Price-to-Rent Ratio isn't the Bottom Line for Seaford Renters
Last week, Seaford residents who keep their eyes on real estate trends got some fresh information about one factor that seeks to put numbers to the relative benefits of buying versus renting. When real estate values head south, buying may seem to be a particularly risky proposition…even though later it’s clear that the value proposition was actually improving. The trade-offs are hard to quantify. Even now, if Seaford listings reflect prices on the rise, renters who failed to lasso the most extreme bargains may assume they’ve missed the boat.
Putting numbers to the problem is a complicated, pencil-snapping exercise. In addition to current dollars spent, it involves speculating on future market values. But Seaford readers who checked into CoreLogic’s Insights blog found some new data toward the end of last week, presented in an interesting way. It arrived in an article that looked at one particular aspect of today’s national real estate landscape “seven years after the last housing bubble.”
What CoreLogic’s market trend analyst Shu Chen did was to calculate the ratio of median home listing prices versus home rental prices, and chart it over the past decade. To come up with the numbers, national median home prices in key markets were divided by median annual rent figures. The beginning 2005 ratio was set at (indexed to) 100: the starting point for this “Price-to-Rent” ratio. The idea would be that when the ratio shows less than 100, it’s a good time to buy; when it goes over 100, the relative advantage has faded. It’s all relative, of course…and it doesn’t work out to be much more than a footnote to history—but you have to check the graph carefully to come to that conclusion.
Tracking the ratio’s movement over the past ten years, the graph shows a more or less steady Price-to-Rent ratio from 2005 until sometime in 2007. English translation: until the onset of the housing crisis, the financial incentives to continue renting versus buying remained pretty much unchanged. But then we see a bumpy but pronounced drop from 2007 until 2012. Aha! The housing crisis/mortgage meltdown! This would verify that listing prices were falling even as rent levels were rising. This would mark a point where purchasing became more advantageous—even though the risk level at the time seemed daunting.
Then, beginning in 2012, the graph does an about-face. It shows a steady rise as the Price-to-Rent ratio returned to previous heights. Right at the end, as we near today’s data, there is a minor drop: but it’s only slightly below the peak—which you’d think should coincide with the least advantage to buying versus renting.
That this conclusion is the opposite of our area’s current situation is because the Price-to-Rent ratio isn’t the only game in town. The spoiler on the US Price-to Rent Ratio graph is a second line (a faint orange one that all but disappears next to the in-your-face deep purple of the Price-to-Rent line). The orange one is the mortgage interest rate curve. It mimics Price-to-Rent’s ups and downs almost exactly…until it doesn’t. At some point in 2012, the mortgage interest rate flat-lines near the bottom, then stays there, hugging the depths even as Price-to-Rent’s purple line heads skyward.
- Written by Russell Stucki
In the Sport of Seaford Property Searching, You are the Captain!
For anyone who has never participated in a serious house-hunting effort, their mental image of how the experience will unfold may be a little off. They might imagine that, after narrowing down their requirements for a Seaford home (size, price range, and the like) they will agree on a day and time, then just climb into their Seaford agent’s car and settle back to have the likely prospect properties exposed before them.
In fact, the house-hunting procedure is almost like that, except for one major detail:
A property search is a participation sport!
Experienced Seaford property searchers have learned to husband their energy on any day that includes home showings. Especially when their property search doesn’t immediately yield a find that fits their target criteria, they know that it may take a while—and more than a few house-hunting outings—before they identify a suitable house.
What takes so much energy? Sophisticated home buyers know that every showing holds the possibility that they could be setting foot in what might just become their future home. Every showing is literally the only time they will ever have a valid ‘first impression’ of the place that might become a major purchase. And each of those first impressions often come as part of a day that includes multiple showings—one that can easily result in a jumble of impressions, where homes with similar features are easily confused in memory. Since second and subsequent showings should be reserved for properties that qualify as serious contenders, wasted time and effort (not to mention inconvenience to the homeowners) can be avoided by alert, sharp-eyed property searchers. It takes stamina!
That’s why more experienced prospects know from the outset that a home showing isn’t a passive experience. It’s not a bad idea to have a pen handy for jotting notes on the listing sheets the Seaford agent provides—notes about distinguishing features (good and bad!) that will help with comparisons at the end of the day.
For those who are veterans of previous property searches, this is old news: they remember reviewing sessions that include, “No – that was the one with the bay windows, not the one with the [fill in the blank].” For first-timers, it’s good to know in advance: a property search is a participation sport. And you’re the team captain!
- Written by Russell Stucki
Seaford Homebuyers' Credit Score Concerns Often Overblown
Most Americans have now arrived at the conclusion that it is a good time to buy a home. That’s the top line analysis from one of the country’s major mortgage creators, but there’s a secondary finding about credit scores that could also have a sizeable impact on Seaford real estate activity. Some would-be Seaford homeowners would benefit from learning the information—which is about misinformation.
The second annual “Wells Fargo Homeownership Survey” is a national survey of 2,016 respondents, and the source upon which last week’s Franklin Codel analysis is based. The excellent news for current and soon-to-be Seaford home sellers is that a whopping 72% of respondents think now is a good time to buy a home. Most Americans also agree that “owning a home remains a vital part” of the American dream— and continues to be a key element in the strength of the nation.
Running counter to that upbeat survey result is the finding that despite the efforts of lenders (and the government) to make credit more available to potential mortgage applicants, two misconceptions are widespread enough that they are “holding many potential buyers back.”
ü The misconception that every buyer must have at least 20% for a down payment; and
ü A belief that credit scores alone determine whether an applicant will land a home loan
Under the heading The legend of the 20% down payment, Wells Fargo’s Codel points out that 36% of the general population (and larger proportions of minority groups) qualify for loans with lower down payment options— some of them as low as 3%.
But equally illuminating is what Codel has to say about the importance of credit scores. He is the head of mortgage production at Wells Fargo, so Seaford home seekers can be expected to pay attention to what he has to say, which is that credit scores are not as all-important as most people think. Because creditworthiness is not determined based on a single factor, homebuyers should do some investigating of their options “before excluding themselves based on credit scores alone.” And when it comes to the actual scores themselves, it’s not true that a ‘good credit score’ has to be above 780. There are multiple models and investor guidelines—and under some of them, more than 660 “is generally considered good.”
If it’s true that Seaford homebuyers agree that now is the time to make a foray into the market, it’s refreshing (and rare) to hear a top mortgage lending insider provide that kind of encouragement. His conclusion is that the cited misconceptions can be overcome with a “better understanding of how credit works”—and that a good lender will use a borrower’s “entire financial picture, not just credit score” to decide whether to issue a mortgage.
- Written by Russell Stucki
Seaford Renters Face Trend toward Continuing Rent Hikes
“WHY YOUR RENT CHECK JUST KEEPS GOING UP” was the headline in CNN Money’s real estate special report last month, which could have explained to Seaford renters why it is that U.S. rents keep rising faster than home values. After all, that doesn’t seem to make sense!
The list of reasons was long, and taken all together, fairly convincing:
· Millennials are renting longer
· Housing inventory is tight and getting tighter
· The housing crash scared those who would otherwise have become homeowners
· Baby Boomers are downsizing
· Rental construction slowed when confidence sank after the housing crisis
It all comes down to demand and supply—less of the latter, more of the former. Although the author may have exaggerated a detail or two (“…there just aren’t enough ‘For Rent’ signs to keep up with the demand”), more than one Seaford renter will probably agree with the gist of the piece: rents have been on the rise long enough that it makes you want to think about the alternative: buying.
Some of the more extreme cases are urban: in San Francisco and Denver, for instance, renters have seen yearly increases of 15% and 11.6%, respectively, according to Zillow. Seaford renters can find themselves in something of a bind, though—since those higher rent bills make saving for a down payment more difficult. It’s just one reason. Per CNN, “There are a bunch of things keeping renters on the sidelines, meaning “the folks that would be normally making the switch to become homeowners are still taking up the rental units.”
The result: more units remain occupied, vacancies go down; rentable units remain scarce…so prices renters pay continue to go up.
Will this Catch-22 situation persist forever? Most likely not: the broad economic news is that this year’s steady job growth coupled with the pronounced turnaround in builder confidence is likely to loosen the supply stranglehold. Last Tuesday, there was also the kind of news that can prompt builders to really get going: government data showed purchases of new U.S. homes surged (particularly in the Northeast and West), with sales of new homes soaring 24% so far in 2015. That’s the best showing since 2007.
- Written by Russell Stucki