The cost of owning versus the cost of renting becomes a very important factor when one is deciding whether or not to buy property. In the bubble, you could rationalize over-paying for a house because you thought that the house would appreciate and that would offset the additional cost of owning versus renting.
I sold my house in November 2005, because the numbers just didn’t justify owning any more. It was simply too cheap to rent for me to want to risk several hundred grand in home equity. I cashed out – tax free – and the rest is a history lesson.
Now that housing prices have imploded, prices are more in line with rents. They will probably overshoot some and fall into the 0.8 or 0.9 range, because owning a house or being a land lord is a pain in the neck and is expensive – property taxes, upkeep, insurance… But housing prices may stabilize soon.
The issue right now is that the only way the average person can afford a house is via historically low interest rates. What will happen to prices when the Fed finally stops buying bonds to artificially hold rates low? The obvious answer is that the cost of owning a home will sky rocket and prices will take another leg down.
So the only solution may be for the Fed to cap interest rates for an extended period (several years). This will allow them to ramp inflation up and make the real cost of home ownership fall, even as prices stay flat. The method for the Fed to cap interest rates is for the Fed to buy US Treasuries. So I would assume that the Fed will announce another commitment of several hundred billion dollars today to buy more Treasuries on the open market.
Not only does this hold interest rates down, it also pumps investment capital into the system, thus supporting stock prices. The policy is obviously to increase asset prices and hold down interest rates.
Expect the next big policy decision to be the extention of TALF to buy 5-year paper, instead of the current 3-year limit.
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