--- In FairfieldLife@yahoogroups.com, off_world_beings <[EMAIL PROTECTED]>
> > > No, in the past rents were too close to the cost of buying a 
> house, 
> > > now it is  more expensive to buy a house than to rent, and this 
> is a  normal market correction. Normal.
> > 
> > Huh? It is normal, the market is in equillibrium, when rents =
> > mortgage payments (after tax, after homeowner costs). The fact
that rents are at or below 50% of mortgage payments in many areas 
> indicates  that the housing market is seriously out of what and a
> No it doesn't. It has always been the case that it is cheaper to 
> rent than to buy. If someone gets a bit better job and perhaps works 
> a bit harder, they may say to themselves it is worth it, so that I 
> can buy my own place and they will go ahead and do it. A lot of 
> people rent because they want quality time and not be workaholics 
> and they are happy that way. Others want to work a bit harder or 
> focus on increasing income, and then buy a house. This is the way it 
> has always been.

We appear to be talking two different things. I am referring to the
disparity of rent and mortgage payments for the SAME property, the
same exact house. 
On the other hand, sure, one may live in a multi-family apartment, and
decide to move to an new neighborhood, with a yard, probably better
schools, more square footage, and sure, the mortgage payment will be
more than the rent. But the property is also much more substantial. 
I am NOT referring to this.

I am referring to the disparity of rent and mortgage payments for the
SAME property, the same exact house. That rents and mortgages would
stay sharply diverged in equillibrium defies all economic logic and
experience.  See the following from the article -- echoed in many
other sources:

The Divergence in House Sale Prices and Rents

While house sale prices and rents have occasionally
drifted apart for periods of time, the difference in their
rates of inflation from 1955 to 1995 averaged less than
0.42 percentage points.7 The divergence in these two
series since 1997 is unprecedented. The House Price
Index (HPI) has increased by 51 percentage points more
than the rent index over the last eight years as shown in

7 The ownership price data use the home purchase component of the
consumer price index (CPI) prior to 1975, an average of the inflation
rate in the home purchase component and the House Price Index
from 1975 until 1982, when the home purchase series was
discontinued, and the Home Price Index for years after 1982. The
rental index is the CPI rent index. The CPI rent index includes some
utilities, which complicates the comparison during periods of rapidly
rising or falling energy prices.

This divergence is also readily visible in the metropolitan
area housing price data, as all the areas that have
experienced large increases in house prices have also seen
large divergences between house sale prices and rents.
While it is reasonable to expect that rents and house
sale prices would not rise at exactly the same pace if
there were fundamental factors pushing up prices, rents
should continue to rise until they have come close to
catching up with house sale prices. This has not happened
in the areas with rapid house price increase. In most, the
pace of rental inflation has slowed in recent years, and
in some of these markets rents have actually been falling
in real terms in the last year. For example, in the last
year, real rents have fallen by 2.3 percent, 1.7 percent,
and 0.9 percent in San Francisco, Boston, and Seattle,

There have been periods in the past in which local
markets have seen large divergences between house sale
prices and rents. In almost every case these divergences
were followed by a sharp fall in house sale prices. 

As can be seen, of the 20 largest percentage
points gaps between the run-up in house sale
prices and rental prices, 14 have occurred in
the last 8 years. In the 4 of the 6 cases on
this list where there was a large gap in the
years prior to 1997, there was a large
subsequent decline in real house prices. In
the case of Boston home prices fell by 24%.
In the case of New York, prices fell by 22
percent. On the other hand, prices in
Portland continued to rise. However, the
initial eight-year run-up in prices in Portland
ends in 1995, just as the nationwide boom
in housing prices begins. Seattle is the only
city on this list where there was a large gap
developing between house sale prices and
rents, prior to the current run-up, where there
was not a subsequent plunge in house sale

The evidence in Table 1 suggests that large
gaps between the rate of increase in house
sale prices and rents were relatively rare, prior
to the post 1997 run-up. Furthermore, in
most of the cases where such gaps arose in
the past, they were followed by sharp declines
in real house sale prices. This evidence is
consistent with the view that the sharp runup
in house sale prices in many metropolitan
areas over the last 8 years is likely to be
reversed at some point in the future.
There is one final point worth noting about
the sharp rise in house sale prices in certain
metropolitan areas. It is undoubtedly true
that many people view some of these
metropolitan areas as very desirable places
to live, and therefore are willing to pay a
premium to live in a metropolitan area like
New York or San Francisco compared to
other areas of the country. However, if these
run-ups in house prices reflect fundamentals,
then it should be assumed that rents will
eventually adjust and these areas will then
have a permanently higher cost of living. This
higher cost of living will be reflected not only
in higher rents, but also in higher prices for
all the services in the area, since restaurants,
stores, and other businesses that provide
services will have to pay workers higher
wages in order to compensate for the higher
rents. No one will work for $5.25 an hour in
an area where the cheapest available rent is
$500 or $600 per month. (The rental
components of the CPI account for
approximately 30 percent of the whole index,
which means that as a national average, rent
accounts for approximately 30 percent of
household consumption.).

In effect, housing prices can be viewed as
analogous to a tax. Certainly cities like San
Francisco and New York could impose
special taxes and still have many people who
would be happy to live there, however if the
taxes become high enough, people will opt
to live elsewhere, in spite of the attractions
of these cities. The exact same logic applies
with housing prices. If high housing prices
in a metropolitan area mean that people at
even good-paying jobs will never be able to
save enough to pay for their children's college
or their own retirement, then it is unlikely
that many people will opt to live there.
Anyone who believes that current house
prices in some of the areas with the sharpest
recent run-ups are driven by fundamentals,
must believe that the families in these areas
can afford homes that in may be three or four
times as expensive as comparable homes

While it is reasonable to expect that rents and house sale prices
would not rise at exactly the same pace if
there were fundamental factors pushing up prices, rents
should continue to rise until they have come close to catching up
with house sale prices.

(see article for tables)

> > > 2) An extraordinary
> > > > jump in the rate of housing construction; >>>
> > > 
> > > Only in parts of the country, where there has been an increase 
> in  jobs. Normal.
> > 
> > 
> > The construction increases have been in areas where housing prices
> > have risen sharply. Contributing to a potential  emerging over-
> supply situation -- that will put downward pressure on prices.>>>
> No because in those areas you speak of there has been a constant 
> rise in population over the last few decades. The trend will 
> continue in those areas, although parts of the midwest are 
> depopulating.

Again, simply not true. What you say has been true historically, and
the lack of population growth along with construction in the current
cycle is what is so alarming. It portends a supply glut.

see article:
Housing Construction Rates
The run-up in real housing prices has led to
near record rates of housing construction.
At the current rate of housing construction,
there will be 2 million units built in 2005, an
amount exceeded only by the 2.4 million
annual rate in 1972. Housing construction
will continue at roughly the current pace (or
expand further), unless prices fall to reduce
the profit of building in the current market.

If housing construction continues at this rate,
then it will vastly exceed the average rate of
construction prior to the recent run-up of
prices. It will also exceed the rate of
household formation, leading to a rise in the
ratio of housing units to households.

The average annual rate of housing
construction from 1980 through 1996 was
1.4 million units. The current rate of
construction is a full 43 percent higher than
the rate of construction over this 17-year
period. It is worth noting that virtually no
economists argued that there was serious
pent-up demand nationwide or a housing
shortage due to a lack of construction during
this long period. The sharp increase in
housing construction was almost completely


You may live in an area where construction is driven my population
demand. Wonderful. But it simply is not the case in major markets.

Here is an example from Jim's neighborhood.

"Prices have been driven by supply and demand."
FALSE. Supply is increasing rapidly as building continues, and demand
is falling as the population of the Bay Area decreases and the
salaries of those who remain decreases. Prices have been driven by low
interest rates and increasingly risky loans. The dramatic drop in
rents and widespread rental vacancies prove that demand for housing is
actually much lower now than a few years ago.

The www.census.gov site has data for Santa Clara County for the years
2000-2003 which shows that the number of housing units went up at the
same time that the population decreased:

year  units   people
2000 580868 / 1686474 = 0.344 housing units per person
2001 587013 / 1692299 = 0.346
2002 592494 / 1677426 = 0.353
2003 596526 / 1678421 = 0.355

So housing supply in Santa Clara County increased 3% per person during
those years. There is an oversupply compared to a few years ago. In a
sane market, prices should fall 3% to compensate for the extra supply
of housing.

At a national level, there is a similar story in the years 2000 to 2005:

2000 115.9M / 281M = 0.412 housing units per person
2005 124.6M / 295M = 0.422

At a national level, there is 2.4% more housing per person now than in


> > > <<  3) A sharp decline in
> > > > the savings rate, driven by a housing wealth effect.>>>

> > This means people have been drawing heavily on home equity loans
> > supported by increased paper profits in the recent rises equity in
> > their homes. This means people are spending more, as a % of
income, thus savings rates are declining -- a bad thing for future
interest rates and productivity.>>>>
> So they are not as rich as the roaring 90's , big deal. 
> They are better off buying than renting. 

Not if house appreciation levels or declines -- which it already is
doing in many areas. People who look "forward" in a rear view mirror
may be hit by some rude surprises.

> Until I bought my house, I  was pouring at least $100,000 every 10
years down the drain ! And I was not in a high cost rental for the
area (I was lucky , I had a  nice place for a bit less than was usual)
> Let me repeat: $100,000 minimum (not including for inflation which 
> would increase that figure)  EVERY 10 YEARS.

So what? Thats about 800 a month. How much is your mortgage payment?
How much is going towards principal? In a traditional loan, only about
 15% in the early years. If you have an interest only ARM - nothing is
going to principal. 85% of your loan payment is for interest and is as
much going down the drain as taxes (aside from the deductibility of
interest -- so the "down the drain" threshold is a bit higher.)
> > > This means people have less savings than they had when they were 
> > > renting and were pouring $10 to 20,000 a year down the drain in 
> > > rent. 

If your mortgage is above 12-1300 / mo you are pouring more down the
drain than when you were a renter. And saving less.

> > People either rent property or rent money to buy property. We are 
> all renters. >>>
> I know, ultimately, the Chinese OWN my house. 
> I don't care.

So you are pouring interest payments down the drain. The question is,
which drain is getting more of your money.

Appreciation is the primary thing that builds equity in your home in
the first 10 years. If your house does not appreciate much in the next
5 -10 years, or if it declines, then you are pouring more money down
the drain if your mortgage (if it is traditional) is moe than 1300 /
month or so, compared to your  800 rent.

> > In initial years of a mortgage, only about 15% of mortgage 
> payments go
> > towards equity -- the rest is interest.
> > 
> > The primary driver of equity build up for buyers is home 
> appreciation -- which all the fundamentals in the market point to
leveling off  or declining.
> >  
> > If one can rent the same property for 1500/mo, rather than buy it 
> with a mortgage of 3000/month, the renter is saving $1500 / month. 

> No they are pouring $180,000 every 10 years down the drain. 
> Burning it. 

Your logic and /or your math is quite off. If there is no home
appreciation -- which is the primary issue here -- in ten years the
equity build up for the above example wil be less than $100,000. The
same renter, saving 1500 a month over the mortgage, will be 180,000. 

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