Want To Know Where To Buy? Check Local Rent For An Idea Of How Much you’ll Pay

It may not be the most widespread measure of housing prices, but if you want to follow a power city to invest in or to buy in, check the rent of local Boston condos and luxury buildings.

Specifically, if the rents Bostonians pay on condos, apartments or multifamily houses that are about the same size, and share the same neighborhood as your, that in the end determine what your house is worth. “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.

In recent reports, Deutsche Bank demonstrates how steady or even falling rents have pulled down housing prices, to the point where in many markets it costs about the same amount to own as to lease. That’s a golden mean that Bostonians hasn’t seen in almost a decade. The DB research also offers convincing evidence that the wrenching adjustment in housing prices is finished for much of the nation, with a bit more pain to come in selected areas.
Housing outlook for 2010

Before we get to the numbers, we have to examine why rents exercise a kind of gravitational pull over home prices.

In normal times, people won’t pay too much more to own a house than to lease it. After all, if you’re paying rent instead of a mortgage and taxes, you still get to enjoy the same rec room, chef’s kitchen, and casita for visiting grandparents. So the surest sign of a frenzy appears when owning becomes far more expensive than renting. That’s precisely what happened during the last bubble.

And the surest sign that prices have fully adjusted arrives when the ratio of what people pay in rent versus what owners spend on the same property returns to its historic average.

On average, DB found that families across America were spending about 87% as much to rent as to own in 1999. Hence, they were traditionally willing to pay a premium as homeowners, though not a big one.

In 2009, apartment rents dropped 2.3%, and the fall continues. And enormous adjustments are needed in still-exorbitant markets such as New York and Baltimore. Thankfully, the improving economy and decline in the rate of job losses means that rents should soon stabilize and could even start increasing by the end of 2010.

But fortunately, for most of the U.S., the sudden, terrifying fall in prices worked its own black magic. The numbers are back in alignment, or close to it. It had to happen. That’s what rents, housing’s great master, were telling us all along.

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