There are a great many analysts and economics experts who use the percentage of income spent by consumers on housing in various ways to measure economic health and spending patterns. Real estate practitioners love times like these for marketing, as they can show that in most markets it's cheaper to buy than to rent. With interest rates still low and owned homes having to compete with foreclosures in the market, prices of homes not in foreclosure haven't been rising much. Two recent articles only a day apart at money.cnn.com present interesting contradictions.
In this article, the stats say that more than 40 million Americans are spending more than 30% of their income on housing (mortgage/rent, taxes, and home expenses). Renters are said to be in worse shape, spending 49% versus 26% for homeowners.
Though home prices are rising, they're still below the highs before the crash. The economy is a major factor, with wage stagnation cited as aggravating the problem. Even with low interest rates and home prices overall, buyers are still few and far between. This data is alarming to some economists, as housing plays a big role in our economy. Rental property investors are still happy and buying, but that's slowing as well with rising prices.
Robert Shiller, a Nobel Prize winning economist and one of the originators of the widely-used Case-Shiller Home Price Index, made a surprising statement at a recent panel discussion. He says that for wealth accumulation Americans should be renting and putting their spare money into the stock market.
He uses Switzerland as an example, where the home ownership rate is very low, people rent, and they're in far better economic shape than the average American. The first contradiction seems to be in the numbers for the cost of rent-vs-own as a percentage of income. If the average homeowner truly does spend 23% less (49% - 26%) of their income to own, then they should be in better shape, with more money to invest.
Even more confusion results from Mr. Shiller's CAPE Index, which predicts future stock market returns. Right now it's not pointing to good news in the next five years, so why the buy stocks advice? In the same discussion he says that home ownership can ultimately be a good investment, especially if the homeowner avoids second mortgages and home equity loans. Wow, what should we be doing?
So, what's the real story?
I believe that the real story is in the poor economy, stagnant wages, and shortage of good employment for graduating college students. Some of them aren't equipped for the best jobs, as their degrees aren't in areas needed, but there's just not a lot of economic growth going on. If wages aren't going up, and we know that rents are rising, it's obvious that more of income will go to housing. This is especially true when stringent credit requirements and lack of a down payment are keeping people in rentals, increasing demand. But is that housing's fault or just a lousy economy as a whole?
When I look at the stunning highs the stock market keeps hitting, it's scary. It looks a bit like the housing market in 2006. It isn't in my playbook to move money from real estate into stocks, but I don't have the expertise to predict a stock market crash either. So, what is one to do?
Consumers: If you're able to buy, it may be a good decision, as prices will continue to rise, though slowly.
Rental property investors: Times are still good. Until and unless the economy and wages improve, rents will continue to hold or rise. If you can buy at a bargain below market value, offering a nice property at just below prevailing rents should keep it occupied.
These type of conflicting articles are everywhere, indicating a lack of any definite trend for either the general economy or the housing market. Whether you're a consumer or an investor, just use caution and buy right, a strategy that is always wise in any market.