Mission De Los Arroyos Report Archive - October 2005

The Housing Bubble Revisited

A recent Wall Street Journal editorial by two top real estate professors-one from Columbia Business School and the other Wharton, gave fresh perspective to the so called "Housing Bubble."

Their thesis is based on a new measurement: The annual cost of owning a home - not the price. Comparing the annual costs of owning with renting gives encouragement to present and future homeowners.

The cost of owning is merely the cash you pay annually to own a home - meaning your after-tax cost of financing PLUS maintenance and economic depreciation MINUS the appreciation you expect when you sell your home.

Their study shows that in 2004, even in the hottest housing markets, the cost of ownership didn't exceed the cost of rental by more than 13%. And, perhaps more amazingly, the markets many consider "bubble" markets didn't exceed 3%. (By the way, I've never seen Phoenix even mentioned as a "bubble" market.)

Even cities having high price-to-rent ratios look good in their analysis, primarily because relatively high prices historically have been offset by higher-than-average capital gains thereby lowering the owning-to-renting ratio.

Bottom Line: Even thought owning a house is not cheap, it's "not inordinately expensive by historical standards."

Note: Their data was based on single-family dwellings only and may not be applicable to condominiums since the number of condos in a market can increase rapidly due to relative speed of construction and availability of investment dollars.

You can see the entire editorial at: http://online.wsj.com/article/0,,SB112708454245544394,00.html