2008 Oct 16th

The Housing Market Price to Rent Ratio – Is Hoboken’s Out of Whack?

Today’s New York Times has an interesting front page article on the housing market.  In addition to citing economists’ predictions of when the national housing market will hit bottom, it also points out that average interest rates on the 30 year fixed mortgage jumped to 6.75% from 6.06% in just one week. 

The article goes on to talk about “price to rent ratio” as a tool to measure where housing prices stand relative to historic norms.  Price to rent ratio is the average cost of ownership divided by the average annual cost of renting.  The average price of a Hoboken condo has been hovering at about $530,000.   It’s much harder to know what average annual rent might be in Hoboken since there is no central listing place for rentals.  Non-subsidized rents typically range from a low of $1,200 per month up to well over $4,000 a month for premium buildings like the Shipyard or 333 River Street.  It’s probably fair to say, though, that the the bulk of Hoboken rentals probably fall in the $1,800 to $2800 a month range.  So just for kicks, let’s say the average is about $2,200 a month or $26,400 annually.  That would put Hoboken’s price to rent ratio right at about 20, higher than New York’s current ratio, according to the article, of 15 although the article is not clear if “New York” refers to the city or state. 

Typically, price to rent ratio is analyzed over time.  We can assume that 10 years ago, both rents and sales prices were considerably lower in Hoboken than they are today.  Back then Hoboken condos were selling for an average price of around $175,000 and rents were dirt cheap.  After all, the luxury Hoboken rental buildings and most new construction Hoboken condos hadn’t yet been built.  When we moved to Hoboken and rented a full floor of a very large row house for $1,700 a month, locals told us we were crazy.  Coming from Manhattan, we thought we’d got a deal. 

Let’s say for the sake of argument that the average rent back then was only about $1,000 a month or $12,000 annually.  The price to rent ratio would have been 21 – higher than it is today.  Changing that assumption just a tiny bit, however, to $1,200 a month or $14,400 annually the ratio plummets to 12.  So without accurate historical data, it’s practically impossible to determine where Hoboken stands today.

  1. FAP

    In your calculation did you include Taxes, including the city tax which is set to double, and maintenance fees? Those two charges can easily add 900 dollars, and that’s probably a low figure for most Hoboken condos, to monthly payments without in anyway increasing ownership equity.

    I’m renting right now precisely because of the cost disparity. I expect prices to come down substantially over the next 24 months for a variety of reasons, including but not limited to, the higher cost to finance a home, stricter lending practices reducing demand, layoffs and compensation reductions that will hit at least 1/4 of all current Hoboken job holders, and Europe and Asia are heading into recessions so there will be fewer foreign buyers.

    Potential buyers, myself included, can afford to wait to buy partially because the Buy VS Rent cost disparity. There is no cost penalty to rent whereas with Hoboken city tax doubling the cost to carry a Hoboken home you plan on selling just got 33% more expensive.

    The market is screaming at sellers and when they start listening homes will again move and supply will start coming down.

  2. FAP

    BTW I find your blog to be the most informative source on Hoboken real estate bar none. Thank you for the updates and analysis.

  3. Lori

    The ratio is based on the average sales price of the property – not carrying costs. That would be an entirely different analysis. This ratio is used just measuring the difference between the two to see where they stand in relation to each other over time. Not to decide which is ‘better’. To do that many additional factors have to be taken into account, such as real estate taxes and maintenance costs and also the tax benefits of owning vs. renting.

    If by Hoboken city tax you mean property tax, what I understood from other sources is that property taxes only for the last quarter of 2008 were to double but I don’t believe that has been enacted. It was supposed to be a temporary fix to our budget deficit. No one yet knows what City Hall will do to fix the gap long term.

    Glad you find this useful. Thanks!

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