By Joel Banner Baird, Free Press Staff Writer • May 31, 2009
Flotillas of sofas strapped atop hatchbacks offer clues. Still-to-be sorted piles of possessions on porches and lawns hint at the annual scramble in full swing.

The rental trucks are a dead giveaway.

Beginning this weekend, a hefty portion of Queen City residents submit to a frantic rental roulette.

Leases expire, new leases are signed; safety deposits are transferred to new landlords.

Thursday, Stuart Jackson, 20, a University of Vermont junior with a South Union Street address, accelerated the process. He went online and found a more desirable dwelling on Greene Street; “a more college-student environment,” he said.

Jackson said he was optimistic about his move to the northeast quadrant of downtown Burlington, a student-rich quarter termed, often affectionately, as a “ghetto.”

The neighborhood’s appeal to students are obvious: it’s within an easy walk to urban diversions as well as the campuses of the UVM, Champlain College, Community College of Vermont and Burlington College.

The young demographic gravitates to (and contributes to) the city’s lively, walkable center.

Friday, Jackson and his roommate, Henry Lindon, 22, hauled the last of their belongings into Lindon’s SUV. Jackson paused as he slid what he called an underused fishing rod at the cargo’s summit.

“We’ve got to be out of here by 8 o’clock Saturday morning,” he said, “And I can’t move into the new place until Monday.”

He’d already phoned around to ask about self-storage units. The nearest facility with a vacancy was Leo’s Self Storage, in Essex.

Living in limbo

Calls to self-storage facilities confirmed Jackson’s findings. Douglas Greig, manager of Burlington Self Storage (in South Burlington) said of 475 units, he had only two very large spaces available.

“If I had another 50 to 100 smaller units here, I could rent them right now,” he said.

Parents phone him as early as March to inquire about availability. He takes their numbers and calls back when space opens up. Some rent units year-round for their acquisitive offspring.

Michael O’Leary, who manages Easy Self Storage in South Burlington, said his facility was likewise “stuffed” with college students’ (and other renters’) belongings.

Parents are often too happy to foot the bill, he added.

“The majority of them don’t want to take their kids’ stuff home,” he said.

How low can we go?

Students provide Burlington with “a steady stream of demand,” said Mark Brooks, a real estate analyst and principle in South Burlington-based Allen & Brooks.

As the most conspicuous and seasonal of Burlington’s migrants, students have perennially triggered discussions over the availability of apartments, he said.

The urgency of those discussions often hinges on a few numbers, and Brooks supplied them on a single, simple chart: Compared with the national average of 10 percent for rental housing vacancies (and a 3.5 percent average for Vermont), Burlington residents contend with an average vacancy rate of about 1.5 percent.

Brooks said he had no simple explanation for the Queen City’s dubious distinction. But, he added, Vermont’s time-consuming permitting process for new construction probably results in proportionally larger logjams in the state’s biggest city.

By another standard, he continued, small is not beautiful: Large-scale developers haven’t rushed here to build apartments for the modest (by national standards) college-student population around Burlington.

Other recent anecdotal evidence points to “more price-sensitive” rental consumers, Brooks said, adding that the phenomenon might be “a hiccup” rather than a solid trend.

But, he added, the current financial downturn would certainly account for parents of college students hoping to trim housing allowances.

Civic duties

Most Burlington renters will remain in “a real crunch” until the University of Vermont and Champlain College provide more attractive on- or near-campus apartment housing, said the city’s Assistant Director for Housing & Neighborhood Revitalization, Brian Pine, this week.

Thursday, he summarized recent letters of understanding between the city and both institutions that formalize a strategy linking dorm room (or apartment) construction directly to enrollment growth.

Most dramatically, UVM agrees to increase its on-campus bed-count by about 160 by this fall; another 400 at the beginning of the 2011 academic year.

The agreement with Champlain College aims to slow — and reverse — the school’s sprawl into neighboring communities.

Pine said the memorandums might promote improved town-gown relations.

“In the 1990s, when UVM was in the midst of leadership transitions, housing was largely forgotten or opposed,” he said.

Past time

A 1998 real estate study, “The Impact of the University of Vermont on Housing in Burlington,” completed by Allen & Cable (now Allen & Brooks) for the city found “a direct relationship” between rental rates and student density.

“The current level of student demand serves to inflate rents and lower vacancies in the Burlington market,” the study states, adding that the city benefited, at least in part:

“In turn, the higher rents translate to higher property values, which serve to increase the City’s taxable grand list and property tax revenues,” it states.

Fifteen years earlier, a city study explored the nature of what seemed then — as now — to be an upward spiral in rents, where “student purchasing power” inflates the market.”

“Landlords tend to use what a student is willing to pay as a benchmark for setting higher appraisal values when rental real estate changes hands,” the 1983 document continues, “and rents must be raised to amortize those transactions.”

Some landlords, the study added, might find themselves with “little incentive to properly maintain their properties.”

Collegial approaches

Burlington’s “crunch” is not confined to the student district, Pine said; tenant families with children contribute their share to properties’ wear and tear.

Because building inspections are designed only to maintain minimum codes of health and safety in a structure, Burlington’s quality of life for renters ultimately depends on new construction, he added.

“Housing shortage results in lowered quality,” he continued. “As a renter, you’re going to take what you can get. A shortage of supply takes away all the bargaining power a renter might have. Market forces alone aren’t going to improve the condition of rental units. It’s a race to the bottom.”

Yet Pine said he was encouraged by a common sense of purpose by the city, UVM and Champlain.

“We’re all developing a more collegial approach these days. It’s really just a challenge now,” he said.

Tom Gustafson, UVM’s vice president for student and campus life, seconded that.

“We’d love to work with some private developers in order to migrate some of these students out of the Victorian houses,” he said.

“We’re making some progress. The problem is finding the resources and the room to do it,” he continued. “And the challenge, of course, is it has to be attractive to students.”

Stay or go?

On Friday, as Jackson and Lindon hauled their belongings to Essex, Spencer Richter, 22, cleaned out his remaining possessions from an adjacent apartment.

The rental truck parked outside was nearly full.

Richter, who graduated this year from Champlain College with a degree in hotel and restaurant management, said the vehicle allowed him to hedge bets between several housing options he’d entertained for the past month or so.

On Thursday afternoon, he’d settled on a four-way share of a house on Williams Street. The truck would serve as a mobile storage unit until Monday — the day he can move in.

Richter’s shuffle won’t end with his upcoming one-year lease. His job at Loretta’s Restaurant in Essex ends in late September, as will some catering work in Stowe.

He whistled his dog back inside and wondered aloud: How and when he might best sublet his new lodging to yet another transient tenant.

See the rest of this article here

By Sally Anderson of MSN Real Estate

Hunting for an apartment is akin to a scavenger hunt: It can seem as if every place you see falls a few pieces short of your wish list. If your budget is low or the market is tight, don’t be too discouraged if you have to settle for less than perfection. You can always move up — maybe even in the same building.

If this is your first apartment you’ll be renting on your own, consider the apartment hunt a rite of passage. It may you remind you more of getting your driver’s license than a first kiss, but once you’ve mastered the mechanics it can be a liberating, even life-changing, event.

Apartment hunter’s checklist
Whether you go for fun and funky, a spare “designer” look, or big complexes with Friday happy hours, start your search by listing your top priorities. What can you not live without, and what are you willing to sacrifice? Take copies of this checklist with you as you look — or steal some ideas and make a list of your own.

* Location of building (safety, proximity to places you visit often)
* Location in building (bottom floors may be less safe; upper floors are harder to move into)
* Emergency exits
* Smoke detectors/fire extinguisher
* Elevator or stairs (ease of moving or evacuation)
* Hallways (well-maintained, well-lit)
* Lead-based paint (important for the very young and those with weakened immune systems)
* Number of bedrooms and bathrooms
* Furnished or unfurnished
* Room for a desk or home office
* Natural light
* Hardwood floors
* Fireplace
* Separate dining room
* Kitchen space (meal area, counter space, storage for cookware and small appliances)
* Kitchen drawers and cupboards (storage and ease of opening)
* Appliances included (and condition of refrigerator, dishwasher, microwave, washer and dryer)
* Gas or electric heat
* Gas or electric oven
* Air conditioning
* Closet space and other storage
* Garden, yard, balcony, patio or rooftop access
* Outlets in all rooms (plentiful, safe, well-located)
* Phone jacks for phones and modems
* Television reception (cable required or provided)
* Door locks (locks on all doors; deadbolt and security chain on entry door)
* Windows (ease of opening, locks, screens)
* Soundproofed walls (neighborhood and building noise)
* Privacy of unit and bedrooms
* Curtains or blinds
* Water heater (large enough to keep showers hot)
* Faucets and shower heads (condition and water flow)
* Tap water (odd color and taste might indicate a problem)
* View
* Laundry facilities (hours of access, adequate lighting)
* Parking (paid building parking or off-street)
* Bike storage (security and lighting)
* Mailboxes (security and lighting)
* Swimming pool
* Common areas
* Workout facilities
* Wheelchair access
* Neighborhood flavor
* Onsite landlord

By Matt Ryan, Free Press Staff Writer •

ESSEX JUNCTION — The owners of a student housing complex in Essex Junction have begun to plan for life after those students leave.

Last month, the New England Culinary Institute decided to move its 120 students living in the village to its Montpelier campus by September. Their departure will leave behind 13 buildings on Franklin Street near downtown Essex Junction — buildings village officials hope fill up soon.
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Kurt Montgomery, vice president of 222 Franklin Inc. of Essex Junction, which owns the property, said his company intends to convert the nine dormitories into one-, two- and three-bedroom apartments. The company has no plans for the four administrative buildings located in a mixed-use commercial zone, Montgomery said.

After a series of meetings with NECI officials, 222 Franklin Inc. agreed to terminate the institute’s leases, some of which ran through 2017. Construction of the campus began in 1996, when NECI moved to Essex, and continued through last year.

“It’s in our best interest to move forward and make these conversions,” Montgomery said, adding, “It is unfortunate for us.”

Converting the dormitories will involve moving around partitions and refurbishing the apartments, he said.

“I’m anticipating in six months, we’ll fill the units; that’s a guess,” Montgomery said. “We have other rentals in the area that have done well.”

Village trustee George Tyler said he welcomed more housing to the area, but wanted to see the administrative buildings put to good use.

“I would like to see some businesses in there as well,” Tyler said. “We need to expand the tax base.”

Village President Larry Yandow said he would like to see students from another school live in the dormitories.

“I would like to see another campus situation,” Yandow said. “NECI’s been awfully good down there. I would like to see the same situation.”

Montgomery said his company rents other property to Vermont Technical College students, and might consider renting the NECI campus to more students.

The Essex (formally The Inn at Essex) will retain NECI chefs and pick up 20 to 40 paid interns from the institute to fill the void of the departing students, said Jim Glanville, the culinary resort’s general manager.

Contact Matt Ryan at 651-4849 or This e-mail address is being protected from spam bots, you need JavaScript enabled to view it To get Free Press headlines delivered free to your e-mail, sign up at www.burlingtonfreepress.com/newsletters.

By Dan McLean • Burlington Free Press Staff Writer • April 16, 2009

You can get the report here: ON THE WEB at www.nlihc.org.

Vermont is the 15th most expensive state in the U.S. for renters, according to a report jointly released by the National Low Income Housing Coalition and the Vermont Affordable Housing Coalition.
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Vermont’s housing wage has risen to $17.57 per hour, or $36,553 per year. The housing wage is the hourly wage a family must earn — working 40 hours a week, 52 weeks a year — to avoid spending more than 30 percent of income on rent and utilities for a two-bedroom apartment. The current wage is a 53 percent increase since 2000, according to the report, titled “Out of Reach 2008-2009.”

The report provides data for each state, metropolitan area and county in the country, including the District of Columbia and Puerto Rico. Vermont’s rental housing market has been among the nation’s tightest for several years, in part, because of low-vacancy rates that have pushed up rents. Many Vermonters also work in relatively low-wage jobs, creating pressures for households to pay for necessities, the report said.

In Vermont, the average two-bedroom apartment costs $914 to rent each month. The typical Vermont renter earns $11.31 an hour, or $23,524 a year. That’s $6.26 an hour less than is needed to afford a two-bedroom apartment, the report said.

Working at the minimum wage of $8.06 an hour, a family must have 2.2 wage earners working full-time, or one full-time earner working 87 hours a week, to afford the two-bedroom apartment.

“Even in a recession, it is becoming more difficult for low-income families to find safe, decent, affordable housing in Vermont,” said Erhard Mahnke, coordinator for the Vermont Affordable Housing Coalition. “If we keep losing jobs, this situation is going to get worse. This report clearly illustrates the pressing need for more affordable housing development in our communities.”

Contact Dan McLean at 651-4877 or This e-mail address is being protected from spam bots, you need JavaScript enabled to view it To have Free Press headlines delivered free to your e-mail, sign up at www.burlingtonfreepress.com/newsletters.

WCAX.com
Burlington, Vermont - April 16, 2009

A new report says Vermonters who rent their homes are paying some of the highest prices in the nation. The National Low Income Coalition and the Vermont Affordable Housing Coalition say the Green Mountain state is the fifteenth most expensive state in the nation for renters.

Vermont’s housing wage has risen to $17.57 per hour or over $36,000 a year. Housing wage is how much a family working 40 hours a week must earn to avoid spending more than 30 percent of their income on a two-bedroom apartment. The current wage has risen 53 percent since 2000.

The average monthly rent for a two-bedroom apartment in Vermont is $914. But the average Vermonter earns $11.31 an hour or around $23,000 a year. That’s over $6 per hour less than what’s needed to afford the apartment.

Experts say the state’s low vacancy rates have pushed up rents and many Vermonters work in low-paying jobs.

By John Briggs • Free Press Staff Writer • April 9, 2009

The residential portion of Ward 1, which houses many college students in sometimes ramshackle rental housing, has a parking problem.

Up and down Weston, Loomis, Isham and other streets in the Ward, the yards of house after house have been converted into parking lots, and the public greenbelts — the space between the sidewalk and the curb — into expanded muddy driveways.

Caryn Long and Sandy Wynne, both of whom say they have complained fruitlessly to the city for years, fault landlords. The absentee owners squeeze too many tenants into single-family houses turned into student tenements and ignore city rules on care of greenbelts and backyard — and, in some cases — front yard parking. But their special ire is reserved for the city’s Code Enforcement office.

The Code office, they say, has been aware for years of the parking and other Code violations in Ward 1 but has been, at best, lackadaisical in enforcement, weak in follow-through, and apparently indifferent to the concerns of permanent residents.

In addition to the aesthetic concerns — the violations make parts of the ward seem slum-like and untended — the use of yards as parking lots insures run-off pollution into Lake Champlain.

The house at the corner of Looms and N. Union Street — a house Wynne describes as “my favorite,” — had a row of cars Wednesday in its front yard. The curb in front was smashed down, and the greenbelt had become the residents’ driveway.

Beyond the parking issues, with cars and SUVs crammed into muddy, rutted backyards, many houses seem in violation of other city ordinances. A house at 55 Loomis Street, for example, has a large rental banner across it’s front offering “1-2-3-4-5BDR Apartments” with leases starting June 1. The sign was posted last year and stayed up for months, Long said. .

Long said she complained again this year when the banner reappeared and received a letter from the Code office, “with a number” indicating the complaint had been received. The letter, she said, was dated March 20. The banner was still hanging on the house Wednesday.

At 22 Loomis Street, the formerly single-lane driveway has expanded to the entire side yard of the house, and the back yard has become a parking lot. Five cars were parked there Wednesday. Three moldy mattresses lean against a building at the back of the lot.

“You’re not supposed to just throw trash in your yard,” Wynne said.

Along Weston Street, at house after house, curbs were broken down and the greenbelts turned into rutted expanded driveways.

“They park regularly in front of the door,” Long said at one house. “The greenbelt? That’s just access.”

Ed Adrian, D-Ward 1, said he hears regularly from Ward 1 residents about Code issues. “The number one ongoing constituent complaint is the inability of Code Enforcement to enforce city ordinances,” he said. “There are longstanding problems I’ve seen for myself and that I know have been brought to the attention of Code Enforcement and haven’t been resolved.”

Assistant City Attorney Gene Bergman became interim Code director on Monday. Told of the complaints from Long and Wynne, he said, “I will have to investigate and get back to you.”

Adrian said the department should make itself more visible, perhaps patrolling in police-cruiser-like cars clearly marked Code Enforcement. “Being a presence is a huge deterrent,” he said.

Beyond that, Adrian said, the Code office needs to notify owners of violations and follow through, working with them reasonably and prosecuting if necessary.

With the departure April 3 of Kathleen Butler as the director of Code Enforcement (the third director in the last five years), Adrian said the timing is ripe for change.

“I want these issues brought to the attention of the public,” he said. “I want to demand from the administration that we hire the very best Code director we possibly can. We have an opportunity to hire a director who is going to reach out and work with the community.”

Emma Mulvaney-Stanak, P-Ward 2, said she has become aware of Code Enforcement issues both through personal experience and by seeing living conditions “inside and outside” while campaigning.

As the city searches for a new Code Enforcement director, she said, it’s a good chance for councilors to learn “what is in the current city code and what should be there and “be thoughtful about how to expand (the Code office) outreach so they can be more effective.”

Adrian said the city must involve the public in the hiring of the new director, as it did in selecting Mike Schirling as police chief.

“We need a public hearing to let people come and share their frustrations with what has, or hasn’t, been going on in the Code office all these years,” Long said. “It might be a wake-up call for the city.”

Contact John Briggs at 660-1863 or This e-mail address is being protected from spam bots, you need JavaScript enabled to view it

By Jack Hough

This weekend I’ll throw $1,100 down the drain. That is to say, I’ll pay my rent. Pop-finance pundits have long used the drain cliché to describe how renters like me waste money, while homeowners with mortgages “pay themselves” and “build equity.”

In April 2007 I argued something different: Renting Makes More Financial Sense Than Homeownership. Basically, houses produce poor returns over long time periods while stocks and other investments produce good ones, and the outlook for houses is especially poor now, so I’d rather rent cheaply and funnel my extra cash into something other than a house.

Even though house prices have plunged and I have enough money to buy one, I’m still not nearly tempted. In what follows I’ll give five reasons. (The first two form the core of my original argument.) Before all this starts to sound too self-congratulatory, I’ll also explain the one big thing my essay got wrong.
Reason 1: Houses produce lousy returns, while stocks produce good ones

Houses looked like smart investments in 2007. They had returned 9.3% a year for a decade, while stocks had returned just 5.9%. This year, with investors fleeing both houses and stocks, both probably look like a waste of money. But be careful about succumbing to what psychologists call recency bias — the tendency to form beliefs based largely on the most recent observations in a long series of data. For U.S. investors, reliable data on stocks and houses goes back well further than 10, 20 or even 50 years.

Stocks returned 7% a year for 200 years ended 2004, according to Wharton professor Jeremy Siegel. That’s after subtracting an average of 3% a year for inflation, or the gradual rise in prices of ordinary goods. The plunge in stock prices over the past 16 months makes me all the more sure that shares are poised to deliver good returns over the next decade or two. Houses returned 0.4% a year over 114 years ended 2004, according to Yale professor Robert Shiller, co-creator of the most widely used index for house prices. That number is suspiciously close to zero. Indeed, it might have been zero, reckons Shiller, if not for two periods of aggressive house buying, one spurred by government incentives following World War II and another created by the Federal Reserve’s drastic interest rate cuts in 2002 and 2003.

A zero return for houses might sound odd. An editor who re-published my original essay at another web site stuck the word “virtually” before zero, I suppose to soften the message. I made him take it out. If you think about it, zero is the only logical answer, so long as we’re talking about a single-family house and not, say, a rental building built to maximize income. Inflation, recall, is the gradual price rise of ordinary goods. What’s a house if not an ordinary good? Houses don’t spend their days thinking about ways to make themselves more valuable. They just sit there. Subtract inflation from their long-term price increases and there’s nothing left.

Apply heaps of leverage to the numbers if you like, but the outcome only worsens. Mortgage rates now are about as low as they’ve ever been, thanks to more government efforts to, among other things, spur house buying. But you’ll still pay 5.2% to capture long-term price increases that merely match inflation. And today, you’ll tie up a bundle of cash with a down payment. I’d rather pay cheap rent instead of an expensive mortgage and put the monthly cash I save into stocks and other investments. And rent is still plenty cheap, because . . .
Reason 2: House prices have further to fall

Price matters. Few stock investors would think about buying shares of a company before looking at some measure of how expensive it is relative to the value it creates. They might look at the price/earnings ratio, for example. Houses have a price/earnings ratio of sorts — the ratio of their price to the yearly income they could generate if rented out. In April 2007 I noted that price/earnings ratios for stocks were only slightly above their historic average, while price/rent ratios for houses were double their average.

Stock prices were the thing I got wrong. The price/earnings ratio I gave was correct, but the earnings on which it was based were far from ordinary. The fierce housing boom was ringing cash registers at furniture stores, employing heaps of real estate agents, padding the profit statements of lenders and, thanks to home equity loans, puffing up buying power for just about everything. I should have realized that America’s corporate profit was close to a third above normal levels as a percentage of gross domestic product. Profits have reverted to average levels, and stocks have fallen to around 14 times earnings. I recently cautioned readers that, even though stocks are fairly priced, it’s natural to assume that after a long period of above-average prices we can enter a few years of below-average ones.

Houses still seem expensive, though. One recent survey by Moody’s Economy.com found that the price/rent ratio in major markets had fallen to 20 from 24 three years ago, but that for 16 years ended 1999, before the house-buying spree began in earnest, it had stayed below 15.

Numbers like those should inform not only house-buying decisions, but public policy. If a citizen is being made poor by the debt they carry on the house they bought, and if a government policy keeps them tied to that house instead of separated from it into more affordable housing, are we really helping them?
Reason 3: Many houses for sale today seem designed to waste money

“Most men appear never to have considered what a house is, and are actually though needlessly poor all their lives because they think that they must have such a one as their neighbors have.” Henry David Thoreau wrote that about 160 years ago in a long, somewhat preachy but also poignant treatise called “Walden,” which argued against materialism and for simplicity. I’d imagine it applies to today’s houses even more than to ones in Thoreau’s day.

Commercial real estate investors seek to maximize the amount of use tenants can get out of a building, while minimizing the operating expenses. Single-family house buyers have lately done almost the opposite, by buying far larger houses than single families need. From the 1950s to 2006, the average American house size doubled, even as the size of families shrank. U.S. tax policy rewards house buyers who borrow, not renters, and not house buyers who pay cash. So naturally, Americans responded by borrowing, which inflated their buying power and ultimately caused dwellings themselves to balloon. The “dream of homeownership” became more of an entitlement to mansion-ownership. But all those mansions on the market do little for me, financially speaking. They’re expensive to heat and cool, and to fill with a respectable amount of stuff.
Reason 4: Big houses are targets for future taxes

This year, U.S. government debt will increase by the largest amount relative to the size of the economy since World War II. Assuming the country will eventually right its financial course, at least some of that money will have to be paid back. That means higher taxes in the future, and taxes come mostly from people with a proven ability to pay — people with high incomes and people with large, expensive, easy-to-find assets. There’s only muted talk of states raising property taxes now, since the federal government is working to support house prices. I’m worried that property taxes will rise sharply in coming years. Of course, renters pay taxes too, if you figure that landlords merely pass along taxes to tenants. But renters live in smaller spaces.

I might have titled this reason, “Few people truly own their house, anyway.” To me, owning something is defined in part by not having to pay anymore. Condo owners are really renters, if we consider their endless maintenance fees. But house owners, too, must pay rent to the government in the form of taxes, and must pay for plenty of ongoing maintenance besides.
Reason 5: Neighborhoods are changing in unpredictable ways

In March 2008, The Atlantic published a frightening vision of what might happen to America’s suburbs. Low-density suburbs, it theorized, may become what inner cities became in the 1960s and ’70s — “slums characterized by poverty, crime and decay.” I’ve no idea whether anything like that will come to pass. But the popping of America’s giant housing bubble, and a corresponding shift in where people find jobs, seems sure to reshape how and where we live in coming years. For rural folks that might not matter much. (For them, in fact, little of this might apply, since house prices in rural America have stayed pretty sane.) But anyone considering a move to the suburbs should do some careful forecasting before sinking a large portion of their wealth into a house.

I hope all this doesn’t sound alarmist. I’ll surely buy a house one day, when prices are low enough, and I’ll probably even buy one that’s a little bigger than I need. But I’ll do so knowing that I’m spending on luxury, not investing. Also, I hope this doesn’t further the anxiety of readers with mortgage troubles. The trend of the day seems to be to take an angry tone with people who’ve gotten in over their heads — one fellow columnist referred to them the other day as “deadbeats.” But two other parties deserve a full measure of blame, and I don’t mean lenders. First, lawmakers have for decades trumpeted house affordability initiatives like tax breaks, while leaving supply in choice markets constrained. That inflated demand and ultimately produced the opposite of affordability. Second, too many people who do what I do for a living spent most of the housing boom cheerleading instead of doing math. It’s time to stop lecturing renters — and maybe to ask why public policy treats them as less-worthy citizens than buyers.

Recently NPR’s Marketplace Money ran a segment highlighting the effects of the economic slowdown on the apartment dwellers of America. Increasingly we are seeing that apartment renters are also being squeezed by the recession.

TEXT OF STORY

Tess Vigeland: Of the many concerns that arise when you lose your job, keeping a roof over your head is primary. We’ve talked a lot about what a struggle that’s been for homeowners, folks who can no longer make the mortgage. But more than 36 million people rent and that number is growing as homeowners go into foreclosure and become renters.

A housing payment is a housing payment, whether it’s a mortgage or a rent check, and renters face tough questions as they decide whether in this economy they can still afford the place they call home.

Find our more: Link to Page or listen to the story Listen

Check out your renting profile based on your rent, your housing price increases, and the cost of buying your home! It is quite astounding that based on today’s estimated residential price appreciation rates, it may make more sense to keep on renting and save that extra money per month.

from the SmartMoney.com website

By Jack Hough
Sep 26th, 2008

I have something un-American to confess: I rent an apartment, despite having enough money to buy a house. I plan to keep renting for as long as I can. I’m not just holding out for better prices. Renting will make me richer.

I normally write about stocks for SmartMoney.com, but the boss asked me to explain to readers my reason for renting. Here goes: Businesses are great investments while houses are poor ones, so I’d rather rent the latter and own the former.

Stocks vs. Houses: Returns
Shares of businesses return 7% a year over long time periods. I’m subtracting for inflation, gradual price increases for everything from a can of beer to an ear exam. (After-inflation or “real” returns are the only ones that matter. The point of increasing wealth is to increase buying power, not numbers on an account statement.) Shares have been remarkably consistent over the past two centuries in their 7% real returns. In Jeremy Siegel’s book, “Stocks for the Long Term,” he finds that real returns averaged 7.0% over nearly seven decades ending 1870, then 6.6% through 1925 and then 6.9% through 2004.

The average real return for houses over long time periods might surprise you. It’s zero.

Shares return 7% a year after inflation because that’s how fast companies tend to increase their profits. Houses have their own version of profits: rents. Tenant-occupied houses generate actual rents while owner-occupied houses generate ones that are implied but no less real: the rents their owners don’t have to pay each year. House prices and rents have been closely linked throughout history, with both increasing at the rate of inflation, or about 3% a year since 1900. A house, after all, is an ordinary good. It can’t think up ways to drive profits like a company’s managers can. Absent artificial boosts to demand, house prices will increase at the rate of inflation over long time periods for a real return of zero.

Robert Shiller, a Yale economist and author of “Irrational Exuberance,” which predicted the stock price collapse in 2000, has recently turned his eye to house prices. Between 1890 and 2004 he finds that real house returns would’ve been zero if not for two brief periods: one immediately following World War II and another since about 2000. (More on them in a moment.) Even if we include these periods houses returned just 0.4% a year, he says.

The average pundit, planner, lender or broker making the case for ownership doesn’t look at returns since 1890. Sometimes they reduce the matter to maxims about “building equity” and “paying yourself” instead of “throwing money down the drain.” If they do look at returns they focus on recent ones. Those tell a different story.

Between World War II and 2000 house prices beat inflation by about two percentage points a year. (Stocks during that time beat inflation by their usual seven percentage points a year.) Since 2000 houses have outpaced inflation by six percentage points a year. (Stocks have merely matched inflation.)

Stocks vs. Houses: Valuations
But while stock returns have come from increased earnings, house returns have come from ballooning valuations, not increased rents. The ratio of share prices to company earnings (the price/earnings ratio) has remained relatively steady. It’s about 16 today, close to both its 1940 value of 17 and to its 130-year average of about 15. Not so, the ratio of house prices to rents. In 1940 the median single-family house price was $2,938, according to the U.S. Census, while the median rent was $27 a month, including utilities. That means the ratio of prices to annual rents was 9. By 2000 the ratio had swelled to 17. In 2005 it hit 20. We can adjust for the size of dwellings, but it doesn’t make much difference. The ratio of single-family house prices to three-bedroom apartments is 19. In SmartMoney.com’s home town of Manhattan, where more detailed data is available, the ratio of condo prices per square foot to apartment rents per square foot is 22.

Two main events have caused house valuations to inflate since World War II. First, the government subsidized housing by relaxing borrowing standards. Prior to the creation of the Federal Housing Authority in 1934 house buyers who borrowed typically put up 40% of the purchase price in cash for a five- to 15-year loan. By insuring mortgages, the FHA permitted terms of up to 20 years and down payments of just 20%. It later expanded the repayment periods to 30 years and reduced down payments to 5%. Today down payments for FHA loans are as low as 3%. Aggressive lenders offer loans with no down payments or even negative ones so that house buyers can borrow the full purchase price plus closing costs. Some require little documentation of income, assets or ability to pay.

That means more Americans can win loans for homes, and they can win them for far more expensive (larger) homes than their incomes previously allowed. Two-thirds of American households own homes today, up from 44% in 1940, even though the percentage of Americans living alone has tripled during that time. The ratio of house values to incomes has risen 260% in just under four decades.

A second event helped boost house demand in recent years. Share prices plunged in 2000. The Federal Reserve, fearing that the decline in stock wealth would cause consumers to stop spending, reduced the federal-funds rate, the core interest rate that determines the cost of everything from credit cards to mortgages, to 1% by the summer of 2003 from 6.5% at the start of 2001. Since most of the cost of financing a house over 30 years is interest, monthly house payments shrank and demand for houses soared. In some markets a string of big yearly increases in house prices led to panic buying.

Stocks vs. Houses: Conclusion
For house returns over the next 20 years to match those over the past 20, the government and private lenders would have to “up the ante” by relaxing borrowing standards further. Given the recent attention paid to swelling foreclosures, that seems unlikely. I suspect real returns will turn negative over most of the next two decades, but that house prices won’t necessarily dip. Since 1963 they’ve done so in only two years, vs. 18 for stocks. That’s because homeowners mostly just stick it out rather than sell during soft markets. But if house prices remain flat, they produce negative real returns due to the creep of inflation. According to calculations made by The Economist in the summer of 2005, house prices would have to stay flat for 12 years with annual inflation at 2.5% for the ratio of prices to rents to fall from its 2005 perch to merely its 1975 to 2000 average.

So to sum up why I rent: Shares right now cost 16 times earnings and over long time periods return 7% a year after inflation. Houses right now cost 19 times their “earnings” and over long time periods return zero after inflation. And they look likely to return less than that for a while.

Questions/Objections
“You can’t live in your stocks” or “Renters throw money down the drain.”
Rent is the cost of owning shares with money you would otherwise spend on a house. Houses have ownership costs, too: taxes, insurance and maintenance. Rent costs about 5% of house prices each year if we apply the price/rent ratio of 19. House incidentals often cost around 2%. If you have $300,000 and a choice between spending it on a house or shares, you’ll pay $6,000 a year in incidentals if you buy the house or about $15,000 a year ($1,250 a month) in rent if you buy the shares. But the shares will return $21,000 a year after inflation while the house will return zero. (My numbers work out even better than these. I pay a smidgen less than $1,250 a month for rent, while house prices in my neighborhood are far higher than $300,000.)

Note that houses and shares have transaction costs, too. Home buyers pay around 1% in closing costs when they buy and 6% in broker commissions when they sell. Share buyers pay $10 trading commissions, which are negligible for buy-and-hold investors.

“House buyers get tax breaks.”
So do share buyers, but both are a bad deal. The interest on loans for houses (mortgages) and shares (margin balances) is tax-deductible. But the rates are almost always too high. A big house loan presently costs 6.1% interest while a big stock loan costs about 9%. For the returns, we can forget about inflation because it helps debtors while hurting investors, making it a wash for those who borrow to invest. Still, nominal returns of 3% for houses and 10% for stocks aren’t high enough to justify those rates. The tax breaks aren’t really breaks at all. Moreover, a majority of homeowners don’t claim them. Their incomes are low enough to make the standard deduction a better deal.

“What about the pride of home ownership?”
It’s not for me. I define ownership as no longer having to pay for something and being able to do as I please with it. I own my coffee maker. House owners must pay taxes each year even when their mortgage payments are done. In certain markets they can’t even make changes to the houses they’ve paid for without seeking the approval of others. Personally, I feel the pride of ownership for shares of businesses, and I’m proud to occupy a nice place while leaving the burden of poor returns and maintenance to someone else.

“You seem to knock government housing subsidies, but they’ve helped many Americans afford homes.”
My inner socialist agrees. My other inner socialist worries that the government has effectively raised prices to the point where the middle class can’t afford houses, or buries itself in debt to own them. My inner capitalist is too busy watching shares to care about house prices. My inner conspiracy theorist notes that while politicians tout the social benefits of homeownership none mentions its tax benefits to the government. I pay no taxes on the overall value of my stock portfolio, just on my cashed-in gains and collected dividends. But Americans pay taxes on the full $11 trillion worth of housing they own plus the $10 trillion worth of it they’re still paying off.

“Houses are bigger than apartments.”
True, and both can be rented. A third of renters live in single-family houses. I prefer an apartment for now. I like not having to fill it with stuff. I like using a fifth of the energy of the average American. I like being 20 minutes from work and (this is unique to New Yorkers) not having owned a car in 10 years. I like not stressing over whether to get the marble countertops or the imported tiles or the 52-inch flat screen. I’m not especially frugal; I spend a teacher’s salary each year on restaurants and travel. But I guess I’m too busy or lazy right now to bother with a big house and its innards.

“Are you saying I should sell my big house and rent an apartment instead?”
No, unless you have more space than you need and moving wouldn’t be disruptive to your family, and you want to cash in on recent housing gains, make more money over the next couple of decades, use less energy while simplifying your life, and you don’t mind seeming odd to friends. In which case, yes. But really, I’m not trying to win anyone over. Strong demand for houses keeps my rent cheap.

“Renting is for poor people.”
True. But it’s for rich people, too. The average renter makes about $34,000 a year, but while the percentage of renters declines after incomes exceed $20,000 and rents exceed $600 a month, it jumps again once incomes top $150,000 and rents top $1,200 a month. In other words, poor people rent modest apartments for lack of choice. Middle-income people buy houses. High-income people, presumably with a dose of financial savvy, often rent nice apartments instead of buying.

“You say houses return zero. But I’ve made a fortune on my house in recent years.”
I’m referring to inflation-adjusted returns over long time periods, absent external boosts to demand. You’re referring to gross returns over a short time period that combined lax borrowing standards and ultra-low interest rates. Over the next 20 years I believe houses will return zero or slightly less after inflation and that stocks will return 7%.

“So you’re never going to buy a house? What about raising a family?”
I might buy one eventually, but the longer I can put it off the more I’ll get out of the shares I’ll have to sell to afford it. I’m 34 now with a fiancée and a fish. I’m going to try to rent for at least 10 more years. If I have kids I’ll probably move into a big apartment or a house once they reach running-around age. I’ll rent, most likely.

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