Affordable housing is closer than you think

Despite most of the talk about home prices and whether or not they have recovered, most of the conversation is around the improving picture of housing inventory/starts or only focus on using things like the Case-Shiller index. These are all important aspects of housing and in fact the outstanding inventory seems to be going down as homes are sold and banks turn foreclosures into rentals instead of selling them. This is happening at a time when builders are rapidly ramping up and turning the housing situation into a full recovery (especially in locations like Houston). This is all good news but doesn't really indicate if homes are more or less affordable.

Bill McBride runs a great series on his blog Calculated Risk that tracks the Price-to-Rent ratio as the housing numbers continue to drive these headlines about home affordability that confuse everyone. Looking at price-to-rent ratios it is interesting that the ratio is nearing the late 1999/early 2000 numbers where the per sq. ft. cost to rent was pretty close to the price to buy.

PriceRentNov2012

In my opinion, this is a normal state for housing to be, where renting provides the advantage of the consumer being able to move easily and buying provides the consumer with a way to recapture the money spent on housing by committing to said housing for 15-30yrs. What is interesting is that this is happening that the same time that the stock market is getting near the same level as the 2000 stock market.

Yet with the price and benefits of housing coming into alignment with historical values we are still seeing the rise of buying/renting alternatives and conservative schemes like 15yr mortgages becoming more interesting than speculative schemes like 5yr ARMs. I have certainly jumped on board refinancing to 15yr mortgages with lower debt service rates and quicker payoffs. Like everyone, the really low lending rates are driving added value and ease to homeowners that renters are giving up by renting.

Similarly this extended low of mortgage rates is driving many real estate investors (myself included) to look hard for great properties and communities to invest in. We're finding them as are many banks and REITs. Even if you aren't taking advantage of a great time to invest in real estate and are just looking at your own home - you should seriously be looking at the difference between investing in the stock market somewhere and investing in your existing home. In many cases dropping your bonus into your house in an effort to refinance it at 15yrs will pay off 4-6% over the next 30yrs. If you aren't getting a guaranteed 4-6% return on your other investments there is no reason why you shouldn't seriously consider this option as a way to grow your wealth. Granted you won't see your bank account grow every year and you can't pull it out in case of an emergency, but if you can live without the psychological affect of seeing your money grow and you already have other debt paid off and emergency reserves - this is an often overlooked scenario to growing your overall wealth.

 

 

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