So says Patrick Killelea (http://patrick.net/housing/crash.html). Lorimer Wilson, editor of www.munKNEE.com, presents below further edited [..] excerpts from the original article* for the sake of clarity and brevity to ensure a fast and easy read. (Please note that this paragraph must be included in any article reposting to avoid copyright infringement.) Killelea goes on to say:
1. House prices are still dangerously high compared to incomes and rents
[On one hand] banks say a safe mortgage is a maximum of 3 times the buyer’s annual income with 20% downpayment [and on the other] landlords say a safe price is a maximum of 15 times the house’s annual rent. On the coasts, [however] both those safety rules are still being violated. Buyers are still borrowing 6 times their income and putting only 3% down, and sellers are still asking 30 times annual rent, even after recent price declines.
Renting is a cash business that proves what people can really pay based on their salary, not how much they can borrow. Salaries and rents prove that prices will keep falling for a long time. Anyone who bought a “bargain” this time last year is already sitting on a very painful loss.
2. It’s still much cheaper to rent than to own the same size and quality house, in the same school district
On the coasts, annual rents are 3% of purchase price while mortgage rates are 6%, so it costs twice as much to borrow the money as it does to borrow the house. Renters win and owners lose! Worse, total owner costs including taxes, maintenance, and insurance come to about 9% of purchase price, which is three times the cost of renting and wipes out any income tax benefit. Buying a house is still a very bad deal in the richer neighborhoods, but it does make sense to buy in some relatively poor neighborhoods where prices have already fallen into line with salaries and rents.
The only true sign of a bottom is a price low enough so that you could rent out the house and make a profit. Then you’ll know it’s safe to buy for yourself because then rent could cover the mortgage and all expenses if necessary, eliminating most of your risk. The basic buying safety rule is to divide annual rent by the purchase price for the house. If the calculation comes out to 3% or less then do not buy; if it is… (Go here to continue reading article. No registration is required. It is a direct link.)
– The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
– Permission to reprint, in whole or in part, is granted provided full credit is given as per paragraph two above.