Ben Bernanke Fed policy keeps home ownership relatively cheap

Kenyatta Harper, a freelancer for advertising agencies, is trading the one-bedroom Brooklyn apartment she’s renting for $1,600 a month for a two-family home nearby that cost her about $600,000.

“I can pay about the same as I would for rent and own a house,” said Harper, 37, who will subsidize her 5 percent mortgage payments on the 100-year-old Bedford-Stuyvesant property with income from tenants.

For New Yorkers like Harper, buying is still more than 20 percent cheaper than renting, even after mortgage rates reached a two-year high last month, according to real-estate data provider Trulia Inc.

The firm calculates that in the 100 largest U.S. metro areas, homeownership is a better option with borrowing costs about 28 percent less than the 20-year average, a scenario that probably will be prolonged after the Federal Reserve unexpectedly extended its support for the mortgage market.

“Rising mortgage rates have been affecting housing markets across the country,” said Jed Kolko, chief economist at San Francisco-based Trulia. “If rates rise more slowly or even fall because of the Fed’s decision, it would take longer to reach the tipping point when renting starts to become cheaper than buying.”

The central bank yesterday announced it would keep purchasing $85 billion of bonds a month, saying it needs to see more signs of lasting improvement in the economy before reducing purchases.

Bernanke Waits

Since Fed Chairman Ben S. Bernanke had indicated in May the Fed may slow its buying of government and mortgage bonds, the average rate on 30-year home loans has risen more than a percentage point from 3.35 percent, according to Freddie Mac data.
Bernanke said Wednesday at a news conference in Washington that policy makers are seeking more information on how higher borrowing costs are affecting housing. The 30-year rate fell to 4.5 percent this week from 4.57 percent, amid signs of weakening in the recovery, according to Freddie Mac. This week’s rate doesn’t fully reflect the market’s reaction to his comments because the data is mostly collected from Monday to Wednesday.

Prices across the U.S. rose 12.1 percent in June from a year earlier, according to the S&P/Case-Shiller index of 20 cities, helping narrow the cost nationally between owning and renting.

Affordability Metrics

Buying is now 35 percent more affordable than renting, compared with a 45 percent difference a year ago, according to a report released today by Trulia, whose calculation uses average rents and sales prices listed on its website, assumes the buyer stays for seven years, and takes into account ownership and rental costs including mortgage payments, property taxes and insurance.

For buyers in Orange County, Calif., the New York area, New Jersey and San Diego, the cost of homeownership is cheaper than renting by at least 20 percent. In Honolulu, the affordability gap has narrowed faster, making it 10 percent less expensive to buy than rent, compared with 24 percent last year.

In San Francisco, where home values gained 24.5 percent in June from a year ago, Trulia calculates owning is now cheaper than renting by just 9 percent, compared with 28 percent a year ago. San Jose, Calif., where it’s 4 percent cheaper to buy, is closest to reaching a tipping point, the data show. Buying a home is most affordable in Detroit, Gary, Ind., Memphis, Tenn., and Cleveland, according to Trulia.

Tipping Points

For renting in New York to become cheaper than buying, 30-year mortgage rates would need to rise to 7.5 percent and in Orange County, Calif. borrowing costs would need to be 7 percent.
“House prices in most of the country are very low compared to what they were during the boom years,” said Mark Goldman, a mortgage broker at C2 Financial Corp. in San Diego. “Once you get into a 30-year loan, your costs are set. You can’t say that about renting. You don’t know what rents are going to do.”

Demand for rentals has been rising since about 7 million households have already lost properties through foreclosure or by selling for a loss since 2007, according to RealtyTrac. The U.S. homeownership rate fell to 65 percent this year, the lowest since 1995 and down from 69.2 percent in 2004, according to Census Bureau data.

Potential homebuyers have also had to navigate the tightest lending conditions in two decades with higher downpayments and credit scores required. In areas such as New York and San Francisco, rental prices have also been driven higher as limited inventory in the sales market fueled competition among tenants.

Revival Threat

More costly home loans have threatened to restrain the housing revival that has been a mainstay of the economic expansion. A report this week showed builders began work on fewer homes than forecast by economists in August.

Homebuilder shares that had slumped since May jumped the most in two months after the Fed said it plans to continue its monthly bond purchases at the same level to keep rates low. 

James Zeumer, head of investor relations at Bloomfield Hills, Mich.-based PulteGroup said on a conference call this month that the run-up in borrowing costs could hurt first-time buyers. A half-percentage-point interest-rate rise means “there will be some of them that will be out of the game,” he said.

Rental Demand

That could mean more demand for rentals. Across the U.S., rents on apartments and single-family homes rose 3.5 percent in August from a year earlier, according to Trulia. In Brooklyn, where Harper is seeking to lease part of her home later this year, the median rental price increased 4.6 percent in August from a year earlier to a median of $2,850, the highest in more than five years, Miller Samuel and Douglas Elliman said in a report this month.

Harper, a Seattle native, wants the best of both worlds. She’s planning to rent half of her house for about $2,200, after fixing it up with funds she secured from a renovation loan.

“In theory, my mortgage will always go down and rent will go up,” she said. “It’s an investment that I see being long term.”