The vast majority of people WANT to OWN their home. Most renters are there by circumstances. Low interest rates kill landlords as their clients buy a home. Investors buying a home to rent may get hurt. The tenant is smart enough to know he is paying for your investment, LOL The divergence is caused by simple supply and demand. SteveD
I would say that is a fair statement...in YOUR Houston, from YOUR realtor point of view. But in California, Florida, D.C., Boston, and other bubble areas, while you could still strictly argue it is "simple supply and demand"... I would add that people, in the very short term, get caught up in speculation, greed, fear of loss, crowd euphoria, and other emotional factors that make models of population growth and housing construction cost go out the window. Eventually fundamentals must reign again, and there will be a correction in these bubble areas. Who knows when, that is the rub. How would you explain 300% appreciation in prices, while population and wage growth is extremely modest and along the same lines as when property appreciation was also modest. Right now more people are leaving California than arriving (citizens anyway), and still we have blockbuster appreciation. Where is the REAL demand? The "demand" you speak of is so much B.S. It is short term speculation, plain and simple. The percentage of speculators that own multiple properties is breaking all records. Some of the speculators actually do live in their "homes", but will still bail out at the first sign of "smoke".
Well of course. Price is the equilibrium of supply and demand. That is a tautology. I am asking how and why. The only explanation you offer is interest rates. I've done the numbers for housing prices in the SF Bay Area, and I have found that less than one third of the change in housing prices versus rent is justified by the change in real interest rates. Even if you think that interest rates will not revert at all, despite the Fed's assurances to the contrary, that is hardly comforting for a real estate buyer. Martin
I don't know how it is in the rest of country but in the city of New York, you NEVER stop paying "rent" even after you own the place. There is a wonderful thing called a "maintaince fee" which can go anywhere from 400-1000 dollars a month. If you finance a house, it is not as simple as paying your mortage payment every month. You have insurance, property taxes and if smth goes wrong, well time to pay up. Everybody is so driven to buy & own that they completely miss the hidden costs. If you rent, technically that is all you pay for your place of living, your rent. The rest falls on the landlord, after all that is how it is structured. You can move freely and you are not tied down to one residence. What if all of the sudden you want to get the F**k outta Dodge? You run and sell ASAP, well that means you have to sell below market unless you're lucky enough to have a buyer waiting by your door willing to buy at market. I'm still young, I prefer to rent, personally I would not tie myself to any residence right now even if I was in a financial situation to do so. This country is in a shady situation, I want to be able to get up and leave at any moment. I do not think people understand that renting is way cheaper than buying and it really does not matter if you get to own your home in 20-30 years when you pay up the a$$ for it with fees, taxes & insurance.
Agreed. The masses are so focused on the tax deductibility of interest they overlook the additional costs of owning a home: especially property taxes! And I love the mobility renting gives you.
Today's WSJ Personal Journal: Mortgage Bankers Association says that second half of last year, two thirds of all new mortgages were interest-only and adjustable-rate. So much for the rainy day contingency, let alone common sense. Combine that with banks willing to loan $500K to deadbeats. Add that to a Realty industry that is overwhelmed, unprepared, and inexperienced in dealing with the process of fair and orderly competitive bidding. You get prices that have nothing to do with fundamentals. It's the IPO situation in the late 90's all over again. Good in terms of long term fundamentals: people tend to multiply a lot faster than the places they desire to live in.
OK How many homes have been built in San Francisco in the last 5 years? This is the supply part. How many people want to live in San Francisco and own their home? This is the demand part. As interest rates have declined over the last 5 years MORE AND MORE people (demand) became eligible to buy their home in SF. Buyers have come into the market!!! But, I assume as I don't know the SF market, the supply side has seen very little increase to meet this demand. Prices will go up and probably stay up. My hometown, Houston, does not suffer that problem as we have no shortage of buildable land therefore, we see little appreciation except in very special neighborhoods. Areas that have some type of limitations such as waterfront, prestige etc are seeing and will continue to see big appreciation. There is a limited supply. And big demand. The landlord is left with a dwindling supply of potential tenants at the rent he desires. These are the less qualified people. The vast majority of people prefer to OWN rather than RENT. Real estate is a very simple business based almost entirely on supply and demand. The demand to own one's own home is always there. What fluctuates is the ability to accomplish that goal, either through lack of credit, enough income or too high interest rates or prices. I can think of no other goal that is so highly sought after by the majority of people in the US. SteveD
Steve, if there was more demand for housing in the Bay Area, and less supply, you would expect rents to go up along with the price of houses. However, while house prices have gone up, rent has gone down. In other words, the demand for home ownership far exceeds the demand for a place to live. Let's examine why this could be happening: Option 1: Bay Area residents suddenly want to own the house they live in -- much more than they used to. In other words, all the emotional benefits of home ownership suddenly became much more important in the last half decade, justifying an increasing premium for ownership over renting. This is not a likely scenario. There is no factor which would explain such a large change in sentiment. To the contrary, in 2000 and 2001, the Bay Area was in an economic meltdown and tens of thousands of people were losing their jobs and moving away, hardly an incentive to take on a new mortgage. Option 2: Due to an unprecedented monetary stimulus by the Fed, real interest rates decreased sharply making home ownership less expensive relative to renting. As the economics of home ownership became more attractive, real estate prices rose relative to rent. This makes a lot of sense. By my calculations, this more or less explains why real estate prices stayed firm in 2000-2003 as rents dropped precipitously. It does not explain why real estate prices have been rising at a double digit rate in 2003-2005 despite the fact that the Fed has been tightening for over a year now and rents remain at 2003 levels. Option 3: There is a real estate bubble. I won't go into the details of the argument because they are well known to anyone who has followed this thread. I believe this is the only possibility which explains the market action since 2003. If you have a better explanation, I'd love to hear it. Nebulous and ill-informed handwaving about supply and demand does not constitute a better explanation. Martin
Martin. You guys are over thinking this. It is basic supply and demand at it's most fundamental level. There is a VERY STRONG desire to own one's HOME. There is no such desire to rent. Do not compare the two. They are very basic fundamental differences between them and they cannot be correlated other than for some class room economic project. SF is a beautiful place to live. When rates started dropping people discovered that they could afford to buy that house. The desire has always been there!! Just not the means. Rates at 10% are vastly different than rates at 5%. When SF went through the meltdown you loss a lot of jobs BUT you did not increase the supply of homes to any great extent, if at all. The survivors decided to stay and buy a house but the ones who could not BUY decided to leave as they were not going to pay rent as they could buy somewhere else. And, since they had loss their jobs, they had no compelling reason to stay in SF. They have moved to less expensive places where they could afford to buy a home. Home ownership is a very basic human desire and need. Just like food. It is a constant human dream throughout history. This may come as a shock but builders were developing subdivision long before the Nasdaq came into existence! If the stock market went away tomorrow, they would still be building homes where there is a need. Hope this helps SteveD