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House Renters Save Big Money
Tuesday, August 5, 2008
Those who opted to rent rather than to buy are seeing their relative wealth grow by the day, especially in the low end of the housing market in many former bubble markets. The latest Case-Shiller house-prices indices show that house prices in their 20-city index dropped by another 0.9 percent in May.
There were large differences by city. Prices in Charlotte, Dallas, and Boston all rose by more than 1 percent for the month. On the other side, prices in Los Angeles fell by 1.9 percent, and prices in Miami fell by 3.6 percent.
In most markets, prices at the bottom end are falling fastest. For example, in Los Angeles, prices for homes in the bottom third of the housing market fell by 4.2 percent in May. Over the last three months, prices for these homes have been falling at a 46.1 percent annual rate (that is, if they continued to fall for a year at the rate they've been falling for the last three months, they would decline by 46.1 percent). Over the last three months prices for the cheapest one-third of homes in Washington, D.C., have been falling at a 35.8 percent annual rate while prices for the bottom third of homes in the Miami area have been falling at a 57 percent annual rate over the last quarter.
These price declines imply a real bonanza for those who made a decision to rent rather than to buy and who may now decide to buy (or wait for prices to fall further). For example, someone who was considering purchasing a house in the Washington area that would have sold for $353,500 back in February, would have saved himself approximately $33,000 by waiting three months. The returns to waiting were even larger in Los Angeles and Miami.
In the context of the housing bill just passed by Congress, many moderate-income homeowners benefited enormously from the delay. In Los Angeles, the price of homes in the bottom third of the market fell by 22.2 percent between December and May. This means that if a homeowner was in a home appraised at $514,000 in December, the same home would be appraised at $400,000 today.
This homeowner effectively has an additional $114,000 in the bank (or owes that much less) as a result of the delay in getting the bill through Congress. Not only does this mean the homeowner will be more likely to pocket money when selling the home, she will also pay much lower interest while she is in the home. At a 7.5 percent annual interest rate (this includes the 1.5 percent guarantee fee attached by Congress to the loans), the price decline would translate into $8,500 in savings on annual mortgage payments, or $700 a month. With prices still falling rapidly in many areas, moderate-income homeowners will gain enormously if they can wait a few more months before their homes go into the new housing program.
By Dean Baker