The question I have is WHEN is the cost of owning vs renting going to approach 1? I lived in S. California at one time...it was not 1 then, nor am I aware of any period when it was. If I'm right about this, then making a statement of this type is tantamount to saying you will never buy. OK with me, of course. But make sure you understand the implication of your statement. OldTrader
I know that I can't rent for the rest of my life. I haven't lived long enough to know if that ratio could ever become 1. Hoped an old-timer can tell me that Though I've heard of people that made fortunes by buying up property, renting it out, wait for appreciation, taking a loan out to buy more property and renting that out too, rinse and repeat. Doesn't that business plan require the own to rent ratio to be below 1?
Actually, it's not important. It's a completely useless and deceptive statistic for an individual investor unless they are fortunate enough to own a geographically diversified portfolio of houses. I'm pretty certain there hasn't been a 45% increase in mortgage rates over a two year period in the last 50 years either. So your imaginary scenario where interest rates go from 5.5% to 8% in 2 years is also pretty off the wall. In any case, I am not claiming that there is a nationwide housing bubble, nor am I predicting a 30% drop in housing prices nationwide. In the only housing market that I have studied carefully, the San Francisco Bay Area, I believe that there is a housing bubble and I would not be suprised to see housing prices lose 30% in the next four years. Martin P.S. Your analysis ignores the opportunity cost of the money you use to buy the house.
There was the move in the 10 year from about 4.1% in late 1998 to late 1999-early 2000 at 6.8%. I make that to be about a 65% move. Then there was the move from mid 2003 from about 3.1 to early 2004 around 4.9%.....about a 58% move. There were comparable types of moves in the mortgage market. Nonetheless, I was not predicting 8% mortgage rates...just giving a scenario. I wouldn't venture a guess as to what San Francisco real estate might do. I suspect it dropped something close to 30% back in the early 90's. But whether this repeats is another question. Most of the time economic events do not repeat in the same ways or magnitudes. OldTrader
I'd say most successful real estate investors buy property at a discount to retail value, which boosts gross rent versus their costs to own. But it may well be that the scenario you just gave is not an effective scenario for California, at least not in the neighborhoods you live in. But as a general statement I don't recall California every having this 1:1 relationship that you speak of. Must have been before my time. OldTrader
Today's mortgage rates are at all time lows, it surely represents a historic opportunity to lock in 30-year rates to buy a house. In a region where housing isn't superheated, it can still be a great buy. In a buyers-gone-mad region, who knows? In the bay area it's hard to build more houses, if the local economy stays strong and people keep moving in (not that they have been), prices may never come down. Stock market opens in six hours, why are we still talking about houses?
The keys here are how long the person is going to live in the house and what their financial status is. Unless you are moving to an area of brand new homes and/ or buying a condo , you also have to factor in a TON of maintenance costs over a ten year period. Roofs , painting, decks, plumbing repairs etc. could add up to a lot of money over ten years. I think that when the bubble bursts it will be much different throughout the USA than the flat periods ( downturns in inflation adjusted dollars in the early 80's) and the regional downturn of the early 90's. In the 70's , almost everybody had a 20% down fixed loan with a gross income ratio of 3 times ( 33% ratio of the loan payment to gross monthly income ) that included the monthly cost of the loan including taxes and insurance) In the 80's most loans were made to 20% down buyers. Ratios were relaxed to 36%. Ten % down buyers still had to meet a 33% ratio for a fixed loan. Including credit card and car loan debt , the back end ratio could not be more than 45%. To get a 10% down loan people had to have GOOD credit. In today's world ratios are being thrown out the window. I've heard radio ads by loan brokers that are like car dealer ads. " Bad credit, Low credit, No credit. We can finance anybody for little or nothing down." That is why I think that when the bubble bursts , it will be more than a regional downturn. I do know that little or nothing down deals to marginal people are being made all over the USA. In other words: Millions of houses throughout the USA are in weak hands. That was NOT true in the early 80's or early 90's. To answer the original question; just because you can buy a home does NOT mean that you can really afford one. I bought my most recent home with a large down payment from equity off of a previous home. My ratios are well below the ratios required in the 70's and I might live here the rest of my life. A person with 20% or more to put down and an income to properly service the loan and maintain the house over the 10 year period is almost certainly better off buying. The low down crowd ( unless they have fantastic incomes from a stable job ) is probably better off renting. Once the bubble bursts , I can see a domino effect coming. The weak hands could end up with no home AND bad credit from a foreclosure.
10 year Treasuries are a lot more volatile than 30 year mortgages. Take a look at this data: http://www.freddiemac.com/pmms/pmms30.htm Your examples were 20 to 25% moves in 30 year mortgage rates. Between 1979 and 1981, mortgage rates did increase by up to 60% over two years. Martin
Interest rates went down significantly during many housing market crashes in the past. Therefore, if a housing bubble exists, falling rates will not necessarily prevent such a crash from occuring. Remember that in 2000, many people thought that falling rates would prop up the stockmarket and prevent a full-blown crash, relying on the time-tested "Don't fight the Fed" strategy. Look what happened then. Historically, falling rates have not prevented price declines following a speculative bubble.
Actually, US home prices fell around 80% (more in some areas) during the Great Depression. And what makes you think that prices since WWII are an accurate predictor of likely price movements from 2005 onwards? Unless you think the current economic and RE situation is similar now to what it has been from 1945 to the early 2000s, then how can you compare the two situations?