Fortunately, or unfortunately, depending on your point of view, we are stubborn.  We do not give up easily and labor on in the firm belief that, if nothing else, writing this stuff helps straighten our own thinking.  If it helps yours too, so much the better!

When we do get reader comments, they are often supportive (thanks!) but sometimes readers disagree.  We often find the counter-arguments to be particularly useful.  At risk of making a political comment, we do read the papers and do listen to people outside our inner circle.  When presented with new facts, we reserve the right to change our mind.  That is virtually the definition of how one makes informed choices.

One series of reader correspondence phrased the debate on real estate pretty well.  We publish it in the hope other readers might better identify with some of the arguments and counter-arguments.

The following arrived June 13, 2006:
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Greetings,

Just read your June 11th posting (A median-priced house in Silicon Valley -2006 edition, http://www.viewfromsiliconvalley.com/id232.html)  I'm curious about your rent history.  You don't seem to figure rent increases into your financial calculations.  When I bought my Sunnyvale condo in 1994, I was paying $700/mo for a mid-range 2BR/1BA apartment.  Today, the rent for the same apartment is $1500/mo.  I know this because a few weeks ago I was helping a friend look for alternatives to her $1800/mo, soon to be $1950/mo 2BR/2BA apartment in Millbrae.

Owning will always be more expensive than renting in the short term (1-4 years).  But inexorable rent increases put owners ahead in the long term.

Rents here are too cheap.  I predict a period of flat prices and rising rents, eliciting whining from all sides. ;-)

XXXX

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Our reply on June 13 was:

Hello:

Thanks for reading!

We missed the accumulated equity from paying down an amortizing mortgage in all the examples.  It would increase the net in the examples used.

However, you highlight exactly the arguments of many RE cheerleaders.  There are holes in your thesis, but the market has been out of whack so long that people misunderstand what is normal.

Claiming, "Owning will always be more expensive than renting in the short term (1-4 years)," may be true in recent years but it wasn't "always" the case.

Before the last two or three years' mania, the standard was "always," "positive cash flow from day one."  By definition, experienced investors demand owning be cheaper than renting.  Otherwise, the investment risk is too high.  ("Risk" isn't zero even with positive cash flow, but nobody seems to even bother to evaluate risk today...)

If it's OK to be negative for the first four years, why not five?  Or eight?  Or 20?  What are the acceptable parameters for negative cash flow?  (We posit there are none.)

We also question, "But inexorable rent increases put owners ahead in the long term."  Rent increases are no more inexorable than top-line appreciation.  This is exactly why professional investors insist on positive cash flow from day one.

Certainly, if a buyer is guaranteed four (or five or eight or 20) annual price increases, this changes the parameters.  If you can provide such a guarantee, we will gladly line up to buy real estate -- or pretty much anything!  Weren't future increases used to justify buying over-priced tech stocks at the height of the boom?

As an aside, if the universe of renters who will pay $2400 is limited, how big is the universe of renters who will pay $2917?  (The rent after your four consecutive 5% increases.)  How much vacant time will this "typical" rent increase cause?  (A half month sitting empty "costs" 4.17%, & triggers additional costs (Cleaning? Advertising? Agent commission?), suggesting a 5% increase can wash out to ~zero if the tenant moves out.  You might suggest your friend point this out this his/her landlord...)

Further afield, we are not convinced rents are widely going up.  (A table in today's (June 13) SJMN gives a mixed picture.)  The alleged rent increases only started as the case for future appreciation was deflating.

Based on just recent data, we could even argue the market can support, at best, price increases or rent increases but not both at the same time. ;=)

On a more serious note, we expect to soon see the marker support neither...

Regards,
View from Silicon Valley