Rent vs. Buy Datapoint of the Day

How do we know we're in a housing bubble? One way of knowing is by looking at house prices, which during the bubble were rising much more quickly than rents. That was clearly unsustainable. But today, in a CPI FAQ, the BLS uncovers a startling statistic:

According to the National Association of Realtors, between 1983 and 2007 the monthly principal and interest payment required to purchase a median-priced existing home in the United States rose by 79 percent, much less than the rental equivalence increase of 140 percent over that same period.

Now I'm not one to pay overmuch attention to the NAR, they're an advocacy group more than a source of reliable statistics. But I do actually believe this, because if you look closely they're not saying that rents have risen more than prices. Instead, they're saying that rents have risen more than the cost of buying a house, which is different, and which is largely a function of falling mortgage rates over the past 25 years.

All the same, for rent-vs-buy calculations, it's precisely the mortgage payments that you'll want to be looking at. And according to this, in order to get back to the ratios of the early 1980s, house prices would have to almost double from their 2007 levels, with rents not moving at all.

Which does raise the obvious question: Why on earth was anybody buying a house in 1983?

(Via Thoma)

Comments

[User 256344:]

Rent vs mortgage payment is only one factor. Other factors that should be considered are maintenance, taxes, tax breaks and the overwhelming factor in today's environment house price appreciation/depreciat...

2008 Sep 05 11:06 AM

[ezrasfund:]

Careful that they were not cherry picking the data points...interest rates on home mortgages have fluctuated from 10%+ to 4.5% over that time...

2008 Sep 05 11:08 AM

[eternitus:]

Housing affordability was at an all time low in 1983 (prices didn't correct down in nominal terms (I think) and mortgage rates were between 12 and 15%). The NAR's presentation of the data is disingenuous at best. Follow the link below.

mortgage-x.com/trends....

If you look at the chart, mortgage rates are anomalous between 1979 and 1986 (only time they were >10%) and data from that period should be disregarded, especially if your aim is to create some type of affordability benchmark.

Do you pay attention to what a used car salesman says? Then why would you listen to a bunch of used house salesmen?

2008 Sep 05 11:29 AM

[Chris B:]

Home prices are another reason the fed is keeping rates low. Low rates keep real estate prices high by keeping monthly payments low, as correctly pointed out in the article. The fed hopes that slowing the decline of home prices will (a) avert an actual housing crash of another 30% or so, or reversion to the long term mean or below, (b) prevent the banks from being hit by a tsunami of foreclosurs, (c) offer adjustable-rate mortgage holders the opportunity to refi at rates they can afford, preventing foreclosures, and (d) preventing a credit seizure (as opposed to squeeze) that would cause currency issues.

Real estate buyers and holders (myself included) can expect zero appreciation at best over the next couple of years even while rates stay low. If reversion to the mean (and affordability) in our local markets have not improved by then, we can expect the coming higher rates to cause gradual losses.

The kicker will be if mortgage rates rise to the 8-10% range despite the fed rate remaining at 2%. As more and more mortgages produce negative returns for their owners, the risk premium for mortgage paper could expand dramatically and mortgage debt will be seen as universally toxic. At that point, the fed will have no control unless they nationalize most of the mortgage market and hold the debt at low rates themselves.

2008 Sep 05 11:58 AM

[Matt Blackman:]

The first major hitch in your argument is you rely on NAR data even though you allude to the risks of doing so in your article. The second is that you quote Mark Thoma who is well-known for his socialist views, a strong Obama promoter/supporter with his pro-tax anti-trade policies. In case you haven't notices, Thoma has a clear agenda and it has little to do with trading or investing.

Third, as mentioned above, relative rents are only part of the story (see the charts at seekingalpha.com/artic... )

It may be true (and I stress may) that mortgage rates do not accurately reflect the true cost of ownership today in this environment of low interest rates (they were close to 10% in 1983) and interest rates are quite volatile. As the charts in my article show, using any metric you want whether it be price/incomes or price/rents, home prices remain very high on a relative basis. And then there are the other challenges facing the market today.... not the least of which is that more than 10 million households are now locked into mortgages that are worth more than their homes.

2008 Sep 05 12:46 PM

[HARM:]

As someone already pointed out, your first mistake was to trust any "statistic" from the NAR --or equally dishonest BLS-- without independently verifying its validity. If you had (or had simple bothered to compare PITI to rents on equivalent houses in some major U.S. cities), you would have recognized this for the bald-faced lie that it is.

Even if we ignored the fact that this "statistic" leaves out the "TI" (taxes and income) part of monthly PITI, it's still complete bullshit. Show me a house you could have bought at market rate in 2007 with monthly PITI less than the equivalent rent, and I'll show you a negatively amortizing NINJA with a 1% teaser. Take out funny money financing, and adios "cheap" PITI.

In most of the U.S. today it is basically *impossible* to purchase a house for less than the cost of renting it. As an example, the CA rent:buy ratio is close to 2:3, still favoring renting. At the market's peak (late 2005), it was close to 1:3 in the greater L.A./O.C. metro areas.

Want truthful data, not Realturd/BLS propaganda? Try here:
calculatedrisk.blogspo...

2008 Sep 05 02:44 PM

[pochovilla:]

Felix:
YBF You've Been Fooled. Drawing a conclusion from two data points is a fools game. Keep it up and we'll vote you for Mark Perry's assistant.

2008 Sep 06 05:54 AM

[Tom Lindmark:]

Harm,
I agree with most of your comments but think that the statement that it is "impossible" to purchase a house for less than the cost of renting in most of the U.S. is overly broad.
I am in Phoenix which has been beaten down just as badly as California. We are now seeing substantial parts of the metro area in which the price depreciation was the most extreme offering rent:buy ratios of better than 1:1. That does include taxes and insurance. Put another way, cap rates are in the nine to ten range.

2008 Sep 06 12:26 PM

[John Preston:]

First, in 1983,not many were...I was there as an LO .... but, Felix raises an interesting point...the heavy reliance on sacred rent/home price relationship...

Simple supply and demand says that rents are as vulnerable to S/D as are prices....do you image that rent rates will remain low given the current crisis?

Home ownership grew from the low 60% range to almost 70%...with more home buyer prospects....prices went up to record levels....

Using rounded numbers to make the math simple...if the 70% drops to say 63%...that is a 10% drop in ownership...and, assuming they all rent, its a 33% increase in renters...

With fewer renter prospects...rents flattened or dipped...

At the peak of housing and the valley of rents....you will find an extreme ratio...a point in time...

Conversely, when housing bottoms and rents have peaked, you will find another extreme relationship...

I do not believe that this rent/price relationship can be considered a solid housing "fundamental or metric" as there will always be some distortion in the ratio in progress....

2008 Sep 06 02:35 PM

[billddrummer:]

If the rent/buy relationship is meaningful, why is it that even in Northern NV, with housing prices down 28% from their peak, rents haven't seen much upward pressure? I consistently notice apartment complexes with rent concessions, low deposits, lease breaks and the like, even though thousands of people have been tossed out of their homes. Where did they go? No one seems to know, but many of them may have simply left town.

As more homes go on the market than are sold, inventory levels remain stubbornly high, despite some uptick in sales over last year. Median prices are still dropping, and I believe they will bottom at the pre-boom level, and remain flat until inventories are cleared out--which may take until 2011. And that's assuming mortgage rates remain low for the next 3 years. If rates rise, the inventory glut will persist, because fewer people will qualify for mortgage financing.

2008 Sep 08 12:34 PM