Last September I recommended that if you expected to remain employed and in your new home for 3 to 5 years, it was a great time to buy a house. Since then, according to the Case-Shiller 20 city composite index, housing prices have plunged by another 6.2 percent. Do I still recommend buying a home? Yes, and let me provide the rationale.
In 2007 at the height of the housing bubble, the average monthly payment on a U.S. home was $1,166 assuming no down payment and a 30 year mortgage. At that same time, the average monthly rent for a U.S. apartment/house was $665. Thus in 2007, the average monthly house payment was 75 percent higher than the average monthly apartment rent. By March 2011, housing prices had plummeted while apartment rents had expanded to the point where the two were equal---that is the monthly mortgage payment was the same as the monthly apartment rental.
Between 1988 and 2004, the monthly mortgage payment was approximately 31 percent higher than the average monthly apartment rent. If U.S. shelter prices return to this average ratio or relationship, one of three changes must occur, 1) apartment rentals must decline by 24 percent, 2) housing prices must rise by 30 percent, or 3) the 30 year mortgage rate must soar from its current level of 4.8 percent to 7.4 percent. Which will occur?
First, I do not expect rental rates to decline. In fact, I expect robust growth in rental prices across the U.S. However, I do forecast a combination of advancing housing prices and expanding mortgage rates to bring the ratio back to its long run average. So just like last September, housing represents a true deal for the buyer who locks in current bargain prices and record low mortgage rates. However in my judgment, this option will only work for the person who remains in the home for more than three years and locks in a fixed mortgage rate close to today’s ultra attractive rates.