High home prices make renting look affordable

Jennifer Shubinski

Wednesday, March 23, 2005 | 11:22 a.m.

Skyrocketing home prices over the past five years have made renting a relative bargain in Las Vegas.

A study conducted by Boston-based Torto Wheaton Research, an independent business unit of CB Richard Ellis, found that there is a widening gap between the cost of renting versus owning in 21 of the nation's biggest markets.

The relative affordability of apartments is greatest in areas where housing costs have skyrocketed, including Las Vegas.

In Las Vegas, last year's average monthly apartment rent of $768 was 54 percent of the $1,421 mortgage payment on a median priced home in Las Vegas, according to the study.

But local experts said rents in Las Vegas have started going up as demand continues and as the supply of apartments decreases because of apartment-to-condo conversions and fewer new apartments being built.

"What it tells me, is there's a lot of room for rents to move," said Spence Ballif, senior vice president at CB Richard Ellis, Las Vegas.

Ballif, who already has tracked a 5 percent increase in rents by the end of 2004 over 2003, said he expects rents will go up another 7 percent to 10 percent this year.

The Torto Wheaton study reported that the monthly payment of a median-priced home (cited as $266,400) in Las Vegas during 2004 was $1,421 compared with the average rent of $768 for an apartment.

The calculation is based just on a principal and interest payment and does not take into account any costs of maintaining a home or property taxes or any tax breaks from owning a home, said Gleb Nechayev, vice president and senior economist at Torto Wheaton Research.

Nechayev said it's not so much the gap between mortgage payments and apartment rents that matters, it's how much and how quickly it changes over time.

"There is an underlying relationship between home prices and rents and right now home prices in Las Vegas are out of historical bounds relative to rents," he said. "... (The) recent dynamic of this ratio suggests that in the future either rent growth has to pick up or home prices growth has to slow down or both."

Nechayev said that there is a greater chance that a much-slower increase or even a drop in home prices will have a greater effect in bringing the ratio back to historical norms.

"The point is that at this stage of the cycle Las Vegas should be seeing more rental apartments being built, yet what is happening is accelerating pace of condo apartments, both as new construction and conversions from rental apartments," he said.

Ballif said new and resale housing prices still continue to go up and that most likely it will be rents catching up to the market.

"Rents will move much faster than housing costs will go backwards," he said. "I know rents are moving, they already are."

One thing that could mitigate an increase in apartment rents is converted condos coming back on the market for rent.

Nechayev said he thinks that as many as half of converted condos could end up back on the market as rental units, in turn increasing the rental supply and leading to vacancy rate increases.