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> As demand for purchasing housing goes up, demand for renting typically goes down (ie. either levels off or regresses) While it's true that we had a rather la

> As demand for purchasing housing goes up, demand for renting typically goes down (ie. either levels off or regresses) While it's true that we had a rather large anomaly 2004-2009 (a.k.a. the housing bubble), and that there are tiny boom/bust cycles in which it is possible to get a little leverage to cover switching costs, prices and rents seem to be mostly linearly correlated [1]. This means that as prices go up, rent goes up. In order for prices to be divorced from rents, you have to hypothesize some weird market externality, like a major recession, or crazy incentives for mortgages, city suddenly becomes a tourist destination, etc. [1] http://static3.businessinsider.com/image/4fb9fad169beddbc29000015/image.jpg http://static3.businessinsider.com/image/4fb9fad169beddbc290...

brandall10 14y ago
It would behoove you to read beyond the sentence you quoted. "In order for prices to be divorced from rents, you have to hypothesize some weird market externality," There are always externalities at play with an asset, and many times they are irrational. Sometimes people just want a place to put their money because a particular asset class appears to be more performant at a given time than the alternatives. [1] Isn't applicable as this is a regional phenomena. Looking at this at a national or global level absorbs localized hysteris.
- drewcrawford 14y ago
  While it's true that there are regional price/rent divergence phenomena, the transactional costs exceed the profits and effectively segment owner-occupied and renter-occupied housing into noninterchangeable goods. Quoting from a BLS meta-study [1] who cites an earlier BLS manuscript by the same author (original paper unavailable): > Despite this novel divergence finding, the third novel finding is that there were evidently no unexploited profit opportunities. The detached-unit rental market is surprisingly thick, and detached housing is readily moved between owner and renter markets, so the capital specificity issue highlighted by Ramey and Shapiro (2001) should not play a big role. However, the large costs associated with real estate transactions would have prevented risk-neutral investors from earning expected profits by using the transaction sequence buy–earn rent on property–sell, and would have prevented risk-neutral homeowners from earning expected profits by using the transaction sequence sell–rent for one year–repurchase. The large wedges offer a partial explanation of the significant divergences: rents and user costs might evolve somewhat independently until their divergence becomes large. Another way to put this is that the owner-occupied and rental markets are segmented. [1] http://siteresources.worldbank.org/ICPINT/Resources/270056-1255977007108/6483550-1257349667891/6544465-1263333205953/01.10_ICP-TAG02_Housing-Rents&UserCosts.pdf http://siteresources.worldbank.org/ICPINT/Resources/270056-1...
  - brandall10 14y ago
    Those transaction costs are going down to the point where they will be a non-issue. Technology is making it happen. 1%/flat fee brokers were common during the last cycle as well as all sorts of tools to buy/sell your property. Check out something called homecoin.com. Additionally, did you know you can become a licensed broker for less than $1000? BTW, I am both a landlord and a homeowner, have been since 2003. I also have known 5 gentlemen/families over the years who have made 8 and 9 figure fortunes solely from real estate. No, it didn't happen over night, it took several boom/bust cycles and leveraging up. I'm just echoing largely what I've been told. I'll take practical experience over studies any day.

brandall10 14y ago

It would behoove you to read beyond the sentence you quoted. "In order for prices to be divorced from rents, you have to hypothesize some weird market externality," There are always externalities at play with an asset, and many times they are irrational. Sometimes people just want a place to put their money because a particular asset class appears to be more performant at a given time than the alternatives. [1] Isn't applicable as this is a regional phenomena. Looking at this at a national or global level absorbs localized hysteris.

drewcrawford 14y ago
While it's true that there are regional price/rent divergence phenomena, the transactional costs exceed the profits and effectively segment owner-occupied and renter-occupied housing into noninterchangeable goods. Quoting from a BLS meta-study [1] who cites an earlier BLS manuscript by the same author (original paper unavailable): > Despite this novel divergence finding, the third novel finding is that there were evidently no unexploited profit opportunities. The detached-unit rental market is surprisingly thick, and detached housing is readily moved between owner and renter markets, so the capital specificity issue highlighted by Ramey and Shapiro (2001) should not play a big role. However, the large costs associated with real estate transactions would have prevented risk-neutral investors from earning expected profits by using the transaction sequence buy–earn rent on property–sell, and would have prevented risk-neutral homeowners from earning expected profits by using the transaction sequence sell–rent for one year–repurchase. The large wedges offer a partial explanation of the significant divergences: rents and user costs might evolve somewhat independently until their divergence becomes large. Another way to put this is that the owner-occupied and rental markets are segmented. [1] http://siteresources.worldbank.org/ICPINT/Resources/270056-1255977007108/6483550-1257349667891/6544465-1263333205953/01.10_ICP-TAG02_Housing-Rents&UserCosts.pdf http://siteresources.worldbank.org/ICPINT/Resources/270056-1...
- brandall10 14y ago
  Those transaction costs are going down to the point where they will be a non-issue. Technology is making it happen. 1%/flat fee brokers were common during the last cycle as well as all sorts of tools to buy/sell your property. Check out something called homecoin.com. Additionally, did you know you can become a licensed broker for less than $1000? BTW, I am both a landlord and a homeowner, have been since 2003. I also have known 5 gentlemen/families over the years who have made 8 and 9 figure fortunes solely from real estate. No, it didn't happen over night, it took several boom/bust cycles and leveraging up. I'm just echoing largely what I've been told. I'll take practical experience over studies any day.