Rising rent prices are bad for renters but is it good for the housing market? I say it is, and here is why.
Rising rent prices and rental rates across the country
Rental rates rising across the country and prices are expected to increase 3.8% this year and 4% projected for 2013. That’s an average for the nation, which means the rise in rent prices could be much higher in cities with high rental demand.
In NYC for example, the rental vacancy rate is just above 1%. Demand is so great that renting often requires the level of paperwork usually reserved for mortgage applications! Rising rent prices have made the rental market so hot that it’s attracting serious investor capital with returns of 6-8%.
This is good, because it will drive rent prices up as more people get in the game.
How rising rent prices are good.
“How can rising rent prices be good?“, I hear you ask.
It does defy common sense up to a point. I mean, higher rent prices mean more of a financial squeeze on renters, leaving them with less disposable income. But this is a short-term view.
In the long term, this is how markets should work. Rent prices rise to point of excess as investors pile in. Higher rental prices make it more affordable to buy a home than to rent one. Especially when the amount of paperwork required to rent is on par with that required to rent.
It doesn’t take Warren Buffet to do the math at this point. When you’re paying very nearly as much for rent as you would for a mortgage, and you need to meet much of the same requirements to rent that you would to buy, it just makes more sense to get the mortgage.
This is of course assuming your lifestyle is suited to being a homeowner. It still doesn’t make sense to buy a home if you travel a lot or don’t expect to live in it more than 7 years. But if you’ve got strong roots in the community and foresee no geographical changes in your future then higher rent prices may be the nudge you need to get you moving.
This is a great time to buy a house – provided you use it as a long term shelter and aren’t looking for a quick profit.
But don’t just take my word for it, here’s a video from BankRate.com:
Pop quiz: What’s more important, your home or your family?
I’m not going to pretend that this is one of those trick questions designed to make you consider your priorities in life and there’s no right or wrong answer.
There is definitely a right and wrong answer here.
The AP tries to make the case that Tera Berbank and John Clark are in the dire financial straights they’re in because the state of Nevada is nearing an economic depression , but that’s only half of the story.
The economic state of Nevada makes the couple’s situation harder, but it is only part of the problem. The rest of their problem is poor priorities and bad choices.
Priorities
For Burbank, surviving means ensuring her children’s success and protecting the one place they could ever call home.
“It’s our everything,” said Burbank, 34, of the family dwelling. “They can take the car and we will eat cat or dog food. Come what may I’ll keep that house.”
There’s a case of priorities that are way out of line. If you’re OK with your kids eating cat food just so you can keep your house, you need to seriously re-evaluate your situation.
She may think she’s “ensuring her children’s success” but her children’s performance in school tells a different story:
The oldest daughter, 14-year-old Brooke, earned D’s and F’s at school. Amalea’s guidance counselor asked about problems at home.
It looks like their current path isn’t working. In the article, she talks about the impact of the family financial situation on her marriage, and it isn’t pretty. She wonders how long it will be before they get a divorce.
Bad choices
Her poor choices started when she was young – she dropped out of school at 14. Fast forward to 2009, and she and her now husband were married and bought a new home. The home they bought wasn’t ridiculously expensive. It was about 2x their combined annual income, which is well within the usually recommended norm. It obviously turned out to be a bad time to buy, and especially in Nevada. But what made this even more risky was the fact that both she and her husband worked in construction.
I don’t mean to come down too hard on her because she made some bad choice early in life, Everybody makes mistakes. But when I read stories like this I always put myself in that position. I ask, “What would I do if I woke up one day in this life?”
In short, what I’d do in this situation is everything I could to ensure the survival of my family – as a family.
I’d say “to hell with the house”, find out where there were jobs and what kind of jobs they were – and move there. I wouldn’t care if it was in another state. I wouldn’t care if I had to lose everything and start over – as long as my family was together and I was doing what I could to provide for them. But that’s just me.
Instead, Tera Berbank seems focused on doing everything she can to hold onto her house, which she will likely lose along with her family.
If this is truly representative of America today, then we are in dire straights indeed.
It’s kind of a catchy headline, right? I know anytime I see something about spending 50% of my income, I tend to take notice. But it’s more or less the big ticket items you’d expect. Here’s the list, and what I think about each. Feel free to add your thoughts in a comment.
1. House.
This makes sense since it’s ultimately what led to the collapse of the subprime housing market and implosion of the all those risky mortgages. Too many people simply bought too much house, and could no longer delay the inevitable with ever cheaper credit.
How much is too much?
Experts recommend no more than a third of your annual income should be spent on your housing payments. It’s important to keep in mind that this includes school and property taxes, which are often taken out of your monthly payment. You should also include homeowner’s insurance and upkeep and maintenance costs. An easy way to get a general idea of how much this should be is to assume 2-3% of the home cost. It also pays to shop around for the best mortgage before you start looking at houses.
The fact that a person’s home is a large chunk of their income makes a lot of sense, but too many people spend just as much on their car. Sometimes, they even spend more! In fact, according to the article, most people can “comfortably afford” to spend 1/3rd of their income on car payments – no wonder some many are so deep in debt!
As with buying a home, a car has many additional costs that people often forget – car insurance, maintenance, gas, parking and other transportation costs. Buying a used car that’s 1-3 years old with low mileage is a much better choice.
It will cost $220,000 to raise a child from diapers to age 18.
If this statistic is true, I’m in a lot of trouble!
I have 3 children, so that’s pretty much my retirement we’re talking about. My feeling on this is that raising a child costs more than it should. For example, there are so many little things I see parents buy for their infants that are simply non-sensical. A baby (who isn’t even walking yet) doesn’t need a pair of $40 designer shoes!
My wife and I get many hand-me-downs and second hand baby items – strollers, clothes, toys, etc..- that keeps the cost down, and the kids don’t know or care. Obvisouly there is a point at which the child becomes aware that they don’t have the latest gizmo, gadget or toy but that’s where we step in as parents and teach them that being materialistic isn’t so good anyway. BEsides, kids today just aren’t tought the value of a dollar anymore.
Also, I see a lot of stories and know a few personally, of parents who mortgage everything – including their house, several times – to make sure that junior never goes without. i understand the desire of a parent to ensure the best possible everything for their kids, but many time this backfires and they simply end up spending more than they should.
My parents helped out a little with my tuition to community college, but I paid most of my way myself. But parents today seem to think a free ride to college is a right these days. At the same time, the cost of higher education just keeps going higher , even outpacing inflation incomes and seemingly everything but the U.S. deficit.
How much is too much?
The recommendation is that you don’t borrow more than you can pay back in 10 years. For example, if your dream job pays a median income of $50,000, don’t borrow more than $50,000 in student loans. The problem I see with this is that most kids have no idea what they want to do when they graduate, and even the ones who do aren’t likely to have an idea of how much the profession would pay. But this is where the parents come in.
I think is is one of those cases of wishful thinking. Most people probably should spend as much, if not more, on their retirement savings as they do on their car and student loan payments but I think for most people, retirement savings isn’t on the top 10 list of expenses, much less the top 5.
It looks like there’s a “mini-wave” of mortgage refinancing that’s been pushing the rate of applications up to a six week high. But the home buyer tax credit doesn’t expire until the end of April, and that doesn’t apply to refinancing anyway, so why the rush?
The rush may be due to the anticipated end to the Federal Reserve MBS purchase program at the end of Q1, 2010. The MBS program is the mechanism by which the Fed has been buying mortgage-backed securities from banks, helping to keep mortgage rates near historic lows.
For example, the average 30-year mortgage rate has been near 5% for almost a year.
According to the Mortgage Bankers Association, their mortgage index jumped 21% last week, as a result of a 26.3% increase in demand for refinancing while purchase loan requests were up 10.3%.
It’s not all rosy news though, the report also states that the borrowing cost was up 0.40% from the record low set last March. Analysts expect both mortgage rates and mortgage costs to be headed higher throughout the year.
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