Rent or Buy?

I just got an 83 page research report from Deutsche Bank analyzing the rent-buy gap. Here is the summary: Rent or Buy? Broader equilibrium within reach Seasonal uptick in home prices expands rent-buy gap The national rent-buy gap widened by 8.5% in 2Q to 84.0% (see Figure 1), which while down from 1Q, is the second highest level since 1Q 2004. The median home price was up 8.9% from 1Q as home... [more]

I just got an 83 page research report from Deutsche Bank analyzing the rent-buy gap. Here is the summary: Rent or Buy? Broader equilibrium within reach Seasonal uptick in home prices expands rent-buy gap The national rent-buy gap widened by 8.5% in 2Q to 84.0% (see Figure 1), which while down from 1Q, is the second highest level since 1Q 2004. The median home price was up 8.9% from 1Q as home prices benefited from the seasonal uptick in activity. Year-over-year, median prices are down 13.0% in the markets we track, which is up from the 17.6% y-o-y decline at the end of 1Q. California is at or beyond 1999 affordability levels The rapid pace of home price declines in California has returned the majority of markets in the state to the rent-buy relationship and affordability of 1999 (see Figures 10 and 11). This is our theoretical “equilibrium” year as the rent-buy gap and affordability were relatively stable during the 1990s. Oakland, Sacramento, San Bernardino, San Diego, San Francisco, and San Jose are all at or beyond 1999 levels. New York metro adjustment continues to lag the national average We do not have data for Manhattan but rather northern New Jersey and Long Island. The rent-buy gap did not expand as rapidly in these markets as it did in California and Florida but it did widen considerably (see Figure 10). Long Island continues to trail the rapid rent-buy trend reversal. In 1999, rent as a percentage of ATMP was 108.1%. In 2Q09, this figure was 72.3%. Similarly, rent as a percentage of ATMP in Northern New Jersey was 85.3% in 1999 versus 72.2% in 2Q09. What happens if rents and home prices decline? Over the last six quarters falling home prices have been the primary factor in closing the rent-buy gap. Looking ahead, we’ve prepared a “pro forma” analysis to reflect the still fragile economy. With home prices seasonally at their strongest in 2Q, our pro forma assumes a 10% drop in home prices across the board, a 4.50% mortgage rate, and a 10% decline in rents. Under this scenario, the vast majority of the markets we have analyzed would return to theoretical equilibrium. However, as we’ve seen with multiple markets, just because a market reaches equilibrium does not mean it will stabilize. If people believe a home is a depreciating asset, people will pay a premium to rent. Other affordability metrics might be overstating how cheap homes are Popular affordability metrics such as the National Association of Realtors’ have led most investors to believe that homes are cheap by historical standards. Our rentbuy analysis argues otherwise (see Figure 12). That’s not to say that affordability hasn’t improved dramatically – it has; however, it is simply back in line with earlier periods as opposed to being at all time highs. The different conclusions stem from different methodologies. We think our methodology paints the correct picture, because 1) it uses a more appropriate mortgage rate, 2) it takes into account trends in the rental market and 3) it is based on local level data. [less]