Buy a House Today!

I'm not advocating going out and buying a house but this is a contrarian look at the current housing market right now.  With rents rising ever so steadily and mortgage rates at historic lows the debate between buying and renting is becoming more than just water cooler conversation.  Obviously there are several other keys determinants in deciding weather to buy or rent than dollar signs alone.


At the end of the Slate article they point out that creditworthy investors should be looking at buying up houses at lower rates and renting them out to less creditworthy individuals.  We've highlighted this rental boom in [February 26, 2012 Investing in Foreclosures: How One Company Does It] and it's also why we chose to invest in Lowe's based on both the rental boom and home improvement turnaround as people stay in the current houses longer.


Via Slate

• As an illustrative example, consider the following from the complex where I live. In the rental portion of the facility, you can grab a 754-square-foot apartment for a minimum of $2,269 per month. In the condo portion, one door down, in a building also completed in 2008, an 868-square-foot apartment is selling for $419,900. That suggests that if you happened to have about $420,000 on hand, you could buy the condo and earn over $27,000 a year renting it out. That’s a yield of more than 6 percent on your investment purely out of rental income. You don’t need to worry about whether the unit will appreciate in price or not over time, just assume that thanks to inflation and population growth, you won’t see a sustained nominal decline in rents. That’s not a risk-free investment, but in the scheme of things it’s a great return on a pretty safe bet. For perspective, consider that Spanish government bonds yields getting up to 6 percent is considered cause for total panic. If you want to invest your $420,000 in U.S. government debt you’ll earn yourself yields that range from 3.13 percent on a 30-year bond to a mind-blowingly low 0.19 percent on a 1-year bond.
• Driving these price anomalies is a one-two punch of rising rents and declining mortgage eligibility. This, in turn, all has its origins in the financial crisis and continued risk aversion gripping the banking system. The subprime lending fiasco means that banks are now much stricter about who they’ll make a mortgage loan to. At the same time, the recession has battered people’s ability to repay debts. These two factors have made it harder for people to qualify for loans. At the same time, we’ve been building a record-low quantity of new housing units year after year since 2006, and many former homeowners are now back on the rental market after foreclosure. More people chasing a diminished stock of rental property means rising rents and great deals for those who can get a loan. Data from the real estate site Trulia suggests we’ve seen some truly eye-popping increases in asking rents around the country. Of the 100 largest metro area rental markets, only five, of which the largest is relatively small Las Vegas, saw year-on-year declines. During the same period, rents rose 6.2 percent in the New York area, 6.1 percent in Chicago, 4.1 percent in Houston, 4.9 percent in Dallas, 5.2 percent in Washington, 2.5 percent in Atlanta, a staggering 9.8 percent in Boston, and an amazing 12.8 percent in Miami. Los Angeles and Philadelphia round out the 10 biggest metro areas in America with small price increases. Across the 100 big metro areas, Trulia saw a 5 percent increase.  The upshot is that outside of San Francisco and Honolulu, the ratio of sale prices to annual rents is now below 15 in every American city, the price at which it generally becomes cheaper to buy.
• The basic problem is that the building stock doesn’t match our organizational knowledge. In principle, very rich or very creditworthy individuals or firms ought to be snapping up cheap homes and renting them to less creditworthy individuals who can’t take advantage of today’s low interest rates. Such actions should lower rents and raise sale prices, eliminating the anomaly. But nobody really has much experience with large-scale ownership of single-family homes as rental properties and the logistics of doing it seem bad. Nevertheless, some bold entrepreneurs are giving it a shot and the government istrying to encourage more. These are good ideas, but it’s not clear if they’ll work or how quickly. When it comes to taking advantage of great homebuying opportunities, there’s still no real substitute for the old-fashioned single household buying a home to live in. That’s what the entire mortgage lending and real estate industry in the United States is set up to support, it’s what our tax code is designed to encourage, and it’s exactly what you should be doing if you’re currently renting and qualify for a conventional mortgage.