September 13th, 2012
Econintersect: Trulia reports that the average for 100 major metro areas comes in with a dramatic 45% lower cost for owning a home than for renting. All 100 markets reported owning cheaper than owning; Honolulu was the "weakest" market - owning was "only" 24% cheaper there. It seems that this would be a springboard for strong increases in home sales. That sense is reinforced by a story today from Realtor Mag: There is a significant increase in competitive bidding for available houses in some markets.
But home sales, although up from recent extreme lows are still very weak, as shown in the following graph from Calculated Risk:
Click on graph for larger image.
Exisiting home sales are at a level seen 13-14 years ago when the U.S. population was about 40 million less.
There are several factors that are inhibiting home sales. These are discussed in the following sections. These sections contain new Econintersect analysis and some editorial conclusions
Under Water Mortgages
A big headwind comes from the 10.8 million homeowners currently underwater on their mortgages. Some of these would normally be in the market to sell and buy another home but cannot do that because they cannot afford to sell their current home. An additional 2.3 million homeowners have within 5% of the balance remaining on their mortgage. Since seller costs can amount to 5-6%, many of these are similarly inhibited from selling in order to buy another home. That puts about 13 million homeowners in the equity trap that will make selling and buying a new home difficult.
A 2009 study by Paul Emrath (HousingEconomics.com) found that the average time home buyers remain in a home is around 15 years. The potential per year for reduced home sales from this source is therefore 867,000. If we arbitrarily assign a 0.7 factor to the potential total we come up with an estimate of 600,000 a year not buying a home because they are under water on their current mortgage. (Note: The adjustment factor assume that 30% of those underwater will find a way to sell and move without destroying their credit and/or down payment needed to buy another home, perhaps too high an estimate.)
Credit Destroyed by Foreclosures
There have been 4.4 million completed foreclosures (bank repossessions) from 2007 through the end of 2011 (Statistic Brain). Virtually all of these former homemowners are not eligible to buy another home because of credit impairment. If we use the same 15 year normalizing factor as above, that indicates another 300,000 who otherwise would have been buying a home each year. As time moves forward early foreclosures will disappear from the credit record and those foreclosed in 2007 and 2008 will become eligible to get another mortgage, provided their credit is otherwise good. As soon as the million or so foreclosure completion rate of the last three years starts to decline significantly then the 300,000 number will start to decline. That is not likely to change for at least a couple more years.
Reduced Household Formation
According to a research paper from the Federal Reserve Bank of Cleveland, the average net new household formation rate from 1997 to 2007 was around 1.5 million. for 2008-2011 the average was approximately 500,000. The accumulated deficit in new households is now about 2.5 million and is expected to continue to grow this year with an expected 1 million new households.
It is reasonable to assume that this represents a future demand overhang that will come into play when there has been sufficient economic recovery. This is not likely until employment recovers to more normal levels. In the meantime an estimate of a 500,000 shortfall per year, atl east for 2012 and 2013, is reasonable. The same Cleveland Fed paper gives an average home ownership rate for those under 35 at about 40%, so we can add 200,000 a year home buyer shortfall per year from this source, assuming that the under 35 age group dominates new home ownership.
The number of unemployed today has been estimated by many sources to be 23 million below what would be the case if we had more normal unemployment levels and past employment population ratios. Many of these 23 million will already be counted in the groupds we have enumerated above. To be conservative, let's subtract the total of all those counted previously from the total number of people without work and another 3 million people remain. at a 60% home ownership rate and an average of 2.3 persons per household we calculate another 800,000 able to buy a house that would be otherwise.
Econintersect estimates that the factors above result in a reduced demand for housing purchase between 1.1 million a year (without the unemployment impact included) and 1.9 million including the effects of high unemployment. If these numbers are added to the current sales rate about 4.5 million house per year, the result is 5.6 million (or 6.4 million). That would certainly put home sales at a very healthy volume, and the higher number might even be considered "bubbly".
The current level of home sales is vary easily justified based on the major economic factors that inhibit realizing a higher demand. Econiontersect suggests that there are obvious economic factors to watch to see when increased housing sales are likely.
Here is the full Trulia press release from Marketwire:
SAN FRANCISCO, CA--(Marketwire - Sep 13, 2012) - Trulia today released its Summer 2012 Rent vs. Buy Report, which provides the inside scoop on whether buying a home is more affordable than renting in America's 100 largest metropolitan areas. Looking at homes for sale and for rent on Trulia between June 1, 2012 and August 31, 2012, this study compares the average cost of renting and owning for all homes on the market in a metro area, factoring in all cost components including transaction costs, taxes and opportunity costs.
Homeownership Affordability Highest in Detroit, Lowest in Honolulu and San Francisco
With a 3.5 percent mortgage, itemized deductions at the 25 percent federal tax bracket, and a seven-year time horizon, homeownership is cheaper than renting in all of the 100 largest U.S. metros by a wide margin. However, relative affordability depends largely on location. Buying a home is 24 percent cheaper than renting in Honolulu, 28 percent cheaper in San Francisco, and 31 percent cheaper in New York, but is 70 percent cheaper in Detroit. However, the actual dollar amount reveals that despite a low 28 percent difference in buying versus renting in San Francisco, the monthly dollar savings is big ($899) because rents and prices are so high in this region.
Top 5 Metros Where Homeownership Affordability Highest U.S. Metro Monthly cost of homeownership ($) Monthly cost
of renting ($)
Difference ($) Difference (%) Detroit, MI $349 $1,149 -$800 -70% Gary, IN $616 $1,649 -$1,033 -63% Oklahoma City, OK $590 $1,576 -$987 -63% Lakeland-Winter Haven, FL $495 $1,276 -$781 -61% Toledo, OH $476 $1,222 -$746 -61%
Top 5 Metros Where Homeownership Affordability Lowest U.S. Metro Monthly cost of homeownership ($) Monthly cost
of renting ($)
Difference ($) Difference (%) Honolulu, HI $1,519 $2,007 -$488 -24% San Francisco, CA $2,327 $3,226 -$899 -28% New York, NY-NJ $1,857 $2,687 -$831 -31% San Jose, CA $1,819 $2,646 -$827 -31% Los Angeles, CA $1,379 $2,020 -$641 -32%
Note: Cost of homeownership assumes that the home is sold after 7 years and includes closing costs, maintenance, insurance, property taxes and other costs. Cost of renting includes security deposit and renters insurance. Monthly costs are based on net present value of costs averaged over 7 years, and based on the average across all properties listed in the metro area, including those for sale and those for rent, in summer 2012.
Why Mortgage Rates, Tax Brackets and Time Horizon Matter in Rent vs. Buy Decision
For prospective homeowners who are unable to secure the best mortgage rates, fail to itemize their tax deductions or plan to stay in their next home fewer than seven years, the cost of homeownership relative to renting will be greater. The chart below illustrates how each of these factors can change the cost considerations in favor of renting or buying. In the New York metro area, a 4.5 percent mortgage rate, not itemizing one's tax deductions and staying in a home for 5 years, will make homeownership 3 percent more expensive than renting, instead of being 31 percent cheaper. Meanwhile, homeownership remains 40 percent cheaper than renting in Atlanta, even with the higher mortgage rate, not itemizing and shorter time horizon.
How Mortgage Rates, Taxes, and Time Horizon Affect Renting vs. Buying SCENARIO New York Los Angeles Boston Atlanta 3.5% mortgage, 25% tax bracket, stay 7 years (baseline) -31% -32% -41% -57% 4.5% mortgage rate* -23% -24% -34% -53% Not itemizing tax deductions* -18% -21% -30% -50% Stay 5 years* -21% -22% -32% -52% 4.5% mortgage, not itemizing, AND 5 years 3% -1% -12% -40%
*For these scenarios, the factors not mentioned are the same as the baseline.
- "Homeownership is cheaper than renting in all of the 100 largest metros, by a wide margin," said Jed Kolko, Trulia's Chief Economist. "Despite the recent price rebound, rents continue to rise faster than prices, and mortgage rates are near record lows. Homeownership makes the most financial sense for people whose strong credit scores let them snag the lowest mortgage rate and who get the biggest benefit from deducting mortgage interest and property taxes from their income taxes."
- "If buying a home is cheaper than renting in every major metro and makes financial sense in most situations, then why aren't more people buying? The reason is because many people can't take advantage of today's affordability," said Jed Kolko, Trulia's Chief Economist. "It takes years to save enough for a down payment, and it takes a high credit score to even qualify for a mortgage, let alone to get the best rate. In the recession, many people found it harder to save -- and harder to keep up their credit scores."
- To view an interactive map illustration how mortgage rates, tax brackets and timing horizon can impact the rent vs. buy decision, click here.
- To view a full list of the rent vs. buy cost considerations for the 100 largest metros, click here.
Trulia looks at homes for sale and for rent and calculates the average rent and sale price across all listed properties in a metro area. Then, Trulia factors in the total costs of homeownership (e.g., closing costs, maintenance, insurance, taxes, etc) and total cost of renting (e.g., renter's insurance and security deposit). It assumes that a prospective homebuyer can get a low mortgage rate of 3.5 percent, itemize their federal tax deductions and are in the 25 percent tax bracket, and will stay in their home for seven years. To account for the opportunity costs, Trulia calculates the net present value of the payment streams for renting and owning. Click here to read the full methodology.
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Trulia gives home buyers, sellers, owners and renters the inside scoop on properties, places and real estate professionals. Trulia has unique info on the areas people want to live that can't be found anywhere else: users can learn about agents, neighborhoods, schools, crime and even ask the local community questions. Real estate professionals use Trulia to connect with millions of transaction-ready buyers and sellers each month via our hyper local advertising services, social recommendations and top-rated mobile apps. Trulia is headquartered in downtown San Francisco and is backed by Accel Partners and Sequoia Capital. Trulia is a registered trademark of Trulia, Inc.
- Homeownership 45 Percent Cheaper Than Renting Nationally, Reports Trulia (Press Release, Marketwire, 13 September 2012)
- The Market Gets Competitive for Home Buyers (Daily Real Estate News, Realtor Mag, 13 September 2012)
- CoreLogic: 22.3% of Mortgages Upside Down (GEI News, 12 September 2012)
- How Long Buyers Remain in Their Homes (Paul Emrath, HousingEconomics.com, 11 February 2009)
- Home Foreclosure Statistics (Statistic Brain, 07 July 2012)
- Household Formation and the Great Recession (Timothy Dunne, Federal Reserve Bank of Cleveland, 23 August 2012)
- After Foreclosure: How long until you can buy a house again? (Les Christie, CNN Money, 28 May 2010)