Some observations on the housing problem

Comparison of Ownership vs. Rental Costs Points to Negative Equity Accruals in Many Markets Over the Next 4 YearsPolicy makers should exercise extreme caution in intervening in housing market as prices continue to fall to trend levels.Center for Economic and Policy ResearchFor Immediate Release: October 28, 2008Contact: Alan Barber, 202-293-5380 x115 (CEPR);Taylor Materio: 202-662-1530 x227 (NLIHC)http://www.cepr.net/index.php/press-releases/press-releases/comparison-of-ownership-vs.-rental-costs-points-to-negative-equity-accruals-in-many-markets/WASHINGTON, D.C. - As the housing market meltdown continues unabated, a report released today by the Center for Economic and Policy Research (CEPR) and the National Low Income Housing Coalition (NLIHC) shows that in many bubble-inflated markets, homeownership remains a costly and risky proposition.The study, "The Changing Prospects for Building Home Equity: An Updated Analysis of Rents and the Price of Housing in 100 Metropolitan Areas," evaluates the median house price and fair market rent, as determined by HUD, for the 100 largest metropolitan areas. The study extends and updates the methodology from two earlier studies, "Ownership, Rental Costs and the Prospects of Building Home Equity: A Comparison of 100 Metropolitan Areas," and "The Cost of Maintaining Home Ownership in the Current Crisis: Comparisons in 20 Cities," to the 100 largest metropolitan areas in the U.S.The new analysis shows the wide diversity in housing markets across the country. While many metropolitan housing markets continue to be subject to real estate bubbles, prices are not out of line with rents in large parts of the country. The findings of the report again show the importance of not relying on a one-size-fits-all solution to the current housing crisis.The report also notes the problems that many homeowners are likely to face finding quality rental housing due to its limited availability."Despite the extreme downward pressure in homeownership and labor markets, rental vacancy rates remain stable and rents continue to inch up" said Danilo Pelletiere, NLIHC Research Director and a co-author of the report. "There was a critical need for affordable rental housing before the foreclosure crisis and the problem is only getting worse.  Creating affordable rental housing in the face of foreclosure is important to keep people in their communities and stabilize housing markets.”According to the report, which analyzed data from the Census Bureau's American Community Survey (ACS), the most inflated markets currently see monthly homeownership costs outpacing rental costs by as much as 300 percent. This creates a substantial and unnecessary drain on household income, especially for middle- and lower-income families."This could mean that families may have to forgo health insurance or quality child care as they struggle to make their mortgage payments, " said Dean Baker, Co-Director of CEPR and an author of the study. "Furthermore, since prices are still falling in these markets, many homeowners won't ever accrue any equity."The study projects that even though prospects for equity accrual have improved slightly in bubble markets, most homeowners will still leave their homes with large amounts of negative equity if house prices return to trend levels. For example, it projects that by the year 2012, homeowners in New York will have $101,964 of negative equity and in Los Angeles the shortfall would be $168,069. In these, and other bubble markets, households would benefit from proposals that attempt to provide affordable rental options as part of policy solutions.For cities where the costs of owning are much closer to rental costs, it is likely that a small amount of equity will be accrued. In these markets, policies that keep owners in their homes, possibly through some form of government-guaranteed mortgage, are preferable.     Modesto BeeReal estate near bottom?Comparing rent to sale value shows that now is time to buy, study says...J.N. Sbranti…10-29-08http://www.modbee.com/local/story/479278.htmlA new way of calculating the actual value of a house indicates that maybe, just maybe, Northern San Joaquin Valley home prices have hit bottom.A national analysis on the cost of renting versus owning a home uses historic trends to determine a "floor" for home prices. That study, released Tuesday, predicts whether those who buy homes today will gain or lose equity during the next four years.It's based on ratios comparing rental costs to home prices, dating back to 1895.The formula determines that the right price for a house is roughly 15 times its annual fair market rental rate.So if a Modesto home can be rented for $1,000 a month, its value would be about $180,000 ($12,000 per year multiplied by 15).The median sales price for Stanislaus County homes fell to $179,000 in September. The county's median rental home rates, meanwhile, are more than $1,000 per month.Therefore, the "theoretical and empirical underpinnings of the relationship between home prices and rents" could indicate that now is the time to buy.That's at least one interpretation of the findings in "The Changing Prospects for Building Home Equity: An Updated Analysis of Rents and the Price of Housing in 100 Metropolitan Areas."The study is by Dean Baker and Hye Jin Rho from the Center for Economic and Policy Research and Danilo Pelletiere from the National Low Income Housing Coalition."It is a very well-reasoned study," said Mike Zagaris, president of PMZ Real Estate in Modesto. "It's based on facts and historical evidence, and it uses a understandable rationale. I plan to send a copy to my banker to help him understand the market."The study itself may confuse those who read it unless they realize it's based on June 2008 housing data. Four-month-old statistics may be reliable during a normal housing market, but Northern San Joaquin Valley home prices have been in free-fall.The median sales price for Stanislaus County homes was $201,000 in June, but it has declined by $22,000 since.Big decline in 4 monthsWorking off the June statistics, the study concludes that people buying modest Stanislaus homes would lose at least $21,000 in equity by 2012. The authors, obviously, didn't know Stanislaus home prices would drop more than that before they could publish their study."Based on their analysis, we're in the zone to buy something at a reasonable price today," said Zagaris. He and a group of investors are in the process of buying a large "portfolio of properties" for an average $210,000 each that he expects to rent for $1,300a month.According to the study, the current cost for rent and utilities of a privately owned, decent, safe and modest three-bedroom Stanislaus home is $1,248 per month.The study's authors, of course, didn't do their analysis to help individual home buyers or investors decide whether to purchase a house. Their work was designed to provide facts for public policy-makers, who are considering more laws and programs to help the ailing housing market.Their primary conclusion "is that policy-makers (nationwide) must be extremely cautious in intervening in housing markets, particularly either purchasing or encouraging others to purchase homes with the goal of increasing equity in the short term."In July, federal lawmakers approved a $3.9 billion federal program to help local governments deal with abandoned and foreclosed homes. Of that, Modesto is expected to get $8.1 million and Stanislaus County's government should get $9.7 million.The study argues against the government buying homes and directly intervening in housing markets nationwide."A top priority must be efforts to limit displacement and community disruption by keeping current owners in their homes, either as owners with more affordable mortgages that reflect lower post-deflation prices or as renters," the study says. "Without such efforts, backed by government influence and money, a vicious cycle of extreme disinvestment is likely to develop in many communities."Zagaris praised the study's opposition to the government buying houses. He said families and investors have jumped in to purchase the valley's bargain-priced houses, and they shouldn't have to bid against the government."The housing market is clearing away (the excess inventory) on its own. It doesn't need trillions of dollars from the government to do it," he said.PMZ statistics show that home sales have been soaring since spring, while the total number of houses on the market steadily has declined.Rather than use federal funds to buy houses, Zagaris said local governments should provide first-time buyers with down payment assistance.