The front page story in the New York Times yesterday, featured a story written by one of my favorite economics writers, David Leonhardt, called A Word of Advice During a Housing Slump: Rent. He explores the rent versus buy dilemma at length in the article. In addition, the article links to the best rent versus buy tool I have ever come across.
The NAR is promoting the current market as a great opportunity to purchase because mortgage rates are low. However…
Over the next five years, which is about the average amount of time recent buyers have remained in their homes, prices in the Los Angeles area would have to rise more than 5 percent a year for a typical buyer there to do better than a renter. The same is true in Phoenix, Las Vegas, the New York region, Northern California and South Florida. In the Boston and Washington areas, the break-even point is about 4 percent.
The impact on prices and affordability is much more dramatic than a change in mortgage rates. Add to this, tightening credit and it appears that prices would need to correct in many parts of the country before the housing market comes back. And by coming back, I would measure this by a noticeable increase in the number of transactions.
“House prices have to fall more before housing becomes a clear buy again,” says Mark Zandi, chief economist of Moody’s Economy.com, a research company that helped conduct the analysis. “These markets aren’t as overvalued as they were a year ago or two years ago, but they’re still unfriendly. And that’s one of the reasons the market is still soft — people realize it’s not a bargain.”
As far as New York goes, the analysis concluded the buy side was favored if the Manhattan co-op example increased 3% per year for the next 5 years and the Westchester county example increased 4% during the same period. Interesting. With inflation at 2-3%, in real dollars, the co-op would would effectively not need to show a gain and the house would need to rise only 5% overall during the five year period.
On the national front, I strongly believe the situation is not as good as NAR paints it (but hey, they are a trade group) and not as dire as economists paint it (hey, they are paid to worry) , but its definitely not good. There will be a lot more painting that needs to be done before this is over.