The National Association of Home Builders (NAHB) reported in their press release [NAHB] that Builder Optimism Rises For Rental Apartments, Declines For Condos At Year-End 2005.
There are two points that can be made here (I know this is just a press release) regarding the real estate market and whether someone is going to write a check to the mortgage company or the landlord:
Rental Apartments – As mortgage rates rise, rental rates rise. Potential buyers that are on the fence as to whether they would qualify for a mortgage are bumped from the bubble (sorry – sort of the analogy that is used at the Indy 500. The slowest racer of the day sits on the bubble and can be bumped off by the next racer that runs a faster time.) As these people are bumped, they become renters, which drives up the rents due to increased competition. The current housing market has come largely at the expense of the rental market. Builders made the transition from rental to condo developments in about 2003 but may return back to rentals if mortgage rates rise this year.
Condo Units – Condo units are entering the market at an increasing pace. However, one of the driving forces of the housing boom has been the adjustable rate mortgage. In contrast to the fixed mortgage rates, which have actually fallen since the fed changed its stance on the market by raising short term rates, rising short term rates have priced out many buyers who would have used the 1-arm mortgages.
For an interesting explanation of the rent versus buy decision, see Houses: Buying Versus Renting by Margaret Smith, Professor of Economics, Pomona and College Gary Smith, Professor of Economics, Pomona College.
Comps can help us judge whether the price of a particular house is high or low relative to the prices of other houses, but they tell us nothing about whether housing prices are high or low in any absolute sense. First-time homebuyers invariably ask, “Is now a good time to buy?” Clients who already own homes often ask if trading up is a good investment or if downsizing is a smart financial move. We have also had clients ask if we are in a housing bubble and if they should sell their house and rent until sanity returns.