Can it be a good time to buy and a good time to rent?
The conventional wisdom is it’s either a good time to buy or it’s a good time to rent, but not both. Rising house prices and rising rents generally favor buying because the owner can lock in a fixed cost of ownership while profiting from appreciation. Falling house prices or stagnant rents generally favor renting because the renter’s costs are not escalating while the owners are losing equity. But who gets the upper hand when prices are rising but rents are stagnant?
In my opinion, it can be both a good time to buy and a good time to rent, and now is one of those times. House prices are rising, and although appreciation will likely slow significantly from its recent torrid pace, the fact is that prices are still going up, and buyers are benefitting from appreciation. Further, despite the rising cost of ownership, in most markets it’s still less expensive to own relative to rents than most of the last 35 years, so it is arguably still a good time to buy.
However, rents are not going up significanly, and in many markets, rents are stagnant or falling. Renters are not facing escalating costs that would compel them to buy in order to prevent future housing cost increases. This fact makes it a good time to rent as well. I recently wrote a post titled Don’t stress about rising home prices. Many people simply can’t buy because they lack the down payment, the income, or the credit qualifications necessary to buy. If they can’t buy, they shouldn’t stress about what they can’t change. Further, since rents are rising only slowly, there is no urgent need to fix housing costs due to a cost push hurting the family finances.
While the housing recovery has led to higher prices and bidding wars, an expanding supply of rentals is holding down prices.
By Andrew Khouri — August 24, 2013, 8:26 p.m.
Why buy when you can rent?
To make a fortune on appreciation, right? I heard that a lot in 2005.
With a frenzied housing market shutting out would-be buyers all over Southern California, sending that check to the landlord is looking smarter every day.
The rental market provides a stark contrast to the red-hot housing recovery. In Los Angeles County, apartment rents have risen only slowly, with an expanding supply of rentals holding down prices. In downtown Los Angeles, an apartment building boom has even driven rents down by 5% over the last year, to an average of $1,990 in the second quarter.
Rents also declined in the single-family home market, where an influx of cash investors is driving up prices for home buyers. These new investors, including some cash-rich Wall Street firms, have scooped up properties to hold and rent.
My data still shows MLS rents rising at about 2% per year, but the cities and zip codes with the most REO have shown declines.
Erin Keegan and her fiance decided to keep renting after losing bidding wars on a home — twice.
The couple, who rent a small house in West Adams, lost out to an investor when they tried to purchase a two-bedroom Victorian last summer. This year, after the home was rehabbed and relisted for sale, their second offer couldn’t compete with a buyer paying $56,000 more than the asking price.
“I just couldn’t believe it sold for that much,” Keegan said. “That was definitely the nail in the coffin.”
There are many unsatisfied potential buyers in the Keegan’s place. I believe these buyers will return to the market over the fall and winter to give it another try, particularly now that rising rates and higher prices have squeezed out marginal buyers and made bidding less competitive.
The buyers this fall and winter may not enjoy the low cost of ownership of buyers from last year, but since many buyers this spring overpaid to win bidding wars, they probably won’t be any worse off than those buyers are.
In comparison, the rental market seems sane.
The tide of investors is boxing out prospective buyers but creating new opportunities for renters. The median rent for single-family homes in L.A. County fell 4.1% last quarter compared with the same period last year, according to real estate website Trulia. Contrast that with the county’s 29% year-over-year median home price gain in July.
I don’t look at median rents or resale prices when performing my calculations. They are too subject to distortions from changes in mix. I use the dollars-per-square-foot measure. I have LA County home prices up 26% and rents up 2.2%.
The diverging paths of the rental and buyer markets are an anomaly — they’ve risen in tandem for most of the last century. But the housing bubble, crash and subsequent recovery have exerted starkly different economic forces on the rental and home markets.
The sharp rise in home values and interest rates has made buying less of a sure bet in some neighborhoods, including Westwood, Culver City and the Miracle Mile, said Richard Green, director of USC’s Lusk Center for Real Estate.
“A year ago, it was an easy call to buy” over renting, he said. “Now it’s sort of a pick ’em call.“
I publish the OC housing market report to help find the markets where buying favors renting and visa versa. In two months, I am going to expand to the coverage to most of Southern California.
In the second quarter, average rents for Los Angeles County apartments reached $1,652 a month, basically flat from the prior three months and a 2.2% increase over last year, according to a report from commercial real estate brokerage Marcus & Millichap. That yearly increase mirrors wage and income growth in the region.
Renters simply have more options in the market. L.A. County is currently in the first year of a two-year apartment-building boom, according to the report, which predicts builders will finish 6,000 units this year, about twice as many as last year. …
The apartment market is getting quickly overbuilt. The Irvine Company added tens of thousands of units to the OC market, and rents are stagnant because of it.
For most of the last century, home prices and rents tended to rise in line with inflation, according to research from Dean Baker, co-director of the Center for Economic and Policy Research. Starting in 1995, Americans increasingly saw their homes as an investment tool, which drove up home prices faster than rents, he said.
And inflated a massive housing bubble.
But after the housing bubble popped, home prices fell hard. Rents declined as well, but not as much. And rents started rising again as more renters entered the market when they lost their homes to foreclosure.
Look at the crash in house prices and the spike in rent in San Bernardino County. It was extreme.
In general, most people who plan to live in their homes at least five years may still be better off buying, Baker said.
On conversely, those that plan to live in their houses for less than five years are still better off renting.
Real estate agent Brittany Walter, who specializes in northeastern Los Angeles, has seen about 1 in 6 of her clients abandon their home search in the last year. They resolved to rent after a frustrating search for a home
— something Walter advises against, because she believes home prices will only rise further.
A realtor telling people to buy because prices are going up? I’m shocked.
Her clients tell her: “We will just take a break for another year and see the market slow down.”
Some will take a break for a year because they rewed leases, but many more will return earlier.
Some signs of a slowdown are emerging as the number of homes on the market increases. The median home price in Southern California remained flat from June to July, at $385,000, according to DataQuick, …
Keegan and her fiance, who lost out on buying the same house twice, plan to stay in their one-bedroom home, where rent hasn’t increased in five years. “When I feel that mania coming,” she said, “I don’t want anything to do with it.”
That’s a smart home shopper. It didn’t work out badly for many last time.
So am I just talking nonsense to make renters fell better about missing the reflation of the housing bubble? I don’t think so. The cost push of rising rents is weak, and although renters missed the windfall from the recent rally, their family circumstances aren’t harmed by renting.
$3,708 in; $131,708 out
The former owners of today’s featured REO paid $240,000 on 10/26/2001 putting $3,708 down and borrowing the rest. They refinanced in 2004 with a $295,000 first mortgage. The refinanced again in 2007 with a $368,000 first mortgage. Their investment grew 35.5 times, and they were given the proceeds as the value went up. Not a bad deal for them — other than the trashed credit score.
[idx-listing mlsnumber=”PW13168972″ showpricehistory=”true”]
29384 CHERRYWOOD Ln San Juan Capistrano, CA 92675
$394,900 …….. Asking Price
$240,000 ………. Purchase Price
10/26/2001 ………. Purchase Date
$154,900 ………. Gross Gain (Loss)
($31,592) ………… Commissions and Costs at 8%
$123,308 ………. Net Gain (Loss)
64.5% ………. Gross Percent Change
51.4% ………. Net Percent Change
4.2% ………… Annual Appreciation
Cost of Home Ownership
$394,900 …….. Asking Price
$13,822 ………… 3.5% Down FHA Financing
4.61% …………. Mortgage Interest Rate
30 ……………… Number of Years
$381,079 …….. Mortgage
$113,616 ………. Income Requirement
$1,956 ………… Monthly Mortgage Payment
$342 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$82 ………… Homeowners Insurance at 0.25%
$429 ………… Private Mortgage Insurance
$126 ………… Homeowners Association Fees
$2,935 ………. Monthly Cash Outlays
($453) ………. Tax Savings
($492) ………. Principal Amortization
$24 ………….. Opportunity Cost of Down Payment
$69 ………….. Maintenance and Replacement Reserves
$2,084 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$5,449 ………… Furnishing and Move-In Costs at 1% + $1,500
$5,449 ………… Closing Costs at 1% + $1,500
$3,811 ………… Interest Points at 1%
$13,822 ………… Down Payment
$28,530 ………. Total Cash Costs
$31,900 ………. Emergency Cash Reserves
$60,430 ………. Total Savings Needed