Housing: Is it Gloom, or is it Underwriting?

More depressing house price numbers from Core logic this morning, with prices falling 1.3 percent month-over month.  The National Association of Realtors says buyer traffic is down.

The fundamentals for buying right now are actually good.  Trulia’s most recent calculation of the cost of owning vs the cost of renting shows that in 74 percent of cities, the cash flow cost of owning is less than the cash flow cost of renting, and I don’t think this takes into account the tax benefits of owning.  One city where the price to rent ratio is out of whack–New York–has such a strange housing market that it is hard to know what to make of it; the other outlier is Fort Worth, and I really don’t know what to make of that.

Since the Trulia calculations were released, rents are up a bit, house prices are down a bit, and mortgage interest rates have fallen, so buying should be even more attractive relative to renting.  To bring things a little closer to home, I am currently refinancing my house, and should I get the new mortgage, there is simply no way I could rent my house for less than the cost of owning (and I am including “hidden” costs of owning, such as maintenance).

So why aren’t we seeing a surge in buying?  The first possibility is that people expect rents, and therefore house prices, to fall.  I think falling rent in the near future is unlikely–multifamily vacancies have dropped a lot, and there has not been much new construction. The second is that people are gloomy about their income prospects, and don’t want to be caught up in an illiquid investment like a house.  This is likely.  And third, there may be households who want to buy–who might have even qualified to buy in the years before the subprime nonsense–who simply can’t get a loan.  Until lenders are more forward looking, it is hard to imagine housing getting off the floor.

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About Richard K. Green 103 Articles

Affiliation: University of Southern California

Richard K. Green, Ph.D., is the Director of the USC Lusk Center for Real Estate. He holds the Lusk Chair in Real Estate and is Professor in the School of Policy, Planning, and Development and the Marshall School of Business at the University of Southern California.

Prior to joining the USC faculty, Dr. Green spent four years as the Oliver T. Carr, Jr., Chair of Real Estate Finance at The George Washington University School of Business. He was Director of the Center for Washington Area Studies and the Center for Real Estate and Urban Studies at that institution. Dr. Green also taught real estate finance and economics courses for 12 years at the University of Wisconsin-Madison, where he was Wangard Faculty Scholar and Chair of Real Estate and Urban Land Economics. He also has been principal economist and director of financial strategy and policy analysis at Freddie Mac.

His research addresses housing markets, housing policy, tax policy, transportation, mortgage finance and urban growth. He is a member of two academic journal editorial boards, and a reviewer for several others.

His work is published in a number of journals including the American Economic Review, Journal of Economic Perspectives, Journal of Real Estate Finance and Economics, Journal of Urban Economics, Land Economics, Regional Science and Urban Economics, Real Estate Economics, Housing Policy Debate, Journal of Housing Economics, and Urban Studies.

His book with Stephen Malpezzi, A Primer on U.S. Housing Markets and Housing Policy, is used at universities throughout the country. His work has been cited or he has been quoted in the New York Times, The Wall Street Journal, The Washington Post, the Christian Science Monitor, the Los Angeles Times, Newsweek and the Economist, as well as other outlets.

Dr. Green earned his Ph.D. and M.S. in economics from the University of Wisconsin-Madison. He earned his A.B. in economics from Harvard University.

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