As the U.S. economy struggles to regain momentum, homebuyers are beleaguered between renting and buying a home.Â While
home prices have plunged nearly a third since 2006 and homeownership
rates have fallen to all-time lows, there is new evidence emerging that
now, could be an optimal time to jump into the housing market.
There are two key measures that shed light into the
comparison between owning a home and renting. First, for the first time
in nearly five years, the nationâ€™s ratio of housing prices to yearly
rents is restored to its pre-bubble average. This is a clear signal that
renting in many of the nationâ€™s metropolitan areas has become more
expensive than financing the purchase of similar properties. Secondly,
adding cheap debt financing to the mix, the affordability of owning a
home is at its highest level since 1970.
For those that invest in stocks, an areas price to
rent ratio is comparable to a stock`s PE or price to earnings ratio.
This variable measures the cost of an asset to the predicted return that
asset will generate over a given period. Typically, the lower the PE,
the greater the anticipated return. For housing, the lower the ratio,
the more affordable it is to buy a home compared to renting similar
properties. The national average is now at 11.3% down from 18.5 in 2007.
For most, mortgage rates are the key factor for
determining whether or not they will purchase or rent. With mortgage
rates hovering around 4%, qualified buyers can take advantage of cheap
money. In August, the housing affordability index hit 183.7%.
These promising signs are also catching the eyes of
investors as well. Yields on income producing properties are increasing
as many find rental homes attractive options despite the risk of
depreciation. For these two categories of homeowners, now could be the
time to pull the trigger.
For more information on these ratios pertaining to your local area, feel free to email me at Tom@DCinsiders.comÂ or call me directly at 202-386-1441