A new study jointly released by the National Low Income Housing Coalition (NLIHC) and the Center for Economic and Policy Research found that given the current state of the housing market, it may be more economical for people to rent rather than purchase a home.
That conclusion comes out of the study “Ownership, Rental Costs and the Prospect of Building Home Equity” authored by Hy Jin Rho, Daniel Pelletiere and Dean Baker.
The report analyzed 100 metropolitan areas and looked at variables such as monthly home ownership costs versus monthly rental costs; the amount of equity homeowners would have by 2012, if they purchased a house today; and the housing and vacancy rates.
What the researchers found was that monthly home ownership costs in the Los Angeles-Long Beach-Santa Ana metropolitan statistical area, on the low side is $3,054 versus $1,300 for a two-bedroom rental.
At the same time, homeowners who purchase today, may lose a minimum of $222,719 in equity.
“We’re projecting that (homeowners) will lose over $200,000 in equity in Los Angeles, and that gives you an idea on how much housing prices have to fall. The researcher said the doubling of home prices in the L.A. area in the last few years was extremely atypical.
“Before the New Deal home buying was a risky proposition, and only the rich did it,” explained Pelletiere. “Then The New Deal made it available to more people with home loan guarantees, set payments, 30-year mortgages etc. In the post war period, it (a home) has been a very stable investment and home prices have kept pace with inflation and kept in line with rent growth.”
In essence, buying a home was not an investment that grew by leaps and bounds, but was a very stable assest that grew over a long period of time and allowed people to gain income.
That has changed significantly in the last five years, said the researcher. “People saw it as a way to get rich,” Pelletiere said.
This has been especially true in areas Like Los Angeles, San Francisco, the Silicon Valley, and even in Oxnard. Home prices have jetted up well beyond what Pelletiere said is typical appreciation.
A rule of thumb, according to the report is that home prices should be about 15 times the local annual rents.
That has definitely not been the case in Los Angeles, and now prices are falling, and are projected to fall even more.
According to Pelletiere, this requires potential home owners to take a close look at whether they should purchase today or wait. Among the factors he said must be considered, are the price (anything over 15 times annual rent is suspect); and how long you intend to keep the home.
Those who plan to stay in the house at least five years should be able to weather further drops in home prices (which equates to lost equity).
But above all, Pelletiere advises potential homeowners to avoid feeling that they must purchase a home no matter the cost, and to do some careful analysis and evaluation.