The Changing Prospects for Building Home Equity: An Updated Analysis of Rents and the Price of Housing in 100 Metropolitan Areas (PDF; 476 KB)
Source: Center for Economic and Policy Research

In the Spring of 2008, we released a report comparing ownership and rental costs in the 100 largest metropolitan areas (Rho, Pelletiere, and Baker, 2008). Based on some simple assumptions drawn from historical relationships between home prices and rents, current interest rates and fees, and the homeownership patterns among moderate income families in the 80s and 90s1, that report also projected in each of these cities the potential for a first-time homebuyer to accumulate home equity. At that time we found that in 34 bubble markets, new homeowners would likely lose home equity by 2012 if they purchased a modest home.

Since the publication of that paper, housing prices have continued their steep descent in much of the country and rents have risen modestly. Recently released data enables us to not only update our findings but also assess what our analysis says about the progress that has been made toward finding the bottom of the housing market and therefore the potential for new home buyers purchasing today to acquire equity in the near future.

In this update we find the prospects for building equity by 2012 somewhat improved in 36 cities. Though we only predict that two cities, Cape Coral-Ft Myers and Orlando-Kissimmee, FL, have turned the corner from negative to positive equity, in another 24 negative equity cities the predicted losses have declined. In 64 cities, the prospects for equity declined, but only nine metro areas where we had already predicted losses showed further declines. Thus, we conclude that while many communities have yet to hit bottom and significant price declines must still be reckoned with in many areas, recent price declines mean that many communities are moving back toward the historical track of modest equity increases for homebuyers.

Given the remaining mismatch between home prices and rent levels in most bubble markets, we argue it is still unwise for policy makers to attempt to directly intervene in housing markets to maintain what are historically unprecedented high home prices. Policies that encourage occupancy, discourage vacancy, and maintain employment to stabilize hard hit communities are likely to be the best approach to assuring prices do not fall any further than is necessary to reestablish a stable housing market.

This entry was posted on Friday, December 5th, 2008 at 7:38 pm and is filed under Business and economics, Consumer issues, Housing and real estate. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.