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U.S. Economic Outlook: November 2018
Payment-to-rent affects tenure choice and presages future home price growth By Frank E. Nothaft
Mortgage rates rose in October to their highest level in seven and a half years
and are expected to rise further in the coming year. A rise in rates may dissuade homeowners from moving.
And for households that are relocating, the rise in monthly mortgage payment relative to rent
may discourage home buying. Comparing the mortgage payment with rent not only affects the buy versus rent decision of households, but it can also indicate whether a local area is overvalued. Places, where the mortgage payment is much higher than its historical relationship with rent, could see not
only a falloff in home buyer activity but also a dip in sales prices.
The house-price bubble from 2004 to 2006 is an example of when the mortgage payment increased well above single-family rent and then fell sharply after 2007 as home prices declined. Using CoreLogic’s sales price data and Single-Family Rent Index, we traced the boom-and-bust pattern for
several metros. Los Angeles and Washington, DC are metros that had a doubling in the mortgage payment-to-rent ratio between 2001 and 2006, with a subsequent crash. In contrast, this ratio remained more stable in the Houston area. (Figure 1) By comparing the payment-to-rent ratio in
2018 with its value in 2001, we can determine whether the buy-versus-rent decision has
become more or less favorable for home buyers. We can also see which metros may be at greater risk of a home-price correction. We found several metros that have a mortgage payment-to-rent ratios that were more than 10 percent higher than in 2001. Other Metros had payment-to-rent ratios that were close to or less than what they were in 2001. Metro areas with high payment-to-rent ratios are
more likely to see slowing sales and less price growth. (Figure 2) If mortgage rates move higher in coming months, as expected, then metros that have affordably priced #homes #for sale relative to
rental will likely continue to have steady or increasing sales, whereas markets, where mortgage payments are high relative to rents, are at greater risk of experiencing cooler home sales and lower sales prices.
Dr. Frank Nothaft
Executive, Chief Economist,
Office of the Chief Economist
Frank Nothaft holds the title executive, chief economist for CoreLogic. He leads the Office of
the Chief Economist and is responsible for analysis, commentary and forecasting trends in global real