Posted on 09/21/2007 10:49:53 PM PDT by Freedom_Is_Not_Free
Sep 17, 2007 -- When you rent, most people mistakenly assume the decision is made out of necessity, not rationality. But there is a very good reason to rent in today's bubble-stricken market: median incomes do not support median home prices.
By Ben W. (bdarbs)
Median income household cannot buy median priced home
The graph above demonstrates three very important facts.
* Whenever prices rise more than the normal trend, they eventually correct and drop back in line. * This housing bubble is an absolute giant when compared to the housing bubbles of the previous decades. * Income levels haven't come close to keeping up with home price inflation. For decades, home prices strongly correlated with median incomes. In 1997, everything changed.
What does this mean?
Now is perhaps the best time in US history to be a renter. You are far better off paying high rents for the next few years than buying a home and watching your equity disappear while the market takes a freefall.
Not convinced? Here's my argument...
The home prices that we are seeing today are artificial and not sustainable. This is because home prices have deviated from the fundamental formula that has always ruled the real estate market. Nationally, median home prices increased by nearly 50 percent in the last decade. The median income, on the other hand, has gone up 10 percent in the last ten years--a very meager increase compared to the change in home prices.
Incomes simply cannot support the bubble-inflated prices. In many places, Americans earning the median income have no chance of reasonably affording a median priced home with a conventional home loan.
(Excerpt) Read more at efinancedirectory.com ...
I cannot argue with your assessment if any exist. Here in KC, we are the last of the cities with a metropolitan area of two-million plus to experience urban renewal. Which means anything decrepid is being ripped to shreds. Let alone the fact that real estate prices have declined less than five percent. Therefore, other than the ghetto (say Linwood and Prospect), a $75,000-99,9999 home will not exist.
Please see my comment to Black Birch. Thank you.
Thanks for the post, Tina. By the way, I love saying oops....
Thank you for the response.
I like stats questions.
The mean value is the sum of all values divided by the number of values summed. The median value is the value where half the values are above and half the values are below it.
The statistic you use depends on what you want to know. If I were a politician trying to predict voting behavior, I would want to use the median value because it is grounded in the proportion of people above and below the median value. If I were a financial analyst, I would probably use the mean (average) because that would estimate the likely value of the phenomenon I was studying.
In practice and with large numbers of people, the median and mean may not be very different. However, if you live in a town with mostly poor people but 10% of the residents live in multi-million dollar mansions, then the mean house value will be a lot more than the value of a house that 90% of the people (the poor) own. The median value will be lower than the mean and will describe a house price more typical of the town’s residents. My neighborhood is sort of skewed with many modest homes but a strip of mansions in the middle that would raise the mean house value for the neighborhood above the median value.
There are differences between living in any apartment vs. any home. Almost any home has 2 bedrooms, for example. A single family home almost always has a driveway and a front and back yard. There is storage in an attic of a home not available in an apartment. These things have value that I don’t see accounted for in your analysis. On the other hand, there may be attributes of apartment living that aren’t available to home owners (no exterior painting or yard work, for example).
I don’t know. Have you tried to do 5% in the current credit climate?
Are lenders still lending to buyers who only put 5% down? I honestly don’t know. I hope someone in the mortgage industry can answer the question and if so, how much higher the interest rate is on those loans, and how much higher the payment is with mortgage insurance.
I honestly don’t know if the liquidity crisis has affected the availability of no down payment loans and 5% down payment loans.
Why do you rent? Still saving the 10% down payment?
If you can buy a place for $1500 per month that you are renting for $1400 per month, that is a no-brainer purchase. Even if the value goes down, your cost of living may be LOWER due to the tax write-off o the $1500 monthly payment. I don’t know the cost of association dues, but you should be buying that place, not renting.
There is no home “ownership” in America anyway. You pay rent to the government every year. While the “ownership” misnomer might save you money in the long run, it’s important to recognize that no one owns their home as long as the government can take a piece of it every year you don’t pay rent.
No down are harder, but not impossible.
5% down is still quite attainable on loans under $417,000. Over 417k a bit harder. Just have to have at least passably decent credit.
The liquidity crisis sucks, but for anyone with halfway decent credit it’s nowhere near as bad as hyped.
Just moved here, just got married and have wedding debts to pay off, have 6 months left on lease, and need to clean up a couple more items on credit. I figure April 2008 is the target timeframe.
I would think VA loans are still being made
Trulia.com had about a dozen or so listed in my zip code. I wouldn't want to live in those homes, but they are available.
I think it’s better to own than rent, as long as you can rent the home you are purchasing for more than the monthly payment. If you can do that, why would you rent? You’re paying less than rent PLUS you’re paying down the debt on the house over time. Yes, prices will fall but incomes will rise and the housing market will come back into balance again.
So if you're in the 25% tax bracket, you can deduct 25 cents out of every buck of mortgage interest paid... You're still out 75 cents.
My point in posting the original article was not to say that it is bad to buy a home, but that there is no hurry to buy a home, as prices still seem to be going down.
Serious investors in real estate confirm that belief, as stated here:
“Back to the Futures: Investors See Four Years’ Worth of Housing Slump
* by Paul Jackson
* September 19, 2007
“Something I’ve been meaning to blog about for a few weeks now is the surprisingly unheralded arrival of extended listings to the CME housing futures — a reader from TFS Derivatives Corp. has been keeping me in the loop with relevant housing metrics and allowed me to share their weekly housing report with HW readers.”
Just to sum up that link...
Professional real estate investors expect homes in Miami and San Francisco to drop about 30% over the next 4 years. Many other cities may see less of a drop, but the point is the same.
The market is not only soft, but it is getting softer. There is no hurry to buy a house, unless you flat can’t stand renting. If you wait a couple of years, you will likely come out ahead. If you wait 4 years, you just might buy near or at the bottom.
That sums up the view of these professional real estate investors. There is just no hurry to get into a home today, with two exceptions...
1. you just flat hate renting and can’t wait patiently for the market to bottom, or...
2. as in your case, housing is just DIRT CHEAP relative to rents.
Oh right, all this while they tell us the U.S. will expand by 50 million in the next few decades?
Sounds like very wishful thinking to me.
What does an increase in population over a few decades have to do with home prices over the next 4 years?
That is like saying I should squander my net worth over the next 4 years, since I’ll be dead in a few decades. Get serious.
If you think all this will have no bearing on homes and available land, then I can't help you.
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