Tuesday, December 6, 2011

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.