Renters Lose Edge on Homeowners

Cost Gap Returns to Historical Norms in Some Markets as House Prices Drop

·        By NICK TIMIRAOS

Th The relative cost of owning versus renting is swinging back in favor of homeownership in some U.S. markets, buoyed by several quarters of sharp declines in home prices.

At the height of the housing boom, as home prices surged, demand for rentals started to rise as the gap between owning and renting widened significantly. Even after the housing market soured, apartment demand grew as former homeowners became renters, allowing landlords to push healthy rent increases.

Now, after two years of rapid home-price depreciation, the relationship between the cost of rental payments versus after-tax mortgage payments is tilting toward ownership in a number of metropolitan areas.

Over the past 18 years, after-tax mortgage payments have averaged 26% more than rent payments, according to Green Street Advisors, a real-estate consultancy based in Newport Beach, Calif. In 2006, at the height of the housing bubble, mortgage payments reached as high as 66% more than rent payments. But by the end of 2008, average monthly rent for the largest 50 metropolitan areas was $1,045, compared with after-tax mortgage payments of $1,300, assuming a rate of 5.5% on a 30-year fixed mortgage. That means mortgage payments averaged just 24% more than rent payments, the narrowest gap since 2001.

A new housing development in Las Vegas, a market like several others in the U.S. where the cost equation has shifted in favor of homeownership.

In more than half of the top 50 U.S. housing markets -- including Los Angeles, northern Virginia and Las Vegas -- the ratio is now below its 18-year average. In Los Angeles, for example, mortgage payments averaged 60% more than rent payments between 1990 and 2008. Now, those payments average 30% more than rent.

"We're not saying on an absolute basis that it's cheaper to own a home, but on a relative basis...owning is looking much more attractive than it has in a long time," said Andrew McCulloch, a Green Street analyst. While the shift doesn't mean that renters will rush to buy homes soon, "it's not a 'no-brainer' anymore if they're going to rent versus own," he said.

If mortgage rates fall to 4.5% -- and some economists have called for the government to push rates to that level to ease the housing crisis -- mortgage payments would average 14% more than rent payments, a level last reached in 1998.

While lower rates could further boost home affordability, that may not be enough to overcome a psychological barrier for many would-be buyers who believe homes will become even more affordable. "One of the challenges in the housing market is not only affordability but also willingness to buy," said Nicolas Retsinas, the director of Harvard University's Joint Center for Housing Studies. "People are still worried about falling prices."

And lending standards are much tighter than they were during the housing boom, when less-creditworthy tenants left apartments in droves to take advantage of no-money-down financing. At the housing market's peak, nearly one in four renters left to buy homes, said Richard Campo, chief executive of Houston-based Camden Property Trust. That rate fell to near its historical norm of around 12% by the end of 2008. "The nonqualified renters are not moving out this time," said Mr. Campo.

A separate report by Moody's Economy.com also finds that home prices relative to rents are more in line with their historical relationship. Using data that measure average home prices and rent payments for 54 metro areas between 1984 and 2004, Moody's Economy.com estimated that eight markets are "undervalued." In those eight markets, home prices relative to rents are below or within 5% of their historical levels. "The bottom is coming into view," said Mark Zandi, chief economist at Moody's Economy.com, "But we've still got a ways to go."

The report notes that home prices relative to rents remain well above historical levels in 30 markets, including Philadelphia; Portland, Ore.; and Virginia Beach, Va.

Lower prices and interest rates are spurring some buyers to get off the sidelines. Jason Schanta, 37, an independent contractor, has been ready to buy for three years, but he said he waited because Southern California home prices had become "outrageous."

"I'm not an economic guru but I knew the bubble was going to burst," he said. He is ready to buy a $500,000 home if Bank of America Corp.'s Countrywide Financial unit approves a short sale on the property in San Juan Capistrano, Calif. (In a short sale, the lender agrees to sell a home for less than the value of the mortgage.) Mr. Schanta currently rents a three-bedroom house for $2,250 a month, and says that he will pay just $150 more in mortgage payments and taxes for a house that has an additional bedroom and 350 more square feet. "Renting now costs just as much as buying," he said.

Others are finding that they could pay less on their mortgage than they would on rent. Carla Zeineh, 22, and her husband recently began shopping for a home in Irvine, Calif., and discovered that with a 5% mortgage rate, her monthly payment on a $350,000 two-bedroom home with 20% down could be less than the $1,800 month that they pay in rent on their two-bedroom condo.

Color Psychology: Choose the Right Colors For Your Home

By Melissa Dittmann Tracey

For years, psychological research has been offering insights into how the brain reacts to color choices. Such research is often tapped by the marketing field in making products more desirable to buyers.

Can these same studies be applied to motivating such big purchases as a home? It’s a leap, but at a subconscious level, certain colors on walls may evoke buyers who enter a home to feel more welcoming and even warmer (which may be particularly nice for rooms in chilly areas of the home).

A recent study by lead researcher Juliet Zhu of the University of British Columbia found that red seems to improve attention to detail. (The findings appeared this month in the journal Science.)  The researchers speculated that we’re taught at a young age that red means danger so red might slow us down and prompt us to zoom in on details (so would that make it a good choice for, say, surrounding the fireplace or to bring out other key details in your listing?).

While color preferences and psychological responses vary, research has revealed some of the following commonalities, according to The Rohm and Haas Paint Quality Institute and Architects Design Group (also included below is suggestions of what rooms the color may work best in).

• Red: Increases energy and heart rate, creates excitement and stimulates the appetite. Best for: Dining rooms

• Orange: Adds comfort, warmth, and cheerfulness and too much can bring about feelings of cautiousness. Best for: Living rooms and family rooms

• Yellow: Brightens mood and promotes welcoming and joyful feelings; increases positive thinking. Best for: Poorly lit foyers and dark hallways; buttery shades of yellow for living rooms

• Green: Most restful color. Reduces nervous system activity and muscular tension, calms and relaxes, offers reminders of nature. Best for: Living rooms (light greens); accent for kitchens and dining rooms (midtones).

• Blue: Promotes feelings of calmness, security, tranquility, and cleanliness; lowers blood pressure, cools a room, and serves as an appetite suppressant. Best for: Bedrooms or any restful, peaceful area in a home.

• Purple: Boosts creativity, imagination, and meditation, but can have unpleasant subconscious responses. Many adults dislike purple walls, particularly lighter shades of purple that are perceived as more youthful. Best for: Children’s bedrooms and play areas.

So, what do you think? Should science guide our paint choices?

30-Year Rates Drop to Near 5%
Mortgage rates across the board fell this week, a welcoming sign to potential buyers and home owners looking to refinance.

The 30-year fixed-rate mortgage averaged 5.04 percent this week, a drop from last week's 5.16 percent. Last year at this time, the 30-year rate averaged 6.04 percent, Freddie Mac reports.

Freddie Mac reported the following for other rates for the week:

• 15-year mortgage rates: averaged 4.68 percent, down from last week's 4.81 percent. Last year at this time: 5.64 percent.
• 5-year hybrid adjustable-rate mortgages: averaged 5.04 percent this week, a drop from last week's 5.23 percent. Last year at this time: 5.37 percent
• 1-year ARMs: averaged 4.8 percent, down from last week's 4.94 percent. Last year at this time: 4.98 percent

Source: Freddie Mac(02/19/09)

Homebuyer Tax Credit – The bill provides for a $8,000 tax credit that would be available to first-time home buyers for the purchase of a principal residence on or after January 1, 2009 and before December 1, 2009.  The credit does not require repayment.  Most of the mechanics of the credit will be the same as under the 2008 rules:  the credit will be claimed on a tax return to reduce the purchaser's income tax liability.  If any credit amount remains unused, then the unused amount will be refunded as a check to the purchaser.
Chart Highlighting the Major Modifications to the First-Time Homebuyer Tax Credit> (PDF: 309K)

FHA, Fannie Mae and Freddie Mac Loan Limits -The bill reinstates last year's 2008 loan limits for FHA, Freddie Mac, and Fannie Mae loans.  These limits were equal to the greater of 125% of the 2008 local area median home price or $271,050 for FHA and $417,000 for Fannie and Freddie, with an overall maximum cap of  $729,750.  For the few areas where the 2009 limits were higher, the higher limits will apply.  In addition, the bill includes language providing the HUD Secretary with the discretion, if warranted, to increase the loan limit for any “sub-area”, i.e.an area smaller than a county. The Secretary's discretion is again limited by the $729,750 cap. These 2009 limits will expire December 31, 2009.

The inclusion of these loan limit provisions in the final bill is a victory for homeowners, buyers and Realtors.  While these new limits were included in version of the original stimulus bill approved by the House, the bill first approved by the Senate did not.  NAR's Call for Action to both the House and the Senate prior to the final vote advocated strongly for the provisions which were then included in the final bill approved by both Chambers. 

Estimated 2009 FHA, Fannie Mae and Freddie Mac Loan Limits> (PDF: 1.3M)

Colorado Business Express

New Secretary of State Bernie Buescher got right to work in his new role, making an announcement with Governor Ritter this week about Colorado Business Express, a new web service to provide Colorado business owners a single site where they can easily access all information necessary to interact with state government.  Until now, businesses had to contact each agency separately to get the same information.  With the new system, business owners can use Colorado Business Express to access the Secretary of State’s website to register their business entity, and get information on how to apply for a state sales tax license from the Department of Revenue or an unemployment insurance identification number from the Department of Labor and Employment.  The new service also links directly to the Internal Revenue Service’s online system, allowing users to quickly get a Federal Employer Identification Number.  Also, people who use the website will be linked to the Office of Economic Development and International Trade to obtain additional information about doing business in Colorado.  The year-long project was a collaboration of five state departments and Colorado.gov, the state internet portal. This is the first time a project of this magnitude has been undertaken jointly by these agencies to benefit the business community.  The new website is accessible at www.colorado.gov/cbe.  

Paying up-front points: Borrowers can pay points--one time, up front fees--in order to reduct their mortgage's interest rate over the life of the loan. One point represents 1% of the mortgage value.

When interest rates were high, paying points didn't make sense because borrowers were very likely to refinance after rates dropped. They wouldn't hold their original loans long enough to recoup their upfront costs. But now borrowers can get a lot more bang for their buck. The old rule of thumb was that paying one point at closing could lower their mortgage's interest rate by a quarter percentage point or so. Today the spread is worth a half point to a full point on the rate.

It means paying $2,000 on a $200,000 mortgage at closing can shave as much as a whole percentage point off the loan's interest rate, changing a 6% loan to 5%. That would save $126 a month and pay for itself in 16 months. Even if the rate were only lowered to 5.5%, that would still save $64 a month, paying for itself in 32 months.

Of course, there are caveats. Buyers who are planning to refinance or sell within a few years shouldn't pay points, since the strategy simply doesn't pay in the short term.

Making more than the minimum down payment: If you can afford to put 25%, 30% or more down, should you do it? Most lenders require a minimum down payment of 20%; anything less and borrowers will need to obtain private mortgage insurance. And if the buyer could afford to put more than 20% down, it was generally assumed that they should. But now, in light of declining home markets, not everyone would agree with that. High down payments can be wiped out in severly declining markets.

Locking in the mortgage rate:  Many borrowers choose not to lock in when rates are falling, as they have been, since they assume that the deals will only get better. But that's often a mistake. Interest rates tend to jump up much faster than they inch down, meaning that buyers are much more likely to get stuck with a higher mortgage rate than they are to get lower one because they waited. Besides, locking in  at the currently very affordable rates can give borrowers peace of mind, which is no small matter when you're trying to buy a house.

Source of article:  Les Christie, CNNMoney.com staff wirter, February 4, 2009

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 5.28%, up 0.06 percentage point from the previous week. Three weeks earlier, mortgage rates were 4.89%, the lowest level recorded since the Mortgage Bankers Association survey began in 1990.

Source:  CNNMoney.com, February 4, 2009

Existing-Home Sales Show Surprising Gain

Existing-home sales rose unexpectedly while inventory declined, led by a surge of sales in the West, according to the National Association of Realtors®.

Existing-home sales – including single-family, townhomes, condominiums and co-ops – jumped 6.5 percent to a seasonally adjusted annual rate of 4.74 million units in December. The number compares to a downwardly revised pace of 4.45 million units in November, but 3.5 percent below the 4.91 million-unit pace in December 2007.

For all of 2008, there were about 4.9 million existing-home sales -- 13.1 percent below the 5.65 million transactions recorded in 2007. This is the lowest volume since 1997 when there were 4,371,000 sales.

Lawrence Yun, NAR chief economist, said home prices continue to fall significantly.

“It appears some buyers are taking advantage of much lower home prices,” he said. “The higher monthly sales gain and falling inventory are steps in the right direction, but the market is still far from normal balanced conditions. Buyers will continue to have an edge over sellers for the foreseeable future.”

Total housing inventory at the end of December fell 11.7 percent to 3.68 million existing homes available for sale, which represents a 9.3-month supply at the current sales pace, down from a 11.2-month supply in November.

Yun said the market is underperforming and hurting the broader economy.

“We’ve added 25 million people to our population over the past decade and housing affordability conditions are the best we’ve seen since 1973, but household formation is much lower than expected,” he said. “Consequently, there is a pent-up demand which could be unleashed with the right stimulus, including a non-repayable home buyer tax credit. The Obama administration and Congress need to move fast to stimulate a spring sales upturn which will help to stabilize home prices and set the foundation for a sustainable economic recovery.”

Housing Stats

National median existing-home price: (for all housing types) was $175,400 in December, which is 15.3 percent below December 2007 when the median was $207,000. There remains a significant downward distortion in the current median from a large number of distress sales at discounted prices, currently 45 percent of transactions; the median is where half of the homes sold for more and half sold for less. For all of 2008, the median price was $198,600, down 9.3 percent from $219,000 in 2007.

Single-family home sales: rose 7 percent to a seasonally adjusted annual rate of 4.26 million in December from a level of 3.98 million in November, but are 1.4 percent below a 4.32 million-unit pace in December 2007. For all of 2008, single-family sales fell 11.9 percent to 4,349,000.

Median existing single-family home price: dropped to $174,700 in December, down 14.8 percent from a year ago. For all of 2008, the single-family median was $197,100, which is 9.5 percent below 2007.

Existing condominium and co-op sales: increased 2.1 percent to a seasonally adjusted annual rate of 480,000 units in December from 470,000 in November, but are 18.4 percent below the 588,000-unit level a year ago. For all of 2008, condo sales dropped 21.0 percent to 563,000 units.

Median existing condo price: slipped to $181,400 in December, down 18.3 percent from December 2007. For all of 2008, the median condo price was $210,000, which is 7.2 percent below 2007.

Existing-Home Sales By Region

• Northeast: slipped 1.4 percent to an annual pace of 720,000 in December, and are 14.3 percent below December 2007. The median price in the Northeast was $235,000, which is 7.8 percent lower than a year ago.

• Midwest: increased 4.0 percent in December to a level of 1.04 million but are 10.3 percent below a year ago. The median price in the Midwest was $140,800, down 11.4 percent from December 2007.

• South: rose 7.4 percent to an annual pace of 1.74 million in December, but are 11.2 percent lower than December 2007. The median price in the South was $158,600, which is down 8 percent from a year ago.

• West: jumped 13.6 percent to an annual rate of 1.25 million in December and are 31.6 percent higher than a year ago. The median price in the West was $213,100, down 31.5 percent from December 2007.

New Refinance Boom May Lift Economy

Record low mortgage rates are providing a small measure of stimulus to the troubled U.S. economy as borrowers scramble to refinance their home loans--a move that frees up cash to spend on other items.

The Mortgage Bankers Association reports that the volume of loan applications has soared since November to its highest level in six years.

However, despite mortgage rates hovering around and even under 5 percent in recent weeks, a surge of buyers back into the housing market is not likely anytime soon, and some homeowners who want to refinance are finding they cannot because of lenders' tightened credit standards.

Source: Christian Science Monitor, Mark Trumbull (01/23/09)