One popular housing theory is that – before a bona fide housing recovery can begin – the cost of owning a home versus renting one must return to historical levels.
If that belief is a truth, a national return to rising home prices may be in store for 2009.
Falling home prices coupled with falling mortgage rates, too, have dropped the relative, after-tax cost of owning a home to 125% of the cost of renting a home.
This is the exact 18-year historical average and not since 2001 has the gap been this small.
As reported by the Wall Street Journal, though, the study has some flaws. For example, the data doesn’t account for ongoing home maintenance costs, nor does it consider real estate tax bills and insurance policies.
But, combining a relatively low cost of ownership with the government’s $8,000 tax credit for first-time home buyers is likely to convert long-time renters into never-before homeowners.
This, too, is thought to be a key element of the housing recovery.
In many markets (but not all), home prices are expected to edge lower through 2009. Provided mortgage rates stay low, the cost gap between owning and renting will shrink even more.
In Mesa, Arizona, Wednesday, the President presented the Homeowner Affordability and Stability plan, a multi-pronged effort to support the housing market.
The story made the front page of nearly every newspaper in the country.
The president’s plan is sweeping:
It’s a broad plan with many positive angles, but for now, we can’t forget that it’s just a plan. Although the White House shapes and influences housing policy, Congress, Loan Servicers, and the Federal Agencies must still implement and execute it. Until that implementation occurs, these reforms exist only on paper.
It’s a key aspect of the speech that’s not getting coverage.
One thing we learned during the stimulus package debate was that just because the President wants something to happen doesn’t mean that it will. There are always details to be worked out and that’s one reason why the Homeowner Affordability and Stability Plan couldn’t go into effect immediately. There are still loose ends to tie and details to define.
According to its website, the White House lists March 4, 2009 as the plan’s effective date. Until March 4, therefore, nothing in Wednesday’s speech is guaranteed.
A real estate trade group reported Tuesday that Pending Home Sales ticked higher in December 2008. A “pending home sale” is a home under contract to sell, but not yet closed.
The group positions Pending Home Sales report as a predictor of future activity, suggesting that home sales will spike 60 days hence.
This is good news for the economy.
However, despite the Pending Home Sales report’s correlation to the actual number of homes sold in the future, that connection may not be the report’s best use. This is because of what Pending Homes Sales doesn’t measure.
Specifically not included in Pending Homes Sales are:
And, lastly, it should be noted that Pending Home Sales tracks contracts — not closings — and until a home is sold and closed, nothing has really happened in the economy. That’s especially relevant in a market like this in which finding financing isn’t always so easy.
Pending Home Sales still has its place, though, because it’s a terrific look at the current buy-side demand for homes. Clearly, low mortgage rates and falling home prices are making an impact and this is why the December’s Pending Home Sales report is so important. It’s the third housing report this month that shows the demand for homes rising while the supply of homes falls.
The other two reports:
This is good news for home sellers and for the economy. If housing is expected to lead the U.S. out of recession, the seeds for that recovery may have already been planted.
First Heritage Mortgage, LLC
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