Apr102012

The new normal in housing: cheaper to own than to rent

Californian’s believe it’s supposed to cost more to own an home than to rent one. It’s one of the biggest misconceptions in real estate. It’s so deeply engrained that even the so-called experts don’t question it. Renting is supposed to be more expensive than owning. Renters have mobility and no responsibility for maintenance, insurance, taxes and other expenses. The main reason anyone would pay more to own than to rent is because they foolishly believe they will be financially compensated for ownership through appreciation. We all see how that is turning out.

HOUSING: ‘This is crazy’: Home ownership cheaper than renting

By ERIC WOLFF [email protected] — Posted: Saturday, April 7, 2012 6:00 pm

The housing market has gone cockeyed.

No, the market has returned to its natural, non-kool-aid intoxicated state.

Monthly payments on a house are now cheaper than monthly rents on a similar house in most of North San Diego and Southwest Riverside counties, according to an analysis of county-supplied and Realtor data by the North County Times.

It’s also less expensive to own than to rent in many Orange County markets according to the OC Housing News.

In a traditional housing market, mortgage payments plus taxes come in much higher than house rents: A mortgage interest tax credit and a long-held preference for buying create demand such that people pay more for home ownership, and landlords must hold down rents to attract customers.

Nonsense. Only in California, and only due to kool-aid intoxication. The “long-held preference for buying” stems from people’s crazy beliefs about appreciation.

But after a foreclosure crisis began in 2007, locals became leery of buying a home, and many former homeowners no longer had the credit to get a mortgage. Investors bought those foreclosed houses and in many cases rented them out. But they couldn’t keep up with the demand, and rents for detached, single-family houses rose.

Meanwhile, prices for houses plummeted and interest rates fell below 4 percent, a 40-year low. The combination of factors has created a house market in North San Diego and Southwest Riverside county in which homeowners are getting a better deal than renters, at least after they’ve paid their down payment.

That’s exactly what happened. And it’s what should happen when the housing Ponzi Scheme unravels. It happened after the last two busts, and it will likely happen after the next one.

“I don’t think this has ever happened before,” said G.U. Krueger, a principal economist for HousingEcon.com. “It’s a function of the huge housing price collapse which has left a lot of people in the lurch.”

This guy writes drivel for the OC Register too. If he doesn’t think this has happened before, he obviously has not studied rental parity over time. House prices become less expensive to own than to rent after every bust. Those conditions are necessary to induce new buyers to enter the market and stabilize prices.

Or, as Carlsbad real estate agent Tyson Lund put it: “This is crazy.” …

No. This is normal.

From boom to bust and back

Dan Bogdanski, a teacher, and his wife bought a house in French Valley for $600,000 in 2005, when house prices peaked.

Then the crash hit: Between 2005 and 2009, prices in Southwest Riverside County fell 55 percent, and prices in North San Diego County fell 40 percent, according to data from the San Diego and Riverside county assessor’s offices. As a result of the rapid drop in price, foreclosures blossomed, with banks taking back 58,000 homes in North San Diego and Southwest Riverside counties between 2006 and 2011, according to data firm ForeclosureRadar. That period also saw a huge upswing in short sales, in which homeowners sold their properties for less than they were worth.

“A lot of people who lost their homes, they have to live somewhere. They’re basically going into the rental market,” Krueger said.

Bogdanski said he and his wife realized that with house values falling so fast and so many foreclosures around them, they wouldn’t be able to sell their house for a profit in the few years he had left of teaching before he retired.

In 2009, they stopped making payments and conducted a short sale for $300,000.

This sale doesn’t become a strategic default statistic, but what would you call it? This family realized there was no point in hanging on, so they got out of the property. I advocate strategic default for the very reasons this family sold. Their shortest path to equity was to get out of the house they occupied any way they could.

For three years, they rented a house in Murrieta for $1,650 a month before deciding they wanted to buy again. Bogdanski much prefers the control of owning his own home, but he would never have jumped back into the market if it didn’t make financial sense. Now he’s in escrow on another French Valley home, this one for $200,000, with 3.5 percent down and a 3.85 percent interest rate on a 30-year mortgage.

“Our house payment will be less than our rent,” Bogdanski said. “We’re purchasing this house with the intention of renting it at some point. The house has to be rentable and hopefully have positive cash flow.”

This guy’s credit came back enough he was able to purchase. Now, rather than being $250,000 underwater with no hope of equity in the next decade, he is buying near the bottom. By the time his former house reaches his purchase price, he will likely have $150,000 to $200,000 in equity. Timing the housing market is important.