Chart of the Day: Attractiveness of Buying vs. Renting

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During the housing bubble, as home prices roared, buying became relatively expensive in comparison to renting. Of course, a lot has changed since then. Prices have collapsed. They continue to fall, which should make buying more affordable for some renters. At what point will renting no longer look like the better option? We're not far from that equilibrium.

In fact, David Blitzer, Chairman of Standard and Poor's Index Committee, explains that the rent-to-buy ratio is approaching its 24-year average. Here's his chart:

Rent-Buy-Ratio2.png

That average is 89.5, represented by the thick black line. Since the ratio is near its equilibrium, does this mean that home prices' may begin to rise again soon?

Not necessarily. We have no reason to believe that the ratio can't rise well above the historical average. After all, it was well above the black line in the early- to mid-1990s. So it depends on other factors.

One is the general sentiment towards homeownership. As long as Americans are worried about stability, buying will continue to suffer. That stability should be defined broadly. The housing market needs to stabilize. But the broader economy also needs to heal. If Americans are unemployed, underemployed, or fear layoff, then they aren't likely to buy a home.

With that said, the housing market has one thing going for it for the next year or two: very, very low interest rates. Over the next nine months, due to new Federal Reserve policies, we'll likely see the lowest mortgage interest rates in U.S. history. That provides a huge incentive to buy in the near-term. Due to those low rates, over the next year-or-so, affordability could be at an all-time high as well. Even if prices have a farther to fall, interest rates will eventually rise significantly and could neutralize their additional declines for potential mortgagees.

(h/t: Real Time Economics)

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.
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