This summer, there were two community listening sessions in Somerville. The goal was to gather opinions about the city’s potential rent stabilization legislation. How could it be done? How could it be done fairly? How would it affect landlords, tenants, and business interests? There will be another session on September 12.

How much rent? Let’s talk money

Financial planners and your favorite uncle have already told you that paying about one-third of your income on housing is good budgeting. That reality is pretty much out the door in Massachusetts. Renters need an $86,613 annual income to rent a two-bedroom apartment in Massachusetts in 2023. That’s a statewide number; costs are higher in the metro-Boston area.  For purchases, mortgage lenders are required to use a figure generally below 43 percent of your income, with some exceptions. Details here, from the Dodd-Frank Act (page 6).

Tenants:

The overall area trend was that rents were at their highest during the summer of 2020, then took a nosedive when new leases were signed at the end of the summer, 2020. Since then, they have climbed back close to pre-pandemic levels throughout eastern Massachusetts. Some reports say they exceed pre-pandemic levels.

Average rent for a one-bedroom apartment in Somerville is $2,800. Two-bedroom apartments average $3,175. [source]

Let’s take 40 percent as the target amount spent on rent. To spend 40 percent or less on your apartment, the household income must be $127,000 or more. Median income in Somerville is $108,896. So, more than half the people living in the city of Somerville can’t really afford to live there. 

Landlords:

The properties:

Roughly half of the two-family houses in Somerville are owner occupied. The total number of two-family and three-family homes is 8177. Of those, 4031 are owner occupied. The total number of two-family and three-family homes available for rental has been going down. In Somerville (and Massachusetts in general), it is legal to change the deeding on a two-family and three-family house to make them separately deeded condos. There are 5295 such condos in Somerville; most of these used to be rented two-family and three-family homes.

The money. Two-family houses

The average purchase price for a two-family home in Somerville has gone up because of the general attractiveness of the city, but also because the supply of these properties has been diminished by condo conversion.

Average sale prices, in 5-year increments. Source: MLSPIN

2000 — $381,617

2005 — $624,931

2010 — $514,405 (Remember that recession?)

2015 –$932,115 (That recession “corrected”)

2020 — $1,406,494

Recently, we seem to be at a plateau:

2021 — $1,366,628

2022 — $1,431,988

2023 so far –$1,320,103

The situation for new owners:

Suppose the purchase price was $1,300,000. Suppose the owner got a 5 percent interest rate and paid a 20% down payment ($260,000). The monthly mortgage would be $5,797.24. The typical homeowner spends about an additional 10 percent of the mortgaged amount for water, sewer, and maintaining these old buildings. That’s plus $580 a month. That’s a cost of about $6377 a month to own this building.

(5 percent interest is lower than the prevailing rate in 2023, but is an average for the years since 2020. Also, I set the sale price slightly lower than average).

Suppose the rental unit is a two bedroom. On average, the rent will be $3175. That leaves a carrying cost of $3202 for the owner.

Positives for an owner: Even though the tenants are paying less than half the costs, the owner still has the benefit of the long-term gain of owning a home. The money that goes to improvements also benefits the owner. Some owners could not afford a single-family house or condo for that monthly cost.

Negatives for an owner: The owner has a large chunk of cash invested in this purchase. That money could have been invested elsewhere and be growing in those investments. The owner also needs to do the labor of maintaining the property or hiring people to do it. They have the mortgage due, whether they have a tenant or not.

The situation for longer-term owners:

The picture is rather different for people who bought two-family homes decades ago. However, those owners took financial risks and expected a benefit. Many depend on having rental income as part of their retirement plan; they spent on the property in order to achieve that goal.

Let’s look at the 15-20 year owners. A good average price for that will be a little less than half of the first example. Suppose the purchase price was $600,000. Suppose the owner got a 3 percent interest rate and paid a 20% down payment ($120,000). The monthly mortgage would have been $2,458 in 2011. The typical homeowner spends about an additional 10 percent of the mortgaged amount for water, sewer and maintaining these old buildings. That’s plus $246 a month. That’s a cost of about $2704 a month to own this building.

(3 percent interest was possible during this time of ownership. I used the taxes from the time of the sale in both examples).

By 2023, the $600,000 example property tax had increased from $7411 a year to $16,512 a year. That makes their monthly costs closer to $3281. Even with that $9000 a year tax increase, plus some extra for water and sewer, that current average rent of $3175 provides enough to cover the property costs. Stabilizing rents is unlikely to destroy their bottom lines, as time goes on.

Part of figuring out how to develop a fair plan for rent stabilization includes figuring out how landlords can get a fair return on their investments while tenants can be offered affordable housing opportunities.