ANOTHER SIGN OF RECOVERY? COST OF OWNING vs RENTING DROPS BACK TO HISTORICAL AVERAGE
February 25th, 2009 categories: Buyer Strategies, Seller Strategies
It is important to at least try to make sense out of the daily dose of housing news, but who has time to assemble the dots, much less try to connect them. That’s why we like to give you short, relevant snapshots of data and news items that have some meaningful value to regular people who are attempting to make sense of the current housing market, so that they can make wise decisions.
In working with buyers and sellers virtually every day, I get a perspective on what people are thinking. Of course, there are many perspectives that people have. One perspective is what I’d call “I need to get on with my life!” It is a sense of not putting one’s life on hold in anticipation of whatever new economic issue surfaces next. The gist of this perspective is, “I can’t control the national economy, but I can live my life. I need to do what’s next!”
In our blog and Chantilly Radio we try to give you information that will help you “do what’s next” regarding housing, whatever “next ” is for you. Here is one study dealing with the cost of renting vs owning that I thought you’d want to know about.
One of the big questions of course is, “When will we reach something that looks like the bottom of declining prices?” We still have lots of houses that need to sell before reaching “normal ” inventory, but here is one piece of data that I think is significant.
To put this in perspective please understand that one view of housing suggests before a genuine housing recovery can occur, the cost of owning versus renting must return to historical levels.
This view makes a lot of common sense, and if it holds true, at least a foundation for housing stabilization may be in store for 2009.
Falling home prices combined with falling mortgage rates have dropped the relative, after-tax cost of owning a home to 125% of the cost of renting a home.
This is the exact 18-year historical average and not since 2001 has the gap been this small.
The Wall Street Journal did note that the study is not perfect. For example, the data doesn’t account for home maintenance costs, nor does it consider real estate tax bills and insurance policies.
But, when you consider the relatively low cost of ownership with the government’s $8,000 tax credit for first-time home buyers, it is likely that many long-term renters will become owners.
The obvious other factor is the sense of confidence that people feel about their own prospects. But people do behave in their own economic self-interest. As housing gets more affordable, people will and are responding.
Many market areas are expected to edge lower during 09, although this won’t necessarily apply across the board. Assuming mortgage rates stay low, the cost gap between owning and renting will diminish even more.
(Image courtesy: Wall Street Journal)
