Declining housing prices combined with (artificially) low mortgage interests rates are combining to bring the costs of owning more in line with renting, according to the Wall Street Journal (h/t: Alison Kemper):
The relative cost of owning versus renting is swinging back in favor of homeownership in some U.S. markets, buoyed by several quarters of sharp declines in home prices. At the height of the housing boom, as home prices surged, demand for rentals started to rise as the gap between owning and renting widened significantly. Even after the housing market soured, apartment demand grew as former homeowners became renters, allowing landlords to push healthy rent increases. Now, after two years of rapid home-price depreciation, the relationship between the cost of rental payments versus after-tax mortgage payments is tilting toward ownership in a number of metropolitan areas.
True, when you factor in massive government incentives for homeownership, and that is only in certain markets. But this kind of thinking misses the bigger issue of the long run. In addition to the issue of month-to-month housing affordability, homeownership carries with it a second, longer-run cost – the cost of exit. In a mobile society, people need to be able to sell their homes. Take the example of homeowners in say Pittsburgh or Detroit or just about any market these days. They got a great deal on a wonderful, affordable home, but then their employment dries up. They’re offered a job say in Seattle or Washington, D.C. and need to move. But they’re locked into a house they can’t sell. If they were renters they could easily up and move.
In today’s economy, many people are better off paying a considerable premium to rent, if they think they might need to move for career or family or lifestyle reasons.
And I continue to believe that we need to put in place a new housing system which can and should make renting easier, more flexible, and even more affordable.
February 27th, 2009 at 2:02 pm
Mobility is important, but if you live in the center of a super-star city, you run the risk of becoming priced out of your own neighborhood. This is huge problem in New York and San Francisco. Many people are trapped because they DON’T own their apartment. They either have to stay where they are or leave the city altogether. Also, because real estate values are so high, many landlords are becoming more aggressive in removing long-time tenants (both legitimately and illegitimately).
February 27th, 2009 at 3:41 pm
While I agree with your argument that renting makes sense for those with families who may need to move, for family-free, first-time homebuyers like myself, the current climate represents a golden opportunity -one that may not have come at all, were it not for the recession. For those who can afford it, first-time home ownership is a perfect idea that makes far more financial sense than renting; I’d sooner be building equity than handing money away to someone else. It remains to be seen which sectors won’t be affected by the ongoing financial crisis, but somehow, it’s weirdly comforting to think the recession is providing the sort of adjusment the overblown real estate market (especially in Toronto) has been desperately needing.
February 27th, 2009 at 4:44 pm
There is also a “capital vs. income” consideration.
If you have income, but little capital, then rent.
If you have capital, but little income, then buy.
When I took a job in NYC, I had enough capital for a decent downpayment (thanks to a loan from my employer), but my income could not sustain the rents on a continuing basis. So I purchased. It was a great deal as my property tripled in value over 10 years.
If I had paid high rents for 10 years, what would I have walked away with?
February 27th, 2009 at 4:58 pm
Your arguments make sense for reducing the subsidy for buying/owning a home. I agree on limiting deductions to a primary residence, and setting an upper limit on mortgage deductability being good policy. And restructuring mortgages a la Canada could make sense. You make a decent argument for why mobile people should rent.
But this isn’t a blanket argument for not buying. tpk and Catherine both make good points. And for many people, a house is not only a home but an asset with a fixed savings plan.
In my case, job mobility hasn’t been an issue but I’ve moved 6 times in the last 37 years because of various personal life changes, while remaining mostly in a one mile radius in Northwest (near downtown) Portland. Four times I’ve bought, twice I’ve rented. Living in a “superstar city” I’ve never had a problem selling a house.
With what has happened in the last year with the market our house has been the only major asset that hasn’t dropped dramatically, and is now maybe our largest investment.
February 28th, 2009 at 8:07 am
I have recently stumbled across various stuff along these lines, but I think there is a more substantial issue making things a “perfect storm” this time.
We have a whole generation of Baby Boomers either wanting to (or being forced to by unemployment) retire. Many have lost heaps of money in the past year from falling house and stock values, in many Western countries.
What happens to both the stock and housing markets when these assets are turned into cash? – because Baby Boomers have to live on something. Gen X is still paying off student debts, and in some cases may need to support both their own children and aging parents. But as a smaller generation, we do not have the collective wealth to buy the full amount of these assets.
Further, does our housing stock work for people in these situations? And if all of this comes to pass, why would anyone buy a house if they expect housing prices to keep falling due to this demographic shift?
This ties into the Creative Class thing really importantly here in Australia because for the past 30 years, many of our coastal areas have been booming – but many of these places are growing mostly due to retirees leaving the big cites. What happens to such places 10 or 15 years from now?
I agree with TPK in that the more creative cities will do OK, and I understand Catherine too. Prices here in Canberra are WAY out of whack but as the Australian capital, it would take a vicious budget slashing many government jobs to bring housing prices down in my city.
I wonder if this GFC will show up on the map not only between the “creatives” and others, but also between those who are financially savvy and those who are not? And this is not necessarily about “education” per se, it’s about which types of people can see a bigger picture, and that the wealth creation recipes which worked for their parents are maybe becoming obsolete?
Here is an article I found (from a while ago) outlining both sides of the issue.
http://www.apa.org.au/upload/2000-2D_Reed.pdf
February 28th, 2009 at 6:38 pm
I’d add that there are often additional costs to home ownership that aren’t considered. Of course there’s commute (time and cost), larger heating/electric bills for homes compared to apartments, repairs + maintenance, and the “stuff” (lawn mowers, snow blowers…etc etc) you need to maintain the property.
March 3rd, 2009 at 7:47 am
The question of owning vs. renting would never raise for people who plan to stay long at their place of residence if they all had enough capital to purchase. Owning a property, whatever obligations it involves, has always been a smart investment and a right thing to do.
There are people who prefer to change the environment and never stay long at one place. For them, renting is a smarter option, but again, provided they can afford it, ownership has never done any harm to anyone.