Housing Bubble

Are you getting that itch to buy a home? Or maybe you are in the other camp, and can’t even think of buying until the market truly changes course, and homes start to appreciate. Maybe you are one of many Californians who don’t have a job and buying a home is not an option for you. Thankfully, the long-standing myth that it is better to own than rent has been finally silenced.  Just like the horror stories of the great depression told by our grandparents, we too need to share our experience of the current great recession to future homebuyers.  We need to remind them that buying a home is based on careful research, hard numbers, and not the buying frenzy mind-set that blinded so many leading up to the crash.

According to the California Building Industry Association (CBIA), which released data Thursday, Sacramento jumped 20 spots in a ranking of the nation’s most affordable housing markets. In addition, the index rose to its highest level in the 20 years since its inception. This takes the adage, “one man’s trash is another man’s treasure”, to new heights. While most of us homeowners have come to sobering grips with the fact our home has lost value in record chunks, it is opening doors for others sitting on the fence of homeownership.

The Sacramento Affordability Index

 The CBIA said the average priced home in the region is affordable to almost 80 percent of families in Sacramento, up 3 percentage points from the third quarter. On a statewide basis CBIA said, a family earning the median income could have afforded 62.9 percent of the new and existing homes sold during the fourth quarter, up slightly from 61.1 percent in the third quarter.  The New York region was the country’s least affordable at 25.5 percent with San Francisco not far behind at 31.5 percent.

To put these numbers in more striking perspective, this index, affectionately known as the HOI or Housing Opportunity Index, reached a low of 7.3 percent in the fourth quarter of 2005 (see HOI complete history by metropolitan area going back to 1991). Yes, only 7 percent of Sacramento homebuyers could reasonably afford a home, yet thousands more jumped into the feeding frenzy we called “an investment that would never depreciate”; not taking the time to pencil out the true cost of owning a home. During my initial consultations with homebuyers, I still ask – “Do you enjoy macaroni and cheese?” Because if you try to keep up with the Joneses, you may find yourself eating a lot of it!

To make you feel even better about your buying decision, for those of us who purchased homes during that period in 2005, the prevailing interest rate back then was 6.2% for a 30 year fixed mortgage and today its at 5%. Yes, your trash has not only lost half its value, it can now be purchased with a lower carrying cost – a double punch to the gut.

Now, lets address all of those fence-sitting buyers out there – aka renters. I would agree with some very smart friends of mine, that the thought of buying a home for some is no longer a dream they aspire for, or in some cases financially prudent. After what has happened to our economy over the past decade, I get it. Even though I am in the business of helping people in Sacramento and California buy homes, I am the first to say, if you are not ready, don’t do it – it’s a life changing event and one you can’t back out of easily.

There are those on the other side of the argument, who feel now is a great time to buy.

Rent-to-Mortgage Payment Index

A value below 100 (or 1.0) means that rent is less than a monthly mortgage payment. The rent to mortgage ratio is simply the adjusted rent divided by a 100% loan-to-value mortgage payment for a median home price. We are finally seeing the rent-to-mortgage ratio at a point where owning a home can actually be cheaper than renting.  According to FHFA September 2010, rent-to-mortgage payment ratio for the US is 105.5, California is 95.9, and Sacramento 98.7.

Home Price-to-Rent Ratio

An even better illustration (I love graphs!), is the FHFA price-to-rent index ratio that shows a long history of home value compared to local rents. We can see the dreaded bubble clear as day and are now seeing it come down to more respectable levels.

Home Price-to-Rent Index Ratio: FHFA, Case-Shiller, First American

Note: This graph is from an easy to use website, www.housingtracker.net.

In conclusion, even with the bursting of the housing bubble, it still begs the question of what makes more sense – renting our buying? Putting current homeowners that are upside down aside, we are finally seeing a market that is more affordable for the new home buyer, but we still have some contraction left and values will probably go down a bit further.  So please, before you go scratch that itch, make your list of pros and cons of ownership versus renting.   Remember none of us so-called “experts”  have all the right answers. In fact, many of us were dead wrong as the blind lead the blind into the housing bubble years ago. As I have stated before, the great recession was the kick in the mouth we needed to prepare ourselves for the next cycle of boom and doom. Let’s hope we can avoid the doom this time.