Posted by Brent_IL on October 15, 2003 at 17:03:04:
The current rates do allow many well-bought properties to cash-flow.
Market rent is set by supply and demand, not interest rates.
As an example, lately, lenders have made marginal loans because they don’t make money when the cash is sitting in overnight accounts. Just suppose that some bump in the economy accelerates the already increasing foreclosure rate. The banks can’t keep the properties, so they dump them by shorting to RE investors. Now, there are a lot of empty houses and apartment buildings. The former owners need housing, so they enter the rental market. There are more rentals available than there are qualified folks to fill them. Everyone wants to fill their buildings with good tenants, so landlords start offering incentives. Rents drift lower, or the cost of amenities rises.
Eventually, things get sorted out, but in the interim, though you have a 6% loan, your competition might have a free-and-clear property, so your house sits empty.
On the other hand, people will live on the street as a last resort. When the available supply is tight, they will make an ever increasing lease payment because we all have to reside someplace. In this case, one with a 12%APR will cover the mortgage.
For the record, I don?t think we?re headed for a freefall yet.
There are ratios of average rent to market value, but these are localized and vary with the type of rental. The ratio of apartment rent to unit cost is different that that of SFH rent to FMV.
Around here, in my experience only, SFH rents have ranged between .72 of 1% of market value to about .94 of 1% of market value during the past two decades. A single point reference is eight-tenths of one percent of value.
Using this ratio, you can look at pricing from the other side. If a house is renting at $800 a month, we?d need a good reason to pay more than $100,000 because it would be a variance to the norm.