and community disruption by keeping current owners in their homes, either as owners with more affordable mortgages that reflect lower post-deflation prices or as renters," the study says. "Without such efforts, backed by government influence and money, a vicious cycle of extreme disinvestment is likely to develop in many communities."

Zagaris praised the study's opposition to the government buying houses. He said families and investors have jumped in to purchase the valley's bargain-priced houses, and they shouldn't have to bid against the government.

"The housing market is clearing away (the excess inventory) on its own. It doesn't need trillions of dollars from the government to do it," he said.

PMZ statistics show that home sales have been soaring since spring, while the total number of houses on the market steadily has declined.

Rather than use federal funds to buy houses, Zagaris said local governments should provide first-time buyers with down payment assistance.

Bee staff writer J.N. Sbranti can be reached at jnsbranti@modbee.com or 578-2196.