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Foreclosed for Sale Prices Influence Rent or Buy Decision

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By : John Cutts    99 or more times read
As foreclosed for sale prices pushed down the prices of all types of homes, the rent or buy decision is again becoming the focus of discussions among individuals, couples and families.

A study conducted by the National Low Income Housing Coalition and the Center for Economic and Policy Research focused on the relationship between home price and rent in several housing markets and on the possibility of gaining home equity in the next 5 years.

The study found that 14 of 27 housing markets that had inflated home prices in April 2008 are now experiencing a decrease of price-to-rent ratios to 18-to-1.

Historically, the price-to-rent ratio averaged 15 to one, which means that it would take a total of $150,000 to purchase a home that would rent for a total of $10,000 a year. During the housing boom, the ratio rose to 25-to-1 in over-inflated markets.

In markets most battered by foreclosures and which now have the highest affordability levels, the price-to-rent ratio dropped significantly, such as in Las Vegas, where the home price-rent ratio dropped in April to 12.5-to-1, compared to the 19-to-one ratio in April 2008.

In the California Inland Empire area, the price-rent ratio has fallen to 13.7-to-1, compared to the 20-to-1 in April 2008.

In markets where the house price-to-rent ratios are still high, decreases in the ratio are also being experienced. In Los Angeles, the house price-to-rent ratio dropped in April to 21.5-to-1 compared to 28-to-1 in April 2008. In San Jose, the price-rent ratio dropped to 29.4-to-1, compared to 35-to-1 in April 2008.

The study also looked at the possible home equity levels of homeowners in the next years until 2013. The researchers said that most houses purchased this year in 21 housing markets would not have positive equity by 2013 because typically first-time home buyers would begin accruing home equity only after the purchase and sale costs are already paid.

According to the study, the cities with strong possibilities of future losses in house values are Seattle, San Francisco and Bridgeport in Connecticut. The three cities expected to have bigger home equity declines this year than in 2008 are Washington, D.C., Providence in Rhode Island and Worcester, Massachusetts.

On the whole, the study by the two organizations concluded that home buying continues to be more affordable than renting in most markets. It also concluded that it would take more than 5 years before buyers in 21 housing markets can begin to accumulate positive home equity.

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