Notorious R.O.B.

About a week ago, the good folks at Trulia released their “Rent vs. Buy Index” of the largest 50 U.S. cities by population.  The full list of the 50 cities is available here as a PDF.  Given the current economic trends, and the rising interest by consumers for rentals, this is a great time for people in real estate to be talking about renting vs. buying.

Trulia didn’t post their full methodology but it does look like they did a good deal of work.  From the blogpost describing the Rent vs. Buy Index:

Total costs of home ownership include mortgage principal and interest, property taxes, hazard insurance, closing costs at time of purchase and ongoing HOA dues and private mortgage insurance, where applicable. Total costs of homeownership include an offset for the tax advantages of homeownership, including mortgage interest, property tax and closing cost deductions.

Total costs of renting include rent and renter’s insurance.

Based on these factors, Trulia concludes:

Price-to-Rent Ratio of 1-15: It is much less expensive to own than to rent a home in this city

Price-to-Rent Ratio of 16-20: It is more expensive to own a home in this city are The total costs of ownership of a home in this city are greater than the costs of renting, but it might still make financial sense depending on the situation.

Price-to-Rent Ratio of 21+: The total costs of owning a home in this city are much greater than the costs of renting.

The analysis was for 2BR apartments, condos, and townhomes — so the rent/buy for single family residences might be different.  But the index is a useful tool nonetheless.

Since I’ve written on the rent vs. buy decision before, I thought it would be interesting to look a bit closer at the ratios — although I don’t have the actual numbers that Trulia used — to see what, if anything, might pop out.

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Ah, Spring… a time when a young man’s fancy lightly turns to thoughts of love… and respected real estate market analysts voice cautious optimism…

For example, here’s Lawrence Yun of NAR voicing cautious optimism:

Yun expects a slightly stronger demand for housing and a fairly even level of foreclosures entering the inventory pipeline before easing in 2011. “We expect distressed home sales to account for 30 to 40 percent of transactions for the remainder of this year,” he said.

And here’s Mark Zandi, Chief Economist of Moody’s, doing the same:

Zandi also forecasts improving demand for housing, but with foreclosures rising later in 2010 before easing in 2011. He said home prices may weaken this year. “The housing crash is over—nearly. We are now near the bottom,” he said. “There will be no real price growth in 2010 or 2011. Whether home prices weaken is unclear, but it will take two more years to work off excess housing inventory at the current sales pace. Of course, if demand picks up, it would take less time for prices to rise,” he said.

Then there is David Crowe, Chief Economist for NAHB:

“Home buyer tax credits clearly did their job and got people back into the marketplace,” said NAHB Chief Economist David Crowe, who also served as moderator of the two-hour webinar.

With the expiration of the tax credits in April, Crowe said the housing momentum is being carried forward by low interest rates, pent up household formations, stabilizing prices and budding employment growth.

Freddie Mac is almost bubbly (PDF):

The reason to expect this relatively benign outcome is that, despite short-term swings in sales activity, the underlying fundamentals for housing markets are steadily improving. The job market report for April showed a rise in nonfarm payrolls of 290,000, the largest new hiring in four years. While temporary Census workers accounted for 66,000 jobs, private payrolls posted a respectable gain of 231,000. The other “headline” figure in the report—the unemployment rate—gave a head fake by rising two tenths, to 9.9 percent. Somewhat paradoxically, this was due to improved labor market conditions, which attracted over 800,000 job seekers back into the labor force. A broader measure of employment that is not affected by changes in labor force participation, the employment-to-population ratio, rose two tenths of a percent. Overall, labor market trends are looking much better than a few months ago. More robust job growth and the incomes this will bring should directly contribute to the housing market recovery, and will likely also have further indirect effects by boosting household confidence.

And we have very encouraging data from the Commerce Department, Fannie Mae, and others.

So why do I feel an unnamed dread going up my spine?  Is it just some sort of Eeyore-itis?  Perhaps, vampire-like, when the sun is shining and the birds are singing, I have to retreat to the chill of the grave.  Yeah, I probably need more Vitamin D….

Nonetheless, I have a bad feeling about the housing market, because of data that economists rarely look at.  That probably makes them right and me wrong (and boy, I’d love to be wrong on this), but hey, this is a blog, so… what the hell.

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