Tim Geithner can't sell his house for more than it's worth

U.S. Treasury Secretary Tim Geithner can't sell his house:

Real estate agents say Geithner recently rented out his Westchester County home after it didn't sell — even though he reduced the price to less than he paid.

Geithner put the five-bedroom Tudor near Larchmont on the market for $1.635 million in February.

Agents Scott Stiefvater of Stiefvater Real Estate and Debbie Meiliken of Keller Williams Realty say the house was rented for $7,500 a month on May 21, a few weeks after the asking price was dropped to $1.575 million.

Here is his house on Zillow. The guy lives in a bubble (pun intended); Zillow says it's worth $200,000 less than his asking price.

Let's do a little math. He's renting it out for $7,500/month, which is $90,000/year. Divide $1,575,000 by $90,000 and we get a price-to-rent ratio of 17.5. That might seem equivalent to a typical stock market P/E ratio, but it's not a price-to-earnings ratio. It's a price-to-sales ratio.

According to real estate "guru" John T. Reed:

The average operating-expense ratio of a residential rental property is 45% plus or minus about 2%. That is, the operating expenses—taxes, management, utilities, insurance, etc.—will consume about 45% of the gross income. That percentage applies all over the U.S. for all types of residential property...

Therefore, we can estimate the annual net income of Tim Geithner's house by multiplying the annual revenues by (1.0 – 0.45):

$90,000 x (1.0 – 0.45) = $90,000 x 0.55 = $49,500

Then divide his asking price by the annual net income to get the P/E ratio:

$1,575,000 ÷ $49,500 = 31.8

Alternatively, we could divide the annual net income by the asking price to get the earnings yield (cap rate):

$49,500 ÷ $1,575,000 = 3.14%

So, the Treasury Secretary of the United States thinks his own house is worth 31.8 times the annual profits it can generate. He's willing to accept an earnings yield of only 3.14%. That's a horrible rate of return! Compare the 3.14% earnings yield with the 5%+ cost of a fixed rate mortgage.

This guy is an economist? Hey, Tim, take the hint: You need to drop the price!