Soft housing prices: Maybe Americans just aren’t dumb enough to keep buying houses?

The housing market remains soft, so we’re told, and the best minds of central economic planning are struggling to understand why and what new government gimmicks can be applied. I’m wondering if former homeowner sentiment has been factored in. This article from Zillow says that approximately 37 percent of home sellers are selling at a loss. Whatever the loss figured by Zillow you also have to add another 5-6 percent in real estate commission, equivalent to more than a year of rent in many markets. Psychologically, a person who just lost enough money to have paid for 5-10 years of rent is not a very likely candidate to go back into the market where he was just burned.

Thus the more houses are sold, the worse the buyer-seller ratio will get. Every sale has a roughly 37% chance of removing a person from the real estate ownership market. More and more Americans will be conditioned to the idea that home ownership is a waste of time and money, not to mention the inflexibility that it imposes on a person who might otherwise have been able to get a better job by moving.

http://www.nytimes.com/2011/05/11/business/economy/11leonhardt.html has some data on the price-to-rent ratio in various markets. In Manhattan it is 30:1. San Francisco and Seattle aren’t far behind. Thus for about 3.3 percent of the cost of buying, a person could rent. A buyer, by contrast, would pay at least 6% in real estate commissions and other transaction costs (the commission might be deferred until the property must be sold, but it will have to be paid eventually; or you could view at least half of the commission as built into the sale price). The buyer will have to pay perhaps 2% every year in property tax and maintenance, plus an additional 5% for mortgage.

In our wealthy suburb of Boston, rents are 3-4% of house prices. That would barely pay for property tax, maintenance (winters are harsh), and landscaping (weeds are aggressive). So the landlord who rents, and there are plenty, is basically giving the house for free to the renter. When it is time to sell, it takes 9-12 months of leaving the house empty, so the cost to sell is 8-10%, even if the market remains flat.

Another advantage for renters is that they can free their minds from the clutter that prevents homeowners from doing or thinking anything interesting. People in Manhattan, even when they own, never do any maintenance or yard work. So they can write novels and build empires. The rest of us go to Home Depot every few days and pull weeds.

Summary: Why would house prices continue to fall then? The longer that house prices fall, the more people will critically assess whether it makes any financial sense to own and conclude “it does not”. They withdraw themselves from the market of potential buyers, at least for 10 years or so until they forget what wounds they suffered and how boring they were when they owned.

52 Comments

  1. Tim C

    May 20, 2011 @ 2:06 pm

    1

    We have invested for thirty years and
    have never seen a better rental climate.
    People who a few years ago swore they’d
    never lease a home now ask for multiple
    year leases.
    I second the earlier poster from Virginia
    who stated the bad home market has
    been a boon for investors who know
    what they’re doing.
    I believe we are seeing a new era of
    educated folks realizing it’s far cheaper
    to lease than buy. And in many area’s
    it truly is just that.

  2. Dan K

    May 20, 2011 @ 3:13 pm

    2

    Phil, being able to tell if you’re interesting or not is very different from being able to tell if you’re more or less interesting than you were at some other period in your life. The former is universally acknowledged to be almost impossibly difficult, and I would never presume to say I’m generally interesting (I would say you can tell a lot from the fact that no one’s lining up to write articles about me). The latter is almost necessarily a much easier judgment. So of course I don’t know for certain if I’m more or less boring now. But I have access to a lot of information on the subject.

    Had I decided 12 years ago to rent instead of buying, it’s hard to tell if it would have made me more or less boring. But the silly mechanism you’re suggesting — less time wasted on home maintenance — wouldn’t be the reason, because that kind of thing accounts for less than a tenth of a percent of my time (more for my wife, she enjoys gardening). My mind was far more cluttered with home-related issues when I rented, because of the near-constant struggle with the constraints imposed by the owners of the property where I lived, and things like that. For most people, bigger issues — e.g., family and career changes — are overwhelmingly more important than the amount of time sucked up by either renting or owning. So I’m skeptical that boringness devolves from owning vs. renting, that’s just a just-so story.

    I wish you’d addressed my other postscript instead. How am I supposed to understand the supposed financial advantages of renting when houses for sale outnumber renters 106 to 4, before even considering most of the things I need? I feel like I’m being told to shop in a non-existent market.

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