Renting vs. Ownership. A changing Reality

                                                                                                         by Henry B. Nathan

Most studies point to the fact that rising house values in metropolitan areas, are supported by low mortgage rates, and changing demographics.

One concern, however, is the growing gap between rental and ownership possibilities.
The real estate boom that has substantially increased house values, plus the inevitable rise of interest rates is affecting home-buying affordability.

There is a disturbing new sign: Rental looks suddenly like a bargain. There is a disturbing change in the usual pattern of rentals and real estate values moving in tandem. A few years ago, the monthly cost of renting a Florida condo was about 80% of the cost of buying it. This ratio has moved down to less than 60% in many cases. The fundamentals considerations between renting and owning are not close to what they have historically been.
Two things could happen to restore this ratio: Reduced home values or higher rents, or a combination of both. We are already seeing rents going up after years of stability. In many markets, the demand of condos is still strong and despite the large inventory of new construction, we have not seen rents dropping.
The cost of owning, however, is still going up, due to higher interests.

An alarming sign, though, could be the unusual amount of Florida real estate purchased by investors. A recent study by the National Associations of Realtors revealed that perhaps 25% of residential real estate was bought last year as an investment. This is much above historical ratios. Investors are betting on rents increase and price appreciation to go hand in hand. But that is not guaranteed and it is known that, in a declining-prices market, investors are more likely to sell than homeowners.


Salaries, on the other hand, have not kept pace with real estate values. And that could also mean pressure on expected increases in rents. However, except in a few metropolitan areas, and when we compare it to other countries, home affordability as a ratio between salaries and either rents or cost of ownership, is still favorable, although rapidly eroding.

What we have noticed is that the large amount of Florida Condo Conversions will certainly reduce the amount of rental units offered in this and that could be a factor in the near future.

Of course low mortgage rates have been a huge factor in the red-hot real estate market.
What will exactly happen to long-term interests cannot be predicted by most economists and will be an important part of the equation. But real estate has always been cyclical and this should be taken into account by all investors. 

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