Does Jane rent? Under NYC's "rent control?"

Sounds like it: Yes, Virginia, it's a bubble.

Jane, (as I commented on her blog,) I wouldn't be gloating quite so soon about having "told us so."

Your earlier posts -- you are a renter I gather? -- glide blissfully over one aspect of ownership which any renter outside of the NYC fantasy land would understand: a renter can be forced to move when the owner decides to move back-in, sells to the grand kids or simply sells to take their profit...or simply raises the rent.

What people buy with housing -- and it astonishes me that so many people in the "housing bubble" debate think that a house can or should be analyzed as a "buy versus rent" economic proposition -- is security of tenure. (At least to the degree allowed by Kelo etc etc.) Renters have little security and would be foolish, for example, to make those home improvements etc etc which even if "frivolous" make life more fun. Like planting some rose bushes, much less a new deck or spa and put the idea of an extra room totally out of your mind unless you have a thirty year lease. Buying provides security and allows people to modify their home to their own taste. Buying is extremely rational. Obviously, by economic definition, these "benefits of ownership" are worth a great deal - the marginal cost between rent and buying! Duh! Only a person who deep-down leans to an elitist, socialist mentality would say that all those home-buyers out there are wrong --- "...you shouldn't really be willing to pay more for a house than the present value of the cash flow it would take you to rent the same house." -- and some pointy-headed economists are correct about that marginal cost/benefit equation.

Does that mean that too-easy money is unwise public policy in that it entices people who may not be able to afford the higher mortgage obligation into over-borrowing? No that is an issue and a real one. But let's not be so glib about this bubble business. The higher marginal cost has real marginal benefits.

"It's the security, stupid!" And most people know it. That's why they try to become buyers.

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Btw, Just for the record, I will say it yet again. I am not saying that there is no bubble. It's merely that most of the analysis seems a bit thin. There may indeed be in various local markets an excess of enthusiasm i.e. a bubble. When I look around at Seattle, I am astonished at the prices. Shocked, in fact. But then when I consider the vacant/developable property for sale, I see very very little. Moreover, traffic congestion seems to get worse by the month and we are doing nothing about that problem. So even in Seattle I just don't know. But I tend to doubt that we will have any sort of huge downward adjustment because of the very limited supply. Of course I am a homeowner.

Comments

[Kevin Bryan]

David, I think you've misunderstood the economist's argument. There has been a historical relations between rental price/month and the buy price for an equivalent property. Recently, rents have been relatively steady compared to skyrocketing house prices. It is certainly true that owning a house is more desirable than renting an equivalent house; economists do not disagree with this premise. We don't, however, see what would cause this rent:buy ratio to swing so suddenly in favor of buy in the last few years. In 1990, or 1980, it was still true that buying is better than renting for an equivalent property, but the buy:rent ratio wasn't at the absurd level that it is today.

As for new homes - there has been significant housing inflation even in regions with record-breaking new housing starts, which suggests to me than lack of supply isn't a problem (and in any case, there hasn't been a massive increase in population in the last five years or any other shock of this type).

[Randy Paul]

David,

Did you see NOW on PBS last night? They were focusing on Northern California and people who had taken out interest-only mortgages. That I think is the real danger, especially as manifested by one couple with a combined income slightly over 6 figures and with an interest-only mortgage of over $900,000?!?

[David Sucher]

"We don't, however, see what would cause this rent:buy ratio to swing so suddenly in favor of buy in the last few years."

That is a relevant question and not an easy one to answer. But the fact that you cannot answer the question does not mean that the market is "wrong."

In fact I believe that there are indeed answers for the Seattle and Bay Area markets -- and I make no pretense of understanding other markets -- which involve limits to growth, transit planning etc etc. It may well be that the market has overshot itself -- that is common. But as I suggested in an earlier post, I believe that part of the answer is limited urban land and transportaion problems which are not amenable to solution i.e. very traffic congestion will be with us. It doesn't strike me as at all irrational tht in-city properties (Seattle and Bay Area)have increased in value so much, especially when you add in growing population and longer lives.

The key, however, and I am still working it out, is what I call the "urban design failure." Because towns and cities are so sadly unable to improve the quality of their public spaces, the individual places more emphasis on control of their own personal environment. Buying gves you more control and autonomy and I think that that is part of the big picture.

[David Sucher]

Randy,
No I didn't see the show and I have no doubt that some people may have made financial decisions in taking on too much housing debt. But I haven't happened across any scenarios (based on real numbers) which explore what might happen with different economic conditions.

[Kevin Brancato]

David,

To me "security of tenure" seems a far more interesting topic than bubbles, so that's what I'd like to discuss.

Would you be in favor of long-term residential leases, wrote up in the same manner as long-term commercial leases (say 5 years, with a 5 year extended option, with rent increases specified in advance)?

Wouldn't that solve part of the tenure-security problem for those truly interested in stability?

Of course, the culture and tradition supporting real residential leases just isn't there, but is there supporting real commercial leases.

Why is that?

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Here's an interesting article on lease-to-buy arrangements.

http://tinyurl.com/c6bl8