Home prices must close with rentals so lower rents are not what the doctor ordered

[Kurt_and_Hunter]

Assuming houses must, at minimum, decline to rejoin historical norms in relation to rents then the bare minimum housing drop going forward isn't huge.

Assuming rents stay where they are.

During the boom people paid a huge premium to own because owning a house paid big valuation returns. Renters didn't get to share in the price appreciation so they were just paying for a roof over their head. Consequently home prices peaked at about 40% premium to renting a comparable property. Now that houses are at least as likely to go down as up there is no reason for an ownership premium. (since a renter cannot lose money if the property deflates there's even an argument for a rental premium.)

So people have been watching the owning/renting price relationship closely it has made progress. The gap that must be closed is still there, but much narrower.

The danger is that if the broader economy drives down rents then houses have to chase the rents further downward to regain the rough parity that circumstances demand. That's a bad scenario.

The relative costs of owning and renting and the implications of any developing rental weakness for home sale prices is a topic the Calculated Risk blog follows closely. One more reason this excellent and relatively un-opinionated blog is a must-read.

_____________________
Recent rental posts:

Apartment: Vacancy Rate Increases, Rents Fall
http://www.calculatedriskblog.com/2009/04/apartment-vacancy-rate-increases-rents.html

Report: NY Office Rents Decline Sharply
http://www.calculatedriskblog.com/2009/04/report-ny-office-rents-decline-sharply.html

Boston Office Vacancy Rate Rises Sharply
http://www.calculatedriskblog.com/2009/04/boston-office-vacancy-rate-rises.html

[MannyGoldstein]

1. Housing Prices Are Still Twice What They Used To Be

In the 1970s, a house cost 1-2 years salary. It's still 3-4 or so.

Doesn't mean it'll drop that far... but it could.

[uponit7771]

10. Good info, I think it was the 80's that got the prices into the 3x category...

...deregulation by both parties presidents have been a disaster for the middle class.

[Duer 157099]

2. I can barely understand what you're saying

But housing prices overall, whether owning or renting, MUST get in line with wages, that's the real bottom line.

For too long, easy credit and increasing real estate values have financed too many lifestyles, to the extent that wages simply no longer are realistically tied to housing cost.

imho.

[Dappleganger]

3. The wage issue is HUGE.

[Duer 157099]

4. Yes. It's the elephant in the room

So many people are focused and obsessed with the "recovery" of the housing market, when that's completely besides the point (except to the extent that so many have funded themselves thusly and therefore think that it MUST recover or else)

It's the wages.

[Dappleganger]

6. And healthcare is directly tied into the wage problem.

There are a lot of people who could be making a livable wage but they have to shell out so much money for healthcare, or they have none so they are screwed.

[uponit7771]

11. The current "wage gap" can be addressed with lower health care and energy

......

[DURHAM D]

5. I don't understand your post but,

let me say this. In my area it has been cheaper to buy a brand new 3 bedroom, 2 bath house (1700-2200 sq feet) with a two car garage then rent a 2 bedroom, 2 bath apartment for the past 8 - 10 years. In other words, rental rates have been flat for a decade.

[Duer 157099]

7. So during a housing boom, when real estate has skyrocketed...

Rental rates have stayed ABOVE that level, and you call it flat?

Why am I having such a hard time understanding things I'm reading today???

[xchrom]

8. people are renting out their homes/condos and seeking

cheaper rentals.

interesting times.

[xchrom]

9. americans need a pay RAISE.

our wages have been decreasing -- in real terms -- since the seventies.
except for some brief areas.

over all americans need to take home more pay.

it's never discussed -- but that is one core problem.