Ten Cities To Go From Renting To Buying

Real Estate

Francesca Levy, 01.21.10, 04:50 PM EST
In these metro areas, now is a good time to make the jump to homeownership.
The U.S. government has pushed hard to make homeowners out of one-third of Americans who still rent their homes. It introduced and later extended a tax credit for first-time home buyers, and has kept federal interest rates at their lowest levels since the 1940s.
Market conditions are such that now is a particularly good time for some renters to take the hint.
In Portland, San Francisco, Minneapolis and Washington, D.C., the premium to buy--the spread between what you'd spend on renting and what you'd pay each month for a mortgage--is far narrower now than its 15-year average. And economists predict a significant home-price hike in five years. So upgrading will cost much less than usual, and home buyers are likely to get a good return on their investment.
Note that buying isn't necessarily cheaper than renting in these metro areas. In fact, it often remains a more expensive proposition. But for those determined to own, that investment is a better one now than it normally is.
Take San Francisco. To live here has always required a hefty bump in monthly costs from renting; it's normally an incredible 296% more expensive to buy than lease a home, and the city's residents know this. That's why 42% of them stick to renting. Even though in the third quarter of 2009 the premium was still in the triple digits--233%--it had shrunk by 63 percentage points from the above 15-year average. As with the other cities we've highlighted, you're not getting nearly as good a deal by renting as you might have just a few years ago.
"Rents are falling, but not nearly as rapidly as home prices," says Ron Witten, founder of Dallas-based Witten Advisors, an apartment market consulting firm. "Part of the reason is a shift away from home ownership toward renting," he says, in part because mortgages have become harder for many to obtain.
Behind the Numbers
To find cities where it's a good time to go from renting to buying, we used data from Witten Advisors, which calculated the premium to buy for 42 Metropolitan Statistical Areas across the country using data from the U.S. Census, the National Association of Realtors and a blended average of fixed- and adjustable-rate mortgages from the Federal Housing Finance Agency (which oversees and regulates lenders). We compared the premium in the third quarter of 2009 with the average premium over the last 15 years to find the biggest drops.
We also wanted to pinpoint markets where home buying is a smart investment, so we factored in the five-year forecast in the S&P/Case-Shiller Home Price Index from Moody's ( MCO - news - people )Economy.com. The cities on our list have some of the biggest discounts on the premium to buy coupled with big projected increases in home prices over the next five years.
One major market we didn't look at is New York City, another spot where rents have softened less than home prices. Witten Advisors doesn't track the metro area because accurate historical data on rental costs there is exceedingly difficult to obtain.
Quality of Life, at a Discount
Portland, Ore., makes our list for much the same reason that San Francisco does: It's a picturesque, culture-driven city with good local services and amenities. The city is still not particularly cheap for buyers--but it's cheaper than normal.
A family hoping to put down roots there would normally pay a 62% premium to go from renting to buying. In the third quarter of 2009, however, that premium shrank by 16 percentage points. At the same time, Moody's Economy.com anticipates that home prices will jump 19% over the next five years. That's partly because, like San Francisco, Portland has strict government limitations on building and a coastal location that keep sprawl in check.
"Portland has one of the most controlled environments in the country in terms of development rights," says Stuart Gabriel, director of the Ziman Center for Real Estate at the UCLA Anderson School of Management. "Those supply constraints will push prices up."
Jobs Stability
The presence of jobs--along with strong industries that will keep generating new ones--is a big factor in keeping demand for homes, and therefore home prices, high. The weak national economy has helped reduce the premium to buy for the time being, but where the labor market is relatively healthy, home prices are predicted to shoot up.
In Minneapolis, for example, where large companies including Target ( TGT - news - people ) and General Mills ( GIS - news - people ) have their corporate headquarters (and there's a large university system), home buyers will only pay 14% more than if they were renting (24 percentage points lower than average), and home prices should climb by 15% in five years.
Similarly, in Washington, D.C., government jobs are plentiful, and anticipated to stay that way. The 6.1% unemployment rate here is well below the national average, which is partly why Moody's anticipates a five-year jump in home prices of 15%. And, at the moment, the premium to buy is 20 percentage points lower than its usual 57%.
Of course, whether buying or renting is best is ultimately an individual choice, and one driven by a lot more than map coordinates. When subprime lending was rampant, many without the means to buy were encouraged to do so anyway--and it's no secret how that turned out.
"If there's anything we should have learned from this housing cycle, it's that the decision to buy or rent ought to be a personal lifestyle decision," says Witten. "In part, it's a question about, 'Do I want to be a homeowner' in general, and specifically, 'Do I want to be a homeowner now, with this economic uncertainty?'

If You Don't Buy a House Now, You're Stupid or Broke

Roth on Real Estate December 8, 2009, 4:01PM EST BUSINESS WEEK

If You Don't Buy a House Now, You're Stupid or Broke
Interest rates are at historic lows but cyclical trends suggest they will soon rise. Home buyers may never see such a chance again, writes Marc Roth

By Marc Roth

Well, you may not be stupid or broke. Maybe you already have a house and you don't want to move. Or maybe you're a Trappist monk and have forsworn all earthly possessions. Or whatever. But if you want to buy a house, now is the time, and if you don't act soon, you will regret it. Here's why: historically low interest rates.

As of today, the average 30-year fixed-rate loan with no points or fees is around 5%. That, as the graph above—which you can find on Mortgage-X.com—shows, is the lowest the rate has been in nearly 40 years.

In fact, rates are so well below historic averages that it should make all current and prospective homeowners take notice of this once-in-a-lifetime opportunity.

And it is exactly that, based on what the graph shows us. Let's look at the point on the far left.

In 1970 the rate was approximately 7.25%. After hovering there for a couple of years, it began a trend upward, landing near 10% in late 1973. It settled at 8.5% to 9% from 1974 to the end of 1976. After the rise to 10%, that probably seemed O.K. to most home buyers.

But they weren't happy soon thereafter. From 1977 to 1981, a period of only 60 months, the 30-year fixed rate climbed to 18%. As I mentioned in one of my previous articles, my dad was one of those unluckily stuck needing a loan at that time.
Interest Rate Lessons

And when rates started to decline after that, they took a long time to recede to previous levels. They hit 9% for a brief time in 1986 and bounced around 10% to 11% until 1990. For the next 11 years through 2001, the rates slowly ebbed and flowed downward, ranging from 7% to 9%. We've since spent the last nine years, until very recently, at 6% to 7%. So you can see why 5% is so remarkable.

So, what can we learn from the historical trends and numbers?

First, rates have far further to move upward than downward; for more than 30 years, 7% was the low and 18% the high. The norm was 9% in the 1970s, 10% in the mid-1980s through the early 1990s, 7% to 8% for much of the 1990s, and 6% only over the last handful of years.

Second, the last time the long-term trends reversed from low to high, it took more than 20 years (1970 to 1992) for the rate to get back to where it was, and 30 years to actually start trending below the 1970 low.

Finally, the most important lesson is to understand the actual financial impact the rate has on the cost of purchasing and paying off a home.

Every quarter-point change in interest rates is equivalent to approximately $6,000 for every $100,000 borrowed over the course of a 30-year fixed. While different in each region, for the sake of simplicity, let's assume that the average person is putting $40,000 down and borrowing $200,000 to pay the price of a typical home nationwide. Thus, over the course of the life of the loan, each quarter-point move up in interest rates will cost that buyer $12,000.
Loan Costs

Stay with me now. We are at 5%. As you can see by the graph above, as the economy stabilizes, it is reasonable for us to see 30-year fixed rates climb to 6% within the foreseeable future and probably to a range of 7% to 8% when the economy is humming again. If every quarter of a point is worth $12,000 per $200,000 borrowed, then each point is worth almost $50,000.

Let's put that into perspective. You have a good stable job (yes, unemployment is at 10%, but another way of looking at that figure is that most of us have good stable jobs). You would like to own a $240,000 home. However, even though home prices have steadied, you may be thinking you can get another $5,000 or $10,000 discount if you wait (never mind the $8,500 or $6,500 tax credit due to run out next spring). Or you may be waiting for the news to tell you the economy is "more stable" and it's safe to get back in the pool. In exchange for what you may think is prudence, you will risk paying $50,000 more per point in interest rate changes between now and the time you decide you are ready to buy. And you are ignoring the fact that according to the Case-Shiller index, home prices in most regions have been trending back up for the last several months.

If you are someone who is looking to buy or upgrade in the $350,000-to-$800,000 home price range, and many people out there are, then you're borrowing $300,000 to $600,000. At 7%, the $300,000 loan will cost just under $150,000 more over the lifetime, and the $600,000 loan an additional $300,000, if rates move up just 2% before you pull the trigger.

What I'm trying to impress upon everyone is that if you are planning on being a homeowner now and/or in the foreseeable future, or if you are looking to move your family into a bigger home, then pay more attention to the interest rates than the price of the home. If you have a steady job, good credit, and the down payment, then you really are being offered the gift of a lifetime.

Is a foreclosure deluge on it's way? Hmmmmm?????

Bay Area median sale price tops year-ago level for first time since ‘07
November 19, 2009La Jolla, CA.----
The Bay Area’s housing market continued to ease back toward normalcy last month as fewer distressed properties sold and $500,000-plus sales accounted for a greater share of transactions than a year ago. The result: The nine-county region posted a modest year-over-year gain in its median sale price – the first in nearly two years, a real estate information service reported.
The median price paid for all new and resale houses and condos that closed escrow rose to $390,000, up 6.8 percent from $365,000 in September and up 4 percent from $375,000 in October 2008. The last time the median sale price rose on a year-over-year basis was in November 2007, when it gained 1.5 percent, according to MDA DataQuick of San Diego.
Last month’s median was the highest since it was $395,000 in July this year, but it was 41.4 percent below the $665,000 peak reached in June and July of 2007.
“The regional price statistics mainly reflect the fading of the foreclosures and the uptick in high-end activity in recent months,” said John Walsh, MDA DataQuick president. “Down at the neighborhood level, different things are happening depending on location, but the big picture is that prices in many areas appear to be bouncing along bottom. Whether that bottom is permanent is the subject of endless debate right now.”
In addition to the Bay Area overall, three counties – Santa Clara, Marin and Sonoma – saw their median sale prices rise year-over-year last month. The last time that more than one county posted an annual gain in the median was November 2007. Also last month, Alameda, Santa Clara, San Francisco and the nine-county region overall posted single-digit annual gains in their median price paid for a specific home-type: resale single-family detached houses.
A total of 7,933 new and resale houses and condos closed escrow in the nine-county Bay Area last month. That was up 0.7 percent from 7,879 in September and up 4.2 percent from 7,613 in October 2008.
Last month’s sales were 10.2 percent below the October sales average of 8,833 since 1988, when DataQuick’s stats begin. October sales have ranged from a low of 5,486 in 2007 to a high of 13,392 in 2003. The average change in sales between September and October since 1988 is a gain of 0.9 percent.
Sales in the region’s higher-cost counties – Marin, San Francisco, Santa Clara and San Mateo – represented 42.2 percent of October sales, up from 35.3 percent a year ago, when more sales were concentrated in the lower-cost inland areas rife with deeply discounted foreclosures. Sales over $500,000 made up 36 percent of all sales last month, up from 34.9 percent a year ago and a low this year of 22.7 percent in January.
October’s overall increase in sales from September and a year ago came even as fewer foreclosed properties sold. Foreclosure resales – homes sold in October that had been foreclosed on in the prior 12 months – made up 31.9 percent of all resale activity. That was down from 32.3 percent the prior month and 44.0 percent in October 2008. It was the lowest since foreclosure resales were 29.9 percent of all resales in June 2008. Foreclosure resales peaked at 52 percent of Bay Area resales in February this year.
Between January 2000 and December 2007, foreclosure resales averaged only about 1 percent of all Bay Area resales each month. Since January 2008, the monthly average for foreclosure resales is about 37 percent.
The recent decline in foreclosure resales follows a generally downward trend this year in the number of homes being foreclosed on. It’s mainly because lenders and loan servicers have increasingly pursued short sales and loan modifications as an alternative to the costly foreclosure process. The declining inventory of lower-cost foreclosures has been key to stabilizing the housing market, along with the federal government’s efforts to boost housing demand through lower mortgage rates, tax incentives and plentiful, low-down-payment FHA financing.
Federally-insured FHA loans, a popular choice among first-time buyers, made up 25.9 percent of all Bay Area purchase loans last month. That was up from 24.9 percent in September, 19 percent a year ago and less than 1 percent two years ago.
Meanwhile, the availability of financing for pricier homes continued to show mild signs of improvement, but such “jumbo” loans remained relatively expensive and difficult to obtain.
Mortgages above $417,000 – formerly the definition of a jumbo loan – made up 30.1 percent of all home purchase loans last month. That was up from 29.6 percent in September and 25.9 percent a year ago. More than 60 percent of Bay Area purchase loans were over $417,000 before the August 2007 credit crunch hit.
Another fuel source for high-end sales – adjustable-rate mortgages (ARMs) – continues to be used far less than what’s been normal historically, but has trended higher lately. In October, 8.1 percent of Bay Area purchase loans were ARMs, up from 7.9 in September and 7.4 percent a year earlier. ARMs fell to a record low of 3.0 percent in January this year. ARMs had averaged 61 percent of the region’s purchase loans this decade up until the August 2007 credit crunch.
San Diego-based MDA DataQuick is a division of MDA Lending Solutions, a subsidiary of Vancouver-based MacDonald Dettwiler and Associates. MDA DataQuick monitors real estate activity nationwide and provides information to consumers, educational institutions, public agencies, lending institutions, title companies and industry analysts. Because of late data availability, sales were estimated in Alameda and San Mateo counties.
The typical monthly mortgage payment that Bay Area buyers committed themselves to paying was $1,665 last month, up from $1,578 the previous month, and down from $1,837 a year ago. Adjusted for inflation, current payments are 36.7 percent below typical payments in the spring of 1989, the peak of the prior real estate cycle. They are 53.3 percent below the current cycle's peak in July 2007.
Indicators of market distress continue to move in different directions. Foreclosure activity is off its recent peak but remains high by historical standards, with mortgage default notices flattening out or trending lower in some areas but edging higher in others. Financing with multiple mortgages is low, down payment sizes are stable, and non-owner occupied buying is above-average in some markets, MDA DataQuick reported.
Source: DataQuick Information Systems

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