Morning Report – Renting vs. Buying 1/27/14

Vital Statistics:

Last Change Percent
S&P Futures 1788.5 6.4 0.36%
Eurostoxx Index 3033.9 5.7 0.19%
Oil (WTI) 96.81 0.2 0.18%
LIBOR 0.236 0.001 0.32%
US Dollar Index (DXY) 80.53 0.076 0.09%
10 Year Govt Bond Yield 2.74% 0.03%
Current Coupon Ginnie Mae TBA 105.6 -0.2
Current Coupon Fannie Mae TBA 104.4 -0.2
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.33
Stocks are up following last week’s late selloff. Emerging Markets have been getting beaten due to a potential default of a major Chinese Bank’s bond issue. That accounts for some of the reason for the risk-off trade (stocks fall, bonds rise). Bonds and MBS are down.
This week promises to be eventful with the FOMC meeting on Tuesday and Wednesday as well as 4Q GDP on Friday. We will also get Pending Home Sales and Case-Shiller as well. The markets are handicapping another $10 billion / month reduction in asset purchases out of the Fed. Finally, we will hear from a couple of homebuilders – D.R. Horton and PulteGroup, which should give us hopefully a peek into how the spring selling season is shaping up, which unofficially kicks off next week.
What has been going on in emerging markets? Well, first there is a high yield bond issue from Industrial and Commercial Bank of China. This was intended to raise money for a coal miner that collapsed in 2012 and absconded with the money. ICBC will make good on investor’s money. Second, we have had a couple currencies hit the wall – specifically the Argentina Peso and the Turkish Lira. These may not have the makings of a crisis, but you never know. IMO, this will not affect the Fed’s thinking regarding tapering unless they see credit begin to become constrained in the U.S. However it is causing a small (and probably short-lived) rally in the bond market. LO’s, any buyers on the fence that were balking at these high rates? Tell them the market just let them back in. Take advantage of it.
Speaking of talking to your potential buyers, here is a good chart to show them – a comparison of renting vs. buying. I charted the median monthly rent versus the expected monthly mortgage payment for the median house (assuming 20% down and the 30 year conforming rate that existed at the time). In spite of the increase in house prices and interest rates, the rent vs. buy decision is still heavily skewed towards buying. This should be shown to every first-time homebuyer. Check it out:

So far, the government has not changed the tax treatment for short sales and debt forgiveness. On January 1, the temporary tax reprieve for short sales and principal mods lapsed and now these events are treated as ordinary income. There doesn’t seem to be much momentum to change it. Although with the FHFA home price index within 10% of its peak, it makes you wonder how many people are left who bought at the tippy top of the market.

35 Responses

  1. just filed my year end LD-203 report.

    and the republic is safe


  2. Welcome back by the way. While you were gone, Ezra quit the Washington Post.


  3. I totally missed that. we split out time between the parks and a cruise. and it’s a total media blackout on the ship. which is one of the reasons we like them.

    so is wonkblog dead?


  4. Jeez, I’m out of it for a little while, everyone gets delusions of grandeur


  5. Sheila Blair cashed out.

    I would love to speak to someone who is surprised by this.

    Next you’ll tell me Elizabeth Warren isn’t 1/679th Cherokee.

    Look at her cheekbones for Christsakes.

    Sheesh! Wingnuts!


  6. Welcome back, NoVA!

    Brent–has rent ever been cheaper than owning? Or even the equivalent?


  7. The chart is in absolute dollars, so yes. I don’t take into account the tax deductions though (would be way too hard with different tax rates, states, etc).


  8. Wow, I just found out Reagan and 30 years of Wrong really doesn’t like me… What a shock


  9. Brent, with regards to the premise of the left having their moment in 2008, did you see Boris Johnson’s recent speech in England about their being no viable alternative to capitalism, hence why it fizzled?

    ” Ding dong! Marx is dead. Ding dong! communism’s dead. Ding dong! socialism’s dead! Ding dong! Clause Four is dead, and it is not coming back.

    Like it or not, the free market economy is the only show in town. ”


  10. Re: Blair, do board positions typically pay well?


    • jnc:

      Re: Blair, do board positions typically pay well?

      According to this the median director pay for an S&P 500 company in 2012 was $200,000. I imagine banks are at the higher end. Not sure about in Europe, though I would imagine they have to be competitive.


  11. she’ll probably get a couple hundred grand…


  12. Ok, so it’s not Jamie Dimon level compensation.


  13. I’d actually think that cash would be better than stock if the goal is to prevent conflicts of interest.


  14. I’d like to suggest that the revolving door isn’t a bad thing.


  15. Brent, I’m not seeing your point based on the chart. It looks like, except for the last few years when the market was still somewhat depressed, renting is always cheaper than owning. I thing there are other benefits to owning that factor in over time but in dollars out it seems that renting is actually quite a bit cheaper.

    Very few of our girls’ friends, who are mostly young professionals, are interested in buying right now. They’re primarily in their early thirties, some married, some not, but they seem to be somewhat gun shy from the conversations we’ve had. I’m wondering if and when this leftover phenomena from the housing crash will wear off.

    Just stopping by to read for a bit and the chart caught my eye, am I missing something there?


  16. Well, the point of the chart was to show how much the relationship has changed over the past few years. To really determine the difference, you would have to take into account many more things like the interest deduction, expected rental inflation, etc.


  17. But yes, the first time homebuyer is very gun shy about buying, and with good reason. However the historical relationship between buying and renting is very skewed towards buying at the moment.


  18. Okay, thanks, but based on the chart it seems like what it’s really showing is that the monthly costs, as in payments only, have merged to become very similar. It seems to me that would be the reason that buying right now would be a better deal than renting compared to past years.

    Guess I’m just missing the point you made that In spite of the increase in house prices and interest rates, the rent vs. buy decision is still heavily skewed towards buying.

    I’m not trying to be argumentative, just trying to figure out what your exact point is.

    Hello everyone btw.

    NoVA sounds like you guys had a great trip, bet the little guy loved every minute of it!


  19. Hey lmsinca. If you haven’t checked PL recently, Sue is doing better from her treatments. Radiation & Chemo I believe.


  20. “I’m not trying to be argumentative, just trying to figure out what your exact point is. ”

    If I had to guess, it would be that QE tapering isn’t going to tank the home buying market. He’s correct on how historically low home prices continue to be, if you are in a position to buy.


  21. Hey Inc, yeah I heard about Sue and hope she continues to improve. It sounds like it’s been a nightmare.

    I think the real estate market is really interesting right now. Even at our age we’ve been tossing around the idea of buying another rental.


  22. I am just saying in the past, buying has been much more expensive than renting. Now it is about the same.

    The caveat is that there are other considerations that aren’t captured in that chart – the biggest one is that if you have a 30 year fixed rate mortgage, that payment will be the same in 2040 as it is today. Your rent payment will not.


  23. Does anybody really know what time it is?


    • I just finished watching the new Netflix documentary, Mitt, about Mitt Romney’s run for the White House. Pretty good. You can never be sure with documentaries like this, as the maker can pick and choose what he puts in to tell pretty much whatever story he wants. But Mitt comes across as a genuinely humble and very decent man.


  24. “Even at our age we’ve been tossing around the idea of buying another rental.”

    I’d remind you how miserable you were with your evictions.


  25. I just had to replace the dryer in my rental. It died after only 2 years.


  26. I’d remind you how miserable you were with your evictions.

    Oh God, you’re right…………..thanks. That was the worst year ever for us financially and we’ve had some doozies.

    It’s probably just talk anyway. I really want to retire.


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