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Saturday, May 28, 2005

More Data On Housing Doom From NYT

In another housing bubble article by the NYT, we see comparisons in rental and housing values that make up the "rent ratio". In "Is Your House Overvalued?" we use a formula similar to a price-to-earnings ratio as one measures stock company values. Here you:

Take the price of a typical house in an area, divide it by the amount that house would cost to rent for a year and the result is what might be called a rent ratio, an imperfect but still telling measure of real estate.

Many of the major markets have a 20 to 1 or greater ratio. So while housing values may have increased by 20% per year over the past 5 years, the rentals have only increased moderately.

Yet, the NYT hedges their message of doom by stating:

And simply because home values have risen more than rents does not mean there is a bubble waiting to burst. For many reasons - the long-term decline in interest rates, the fall in mortgage costs as the Internet has increased competition and the extension of credit to low-income families - buying a home is easier for many families than it once was. It makes sense that house prices have risen in recent years, economists say.

The most interesting part of the article is to learn that doomsayer economist Dean Baker, recently mentioned in my earlier post WSJ Schizophrenia: Scaring and Reassuring, has sold his house for $440,000 after buying it for $165,000 8 years ago and is now renting (at an estimated cost of $2500 per month in the DC area). Says Baker:

"I felt stupid not doing it," said Mr. Baker, co-director of the Center for Economic and Policy Research, a liberal group. "To me, there's no doubt about the direction. The only question is timing."

Looks like we have a doomsayer (like the famous Paul Ehrlich bet with Julian Simon) putting his mouth where his money is. Many factors will have to be considered in measuring the reults. His rent costs will be $30,000 per year and lost real estate taxes and mortgage interest deductions. There is an immediate real estate gaent commission of say $25,000.

And worst of all, what if his landlord converts his building into condos and baker has to move? There are some psychic and assurance reasons for owning that cannot be quantified. Let's keep an eye on DC housing market for then next 5-10 years. I'll post something then.


At 5:33 PM, Anonymous Anonymous said...

We're supposed to let guys with this sort of massive head injury tell us how to live?

If he's owned a home for 8 years that he bought for 165K, his current cost of ownership would have to be waaaaaay less than $2,500 a month so whatever profit he made on the house now has to make up that difference.

The man's a moron.

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