'Homeownership is cheaper' headlines gather steam

Source: North County Times

The housing market has gone cockeyed.

Monthly payments on a house are now cheaper than monthly rents on a similar house in most of North San Diego and Southwest Riverside counties, according to an analysis of county-supplied and Realtor data by the North County Times.

In a traditional housing market, mortgage payments plus taxes come in much higher than house rents: A mortgage interest tax credit and a long-held preference for buying create demand such that people pay more for home ownership, and landlords must hold down rents to attract customers.

But after a foreclosure crisis began in 2007, locals became leery of buying a home, and many former homeowners no longer had the credit to get a mortgage. Investors bought those foreclosed houses and in many cases rented them out. But they couldn't keep up with the demand, and rents for detached, single-family houses rose.

Meanwhile, prices for houses plummeted and interest rates fell below 4 percent, a 40-year low. The combination of factors has created a house market in North San Diego and Southwest Riverside county in which homeowners are getting a better deal than renters, at least after they've paid their down payment.

"I don't think this has ever happened before," said G.U. Krueger, a principal economist for HousingEcon.com. "It's a function of the huge housing price collapse which has left a lot of people in the lurch."

Or, as Carlsbad real estate agent Tyson Lund put it: "This is crazy."

Buyers who put down 20 percent of the cost of a median-priced house and pay 3.9 percent interest on a 30-year conventional loan will have a lower monthly mortgage payment than the median house rent in 23 out of 34 North County ZIP codes. Some homebuyers get loans backed by the Federal Housing Administration, allowing them to make a 3.5 percent down payment, which means they pay more in monthly payments. Despite that, those homeowners are still paying less than rent in half of all North County ZIP codes.

In Southwest Riverside County, homebuyers who make a 20 percent down payment to buy in 13 of 15 ZIP codes, pay less on a monthly basis than they would in rent. Even homebuyers with FHA loans still pay less in those same ZIP codes.

From boom to bust and back

Dan Bogdanski, a teacher, and his wife bought a house in French Valley for $600,000 in 2005, when house prices peaked.

Then the crash hit: Between 2005 and 2009, prices in Southwest Riverside County fell 55 percent, and prices in North San Diego County fell 40 percent, according to data from the San Diego and Riverside county assessor's offices. As a result of the rapid drop in price, foreclosures blossomed, with banks taking back 58,000 homes in North San Diego and Southwest Riverside counties between 2006 and 2011, according to data firm ForeclosureRadar. That period also saw a huge upswing in short sales, in which homeowners sold their properties for less than they were worth.

"A lot of people who lost their homes, they have to live somewhere. They're basically going into the rental market," Krueger said.

Bogdanski said he and his wife realized that with house values falling so fast and so many foreclosures around them, they wouldn't be able to sell their house for a profit in the few years he had left of teaching before he retired.

In 2009, they stopped making payments and conducted a short sale for $300,000.

For three years, they rented a house in Murrieta for $1,650 a month before deciding they wanted to buy again. Bogdanski much prefers the control of owning his own home, but he would never have jumped back into the market if it didn't make financial sense. Now he's in escrow on another French Valley home, this one for $200,000, with 3.5 percent down and a 3.85 percent interest rate on a 30-year mortgage.

"Our house payment will be less than our rent," Bogdanski said. "We're purchasing this house with the intention of renting it at some point. The house has to be rentable and hopefully have positive cash flow."

In Bogdanski's French Valley ZIP code, a house rents for a median of $2,055 a month, but a mortgage payment plus taxes on a median-priced house in his ZIP code on his FHA loan would cost $1,232, a 40 percent discount.

Analysis of rent vs. buy is tricky

The analysis comes from a North County times comparison of median house prices by ZIP code from transaction records collected by the San Diego County and Riverside County assessor's offices. Single-family house rents come from the Realtors' multiple listing service, as provided by Gregory Moser, a San Marcos Realtor, and from craigslist.

There are, of course, a host of caveats not included in the calculation. The analysis does not amortize the down payment on the house, nor does it include the maintenance costs that homeowners accrue to keep their homes in good repair, though many economists argue the mortgage interest tax deduction offered by the federal government balances those expenses. Still, the calculation depends on a homebuyer having enough money to make a down payment, and sufficient credit to get a loan. In 2011, banks raised the bar on those to whom they'd lend, making it difficult for many people to get mortgages.

Also, the rental data from the Realtors' database includes many house rentals but is far from a complete list: Homeowners often list rentals in newspaper classifieds or directly through property managers, and thus would not be included.

The trend reverses in the region's most expensive ZIP codes, notably Del Mar, Solana Beach, Rancho Santa Fe, and the priciest parts of Temecula. People who have just lost their homes to foreclosure tend not to be able to afford rents in those areas, so demand is lower. Also, there are fewer renters for properties with very high rents, as people with that much money tend to buy, said Len Baron, a professor of real estate at the Corky McMillin Center for Real Estate at San Diego State University. That pushes up purchase prices in those neighborhoods and suppresses rents.

"When you look at rents for higher-priced houses, it's not the same scenario," Baron said.

No one really knows how long this unusual market will persist. Already a shortage of listings is creating bidding wars that could propel prices up. But the key to the trend is sub-4 percent interest rates, according to Nathan Moeder, a principal at The London Group in San Diego.

"If rates were back to 5.5 percent or 6 percent, then the mortgages become more expensive than rents. I would not call 4 percent a normalized housing market," he said in an email. "Today, people are able to afford more home because of the interest rates."

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