About 6 months ago I was challenged by a reader to prove it was cheaper to rent than to buy, something I stated right here in TheRealEstateConversation.com. My point then was that you needed to factor the costs of home ownership in terms of maintenance against those of renting. I still advocated buying, but not based on the cost comparison. However rents are rising. Why are rents rising? - simple, increased demand. Demand is coming from several places; an improving workforce for one. As the economy improves, 20-34 year olds are moving out of their parents’ homes and into apartments. It is also coming from those distressed sales we see every day. Short sellers and foreclosed homeowners have no choice but to rent since their credit is shot and even after they’ve rebuilt their credit, they lack the funds for a down payment. So what then does this portend for the housing market?
Conventional wisdom would suggest that the housing market will by default improve because more and more people will conclude that owning is cheaper than renting. That equity building, leverage and the chance at the American Dream are reasons to test the waters of this choppy and unpredictable housing market. In fact, it is a logical that as demand pushes the cost to rent upward, buying will look more and more attractive. And I believe that conventional wisdom is correct, but the question remains, when?
Dan Hamilton, economics professor and team member of the Center for Economic Research and Forecasting and at California Lutheran University in Thousand Oaks, Ca, has suggested that the shift away from home ownership is a positive thing. He reasons that home ownership levels exceeded historical averages and until we get back to those averages, about 65%, we will continue to experience defaults. As a professional observer to the real estate market I believe that the defaults/distressed sales are in large part already within the system. It’s frequently referred to as “the shadow inventory”. Naturally any rebound in housing is predicated on a continuing improving economy, but if renters and first time buyers start entering the market, they will offset the defaulting properties. Moreover we are seeing investors, largely all cash buyers; absorb more and more of the slackness in inventory. Locally, the Conejo Valley has seen a decline in distressed properties for sale from 30-35% down to 17%. Yes, we are still hearing the foreclosures are coming, and yes there are many people underwater on the loans or even those who haven’t paid a mortgage in 2 years, but still in their homes. Further, today’s restrictive lending standards are preventing large segments of the buying population from buying. But these are the factors that are conspiring to achieve Dan Hamilton’s 65% target home ownership level.
So back to the original question, with rents rising is it time to buy? Yes it is. Is there risk in buying? Not really; not if you consider your real estate purchase as a long term investment: five years or longer. Thinking that you can make money or break even in less time is less about home ownership and investment than it is about speculation. Is there risk in renting? Nope, but there is lost opportunity cost, and unfortunately, that cost can only be calculated through the hour glass of time.