Housing calculations
I just read this NYT article from a few months ago; buyers in the bubble today are more than ever dependent on further appreciation:
For new home buyers, prices in New York would need to rise roughly another 13 percent over the next five years for the average buyer to do better than the average renter over that span. In Northern California, where the gap between house prices and rents is largest, home values would need to go up about 19 percent by 2010.
Over the next decade, the break-even increase is about 25 percent in New York and 40 percent in California.
From the article we see price/annual rent ratios of 33 in the bay area, and 25 in the next tier including NY, LA, Boston. And while the equation is different here in France (no mortgage writeoff, for example), our current apartment has a ratio of >30.
But to many people, the psychological benefits of buying are almost impossible to overcome. Owning makes them feel that they have achieved the American dream, or it gives them the secure sense that, if nothing else, they have a tangible asset where they can sleep at night.
Those are nice feelings, indeed. The question is how much they are worth to you.
Our case is a little different. While we hate missing the price runups (first in San Francisco, now in Paris), renting has been a conscious decision to keep life simpler and more flexible, and to live in buildings or locations where we wouldn’t or couldn’t purchase. It’s been the difference between doing and not doing a number of things that we’ve appreciated. And now, current housing purchase prices are helping to make this a logical decision as well.
(via Rebecca’s Pocket)
December 8th, 2005 at 01:18
The many (>60% in the Bay Area, cf. this article in the Comical) home buyers who have financed their recent purchases using interest-only loans are even more dependent on big capital gains, since there’s no other way to pay the loans back (excepting those well-heeled investors who can just pay out of pocket). The large participation of these leveraged-but-not-rich buyers should make the coming bust unlike any other in recent American memory. Normally, home owners refuse to sell during real estate downturns, and the rate of transactions is greatly reduced, slowing the decline; but this time, there will be a large number of distressed sellers who have no choice but to sell immediately. Keep your $ and your plane tickets ready, Freys.
December 8th, 2005 at 08:58
Thanks for the link, it added a lot of good concrete detail for me, and was a pretty balanced treatment. My little rent/buy decisions are loaded with opportunity cost, but this loan nonsense means real pain and suffering. So, the industry can argue that it’s just another tool to manage your cashflow, and it looks great for a couple of scenarios, but what fraction of the borrowers are using this to save money on the side, it’s got to be low:
And if they’re not saving, how many of the >60% of these buyers are going to absorb a payment bump realistically between 20-70% in a few years? Certainly our line of work is not promising that kind of income growth.
You’re absolutely right, it’s a good time to be watching on the sidelines, just don’t forget to pack a strong stomach.