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Finally, time to buy a house

The conditions are now right for homebuyers looking long term.

By MSN Money Partner Oct 17, 2011 1:37PM

This post comes from Jack Hough at partner site SmartMoney.


SmartMoney on MSN MoneyU.S. house prices have plunged by nearly one-third in five years, and the nation's homeownership rate is falling at the fastest pace since the Great Depression.


Two key measures now suggest it's an excellent time to buy a house as a long-term residence or an income property -- but not for a quick flip.

First, the nation's ratio of house prices to yearly rents is nearly restored to its pre-bubble average, suggesting the financial advantages of homeownership once again await buyers.

Second, when ultra-low mortgage rates are taken into consideration, houses are the most affordable they've been in four decades of data.


Two of the silliest mantras prevalent during the real-estate bubble were that a house is the best investment you'll ever make and that a renter "throws money down the drain." Whether buying is a better financial deal than renting isn't a stagnant fact but a changing condition that depends on the relationship between prices and rents and the cost of financing, among other factors.


But the math is shifting in favor of buyers. Stock-oriented folks can think of a house's price-to-rent ratio as akin to a stock's price-to-earnings ratio, in that it compares the cost of an asset with the money it's capable of generating. For investors, a lower ratio suggests more income for the price. For prospective homeowners, a lower ratio makes owning more attractive than renting, all else held equal.


Nationwide, the ratio of median home prices to rents on average-size apartments is 11.3, down from 18.5 at the height of the housing bubble, according to Moody's Analytics. The average price-to-rent ratio between 1989 and 2003 was about 10, according to Moody's. So valuations appear almost back to normal, on average.


Other factors increase affordability

But for most house buyers, mortgage rates are a key determinant of their total costs. Rates are so low right now that houses in many markets look like bargains, even if price-to-rent ratios aren't hitting new lows. The 30-year mortgage rate rose to 4.12% last week from a record low of 3.94% the previous week, Freddie Mac said Thursday. (The rates assume 0.8% in prepaid interest, or "points.") The latest rate is still less than half the average since 1971.


As a result, house payments are more affordable than they've been in at least four decades of data. The National Association of Realtors Housing Affordability Index hit 183.7 in August, near a record high in data going back to 1970. A reading of 100 would mean that a median-income family with a 20% down payment can afford a mortgage on a median-price home. The index's historic average reading is 120. So today's buyers can afford handsome houses -- but prudent ones might opt instead for moderate houses with skimpy payments. Post continues after video.

For example, a median house in Phoenix costs $121,700, according to With a 20% down payment and a 4.12% mortgage rate, a buyer's monthly payment would be about $470. Rent for a comparable house would be more than $1,100 a month, according to data provided by Zillow. That suggests buyers are much better off, even after adjusting for their additional expenses.


Of course, all of this assumes mortgages are available -- no given now that lending standards have tightened. But long-term data on down payments and credit scores suggest conditions are more normal than many buyers think, according to Stan Humphries, chief economist at Zillow. "If you have good credit, a job and a down payment, you can get a mortgage," says Humphries. "There's more paperwork and scrutiny than five years ago, but things are pretty much like they were in the '80s and '90s."


Not all housing markets are cheap, of course. Humphries says Zillow has developed a new price-to-rent ratio that uses price and rent estimates for each individual property rather than city medians, to better reflect the choices facing typical buyers. A fresh look at the numbers suggests Detroit and Miami are plenty cheap for buyers, with price-to-rent ratios of 5.6 and 7.7, respectively. New York and San Francisco might favor renters, with ratios of 17.6 and 17.2, respectively. The median ratio for 169 markets is 10.7.


Compare the yields

For investors seeking income, one back-of-the-envelope way of seeing how these numbers stack up against yields for other assets is to divide 1 by the price-to-rent ratio, resulting in a rent yield. The median market's rent yield is 9.3% and Detroit's is 17.9%. From those yields, a real estate-investor would have to subtract for taxes, insurance, upkeep and other expenses, and costs vary widely by market and case. But suppose total expenses are 4% of the purchase price. With the 10-year Treasury yield sitting at 2.2% and the S&P 500 index carrying a dividend yield of 2.1%, rents for residential housing in many markets look attractive, even after expenses.


It's little wonder that, as The Wall Street Journal reported in August, even investment funds are dabbling in single-family houses (see "Big money gets into the landlord game").

A few caveats: First, not all transactions are average ones. Even in attractively priced markets, buyers should shop carefully. Second, prices may well fall further. Celia Chen, a senior director at Moody's Analytics, expects that prices will fall another 3% before bottoming early next year and rising slowly thereafter. "If the economy slips back into recession, however, we could easily see a 10% drop," says Chen.


Third, property "flipping" can be dangerous even when prices are rising. That's because absent a real-estate boom, house price gains simply aren't that exciting. Research by Yale economist Robert Shiller suggests houses more or less track the rate of inflation over long time periods.


That's what we'd expect from something made from sticks and stones and other ordinary materials. Houses aren't the magic wealth creators they were made out to be during the bubble. But when prices are low, loans are cheap and attractive investment yields are scarce, as now, buyers should jump.


More on SmartMoney and MSN Money:

Oct 18, 2011 2:15AM
Yea sure but the property taxes is whats killing the market!!!! They are outragous... I've been looking to buy & getting shot down with an average of a $250.00 a month, $1500.00 1/2 year property tax!!!! on a piece of land that is not even a 1/4 acre!!! Tax this tax that so the men in washington can sit behind a big desk smoking their cuban cigars while getting their %*^# sucked I'd rather rent than own a freakin house!
Oct 17, 2011 7:45PM
Want to buy for cheap.  Move to Henderson, Nv.  My townhouse sold for $235K before the market crash, you can now buy one for $68K, we paid $100K...15 years ago.  NEVADA is in the toilet, no work, cheap housing and not much hope!!  AND WE'VE GOT HARRY REID IN THE SENATE, BOY ARE WE IN DEEP SH!T.
Oct 17, 2011 9:28PM
It would be a great time to buy a house assuming you don't already own a house that you need to sell.  Every buyer out there wants to pay next to nothing.  Our house is paid for and I think we will just stay put.  Low interest rates are nice, but they can't compete with having no mortgage at all. 
Oct 17, 2011 8:02PM
Home prices and interest rates are inversely correlated. As interest rates go down, home prices go up and vice-versa. All things being equal of course. So if you plan on buying a home that you'll never have to sell, right now is as good a time to buy as ever, since you can capitalize on freakishly low mortgage rates. But if you think you might need to sell your house at any time in your life, you better hope that we get another bond bubble that keeps our interest rates so low. The mantra goes "These low interest rates won't be around forever". And I completely agree. Based upon history, the typical mortgage rate is around 9% for a 30 year fixed. So once interest rates revert back to the norm, you would have to hope that treasury prices rally to this level once again. I say, fat chance. So bottom line is if you're trying to buy a starter home, I strongly recommend that you wait until interest rates normalize or at least get to around the 7% mark. It's much better to pay higher interest, than to buy an overpriced home. Do the math in excel and you'll see why.
Oct 18, 2011 12:25PM
Not everyone is just sitting around pissed off.  If you truly want to purchase a home, you need to be part of the process....find out what is available within your lowest budget, and work with a professional mortgage broker and real estate agent  I'm a single mom with 2 kids and an okay job.  I found 100% financing and 4% interest through the USDA (yes, the United States Department of Agriculture!) as my town is considered rural.  I found a house I could afford, with a payment that is $250 less then I was paying for rent for an apartment.  I don't have perfect credit, I have declared bankruptcy when I was married, car repossessed, you name it, but it IS possible to live "The American Dream" if you are willing to live within your means, and make wise choices.
Oct 17, 2011 9:36PM
Can anybody tell me why I never see a "replacement cost" calculation in any of these postings/discussions?  If you can buy a property for 50K that would cost 150K to replace, that should be part of any calculation!!!
Oct 17, 2011 11:46PM
Remember the banks with 4 million reo's in the shadow inventory is the competition. As banks seek to reduce inventory, they will continue to list and sell properties lower and it most definitely will affect a new homeowners value. The new owners could end up under water by 1% per month or more into the future depending on the market area where you buy. Thought you should know.
Oct 18, 2011 12:02PM

Another big impact component is the rapidly declining levels of available inventory.  There is virtually no remaining new construction inventory and resale inventory (even accounting for shadow inventory) is greatly diminished.


The first uptick in economic expansion will put immediate pressure on can read more of what we think at

Oct 18, 2011 5:48AM

123 Refi recommends that since there's a higher volume of refinance applicants now, it's best to be prepared and gather all the financial docs you need before you seek a quote so you can get your application processed before lenders raise rates.

Oct 19, 2011 4:30AM

I don't see any "fat ladies singing" in the house market at the moment.


Consumer demand and consumer confidence is low.


The eurozone issue with debt from the PIGS if not resolved may still cause a major impact on banks and the world economy.


Personally, if I had time spare, I'd spend come time educating myself on how to get the best deal and get ready to buy when the market stabilses - hopefully in just a few months time.  


Oct 17, 2011 11:53PM



Replacement cost is not going to be any help t this point. The cost to construct is much higher than what a home can be purchased for at this point in time. I am an appraiser and I can tell you with 100% certainty that cost has nothing to do with value. Value is dependent on demand and what someone is willing to pay for an item. Currently we have an over supply of homes on the market, reduced buying power and tight underwriting and credit issues. Until something gives, prices will continue to decline. .

Oct 18, 2011 2:05PM

You can't compare $1,100/mo rent with $470 in P&I on a mortgage with 20% down payment.  First of all, there are other costs to living in the house that a renter wouldn't normally pay, like taxes, insurance, water/sewer and possibly trash removal plus regular maintenance costs.  Next, you have to look at closing costs to buy and closing costs when you sell.  Then, you have to take that 20% down payment and compare it to the renter who would have that money sitting in an account earning interest or invested in the market.


In many cases, especially when you plan to live in the house for a long time, ownership comes out ahead, but probably not as drastically as this article would lead you to believe.

Oct 18, 2011 1:06AM

I'm ready to buy a home,But at these prices I could not do it, Not only are things way over priced,But the banks are ripping people off with their interest rates. The whole thing is spiraling out of control because of greed and dishonest people. I don't expect to get something for nothing and I don't expect anyone to give me a living, However do expect people to deal honestly and fairly with me and you don't find that in today's market. So far all I've seen is folks trying to get more then they are worth. Do you remember the baker's dozen? People use to give a little extra to bring customers back. Now folks take everything they can get and don't want to give you anything. That ,I believe, Is what id wrong with us today.

Oct 18, 2011 11:37AM
the prices on homes are low  interest rates good  all good news for buyers that have cash
to buy   if you need a loan  forget it    until something is done about the banks   a normal
buyer is out of luck   there is millions  of homes sitting empty  people can,t get loans to buy
from greedy banks and loan  company s  why is  people Gov and  law people not
doing something about  banks not giving loans  the  media   needs to say more more more
about the banks   why why  are those people  not speaking out more on the banks  that use
the Tax  payers  money  to make  bank Ceo,s rich   its time to  make bankers answer
Oct 17, 2011 7:15PM
Off subject but important!  We are trying to start a new movement!  It is called 'occupy mid-Atlantic".  We need all the protesters to tell each other about it, gather up your stuff and travel to the mid-Atlantic and camp out there!  Bring your sleeping bags!  It might be cold (and wet).
Oct 17, 2011 9:32PM
So long as President Obama remains in office, buyers should beware.
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