How do you answer the question….”Have the housing markets reached bottom…..are homes done depreciating?”
What we have been suggesting will be the clearest indication that the housing markets have reached bottom is when the rental payment/ mortgage payment ratio is roughly in balance.
For example, if you are interested in buying a $100,000 home with 10% down..what will the PITI payment be? Roughly $1000 (remember, I said ‘roughly’) If that same home will rent for $600 where is the logic in buying the home?
(Don’t add the current tax break for owning…or any potential future appreciation…into the mix…just look at this from a pure numbers perspective)
In other words, it clearly makes better financial sense to rent because the monthly payment is LESS vs. owning. In this case the rent/ own ratio favors renting.
Now, lets look at the other side of this. When the rental price and the mortgage payment are roughly the same…then, it could be argued..that housing has hit bottom. Using the same example, the rental price is $1000 and the mortgage payment is $1000.
The key with this is that rental prices have to be roughly the same as what that same home would cost to own. How does your housing market measure up to this analysis…are your homes still overpriced or are they inline with what similar rentals cost?
Here is a great article from FT.com
In which US cities are home prices likely to fall?
One measure is to look at the amount home prices have fallen, relative to the increases in their rental prices. Moves in rental prices tend to represent fundamental changes in the value of a property (people are paying only what it’s worth to stay there) rather than bubble-induced speculation about the future value of the property. In markets where there are bubbles, eventually, home prices should fall back in line with rental prices.
Using Case Shiller and BLS data, there are 17 cities where we can compare home prices versus rentals (See chart). It’s a rough measure, to be sure. Rental price inflation is typically measured over a larger area than home price inflation, react with a lag, and can be pulled up by housing speculation. Also, for simplicity, I’ve used the same starting dates, even though bubble-suggestive activity didn’t begin simultaneously in all cities.
Still, major US cities are telling very different stories. In only seven of the 17 cities are house prices significantly above their 2000 levels, adjusted for rental inflation. In four of them (including ailing Detroit) prices are well below those levels.
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