After reading an article in CNN this week, it sounds like the guru’s of the housing market think that research on the cost of home owning versus the cost of renting, can determine what Americans can expect in the outlook for housing in America for 2010. Thats a sensible statement, right?
Lets start with the common sense reason why we can track the rent vs home price to do our homework on the future of the housing market. Plainly, people generally need a good reason why they might benefit from leaving their lease when they compare and contrast owning and renting for what they give up in monthly out of pocket costs each month. Shawn Tully wrote in the CNN article, “And the surest sign that prices have fully adjusted arrives when the ratio of what people pay in rent versus what owners spend on the same property returns to its historic average.” So, that is where it starts.
Through research of rents vs homeownership, they found that in 1999 renters were paying 87% of what homeowners were paying monthly. All in all, Americans are ok with paying a little higher monthly when it came to the benefit of owning…13% higher to be specific in 1999 (the case study was called the REIT research team done by Deutsche Bank…REIT=Ratio of Rents to Ownership Costs). Later studies showed drastic changes in that ratio as the housing bubble was growing in areas like California. Home owners prices drop compared to what renters paid in the bubble times.
When the cost to own is “overpriced” by the rent to own ratio, when comparing out of pocket monthly costs, you typically will see that the housing market will tend to fall more until the ratio of rental to owning is more equal…like in the 1990’s. In more recent studies, like the one in 1999, we see that the majority of Americans still pay an “over priced” amount for owning than renting today. This research leads the experts to believe we will see a hopeful and final fall in overall national housing market of 5% more in 2010. (My hypothesis is that Texas will not follow that statistic as close and we’ll see much less or even small gain in 2010).