Will the Housing Market Get Better?

There is still much speculation about the current state of the economy. Some say that it is on an upswing while others say that the worst still isn’t over. According to the last census data, there are many changing factors that suggest that there is hope in our recovering economy. Births aren't declining as they have been in past years. The job market is improving, allowing many who have finished college to find a job or a better job than they currently have. The housing market is showing signs of possible growth for 2012 as well.

I am very interested in seeing how the housing market will turn out since it was an enormous cause of our recession. This year we have seen interest rates very low, especially for mortgages. Many places don't even have mortgage rates above 4%, such as in Cedar City, UT. Something else has been happening. The gap between renting and buying a home has disappeared in many cases. An article in the Wall Street Journal online states "that, historically, the cost to rent an apartment has been about 10% lower than the after-tax cost of owning a home." However, "[b]y the end of 2011...research found that the cost to rent an apartment was about 15% higher than the cost to own a home." That is an enormous difference. With renting an apartment being more expensive, buying a home is the cheaper substitute. There are many factors that will affect the housing market, such as if potential buyers have steady jobs or not. Even with the other factors included, with record-low rates, high rent prices, and lower home prices, the demand for homes should increase.


Dave Tufte said...

Jake: 100/100

This is a well-written post, but I'd like to see it related back to managerial economics more than it is.

Here's some thoughts about the current situation as discussed here.

1) I get a little "weirded out" when the Census Bureau releases reports like this. This was big news last week. But ... it's not really in that agency's job description.

2) Births are up, but that won't affect much for 20 years.

3) The housing market isn't just showing signs of "possible growth". It is looking pretty good.

4) The housing market was a cause of the most recent recession. Saying an "enormous" cause is probably overstating it.

5) Interest rates have been low for several years. They haven't change much recently (in the big scheme of things).

6) The point about renting being currently more expensive than buying is definitely correct, and somewhat unusual. I am dubious about whether that will lead to a demand shift for home purchases though ... perhaps too many people have been burned recently.

Patrick said...

Home prices are the highest they have been in five years so the housing market is recvering well. From 2007 to 2010 there was a huge excess in supply of housing that caused prices to drop over 50% in several areas across the country. As the existing supply has been purchased at low prices and many builders have either gone out of business or have been hesitant to build, I think the decrease in supply over the last two years is one of the major reasons for the increase in prices.

While purchasing a home can be considered a substitute for renting, I think that most renters are renting because they are unable to get approved to purchase a home. In recent years lenders have become much more strict about who they will lend to, so even though it may be cheaper to buy than rent I don't think it causes a significant impact on the demand.

Dr. Tufte said...

Patrick: 50/50.

Just a note for those trying to figure this out: a link is required for a post, but is just a nice addition to a comment.

There's nothing in the content of Patrick's comment that I disagree with.

I would add that it seems that our past encouragement of home ownership has been excessive. Perhaps it's a good thing that lenders are acting as tougher gatekeepers.

* I wrote a comment for this, but my browser tweaked on me when I clicked publish. So, this is a repeat.

Trevor said...

Even though prices have increased over the last two years, they still remain comparably low, in part due to the large amount of properties still available. Yet, this excess in supply coupled with the tougher gatekeeping of lenders, mentioned by Patrick, provides an avenue toward recovery.

One of the reasons the housing market is indeed recovering well is that people are also starting to cash in on the huge potential that the current market offers to investors. With property prices and rates low, more and more people are snapping up cheap second homes and rental properties. Short sales and foreclosures, while often requiring renovation and repair offer great opportunities for individuals willing to put in the time and effort to improving the properties. Data from CoreLogic, an information driven service used widely by real estate professionals, suggests that the conversion rate of foreclosed properties into rental properties in 2012 will be more than $100 billion dollars this year. And with the increase in renters that Dr. Tufte and Patrick have pointed out, there is certainly a greater demand to fill those rental properties.

The second silver lining for investors right now is that even if you scoop up some properties to convert to rentals you don’t have to necessarily plan on being a landlord (or enduring the headaches that can come with being a landlord) forever. Examining recent polling data that claims 60% of people renting today would prefer to own their own homes, projections from the Wall Street Journal argue that as lending standards inevitably loosen again, there is a pent-up demand waiting to spring back into home ownership. Five or ten years down the road those cheap rental properties will likely make tempting purchases for today’s renters who can now qualify for their own place.

Dave Tufte said...

Oops. I forgot to ding Patrick 3 points for a spelling error, so 47/50. Trevor gets a 50/50.

All the comments are good, but they definitely show signs of the (common) bias in the U.S. to think of real estate as a good investment. It isn't. Rates of return on real estate have never been particularly high. The reason that it appears to be a good investment is that it is one of the few things that can be bought with a large amount of leverage. But, leverage doesn't increase rates of return. Instead, it increases risk which entails higher required rates of return. We all saw how that risk can pan out in 2007-2010. How quickly we forget.