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Renting vs. Home Ownership in the Current Market

Posted on 27. Oct, 2009 by Marc Courtenay in Real Estate

Allow me to cut to the chase. Two million people have lost jobs since January 2008; and many economists say that only two-thirds will return to work by 2013. This year’s shocking 12% decline in manufacturing production underscores this reality.

For many workers whose jobs were tied to housing, autos, textiles, plastics, fabricated metals, furniture, appliances, etc., this recession is the last straw dashing their hopes for long-term employment.

Relentless automation and globalization of labor intensive industries will continue to erode many jobs, and even President Obama said that the ranks of the unemployed will swell through next year. Sadly, many more will be loosing their homes to foreclosure.

The good news for the American economy is that manufacturing will continue to hold remarkably steady at an estimated 13% of GDP, despite the decline in employment. There will be investment capital and credit will be available.

But, the value of houses will continue to decline for the foreseeable future. For instance, some authorities in Florida real estate believe recent buyers who have been buying entire buildings for cash, are buying too soon, in spite of the fact that prices have fallen by as much as 80%.

On average, 45 condos priced at more than $750,000 sold in Dade Country (home to Miami) in June, July, and August. But about 2,439 units remain on the market, meaning it would take 4.5 years to clear the unsold inventory.

I just returned from a fact-finding trip to southern California. The situation there is almost as bad. Some analysts I spoke with think prices may fall another 20-30% in some of the overbuilt areas.

Word is that the Federal Housing Administration (FHA), which guaranteed about a quarter of all U.S. home loans made this year, is nearly insolvent. Soaring mortgage defaults have pushed the FHA’s reserves to below the minimum level set by Congress.

“It’s very serious,” FHA Commissioner David Stevens said in an interview. “There’s nothing more serious that we’re addressing right now, outside the housing crisis in general, than this issue.”

If the FHA goes bust, the housing resurgence is finished. To keep housing going, the organization must get a multibillion-dollar bailout from Congress or start charging borrowers more. Bottom line: Qualified buyers are better off renting. Lower home prices are at least 6 months to one year away.

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Tags: investing, owners, Real Estate