Thursday, May 17, 2012

Buying Now Cheaper Than Renting in Most Major US Cities

Home prices have taken such a beating and demand for rental units has increased so much that it's now cheaper to buy a two-bedroom home than to rent one in most major U.S. cities.
According to real estate web site Trulia, buying was cheaper than renting in 74% of the country's 50 largest cities in July. In just 12% of the cities, including New York, Seattle and San Francisco, renting was cheaper. In the remaining 14% of cities, renting was less expensive but close to the cost of buying.
In addition to a continuing decline in home prices, rock-bottom interest rates have added a lot of weight to the buy side of the scale. The overnight average rate for a 30-year fixed was just 4.19% on Monday, according to A 15-year fixed averaged just 3.43%. Add in the tax perks of home ownership and for those who can afford it (and who can actually qualify for a loan), it certainly is a buyer's market.
"It's a personal decision, of course. But if you have a steady job and you are planning to stay for seven years or more and have enough cash to put 20% down and enough left over for seven or eight months of expenses, you're better off buying in most places," said Daisy Kong, a spokeswoman for Trulia.
Top buyer's markets
Las Vegas offered the most compelling buy-side math, Trulia's survey found. Prices there have plunged more than 59% from their August 2006 peak, according to the S&P/Case-Shiller home price index.

The median price of a two-bedroom, two-bath condo or townhouse is about $60,000, according to Trulia, a ratio of only six times the median annual rent of a similar rental apartment, which is $9,700.
Monthly mortgage payments on a median-priced Vegas condo would come to only $256 on a 30-year, 5% interest loan. Even factoring in property taxes and common charges of roughly $300 a month, the monthly amount is still much lower than the $810 in monthly rent they would pay on a similar place.
Detroit, according to Trulia, is another metro area where buying is better. The median price for a condo or townhouse is about seven times annual rent. Home prices in Mesa, Ariz. and Fresno, Calif. also clock in at seven times rent. Arlington, TexasSacramento, Calif., Phoenix and Jacksonville, Fla.all had buy-rent ratios of eight, Trulia said.
Top renter's markets
Even though rents average $2,980 a month in New York (the highest of any of the 50 markets), it's still the best city for renters, according to Trulia's survey.
Paying for the same kind of two-bedroom Manhattan apartment would cost 36 times as much, nearly $1.3 million.

Big money towns

One surprising place where renting is cheaper is Ft. Worth, Texas; buying exceeds renting costs by 32 times. Part of the reason is there are relatively few condos in the city and they tend to be upscale and costly. That, combined with low rents of about $9,500 a year, make renting cheaper.
Omaha, Neb., where buying is 27 times annual rents, Seattle and San Francisco, which both clock in with purchase prices that are 24 times rents, and Kansas City, at 22 times rents, are other places where renting makes financial sense.
Should you rent or buy?
The buy-rent calculation is just one part of the decision-making process. Other factors include:
  • How long you plan to stay. If you're not keeping the home for several years, transactional costs of buying and selling (e.g; commissions, closing costs) can wipe out any buying edge.
  • Whether you have cash for closing. It's not easy to find banks willing to lend more than 80% of the cost of a home. That means buyers have to come up with 20% down, plus closing costs. On a $200,000 home, that's $40,000.
  • Whether you can cover all the homeownership costs. It's not just the mortgage: There are property taxes, insurance, heat, utilities and regular maintenance.
  • Whether you can claim the tax advantages of homeownership.Mortgage interest is deductible and can shave a lot off tax bills but this benefit accrues mostly to high income earners with substantial mortgage payments. Many borrowers claim the standard deduction on their taxes and so derive no savings from the deduction.
Even where it's cheaper to rent, it doesn't necessarily mean renters will come out ahead, according to Ken Johnson, a real estate professor at Florida International University and co-author of a new study on whether it's better to buy or rent.
"Paying off a mortgage is a kind of forced savings," he said. Each check homeowners write lowers the balance they owe and increases the value of their property holdings. That, unlike cash in a bank account, is not easy to tap.

Where the jobs are

Homeowners have to go through a lengthy and costly process to access it by taking out a home equity loan or a cash-out refinance -- actions they tend not to take unless there's a specific need.
Depending on where they live, renters may save on monthly expenses but, unlike the forced savings of mortgage payments, they won't have anything to show for their monthly payments in the way of savings.
Ultimately, however, the decision whether to buy or rent depends on each person's situation and their plans for the future.
While buying a home may be an attractively cheap option these days, many mortgage holders have found out the hard way that the joys of homeownership can turn sour should the unexpected strike. To top of page
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Thursday, May 10, 2012

Time to Consider Investing in the U.S. Home Market?

The long, discontented winter for the U.S. home market might be easing. Home prices are inching up in some markets, and it might be a good time to invest.

That doesn't mean that every place makes sense for homebuying. Nationally, new-home sales fell by the largest amount in more than a year in March--7.1%--so there's no widespread rebound under way, according to the U.S. Commerce Department.

You'll still have to be incredibly careful and look at several factors such as local job growth, housing inventories, and price trends. Whether you're looking to relocate, eyeing a retirement locale, or scouting investment properties, caution is still essential.

Foreclosures and excess inventory will continue to hurt key markets. "I think we'll see a strange housing market for the next couple of years, where foreclosures and vacancies continue at the same time as new construction grows rapidly," said Ingo Winzer, president of real estate information service Local Market Monitor.

With the exception of Washington and perhaps Boise, markets in Arizona, California, and Florida were pummeled in the downturn, with some areas suffering 50% markdowns from the peak of the bubble.

Bright Spots
Although good news is in short supply, there's a tinge of optimism surfacing on U.S. real estate. Local Market Monitor reported recently that its housing demand index is in expansion status, compared with 64 months of contraction that began in 2006. The strongest markets generally are experiencing robust job growth, which typically is one of the linchpins of any strong housing market. Rebounding regional industries are boosting some areas such as Austin, Texas; Bakersfield, Calif.; Boise, Idaho; Ogden, Utah; Dallas; and Grand Rapids, Mich., according to the Metro Monitor from the Brookings Institution. These were among the strongest-performing metropolitan markets Brookings surveyed.

Clusters of strong industries make a huge difference in real estate recoveries. Information technology businesses in Austin; Boise; Ogden; Portland, Ore.; Provo, Utah; and San Jose, Calif., (Silicon Valley) are seeing growth. Other industries in recovery mode are manufacturing--particularly auto production--and high technology. Meanwhile, areas once supported by old-line industries--such as Allentown, Pa.; Little Rock, Ark.; Atlanta; Fresno, Calif.; and Philadelphia--aren't faring as well.

Indeed, those areas hardest-hit by the bubble bursting and the Great Recession are struggling. While you're seeing some evidence that the downturn might be bottoming out, places like Las Vegas; Los Angeles/Central California; Tucson, Ariz.; and Tampa, Fla., are among the worst performers.

In terms of price increases, however, it appears that the most devastated areas are slowly coming back. They've not recovered to 2006 levels--and may never--but there's strong evidence that they've turned the corner. Here's a short list of areas from with the best year-over-year price increases (through March 2012):

Rooting Out Real Bargains
Prices alone, however, aren't necessarily a green light to buy. In cities where housing inventories are high and foreclosures are ongoing, you'll continue to see downward pressure on prices. List prices are still falling in Chicago; Knoxville, Tenn.; Southern California; Sacramento, Calif.; and several cities in Pennsylvania, including Philadelphia. That means even though some areas appear to be recovering, it might be some time before prices stabilize.

For absolute bargains, the best prices are found where the price-to-rent ratio--a gauge that shows where buying makes the most sense--is still favoring homeownership, according to These cities include Detroit; Oklahoma City; Dayton, Ohio; Toledo, Ohio; Grand Rapids, Mich.; Cleveland; Atlanta; and Memphis, Tenn. Of course, many, if not most, of these areas have been hurting from massive job losses from older industries, so they might not be the best places to buy if you're expecting quick price appreciation.

Ultimately, if you're interested in a long-term investment, you'll need to look at areas that have the greatest chance of sustaining job growth well into the future. These markets are not to be confused with those offering the best values now, though some might offer some bargains relative to cities that have traditionally been the highest-priced, such as those in Silicon Valley.

Using Local Market Monitor's 24-month forecasting model, San Jose/Santa Clara, Calif.; Houston; Austin; McAllen, Texas; Fort Worth, Texas; Rochester, N.Y.; Pittsburgh; Louisville, Ky.; Oklahoma City; and Knoxville, Tenn., might offer the best opportunities for price appreciation, which ranges from 1% to 4% during the next two years.

Much of the new optimism hinges on foreclosures leveling off and job growth continuing. Another boost might come from proposed changes that may allow homeowners whose mortgages are owned by Freddie Mac (FMCC) and Fannie Mae (FNMA) to stay in their homes through refinancing or writing down principal.

Because this is an election year, it's probably a safe bet that Washington will do everything it can to show some progress on housing. In the interim, keep your eye on places where home inventories are falling, jobs are being created, and prices are stabilizing. You could find some excellent values if you do your homework.

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Thursday, May 3, 2012

Real Estate Trends for 2012 and Beyond

Today’s housing market is evolving, and many of the changes we are seeing now are unlikely to go away any time soon. Today, we examine six rising trends that are set to become the new “normal” in the majority of US housing markets in the months and years to come.

1. Distressed or foreclosed properties will continue in high numbers, keeping the supply of vacant homes at levels that will exceed end user demand in many local markets:

Areas with an over-supply of existing homes will continue to see prices flat or eroding, until the supply-demand ratio comes back into balance. In some parts of Florida, California, Georgia, Nevada, and Arizona, to name a few, it will take years for this ratio to balance out.

Any market seeing increasing foreclosures in 2012 will experience this imbalance in the future, to some extent. The larger the supply relative to the existing demand, the lower the prices will tend to be.

2. Conversion Of Single Family Homes To Rentals:
Home ownership has been shrinking. The housing market is undergoing a fundamental change to a much higher percentage of single family rentals. Rent rates will only go up in those areas that have a tight supply relative to local demand. This will be mostly near major employment centers in bigger cities.

That being said, we’ll see a much higher percentage of tenants in suburban “bedroom communities”. Those neighborhoods tend to have higher foreclosure rates, and are located farther from the best paying employment centers.

The Worst locations are neighborhoods near “dying” employment centers. A prime example is Detroit, Michigan. As the auto industry has lagged, and employment has fallen in a number of related sectors, jobs in the “rust belt” are still dwindling. “Industrial age” population centers are shrinking and this trend will continue have a negative impact locally.

For residential real estate brokers, the biggest growth opportunity at present is in property management. Some brokers have opened new property management companies to accomodate the growing demand caused by a local transition from owners to tenants.

3. A New Market Variable:
The development of “Big Box” rental property owners in the single family market Wall Street has entered the housing market in an attempt to buy up bulk reo packages of single family residences being offered by Fannie Mae or other entities holding a large inventory of foreclosed properties.

This has never been done before. The impact may be positive in the short term for the selling entity, but I believe that it is most likely that this development will have a negative impact locally. The increased supply could force rental rates lower. Mom and pop investors may have difficulty cash flowing against such competition. Managing a Single Family Rental project of this type and scale are unprecedented.

For existing homeowners, this event could lead to a higher percentage of tenants in many neighborhoods that used to be 90 to 100% owner occupied. The attempt to cash flow single family rental properties in unprecedented numbers, combined with high unemployment and lower incomes among the tenant population is leading to

4. Significant growth in the use of government subsidized housing programs commonly known as “Section 8″:
Today there are fewer people who can afford to pay full “market rent”, which is usually higher than a mortgage would be on the same property. And Government Subsidized housing has a reputation for paying above market rent rates for a variety of reasons.

I fully expect that “Big Box” landlords will want to utilize “section 8″ or similar programs, as this is a common strategy for boosting rental income to “above market” levels, thereby increasing positive cash flow. However, in cities where the number of available properties exceeds the local demand for subsidized rent, houses can go begging for tenants. This could upset the “Big Box” cash flow projections. It will be interesting to see how this plays out over the next few years.

5. Government Domination of The Mortgage Market:
Taxpayer “ownership” of the secondary mortgage market, in order to continue funding mortgages in a market that has lost most of it’s private investment capital. The financial burdens are already significant for both the taxpayers and the buyers who are using these loans. We’re stuck in a vicious cycle of more government programs and guarantees, with much less private sector involvement than ever before in the history of the secondary mortgage market.

6. Higher unemployment and lower wages:
Productivity is at record high levels, but new technology has limited the creation of new jobs for humans. Globalization and internet commerce have made Americans compete with workers in Pakistan or Indonesia, resulting in much lower incomes. This will have a direct impact on home prices, rental rates, and government intervention in the housing market.

These are not short term events, they are here to stay on some level. This is part of the new “normal” where today’s housing market is concerned

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