...That brings us to the Deutsche Bank studies. Its REIT research team first established a benchmark for a "normal" ratio of rents to ownership costs -- what it calls ATMP, or after-tax mortgage payment -- for 53 U.S. cities.
On average, DB found that families across America were spending about 87% as much to rent as to own in 1999. Hence, they were traditionally willing to pay a premium as homeowners, though not a big one
But by mid-2006, with the craze in full swing, the figure fell below 60%. At that point, Americans were spending an incredible 66% more to own than to rent. It was far worse in the bubble markets: In Las Vegas, Phoenix and Miami, homeowners were paying twice as much as renters, and in San Francisco and Orange Country, owners' monthly payments were triple those of their neighbors with leases instead of mortgages.
DB reckoned that housing prices are more or less reasonable when the ratio returns to its 1999 level. Why 1999? Because the ratio was relatively stable throughout the 1990s, and it was the year the steep rise in prices began in earnest.. At the end of the third quarter of 2009, the overall number stood at 83%, meaning renting was just a tad more attractive than owning.
In other words, at some point prices will fall and/or rents will rise to a point where it becomes more attractive to own than rent. But there are other variables at work here. Interest rates will almost certainly rise soon and big inflation shocks are inevitable when government spends, borrows and prints money at its current, unsustainable pace. Additionally, there is a shadow inventory of distressed homes that will continue to add to supply in record numbers.
Yes, there is pent-up demand, but there is also a lot of pent-up supply along with much economic uncertainty that our government is only exacerbating. Like any other measure, this one should be just one tool in the box.
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