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Housing Barometer: Recovery Staggers Forward Visualization Preview

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Housing Barometer: Recovery Staggers Forward

Trulia’s Housing Barometer shows that 4 of the 5 key housing indicators improved over the past year: prices, the delinquency+foreclosure rate, non-distressed home sales, and young-adult employment are all in better shape than one year ago. However, despite improvement, young-adult employment still isn’t halfway back to normal; neither is the fifth indicator, construction starts.

How We Track This Uneven Recovery
Since February 2012, Trulia’s Housing Barometer has charted how quickly the housing market is moving back to “normal” based on multiple indicators. Because the recovery is uneven, with some housing activities improving faster than others, our Barometer highlights five measures:

  1. New construction starts (Census)
  2. Existing home sales, excluding distressed sales (National Association of Realtors, NAR)
  3. Delinquency + foreclosure rate (Black Knight, formerly LPS)
  4. The employment rate for 25-34 year-olds, a key age group for household formation and first-time homeownership (Bureau of Labor Statistics, BLS)
  5. Home-price levels relative to fundamentals (Trulia Bubble Watch)

The first four measures are reported monthly; to reduce volatility, we use three-month moving averages for these measures. The fifth, prices from our Bubble Watch, is a quarterly report. For each indicator, we compare the latest available data to (1) its worst reading for that indicator during the housing bust and (2) its pre-bubble “normal” level.

Housing-Barometer_Q12014

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Buying a Home 38% Cheaper Than Renting – But How Risky Is It? Visualization Preview

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Buying a Home 38% Cheaper Than Renting – But How Risky Is It?

Though the gap is narrowing, buying costs less than renting in all 100 large U.S. metros. But uncertainty about future home price appreciation means buying isn’t always a safe bet.

Jed Kolko, Chief Economist
February 26, 2014

Homeownership remains cheaper than renting nationally and in all of the 100 largest metro areas. Rising mortgage rates and home prices have narrowed the gap over the past year, though rates have recently dropped and price gains are slowing. Now, at a 30-year fixed rate of 4.5%, buying is 38% cheaper than renting nationally, versus being 44% cheaper one year ago.

The rent versus buy math is different in each local market. Buying ranges from being just 5% cheaper than renting in Honolulu to being 66% cheaper than renting in Detroit. But even for a specific market, the cost of buying versus renting depends on how much home prices rise (or fall) after you buy. Our model assumes conservative home price appreciation, but – as we all know after the last decade – home prices can unexpectedly rocket or plummet. This edition of Trulia’s Rent vs. Buy Report focuses on how different home price assumptions can affect the math for someone deciding to buy or rent today.

Our interactive Rent vs. Buy Map shows how the math changes under alternative assumptions for the mortgage rate, the income tax bracket for tax deductions, and the number of years that one stays in the home.  To personalize the decision fully, Trulia’s Rent vs. Buy Calculator lets you compare the cost of renting and buying based on whatever assumptions and scenarios you like.

This report, our map, and our calculator are all powered by the same math, which includes these five steps:

  1. Calculate the average rent and for-sale price for an identical set of properties. For this report we looked at all the homes listed on Trulia for sale and for rent from December 2013 through January 2014. We estimate prices and rents for similar homes in similar neighborhoods in order to get a direct apples-to-apples comparison. We are NOT just comparing the average rent and  price of homes on the market, which would be misleading since rental and for-sale properties are very different: most importantly, for-sale homes are roughly 50% bigger, on average, than rentals.
  2. Calculate the initial total monthly costs of owning and renting, including the mortgage payment and rent, as well as maintenance, insurance, and taxes.
  3. Calculate the future total monthly costs of owning and renting, taking into account price and rent appreciation, as well as inflation.
  4. Factor in one-time costs and proceeds, like closing costs, down payment, sales proceeds, and security deposits.
  5. Calculate the net present value to account for opportunity cost of money.

To compare the costs of owning and renting, we assume buyers get a 4.5% mortgage rate on a 30-year fixed-rate loan with 20% down; itemize their federal tax deductions and are in the 25% tax bracket; and will stay in their home for seven years. Under these assumptions, buying is 38% cheaper than renting nationwide, taking into account all of the costs and proceeds from buying or renting over the entire seven-year period. The full methodology is available here.

Buying Beats Renting Until Mortgage Rates Hit 10.6%
Buying a home remains cheaper than renting in all of the 100 largest metro areas. Even though prices increased sharply in many markets over the past year, low mortgage rates have kept homeownership from becoming more expensive than renting. Also, in some markets, like San Francisco and Seattle, rents have risen sharply; rising rents hurt affordability relative to incomes, but rising rents make buying look cheaper in comparison.

The rent-versus-buy math differs across metros mostly because each local market has its own normal level of prices and rents, but also because property taxes and home-price appreciation differ in individual markets as well. Taking all these factors into account, buying ranges from just 5% cheaper than renting in Honolulu to 66% cheaper than renting in Detroit. Generally, buying is a tougher call relative to renting in California and New York, while the gap is largest in the Midwest and South.

Will renting become cheaper than buying soon? Some markets might tip in favor of renting this year as prices continue to rise faster than rents and if – as most economists expect – mortgage rates rise, due both to the strengthening economy and Fed tapering. For each metro, we identified the mortgage rate “tipping point” at which renting becomes cheaper than buying, given current prices and rents. If rates rise, Honolulu would become the first metro to tip, at a mortgage rate of 5.0%. San Jose and San Francisco would also tip before rates reach 6%. But those are the extreme markets. Nationally, rates would have to rise to 10.6% for renting to be cheaper than buying – and rates haven’t been that high since 1989.

Where Buying a Home is a Tougher Call

# U.S. Metro

Cost of Buying vs. Renting (%),

Winter 2014

Cost of Buying vs. Renting (%),

Winter 2013

Mortgage Rate Tipping Point When Renting Becomes Cheaper Than Buying, Winter 2014

1 Honolulu, HI

-5%

-23%

5.0%

2 San Jose, CA

-9%

-24%

5.4%

3 San Francisco, CA

-13%

-19%

5.8%

4 Orange County, CA

-21%

-32%

6.8%

5 New York, NY-NJ

-22%

-26%

7.2%

6 Oakland, CA

-24%

-40%

7.2%

7 Los Angeles, CA

-24%

-35%

7.3%

8 Ventura County, CA

-27%

-36%

7.6%

9 Albany, NY

-27%

-30%

9.0%

10 Austin, TX

-30%

-38%

9.2%

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Housing Barometer: Recovery Moving Ahead, Unevenly Visualization Preview

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Housing Barometer: Recovery Moving Ahead, Unevenly

Trulia’s revised Housing Barometer shows that 3 of the 5 key housing indicators are on track towards a full recovery. Home sales and prices are approaching normal levels, but construction and young-adult employment are badly lagging. At the metro level, some housing markets are fully recovered, while others are far from normal.

Jed Kolko, Chief Economist
December 11, 2013

Tracking This Uneven Recovery
Since February 2012, Trulia’s Housing Barometer has charted how quickly the housing market is moving back to “normal” based on three indicators: construction starts (Census), existing home sales (NAR), and the delinquency + foreclosure rate (LPS). Today, we’re re-launching our Housing Barometer, which better tracks the uneven recovery with some recalibrations and two additional housing market indicators:

  1. The level of home prices relative to fundamentals, based on our own Bubble Watch report.
  2. The employment rate for 25-34 year-olds, a key age group for household formation and first-time homeownership, based on the Bureau of Labor Statistics’s (BLS) monthly employment report.

In addition to adding two new measures, we’re excluding distressed sales from existing-home sales because non-distressed sales are a better measure of healthy market activity than overall sales. We’re also using three-month moving averages for the indicators that are reported monthly (sales, delinquency + foreclosure rate, starts, and employment) to smooth out volatility.

For each indicator, we compare the latest available data to (1) the worst reading for that indicator during the housing bust and (2) its pre-bubble “normal” level. We’re also no longer averaging together the “back to normal” levels across different indicators because the average masks huge differences among these indicators. Instead, we are taking a closer look at the recovery of each indicator: three are most of the way back to normal and closing the gap quickly, while two others are stagnating near troublesome lows.

MD-235 Housing Barometer_9

Back to Normal Or Left Behind: 3 in 5 Key Market Indicators Recovering
Of the Housing Barometer’s five indicators, prices and sales are getting close to normal. Delinquencies + foreclosures, while not as close to normal as prices and sales, have improved significantly in the past year. The other two measures – new home starts and jobs for young adults – still have a long way to go:

  • Existing home sales (excluding distressed) were 79% back to normal in October, up from 51% one year earlier. While existing and pending home sales have slipped in recent months, distressed sales – foreclosures and short sales – account for much of the drop. The mix of sales continues to shift from distressed to non-distressed, which is a sign of market recovery.
  • Prices have had an astounding recovery in the past year. Trulia’s Bubble Watch shows prices were 4% undervalued in Q4 2013, compared with 15% at the worst of the housing bust, which means that prices are almost three-quarters (71%) of the way back to the “normal” level of being neither over- nor under-valued. One year ago, prices looked 13% undervalued – just 16% of the way back to normal from their worst levels – leading home prices to win the “most improved” award over the past year.
  • The delinquency + foreclosure rate fell to 8.92% in October after rising to more than 14% during the recession. This rate is now 59% back to normal. Rising prices and an improving economy have caused fewer borrowers to become seriously delinquent on their mortgages in the first place; at the other end of the pipeline, more foreclosures continue to get completed and sold. The remaining foreclosure inventory is increasingly concentrated in Florida and several other states with long legal foreclosure processes.
  • New home starts are just 36% of the way back to normal. The latest three-month average (from August because more recent data have been delayed by the government shutdown) is 870,000 starts, well below the long-term norm of 1.5 million. Construction, however, is looking up: the latest permits data, for October, showed a jump to 1.03 million, which heralds an increase in starts in November or December.
  • Employment for young adults is the recovery’s caboose. Just 74.9% of adults age 25-34 are employed, which is only 23% back to normal (79.3% employment rate) from the worst level of the recession (73.6%). Young adults need jobs in order to move out of their parents’ homes, form their own households, and eventually become homeowners. In turn, construction depends on household formation. The housing market cannot fully recover until young adults get back to work.

Which Local Markets are Back to Normal?
Not only are different housing market activities recovering at different rates, the housing recovery is uneven across local markets, too. To track local recoveries, we examine two of the above indicators at the metro level: prices relative to local norms, from Trulia’s Bubble Watch, and construction permits relative to local norms, from the Census. These two measures are strongly correlated: as the scatterplot below shows, in metros where prices are near or above normal, construction permits are also near or above normal.

Trulia_HousingBarometer_Scatterplot

Of the 100 largest metros, 10 are back to normal or nearly there for both prices and permits. (By “nearly there,” we mean that prices are undervalued by less than 2% and permits are less than 10% below normal.) These include Austin, Dallas, and Houston in Texas; Orange County, San Francisco, and San Jose in California; and Denver, Seattle, Nashville, and the Bethesda, MD, metro areas.

These 10 metros share a couple things in common: they weren’t among the worst-hit markets in the housing bust, and they’ve had relatively strong job growth in the recovery. However, these recovered metros are NOT the markets with the biggest price increases. Among the 10 recovered metros, only one – Orange County – is also in the top 10 for year-over-year price gains, according to the November Trulia Price Monitor. In contrast, some of the markets with the largest price increases, like Las Vegas and Detroit, are still far from fully recovered. Local price increases, by themselves, are a poor guide to whether local markets have recovered: instead, the markets with the biggest price increases in 2013 are those that suffered the biggest price declines after the housing bubble burst.

To sum it up: Trulia’s Housing Barometer shows that the recovery has progressed on most fronts. Non-distressed sales and home prices are approaching normal levels and could reach them in 2014. Delinquencies + foreclosures are also improving, though “normal” is still more than one year away. The red flags are construction starts and young-adult employment, both of which remain closer to recession levels than to normal. The recovery has gone a lot farther for homeowners, who benefit from rising home values, and real estate agents, whose commissions rise with both prices and sales, than for construction workers or young adults looking for jobs. The recovery also looks much better in the San Francisco Bay Area, Texas, and other markets that are back to normal than in wide swathes of the country where normal isn’t yet within reach. Even as the recovery progresses overall, it remains stubbornly uneven.

NOTE: Trulia’s Housing Barometer tracks five measures: existing home sales excluding distressed (NAR), home prices (Trulia Bubble Watch), delinquency + foreclosure rate (LPS), new home starts (Census), and the employment rate for 25-34 year-olds (BLS). Also, our estimate of the “normal” share of sales that are distressed is 5%; LPS reports that the share was in the 3-5% range during the bubble. For each measure, we compare the latest available data to (1) the worst reading for that indicator during the housing bust and (2) its pre-bubble “normal” level. We use a three-month average to smooth volatility for the four indicators that are reported monthly (all but home prices). The latest published data are November for the employment rate; October for existing home sales and delinquency + foreclosure rate; August for new home starts (September and October were delayed due to government shutdown); and Q4 for home prices.

 

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Rising Mortgage Rates Narrowing Buy vs. Rent Gap Visualization Preview

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Rising Mortgage Rates Narrowing Buy vs. Rent Gap

Despite higher mortgage rates, buying is still 35% cheaper than renting in all of the 100 largest metros, but San Jose, San Francisco, and Honolulu are on the verge of tipping.

Jed Kolko, Chief Economist
September 19, 2013

Homeownership remains cheaper than renting nationally and in all of the 100 largest metro areas. But rising mortgage rates have narrowed the gap between the cost of buying and the cost of renting. The 30-year fixed rate is now 4.80%, compared with 3.75% one year ago (according to the Mortgage Bankers Association, or MBA). This jump in rates has raised the cost of buying relative to renting. As a result, buying is 35% cheaper than renting today, versus being 45% cheaper than renting one year ago.

How can buying be so much cheaper than renting when home prices and mortgage rates are both climbing? The key reason: both rates and prices are rising from very low levels and are still below their long-term historical norms. But the rent versus buy math depends on your local market, as rising rates and prices have pushed a handful of metros very close to the tipping point when renting becomes cheaper.

Before going further into the data, here’s how we do the math. To calculate whether renting or buying a home costs less, we take the following steps:

  1. Calculate the average rent and for-sale price for an identical set of properties. For this report we looked at all the homes listed on Trulia for sale and for rent from June to August 2013. We estimate prices and rents for similar homes in similar neighborhoods in order get a direct apples-to-apples comparison. We are NOT just comparing the average rent and average price of homes on the market, which would be misleading because rental and for-sale properties are very different: most importantly, for-sale homes are roughly 50% bigger, on average, than rentals.
  2. Calculate the initial total monthly costs of owning and renting, including maintenance, insurance, and taxes.
  3. Calculate the future total monthly costs of owning and renting, taking into account price and rent appreciation as well as inflation.
  4. Factor in one-time costs and proceeds, like closing costs, downpayment, sales proceeds, and security deposits.
  5. Calculate the net present value to account for opportunity cost of money.

To compare the costs of owning and renting, we assume people get a 4.8% mortgage rate on a 30-year fixed-rate loan with 20% down; itemize their federal tax deductions and are in the 25% tax bracket; and will stay in their home for seven years. Under these assumptions, buying is 35% cheaper than renting nationwide, taking into account all of the costs and proceeds from buying or renting over the entire seven-year period. We also look at alternative scenarios by changing the mortgage rate, the income tax bracket for tax deductions, and the number of years that one stays in the home.  The full methodology is available here.

Our interactive Rent vs. Buy Map shows how the math changes under alternative assumptions. And if you’re interested, check out our detailed methodology which explains our entire approach step-by-step.

RentvsBuyMap

Best of all: today we launched our new Rent vs. Buy Calculator, which lets you compare the cost of renting and buying based on whatever assumptions, prices, rents, and scenarios you like, using the same math that powers our interactive map and this report. Check it out and find out what’s the cheaper option for you.

San Francisco Bay Area Close to Tipping in Favor of Renting
Buying a home is cheaper than renting in all of the 100 largest metro areas, but buying ranges from being 65% cheaper in Detroit to just 4% cheaper in San Jose. In fact, owning is now cheaper by just 10% or less in San Jose, San Francisco, and Honolulu – that’s a big change from one year ago, when buying was 24% cheaper than renting in Honolulu, 28% in San Francisco, and 31% in San Jose. Even in markets with minimal year-over-year price increases, buying today isn’t as great of a deal versus renting compared with last year. For example, home prices rose just 1.7% year-over-year in Philadelphia, but buying is now 40% cheaper than renting compared to being 46% cheaper one year ago.

The biggest factor narrowing the gap between the cost of buying and the cost of renting is rising mortgage rates – which affect the entire country. In fact, the benefit of buying relative to renting shrank in nearly all of the 100 largest metros over the past year: only in Springfield, MA did the gap widen, from buying being 47% cheaper than renting last year to being 49% cheaper than renting today. Nationally, rising mortgage rates account for about 8 points of the 10-point shift from buying being 45% cheaper than renting one year ago to being 35% cheaper now. The other 2 points are due to prices rising faster than rents. (How did we figure that out? If you used today’s prices and rents in the rent vs. buy calculation but used a 3.5% mortgage instead of a 4.8% mortgage, buying would be 43% cheaper than renting – 2 points less than last year.)

Because fluctuating mortgage rates can affect the rent versus buy math, we identified the mortgage rate “tipping point” at which renting becomes cheaper than buying, given current prices and rents. If rates keep rising, San Jose will tip first in favor of renting, at 5.2%. Already today, at 4.8%, buying is just 4% cheaper than renting in San Jose. The tipping point is below 6% in San Francisco and Honolulu as well, and below 8% in New York, Los Angeles, and seven other major metros. Nationally, the mortgage rate tipping point is 10.5%, and it’s 20% or higher in Detroit, Gary, and Cleveland.

Where Buying a Home is a Tougher Call

# U.S. Metro

Cost of Buying vs. Renting (%),
Summer 2013

Cost of Buying vs. Renting (%),
Summer 2012

Mortgage Rate Tipping Point When Renting Becomes Cheaper Than Buying, Summer 2013

1 San Jose, CA

-4%

-31%

5.2%

2 San Francisco, CA

-9%

-28%

5.7%

3 Honolulu, HI

-10%

-24%

5.8%

4 Orange County, CA

-20%

-34%

7.0%

5 New York, NY-NJ

-21%

-31%

7.5%

6 San Diego, CA

-21%

-34%

7.3%

7 Los Angeles, CA

-21%

-32%

7.3%

8 Ventura County, CA

-22%

-33%

7.5%

9 Oakland, CA

-23%

-43%

7.5%

10 Sacramento, CA

-26%

-39%

8.2%

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Where Americans Look for Vacation Homes Visualization Preview

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Where Americans Look for Vacation Homes

The top vacation spots for home searches range from expensive Nantucket to affordable Gatlinburg in the Great Smoky Mountains of Tennessee. People look for vacation homes nearby, rather than across the country.

Every year, Memorial Day weekend kicks off the summer vacation season. As people across the country start planning their summertime escapes, we analyzed search traffic on Trulia to discover the most popular areas for vacation homes. (See note at end about methodology.) We found that median prices in the most popular vacation spots in America span a huge range, from just under $180,000 in Gatlinburg, TN, to ten times that much in Nantucket. We also found that people tend to look at vacation areas close to home rather than across the country.

America’s Top Vacation-Home Spots
The two most-searched vacation ZIP codes in America are both in Cape May, NJ: Ocean City and North Wildwood. The top vacation areas also include Kissimmee, Marco Island, and Panama City Beach, all in Florida. In California, the most popular locations for a vacation home are Big Bear Lake and Lake Arrowhead near Los Angeles, and in the north, Truckee and South Lake Tahoe.

America’s Top 20 Vacation-Home ZIP Codes

# ZIP code Neighborhood County Median price
1

08226

Ocean City Cape May, NJ

$525,000

2

08260

North Wildwood Cape May, NJ

$289,000

3

34747

Kissimmee Osceola, FL

$298,800

4

21842

Ocean City Worcester, MD

$275,000

5

34145

Marco Island Collier, FL

$499,000

6

92315

Big Bear Lake San Bernardino, CA

$335,000

7

92352

Lake Arrowhead San Bernardino, CA

$399,000

8

32413

Panama City Beach Bay, FL

$294,245

9

37738

Gatlinburg Sevier, TN

$179,600

10

29582

Cherry Grove Beach Horry, SC

$219,900

11

32459

Santa Rosa Beach Walton, FL

$525,000

12

08008

Harvey Cedars Ocean, NJ

$887,500

13

36542

Fort Morgan Baldwin, AL

$255,000

14

96150

South Lake Tahoe El Dorado, CA

$365,000

15

96161

Truckee Nevada, CA

$499,000

16

11937

East Hampton Suffolk, NY

$1,250,000

17

92264

Palm Springs Riverside, CA

$309,000

18

78597

South Padre Island Cameron, TX

$289,000

19

32541

Destin Okaloosa, FL

$475,000

20

02554

Nantucket Nantucket, MA

$1,799,999

Among the top 20 vacation ZIP codes, the most expensive are Nantucket and East Hampton, where the median asking price is well over a million. The least expensive are in the South: Gatlinburg, TN, at the Great Smoky Mountains National Park, and Cherry Grove Beach, near Myrtle Beach, SC.

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