I’m interrupting the saga of Rentrilla’s creation for a brief (or not so brief) commentary on the current real estate (”RE”) debacle which has spread like a pandemic from California, Nevada and Florida to the world. This is a subject that I’ve followed very closely since 2003 at the time I purchased my San Jose, CA home. I’ve long held the belief that certain underlying causes would cause an implosion in the RE market which would affect locations from Silicon Valley to Hawaii which is why I sold in 2006. I was sometimes laughed at for my prediction of large declines in the real estate market. I wonder if those same people are still laughing now?
Most economists agree that the root cause of the current crisis is the unsustainable asset bubble that grew out of easy credit mainly in the housing market. It was not hard to see that giving a $500k mortgage to someone making $50k/year with no down payment and possibly no income verification would have dire consequences. And as the bubble grew, homes became increasingly more unaffordable as incomes did not keep pace so affordability only got worse.
Another indication of how disconnected from reality prices had become were price to rent ratios (”P/R ratio”). According to Moody’s, the 15 year average P/R ratio as of June 2007 was 16.9 with that months ratio at 22.8, a full 26% premium to the average. San Jose’s P/R ratio was at 42.5 and Honolulu’s 35.2. Based on this disparity in incomes and rents as opposed to home prices, the increased values were just not sustainable. This problem was also compounded by speculators that thought they could make an easy buck by flipping houses for a profit. Give these guys easy credit and you’re just asking for a meltdown. Now they can’t sell because they owe more than they can sell for and rents don’t even come close to covering their costs, so they are walking away thereby flooding the market with foreclosures.
Bailout? It’s my opinion that it is not feasible to “bail out” the individual homeowner and would be unconscionable to do so. For the most part, no longer are stated income, no down, option ARM loans available. Coupled with this are rapidly declining home values. As a result, many homeowners who purchased in the last 5 years will not be able to refinance their current loans unless principle is reduced. So how do you bail out the homeowner who knowingly (or should have known) bought more house than they could afford and now cannot make their payments, but not do anything for his neighbor who is current on their payments? Is it fair that the irresponsible get a reduction in their mortgage principle and a lower interest rate while the neighbor still pays full price? Yeah, there are those unfortunate people who were defrauded into getting a risky mortgage or those that due to macro economic circumstances were able to afford their house when they purchased but are now not able to afford their monthly payments, but they are in the minority. Most of those in trouble who cannot afford their home now, could not afford it at the time of purchase. So I don’t believe it should be my (and your) tax dollars that are keeping these people in their homes particularly when many of us are renting and will get no assitance in purchasing a home. There is no inherent right of home ownership. There’s nothing wrong with renting.
I could go on for days on this subject but the point I’m making with this topic is that while I think prices will come down further, particularly in the Hawaii market, we have some time before we see a bottom and now is a time to RENT. Hawaii is only now seeing the first effects of the downturn in the national economic environment but the full impact will not be seen until at least late in 2009. Hawaii’s economy is driven mainly by tourism and with home equity, incomes and savings disappearing in the mainland and Asia, tourism will continue to decline leading to further contraction in spending, incomes and employment. Secondary home purchases from mainland buyers will be rarer with many current investors needing to sell to get some liquidity due to the ripple effect into the debt and equity markets. All of these factors will lead to an excess of inventory in the RE market resulting in further downward pressure on prices.
Sure there are many intangible benefits of owning a home that you can’t factor into an economic analysis, but when the dollar differences between renting and buying are so great there is just no question renting makes more sense. In October 2008 Prudential reported Hawaii median home prices at $625k and the U.S. Census reported Hawaii median rents at approximately $1,200. Purchasing a median priced home will likely result in a $3k monthly mortgage on a $500k loan. Add to that property taxes, insurance and amortized closing and misc costs and the monthly expense will run about $3,500. Compare this to $1,200/mo rent expense. Even with the tax deduction for interest and prop taxes, cost of ownership will still run close to $3k/mo. Imagine what else you could do with that extra $1,800/mo.
Make no mistake, there will be a great time to buy but until the cost of owning comes closer to the cost of renting, it doesn’t make sense to do anything else but rent. That’s what I’m doing.
Good luck to all and let us know if we can help you advertise your property or find you a place to rent.
Ryan