Monday, January 21, 2008

Chicago-area rents much lower than house payments

From Crain's today.

Apartment rents are surging in the Chicago area, but that check to the landlord is still a lot smaller than a monthly mortgage payment.

Rent in the Chicago area represented just 60.0% of the after-tax monthly mortgage payment for the median home in the third quarter, according to a recent report by Deutsche Bank Securities Inc. That is up from 59.6% in the second quarter and a low of 58.2% in second-quarter 2006.

With the for-sale housing market in a deep slump, homes in many parts of the country are becoming more affordable at the same time the strong apartment market is fueling solid rent increases. The rent/buy relationship has taken on greater significance recently as analysts try to determine how much home prices — or interest rates — need to fall before the residential market returns to equilibrium.

In Chicago, “the gap has got to narrow,” says Deutsche Bank analyst Louis Taylor. “Chicago is going to have an adjustment, and an adjustment that I don’t think is going to be particularly painful.”

That could come in the form of falling home prices, falling interest rates or a continued rise in rents — most likely a combination of all three. Deutsche Bank estimates that the Chicago-area market will get close to an equilibrium level if the median home price falls 10% from its third-quarter level and if mortgage rates fall a full percentage point. The Chicago-area median home price rose 2.5% in the year ended Sept. 30.

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