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April 27, 2011

Baltimore rents up, home prices down

Rents in Baltimore (and many other places) are climbing, while typical home prices -- thanks to foreclosure sales -- are way down.

Here are just two of the implications:

--Affordability problems for renters. Twenty-seven percent of renter householders in the Baltimore region were spending more than half their pre-tax income on housing and utilities in 2009, up from 19 percent in 2000, according to a new report by Harvard's Joint Center for Housing Studies. And rents have only increased since.

That's a "severe" cost burden, but plenty of others are feeling pinched. Nationwide, just half of renter households were spending less than 30 percent of their income on housing and utilities in 2009, the center said.

"In the last decade, rental housing affordability problems went through the roof," co-author Eric S. Belsky of the joint center said in a statement. "And these affordability problems are marching up the income scale. In real terms, it means more people have less money to spend on household necessities such as food, health care, and savings."

--New grist for the buy vs. rent debate., a real estate site that shows both rental and for-sale listings, says rents in Baltimore have jumped nearly 5 percent in the last year while asking prices for city homes on the market have slumped nearly 30 percent. That's lowered the "rent ratio" -- its buy vs. rent calculation -- to the point that buying is "more favorable" than renting, the company says. The median home price is 7.8 times higher than a year's worth of rent in Baltimore, down from 10.7 a year ago, HotPads says.

Statewide, the figure is 14.7. For comparison's sake, that's 13th lowest in the country.

Of course, foreclosures in need of fixing up -- substantially, in some cases -- are helping to drag down the median asking price. Another cost consideration for the mix if you're crunching the numbers.

Patrick Killelea, of the housing-bubble-and-bust site, has his own buying rule of thumb:

The only true sign of a bottom is a price low enough so that you could rent out the house and make a profit. Then you'll know it's pretty safe to buy for yourself because then rent could cover the mortgage and ownership expenses if necessary, eliminating most of your risk. The basic buying safety rule is to divide annual rent by the purchase price for the house:

annual rent / purchase price = 3% means do not buy, prices are too high

annual rent / purchase price = 6% means borderline

annual rent / purchase price = 9% means ok to buy, prices are reasonable

That would be an interesting exercise. Homeowners, how much could you rent your home for, and does the annual amount divided by your purchase price work out to 9 percent or more? Renters, would the purchase price on your home -- or a home comparable to your apartment -- meet Killelea's test?

If you're doing the math, remember that the result will be a decimal. Multiply by 100 (that is, move the decimal two places to the right) if you want to see it expressed as a percent.

Maryland, using HotPad's figures on median asking price ($239,990) and median rent ($1,358), works out to 6.8 percent. Borderline, by Killelea's reckoning. I'm sure that calculation varies a lot from community to community. 

Posted by Jamie Smith Hopkins at 6:00 AM | | Comments (14)
Categories: First-time home buyers, Housing stats, Renting


I can't really do the math because i'm just renting out a basement 'studio' apartment with a 3/4 bath and half of a kitchen (I still use the upstairs kitchen for a stove, but I have a fridge and microwave in unit). What I do know is even with a masters degree and a full time job - this is all I can afford. The 1 bedrooms that are within a half an hour drive of my work are all either $800-900 a month NOT including any utilities, or are in an extremely undesirable neighborhood. (I'm not above living in a working class area, but when the police have a semi-permanent presence due to ongoing drug and domestic violence issues, i'll pass.).

The issue is 3 fold - first, all of these people who have been foreclosed on still need a place to live, so there are a lot of families that once were owners who are now finding themselves needing to rent. Second, the generation of people who at this point in their life should be looking for their first time house are probably not buying, and third, the people moving to the area for BRAC are looking to rent when they first arrive in the Baltimore area, until they get settled into living here and have the chance to fully discover where they'd like to purchase property.

I feel your pain BB. I lived in a basement studio for a while, and I also paid too much, but it was only temporary. My rent was over $600, not including utilities. It was crazy. And the apartment only had one north-facing window. It was like living in a horrible cavern in the side of a desolate mountain.

It's difficult to rent homes in suburban or rural areas.

There are a lot of big complexes and the rents are competitive. There are also amenities for families (They'd be the most likely candidates for renting a house) in a lot of complexes: pools, clubhouses etc. Difficult to replicate that in a single family house...not to mention the 24 hour maintenance.

I guess I COULD rent my house if I had to, but I'd have to rent it to like 5 people..a large family or some people on work-release LOL who would probably destroy the house and landscaping. No thanks.

When I was a kid my art teacher lived in a beautiful brownstone. It was kind of a coop..a group of artists shared the house.

I guess you'd have to do something similar to successfully rent a single family house. But the house would have to be know.

The cooperative or whatever would have to feel that they're working together to pay for a nice place that they wouldn't be able to afford otherwise.

For my rental house, the percentage is 15%. Rental income of 18k per year, total mortgage principal is 120k. (This is actually a refi, after about 30k of improvements to the house.)

The house I live in works out to under 12%. I'm guestimating 1800/month income if I'd rent it out as-is, versus 150k mortgage and 25k in cash for upgrades (for a total of 175k). This is misleading, though, because if I actually was planning to rent it, I could push that % at least 1% higher by turning our office into a bedroom, which could be done for under $2k.

The bigger problem I have with this guy's methodology (don't get me wrong, his blog is excellent) is that you can't *only* include the mortgage, or at least the original mortgage. If you refi or make substantial improvements (e.g. 10k for a new kitchen or 5k to finish the basement), you need to include that in your basis.Just as with my example above, if you get a house cheaply but then spent a lot of cash that isn't included in the mortgage, you still need to include that cash in the calculation.

Basically, a landlord looking to "cash flow" a rental property needs to include his capital improvements in the calculation and then depreciate them over time.

One other way that this formula might be wrong is, a landlord isn't typically going to make the same expenditures on a rental house as he will for his/her own house. If your tenants are paying utilities, you're going to skimp on insulation and the energy-efficiency of appliances.If there is no dishwasher, you're most likely not going to add one. Flooring will likely also be cheaper. This creates a difference of at least 1k/yr in replacement and maintenance, which adds a lot to the total cost of the house over the typical 30 yr mortgage period. So if you wanted to get technical, you could factor that in as well.

Why are rents going up in the city? Because the expenses of owning a rental property have jumped up so high and so quickly. If you live in your own home, your tax increases are capped at 4% - the person who owns the rental next door has no cap and pays the full increase right away - double or triple the property taxes of the owner occupant. Mortgages for income property are also more expensive (higher rates, more points, and less favorable terms). Insurance rates have skyrocketed. Now there is all the new laws and regulations - all instituted in the past 6 years - property registration, lead registration, and now carbon monoxide detector registration - with the associated fees, inspections, and documentation. These often require expensive repairs - and the fees for permits (which you cannot do without on a rental) have also increased substantially. If you own the house a few roommates can help cover the increases, but if it is a rental this is capped by law. A good number of these vacant properties are owned by landlords who cannot afford to do the necessary repairs to make and keep their property rentable while paying all the taxes and fees. p.s. People need good clean, safe, and affordable places to live in the city - and there are plenty of folks trying to provide them with homes. But the city is working against them. At some point you cannot afford to subsidize strangers and feed your family too.

Shirley has a point there as well. And it's another reason the rent/buy percentage calculation isn't necessarily correct. If you look at a Homestead program home (supposed to be owner-occupied, but this isn't always true) vs a rented house, the property taxes become very different over time.

For example, a rental property purchased in 2000 and a Homesteaded home bought in 2000, property tax rates and assessments rose a lot during that period. For a 150k house, it's a $1,500/yr difference which works out to $140/month. Technically, the landlord pays this. In reality, landlords just raise the price to cover this. The result of sort of perverse. I'll be paying less taxes on my personal house than my tenants will pay on the rental house, which is 30% less sq ft and 33% land, rowhouse with no garage, and rather plain inside. The more time that passes, the greater the disparity between taxes on the owned and the rented house.

I realize you want to give people an incentive to buy a house, because theoretically it makes neighbhoods more "stable", but the simple reality is that the higher property taxes for rentals just get passed along to renters. This is fairly regressive, because the people who have the least resources in society--people who have no choice but to rent and will probably never save enough money or have the income to buy--end up paying more (as a %) than their landlords. If I was the renter in this situation, I would be mad.

I rent by basement for $600 a month, I'd probably rent the whole house for 1100 about 100 more a month than the actual mortgage payment.

i would like more information about forclosure houses

Michelle, did you mean to post this as a question on this blog piece?

If so, better post it there so I don't lose track of it as I'm trying to find experts. Also, a few more specific questions would be helpful -- what exactly do you want to know about foreclosures?

We are seeing the exact same senario in Nashville, a market that is supposed to be in better shape than Baltimore's. I think that home prices will probably not begin to go back up until the annual income for the average American has recovered for at least 6 months. Once that occurs, we'll get back to slow, steady recovery.

Why do landlords in Baltimore City charge rents in the amount of $1500 to $ 1800 per month on properties that they brought for $20,000 or less. Unless you have a Section 8 voucher, and maybe this is the renter that they are going after, the average worker can't afford that amount plus utilities. These rentals are not even in the most desirable neighborhoods, crime, drugs, gang activity and blue light surveillance is the norm.

Joanne, you hit the nail on the head. Many landlords have discovered that Section 8 in Baltimore City is a profitable turnkey operation. There is a serious problem when someone can pay $40K for a property, pay just enough money to bring it up to the Housing Authority of Baltimore City's (HABC) standards, and collect $1,500/month in rent in Highlandtown. The original incentive for a landlord to offer a house to voucher holders was that he would receive guaranteed income from HABC and thus not have to deal with someone who didn't pay their rent on time. Why would any landlord want to offer their rentals at market rate when HABC pays them a rate that is on par with (or even above) market rate? Somebody please ask Paul Graziano that question.

Well I was renting a one-bedroom for $1100. The complex sent a notice to raise my rent nearly $100. Doesn't seem so extreme, but with the cost of fuel and food, it packed a punch.

I found a one-bedroom condo listed for $35K down the street, and offered $27K, they accepted the cash offer. All my utilities are included in the condo fee of about $300...

I think there are deals out there for people who are willing to make tough financial decisions, and come off the notion that they will live in a McMansion. Rents are only going to go higher, along with other things, zapping any ability to save for a down payment for a future home, even if the home prices go down...The cost of living won't allow you to do both!

If you can get somewhere, even temporary, to allow you to financially be able to breath and save, do it now! Falling home prices don't mean anything if you don't have 20% and if everything you have is going to rent! Living on the cheap is good, and the best revenge!

As a Realtor, I work with potential renters all the time and it's becoming more and more frustrating as renters who would like to rent in somewhat decent neighborhoods are being asked to pay a minimum of $1500 per month!

i've seen some rent to own props where the owners are asking 15k down payment and $1700 per month! Where in the world would a renter get that kind of money from? if they had it they would most likely be able to afford a mortgage would they not?

The problem is that lenders won't lend to people with risky credit. So even if the renter had $15k but poor credit they would not be able to get a loan. Sellers are willing to take this risk in hopes of selling their home. You will see more of these deals until the bank start lending again.

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About Jamie Smith Hopkins
Jamie Smith Hopkins, a Baltimore Sun reporter since 1999, writes about the regional economy. Her reporting on the housing market has won national and local awards. Hopkins is a Columbia native and has lived in Maryland all her life, save for 10 months spent covering schools in Ames, Iowa.
She trained to become a wonk by spending large chunks of time as a geek and an insufferable know-it-all.
Baltimore Sun articles by Jamie

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