Is It Really a Good Time to Buy a House?

Wednesday, April 21, 2010 at 11:20 am

Today, New York Times economics writer David Leonhardt has a good column on why it might be a good time to buy a home in some unlikely parts of the United States.

Leonhardt shows that the rent ratio — the price of the home divided by the estimated annual cost to rent one like it — in many metro districts has fallen enough to signal that it is a good time to consider purchasing a home rather than renting one. Housing market experts believe that if the rent ratio is lower than 20, a home is of good enough value to consider buying. If the number is higher than 20, a purchaser is counting on real estate prices to rise to make up the higher aggregate cost of paying a mortgage. (During the worst of the housing bubble, homebuyers in places like Ft. Myers, Fla., were bidding on homes with sky-high rent ratios in the 40s.)

Leonhardt’s analysis shows that homes seem to be a decent deal in markets like California’s Inland Empire and Las Vegas — the very markets that stoked the worst of the housing crisis. But those parts of the country are suffering from high, high unemployment and a long real-estate hangover. And Leonhardt’s analysis does not take into account the fact that many mortgage experts believe those markets still have a ways to fall. I took the markets the Times column indicates might be a good deal — with rent ratios below 20 — and overlayed the data with information from RealtyTrac indicating the proportion of houses that received a foreclosure notice last month. In places like Washington, D.C., and Seattle, just one in 1,800 homes received a foreclosure notice. But in Las Vegas, one in 69 did, meaning a whole lot of houses might be coming on the market soon.

Indeed, the foreclosure crisis looks like it might worsen in many already hard-hit markets this summer and fall. The blue line on the graph below shows the rent ratio. The purple line shows the proportion of homes in the midst of foreclosure last month — and indicates markets that look likely to gain some capacity in the next few months.

So people looking to buy new homes might want to think twice before sinking their savings into one of the markets with a long purple line here, like Las Vegas or Riverside or Miami. On the other hand, the real estate markets in cities like Indianapolis, Dallas and Washington look considerably safer.

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Comment posted April 27, 2010 @ 4:43 am

This analysis makes an erroneous assumption that can make this rent/buy decision metric incorrect. Consider this: Just because a mortgage house payment is less than a theoretical rent payment does NOT imply that buying is the better decision.

There are three other variables, two variables concern time.

1) Time to sell– How long will it take for a seller WITH EQUITY to sell a house purchased at todays prices, considering there are another > 5 million houses that have not yet been released for sale by the banks.

Many houses drop off the market, so Days On Market ( DOM) is not accurate. Even with this DOM it can be months to years to sell at the listed price. How much equity is in the new purchase? The standard 6% real estate commission takes at least 2-3 years to absorb in at least a 3% per year house price inflation. Today, with the end of HAMP and similar programs there is less incentive to buy.

2) Time factor considering diminishing house prices. We can NOT make the same mistake and believe house prices MUST ALWAYS GO UP. The Japanese housing bubble took 15 years on a slow downward spiral. Any purchase at anytime during this 15 years resulted in a loss.

3) Value- Would you buy a junk car just because you could afford the monthly payments? Of course not! The same is true with houses. They are a mechanical structure which requires upkeep, and repairs. The only thing that does not require repairs is the dirt the house sits on. Are you buying a lot or a house?

Conclusion: Today, there are tens of thousands of potential house buyers who do not require anything more than a conventional loan. They are NOT going to risk their equity down payment on buying a house that destroys this savings. Mortgage interest can only increase from here. As mortgage interest increases, house prices fall. This is important because RENTS are also limited by average renter income. When unemployment increases—like today, average salaries decline, and many are underemployed, families will double up rather than pay high rents. In my middle class area on my street at least three extended families are forrced to live in some houses. They lost their houses to foreclosure. Will thy pay high rents or save by living with family? This increases potential rent vacancy rates which drives rents down further.

Some who can buy today with conventional mortgages or cash will not buy until prices resume to an affordable and value laden level.

I am a potential buyer and can pay cash. Why should I buy now when my rents are so low? My rent is about 30% of comparable PITI for the SAME HOUSE. Convince me I am wrong! My landlord who happens to be a Realtor is in BIG PAIN. He voluntarily has dropped my rent several times so I keep the place occupied. This house went from 550k to 200K in 4 years. It is still dropping in value. I live here and KNOW THE problems. I let HIM hire a plumber or hire roofers or replace the HVAC. It is costing him big bucks. I am only taking advantage of the sutuation. If I see a better deal down the block, I will move in a blink of an eye. And he knows it. This keeps rent down also.

Comment posted April 27, 2010 @ 2:15 pm

Games still happening mostly in such effected areas. Real estate trusts and individual “investors” that are grabbing these properties up pennies on the dollar and throwing them back on the market. It's nearly impossible for the avg Joe to honestly bid for a foreclosure anywhere in the US with a traditional 20%/30 year. Until these games are stopped you will be catching a falling knife. Who the hell wants to live in Inland Empire (wt, section 8?) or Vegas anyway (working at amazon, love the uncultured nightliife?). Never understood this. Awful schools, awful heat, awful shopping…unless strip mall after strip mall are your thing. No thanks.

Comment posted April 27, 2010 @ 8:28 pm

This article is missing the most crucial piece – what will happen to rents going forward. Excess supply will cause rents to drop. The price/rent ratio will stay at 20 while both numbers fall…

Annie, David – are you interested in buying a bridge I have for sale?

Happy Renter
Comment posted April 28, 2010 @ 7:54 pm

Great note Investor90. We're in the same place rental wise, taking great advantage of the low prices. I take exception to one thing you wrote however: “The only thing that does not require repairs is the dirt the house sits on. Are you buying a lot or a house?”

I live in a hilly area that has periodic land movement and soil erosion. This can put stress on retaining walls, cause mud slides, etc. So in some cases, the owner DOES have to do repairs on the dirt!

Comment posted April 29, 2010 @ 3:25 am

The Wall Street bankers would be shot if they pulled this sh-t in China…and the irony is we have sent American jobs at our expense to a country that puts a C.E.O of a toy company with tainted lead products in front of a firing squad…so why don't we put Blanfein and Greenspan, Rubin and Larry Summers on a fast boat to China where they belong with the rest of our good American jobs they sent there through deregulation. Bunch of gangsters!

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Andrew Sheldon
Comment posted October 1, 2010 @ 2:24 am

Why not buy foreclosed property in Japan, its a stronger currency than the USD, its offering 12-13% yields, its a great holiday/retirement destination, the property is offered for sale through the courts, its a safe country.
I bought a 18yo, 5br dormitory 1hr from Tokyo for $28,000, next to a private school with 300m2 of land. My partner bought a 12yo 3br house for $38,000 in better condition, rented after painting and cleaning for $600/mth.Yields 12-13%, this was 90mins from Tokyo, close to local service centre.

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