Comparison of Ownership vs. Rental Costs Points to Negative Equity Accruals in Many Markets Over the Next 4 YearsPolicy makers should exercise extreme caution in intervening in housing market as prices continue to fall to trend levels.
For Immediate Release: October 28, 2008
Contact: Alan Barber, 202-293-5380 x115 (CEPR);
Taylor Materio: 202-662-1530 x227 (NLIHC)
WASHINGTON, D.C. - As the housing market meltdown continues unabated, a report released today by the Center for Economic and Policy Research (CEPR) and the National Low Income Housing Coalition (NLIHC) shows that in many bubble-inflated markets, homeownership remains a costly and risky proposition.
The study, "The Changing Prospects for Building Home Equity: An Updated Analysis of Rents and the Price of Housing in 100 Metropolitan Areas," evaluates the median house price and fair market rent, as determined by HUD, for the 100 largest metropolitan areas. The study extends and updates the methodology from two earlier studies, "Ownership, Rental Costs and the Prospects of Building Home Equity: A Comparison of 100 Metropolitan Areas," and "The Cost of Maintaining Home Ownership in the Current Crisis: Comparisons in 20 Cities," to the 100 largest metropolitan areas in the U.S.
The new analysis shows the wide diversity in housing markets across the country. While many metropolitan housing markets continue to be subject to real estate bubbles, prices are not out of line with rents in large parts of the country. The findings of the report again show the importance of not relying on a one-size-fits-all solution to the current housing crisis.
The report also notes the problems that many homeowners are likely to face finding quality rental housing due to its limited availability.
"Despite the extreme downward pressure in homeownership and labor markets, rental vacancy rates remain stable and rents continue to inch up" said Danilo Pelletiere, NLIHC Research Director and a co-author of the report. "There was a critical need for affordable rental housing before the foreclosure crisis and the problem is only getting worse. Creating affordable rental housing in the face of foreclosure is important to keep people in their communities and stabilize housing markets.”
According to the report, which analyzed data from the Census Bureau's American Community Survey (ACS), the most inflated markets currently see monthly homeownership costs outpacing rental costs by as much as 300 percent. This creates a substantial and unnecessary drain on household income, especially for middle- and lower-income families.
"This could mean that families may have to forgo health insurance or quality child care as they struggle to make their mortgage payments, " said Dean Baker, Co-Director of CEPR and an author of the study. "Furthermore, since prices are still falling in these markets, many homeowners won't ever accrue any equity."
The study projects that even though prospects for equity accrual have improved slightly in bubble markets, most homeowners will still leave their homes with large amounts of negative equity if house prices return to trend levels. For example, it projects that by the year 2012, homeowners in New York will have $101,964 of negative equity and in Los Angeles the shortfall would be $168,069. In these, and other bubble markets, households would benefit from proposals that attempt to provide affordable rental options as part of policy solutions.
For cities where the costs of owning are much closer to rental costs, it is likely that a small amount of equity will be accrued. In these markets, policies that keep owners in their homes, possibly through some form of government-guaranteed mortgage, are preferable.