During the mid-2000s, Camden Property Trust’s Ric Campo remembers seeing renters who were leasing $1,000-per-month apartments moving out to buy $400,000 homes. And he only ever wondered one thing: “How does that math work? We knew it would end badly.”
Campo was right. The cost of owning a home had greatly outstripped the cost of renting, with zero-down, interest-only loans and the promise of appreciation luring renters into ownership. When everything collapsed in 2008, however, the cost to rent and own both fell off a cliff and only started to recover in 2010.
Now, rising rents, combined with low interest rates, could make homeownership look like a deal again for those who can get credit and afford the downpayment for a house.
The Case-Shiller U.S. house price index has fallen 33 percent from its peak in the first quarter of 2006 to the third quarter of 2011. “Definitely in some parts of the country, affordability is at levels we haven’t seen in a while,” says Reis’ Severino.
Others agree. “Home prices are very cheap,” says Moody’s Analytics’ Chen. “For anyone who has interest in buying a home and has the resources to do so, it’s a very good time to do that.”
The NAR says that with rent growth rate projections of 3.5 percent in 2012 and 3.8 percent in 2013, the cost arrows will soon point toward homeownership. “One of the consequences of this [situation] is that for folks who have been on the sidelines for quite some time looking, it may be the right time to get into the market,” says the trade group’s Molony.
Chen looks at a metric called the price-to-rent ratio. Between 1990 and 2003, the average price-to-rent ratio was 9.6 before jumping to 18.5 in the first quarter of 2006. It has fallen back to 11.3, which Chen says shows that owning is still more expensive than renting.
“Even though rents are rising, they haven’t caught up,” she says. “Overvaluation of rents relative to home prices has been declining for a couple of quarters. I do anticipate that to come back to normal over the next year or two.”
But historical trends only play part of the role in the cost differences between the renter and owner lifestyles. Data from Kiplinger and The New York Times indicate that buying a home doesn’t pay for five years when up-front costs such as utilities, furniture, pest-control services, and the yard care that’s incurred when a person moves from a one-bedroom apartment to a three-bedroom house are considered.
With up-front costs like these, it will cost $18,674 more to rent than own in the first year. That number falls to $14,502, $9,744, and $4,379 in the subsequent three years. By year five, the homeowner saves $1,646 by having bought. But it takes a lot of expenditures to get to that point.
But consumers are saving more, and the cost of owning and renting are moving closer together. So if jobs pick up and home prices stabilize, homeownership could again gain favor in the eyes of many Americans.
“We’re not Pollyanna-ish about this,” says the NMHC’s Bibby. “If rates stay at these generational lows, housing prices stabilize, and rents rise, you will see people take another look at homeownership.”