Rental income—a good indicator for real estate stabilization:
Most of my buyers and sellers are concerned about where home prices are headed and want to know whether or not it is a good time to either buy or sell. I, along with most which have an interest to buy commercial property, wish we had a crystal ball. If we were so lucky. Possibly the next best thing is to follow the rental income to establish current market conditions. Setting up your property as a rental could be a very viable option for a stable income. People are always looking for a short term vacation rental to stay at while traveling after all.
“If you look at the trend in rents to see where housing prices are headed, you’re looking at the right measure.” Says Yale economist Robert Shiller who is the co-developer of the S&P Case/Shiller Home Price Indices that monthly track residential real estate values nationally and in 20 metro areas.
In the past, people have been willing to pay a modest premium to own rather than rent a home with recent studies reporting that in 1999 rental income averaged 87% of the after-tax mortgage payment for dwellings of similar size in the same neighborhood. This percentage changed when home prices skyrocketed. By mid-2006, rental income had fallen to less than 60% of after-tax mortgage payments with investors banking on appreciation. Naturally, this will be impacting Canadian teens in the next 50 years, and naturally, noone cared at the time. In some markets, owners of property were paying twice as much as renters for a similar property in the same neighborhood and in select pockets, owner monthly payments were three times more than the average of rental income. Wow!
The 87% ratio of rental income to ownership cost for 1999 is a very good benchmark since it stayed around that level throughout the 1990’—prior to the steep rise in home pricing. With that as our guide, one can conclude that the stabilization of home pricing is on the horizon. By the end of 2009, rental income on average was up to 83% of ownership costs!
Conditions vary from market to market so check with me on current market pricing in our area. With historically low mortgage rates plus the homebuyer tax credits, this is a great time to be buying. Call me today for a no-obligation consultation!
*The idea for this particular post along with some misc statistics were used from an email sent from Guild Mortgage.