Feds Shouldn't Prop Up Home Prices

Home Prices Still Have Some Dropping To Do, If Washington Will Allow It, Writes Declan McCullagh

(CBS)  A housing report released Tuesday delivered this telling economic news: American home values in metro areas fell by 27 percent from their peak, according to the Standard & Poor's/Case-Shiller index.

The Case-Shiller index is broad, sweeping a metro area's cheapest housing markets in with its most exclusive. This can be misleading: in many cities, less expensive areas have fallen rapidly, spurring an uptick in purchases, while the priciest areas have slid less.

As the U.S. economy contracts, any sensible forecast calls for this slide to accelerate. Yet the federal government seems intent on trying to halt the normalization process, even though it would offer more affordable housing to prospective homebuyers.

The reason for this forecast is that buy-vs-rent ratios in such areas remain far higher than historic norms, a sign that localized housing bubbles have yet to deflate. The buy-vs-rent ratio is the equivalent of the price-to-earnings ratio for stocks; the Federal Reserve Bank of San Francisco uses a variant in its own analysis and noted back as far as 2005 that the "ratio is about 40 percent higher than the normal level" for San Francisco and Los Angeles. (You may have seen its cousin, the price-rent ratio.)

As of early 2009, the buy-vs-rent ratio is even further out of whack. A mile or so from my old neighborhood of Adams Morgan in Washington, D.C., you can rent a three-or-four bedroom house with off-street parking and granite counters for $4,300 a month near Calvert Street and 39th.

You can buy a three bedroom house with off-street parking and granite counters for an asking price of $1,695,000 near Calvert and 34th.

The houses aren't identical: the second includes a pool and seems larger, but let's try a rough estimate. For simplicity's sake, assume property taxes are about 1 percent, jumbo mortgage rates are 7 percent, annual insurance and maintenance costs total 1 percent, the house is bought with 0 percent down, and the buyer can deduct $21,000 a year in mortgage interest.

That means the annual out-of-pocket cost to own that size house in that neighborhood is around $148,000. Renting costs $51,600, and includes a housekeeping service. It's about three times as expensive to buy, for a buy-vs-rent ratio of 3:1.

That ratio is why, even for those well-heeled souls who could afford such a house, buying doesn't always make sense. There are some real benefits, of course, including the ability to customize your home or knock down walls. You won't be kicked out when your lease expires, and with a 30-year mortgage, you'll know how much your payments will be.

But if it's a heck of a lot cheaper to rent, why buy? For the last decade, the reason was price appreciation. When prices are falling, that's no reason at all.

Manhattanites can correct me if I'm wrong -- yes, I know each block is unique -- but consider a 4br upper east side apartment with 2,300 square feet renting for $6,000 a month. Compare that to a 4br upper east side condo with only 2,000 square feet selling for $2,775,000.

The annual totals: $72,000 to rent compared with $245,000 to buy.

Our tour continues to the posh, leafy town of Woodside, Calif., home to Steve Jobs, Larry Ellison, and local authorities who loathe new construction and adore alpaca farms.

You can rent a 3br/2ba house with a home office on Lindenbrook Road on five acres about 30 miles south of San Francisco for $4,250.

The owners helpfully provide a link to their listing when the house was on the market -- for a mere $3,299,000. An advertisement hopefully, and unsuccessfully, dubbed it a "truly one-of-a-kind opportunity."

Given the same assumptions and adjusting for local property taxes, that house would cost about $315,000 a year to buy and only $51,000 a year to rent. While it's true that you don't get to use the smaller guest house in the back if you're a tenant, you do get an 84 percent discount.

Two more examples: A 3br/2ba rental home in the hills in the tony San Francisco suburb of Burlingame costs $3,600 a month, including a gardener. A 3br/2ba house costs $1,195,000 to buy, not including a gardener. That's over $43,200 a year to rent, compared with $100,000 a year to own.

And then there's Noe Valley, one of San Francisco's most liberal and hip enclaves, at least if you're talking about the $1,000 baby stroller set. A 4br/3.5ba house on a corner lot rents for $4,500 a month. A 4br/3.5ba Noe house (that's larger but not on a corner lot) is selling for $2,495,000.

The buy-vs-rent ratio is over four-to-one: $54,000 a year to rent, compared with $231,000 for the privilege of owning a similar house a block away. As I wrote in November, the Feds should let housing prices fall. American taxpayers should not be forced to bail out underwater home-debtors concentrated in a handful of states -- the foreclosure five. (It's true that President Obama's plan announced last week is limited to lower-cost mortgages, but wait 'til the solidly Democratic coastal strongholds really feel the pain.)

One way the buy-vs-rent ratio can return to normal is for rents to rise. But a recent New York Times article about falling rents in Manhattan, and similar reports in Crain's Chicago Business and the Los Angeles Times suggests that's not terribly likely.

Perhaps the 1997 law excluding some capital gains from income taxes should shift these ratios from their long-run trend. But even taking that into account, housing prices in the nation's wealthiest enclaves still have a long way to fall -- as long as the Feds will let it happen.

---

Declan McCullagh is the chief political correspondent for CNET. Previously, he was Wired's Washington bureau chief and a reporter for Time.com and Time magazine in Washington, D.C. He has taught journalism, public policy, and First Amendment law. He is an occasional programmer, avid analog and digital photographer, and lives in the San Francisco Bay area. His e-mail address is [e-mail]

[sjc_1]

No one is propping up home prices, but just trying to keep more foreclosed homes off the market. 2 million foreclosed in 2007, 3 million in 2008 and on track to lose 4 million in 2009. If you want your house to be worth more in the coming years, you will support fewer foreclosures flooding the home market.

[ioweign]

Dear President Obama,

HI!, yoo-hoo, over here, we are 100,000,000 men, women and children who rent and we seem to be invisible to you and the media (including NPR, New York Times and the Wall Street Journal) but clearly our numbers make us important. We are wondering why you are helping 9 million people at the expense of me and my 99,999,999 friends, neighbors and fellow countrymen. Not to mention the additional millions of former homeowners who will soon join us because they rationally decided to live within their means and rent.

But how is your plan hurting 100,000,000 renters? It is hurting them in three major ways:

1. By putting a floor (and debatable how stable or realistic that floor is) under housing prices above what they were before the bubble began you are continuing to price renters out of the market.

2. By raising the deficit you are going to be putting some of the tax burden on renters (yes some will go to homeowners as well).

3. Because many former owner-occupied properties have turned into rentals rental prices are actually falling. By keeping people in houses they can?t afford you will, in effect, raise rents again.

The net result is that you are charging renters, through the eventual taxes needed to pay for this, for the privilege of NOT being able to afford a house while also raising their current rents. This reminds me of the former Soviet practice of making soon-to-be-victims of execution pay for their own bullets and then charging their families for their burials.

Read more here
http://watchingmarcitz.com/2009/02/22/obama-hurts-100-million-to-help-9-million/
Posted by at 9:15 PM : Feb 25, 2009

How much of your rent covers the property taxes in your area ?

[beosguy]

Agreed. Prices skyrocketed since 1998 in places like SF Bay Area.
partly due to stock option cash outs from IPOs and then later in 2002 from easy lending standards. From 1998 prices doubled by 2000 and then doubled to the peak in 2006.
Yet incomes has gone down and then flat. Rents are lower today than 2000 adjusted for inflation. Now we are seeing corrections take root. Check this out. Prices only go up at rate of inflation as was well documented by Shilling "Irrational Exhuberance: 2nd Edition".
The bottom is 50% less from the peak... we even may see further erosion from the bottom.

housingbubblebust.com/OFHEO/Major/NorCal.html

loads of fresh data on this link...
wikipedia.org/wiki/United_States_housing_bubble

[msay3]

Posted by at 9:15 PM : Feb 25, 2009
~~~~~~~~~~~~~~~~~~~~
You're wasting your breath

[delfmast]

Retiring at last, we will rent in a desirable area, to wait for local real estate to return to humanly affordable levels, then buy a farm, to feed ourselves, and our families, if they survive being when driven out of the failing metro areas by ravening mobs, of the unproductive welfare class, not satisfied by the amount of wealth that our feckless political criminal classes steal from us, and spread around to those who produce nothing.

[psurossbah]

What took you so long to come to this conclusion. I have been beating this exact same drum for a year. It certainly can't be the advantage of my 6 credits of college econ.

http://TheLastGoodIdea.blogspot.com

Dear President Obama,

HI!, yoo-hoo, over here, we are 100,000,000 men, women and children who rent and we seem to be invisible to you and the media (including NPR, New York Times and the Wall Street Journal) but clearly our numbers make us important. We are wondering why you are helping 9 million people at the expense of me and my 99,999,999 friends, neighbors and fellow countrymen. Not to mention the additional millions of former homeowners who will soon join us because they rationally decided to live within their means and rent.

But how is your plan hurting 100,000,000 renters? It is hurting them in three major ways:

1. By putting a floor (and debatable how stable or realistic that floor is) under housing prices above what they were before the bubble began you are continuing to price renters out of the market.

2. By raising the deficit you are going to be putting some of the tax burden on renters (yes some will go to homeowners as well).

3. Because many former owner-occupied properties have turned into rentals rental prices are actually falling. By keeping people in houses they can?t afford you will, in effect, raise rents again.

The net result is that you are charging renters, through the eventual taxes needed to pay for this, for the privilege of NOT being able to afford a house while also raising their current rents. This reminds me of the former Soviet practice of making soon-to-be-victims of execution pay for their own bullets and then charging their families for their burials.

Read more here
http://watchingmarcitz.com/2009/02/22/obama-hurts-100-million-to-help-9-million/

[stevador39]

LOOK WHERE THE MONEY GOES. IT GOES TO THE BANKS. IT ONLY PASSES THROUGH THE HANDS OF THE HOME OWNERS.

[gold_standard]

A free market would reach a stable, reasonable price on everything including housing. Government intervention is not a free market. People with money and power are constantly taking advantage of those who do not have money or power. Supporting housing prices for the benefit of the rich just makes housing less affordable for the poor. It is corruption under color of authority.

In a free country, everyone has to compete on equal terms. All men are created equal, equality before the law, justice for all, and all those other principles that our nation no longer stands for. We do not live in a free country because the government plays favorites with whoever supports the leadership and ruins the lives of anyone who does not goosestep to the government tune.

America would be a much different place if people loved freedom rather than just pretended to be free.

[quickly101]

I agree if we are going to call ourselves a capitalistic economy, let the market control prices and wages also. So tell unions to accept what the market dictates what they earn. Let's just throw away all government regulation if all you blooming capitalists want capitalism. Let the market dictate everything. Forget about food stamps, welfare, social security, FDIC, medicare, the USPostal service, the TVA, federal aid to states of any kind. I am being sarcastic to say the least. But you people who want government to butt out make my skin crawl.

[bubba027]

Lets place blame on all the greedy parties.
Posted by ladybluecpd at 9:23 AM : Feb 25, 2009

You're exactly right, but you missed a few. Let's also blame ACORN and other groups representing the underprivilaged that first pressured banks to make risky loans, and then pressured Fannie Mae and Freddie Mac to lighten the regulations on banks so they could make risky loans. Let's blame just about every politician that wanted to increase home ownership, including Jimmy Carter, Bill Clinton, and George W. Bush and all the congressman that said there weren't any problems with Fannie mae and Freddie Mac since 1999. They're all to blame as well.. Obama is falling into the same trap. He say's banks were irresponsible, but at the same time says banks need to make fast loans to consumers now! Loan requirements should be stricter now; less folks should qualify. We can't have it all ways.

[ladybluecpd]

Lets place blame on all the greedy parties.. It began with the real estate agent who listed the price of the property, then the appraiser who fudged the numbers who was in collusion ,with the mortgage broker to make the loan work.. All got their cut off the deal They all made money. they all should go to jail..
And the NAR( National Association of Realtors ) says its a good time to buy a house.... Not! NAR has powerful lobbyists who are putting pressure on FHA loan limits.. In 2004-2007 the prices were so inflated it will take more than a few years for the market to reset itself. Does anyone think the NAR wants prices to come down???? There never should have been a housing bail out.. It is only a matter of time before the next wave of foreclosures comes our way .. Bad FHA loans on over inflated properties are still being made... Who is going to bail out the government next time?

[ghwab1949]

The government "propping up" home prices was a key factor in getting into the economic condition we are in. Those who borrowed more than they can afford or want to pay back should suffer the consequences as should those who loaned them money they could not or chose not to pay back.

[platteman]

First, not everyone is entitled to a house to live in. That is not a right in any form of the constution I have ever read. Second, houses are like stock, they go up, they go down, if you buy high, you have two choices, either ride it out of sell and take a loss. If you messed up, take the responsibility, don't ask those of us who made the right decisions, pay for your bad decisions.
So suck it up and go on. If you don't have enough money, go bankrupt. Then start over, and work more. Grow up all you limo liberals who say everyone should have a house, some people can't handle a house.

[bk49120]

HOUSES WERE WAY OVERPRICED IN THE FIRST PLACE FOR THE PAST 15 YEARS. SOME WENT UP $100,000 IN A 10-YEAR PERIOD. NOW I THINK THEIR PRICES ARE JUST GETTING BACK TO WHERE THEY SHOULD HAVE BEEN IN THE FIRST PLACE, BUT STILL OVERPRICED.

[msay3]

We can not blame people who are called credit risks, because the job market is so poor, and it changes all the time. People just can't keep up with the payments, say they lose their jobs...so to call them a risk....is not right...Posted by cbsnewscomme at 4:34 AM : Feb 25, 2009
~~~~~~~~~~~~~~~~~~~~~~

Why is it not right? There are plenty of people out there who have lost their jobs, and to their credit they have prepared for such an event by saving as much as they could to carry them (and their mortgage) through....Maybe not in the best of style, but at least they can make it.....If you max out your mortgage with no savings, have maxed-out credit cards, live right on the edge, what do you expect? Short-sighted people have a long fall.....

[msay3]

Two friends with umteen degrees had such a closing, wherein the lender swore they had a "30 yr fixed mortgage." It was fixed alright, and after pouring over the details later, they discovered it was a 5/25 ARM.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~
It's one thing to swear, but another to see it in writing....The difference between being a chump and being able to sue....

[msay3]

I'm sick and tired of propping up people who didn't have enough brains to know what they were getting into when they signed on the bottom line.....You don't mortgage yourself to the hilt with nothing to fall back on when times become tough....Otherwise, the American Dream becomes the American Nightmare!!

[roger3816]

No they shouldn't.

[foxybarb]

Obama recognizes a lot of people got scammed by unscrupulous lenders and I'm glad he's trying to help the people in trouble. So many people are unsophisticated about documents, and there was a lot of hoopla and champagne parties when the poor schmuck arrived at the title company for their closing. Two friends with umteen degrees had such a closing, wherein the lender swore they had a "30 yr fixed mortgage." It was fixed alright, and after pouring over the details later, they discovered it was a 5/25 ARM.

My Peruvian housekeeper was given a mortgage that she in no way was qualified for. Her payments are now over $2,000 a month, and her two sons now can't find work in the construction field, so many of us are trying to help her keep her home. Wisely, she has rented her basement, so this is helping each month. Job loss is greatly affecting many families and Obama recognizes this.

The first couple can well afford to refinance, losing more money at the closing table; my housekeeper cannot do that. They were both scammed one way or another, and as Americans we just cannot in good consciousness stand by and let these people live in the parks and under bridges. Their loss, and a subsequent foreclosed house, drives down the value of their neighbors' homes, too.

We all await Obama's housing plan and hope it helps the millions of families in need.