None of this takes into account that renting is exchanging money for a living space, while buying a house you have something to show for the money you spent at the end of the day. Renting is money down the drain.

But how does "own to rent" address the problems of tenants in foreclosed properties? Will they also get to stay as tenants (with the lender as the landlord) or will they be forced out on foreclosure? Protecting tenants in this situation would require national rent control/just cause legislation.

akachazz misses three really big points in his "money down the drain" analysis.

1) If you are renting for less than it costs to buy, you can invest your savings in something higher yielding and more liquid than housing.

2) As Baker points out, you can easily end up with zero or less than zero equity if you buy into a bubble market.

3) You may argue that somebody with zero or negative equity can eventually make it all back by grinding it out. The problem is that the opportunity cost of this action is that one cannot easily move. Real estate is already a very illiquid asset with high transaction costs (e.g., real estate commissions).

There are many situation where renting makes more sense than buying, precisely because buying would be pouring money down the drain.

akachazz's "money down the drain" view is shared by many, but it is awfully addlepated. Or is the interest you pay on your mortgage "money down the drain" as well? If akachazz bought his house with cash, I retract my critique. If not, perhaps 'addlepated' was too kind.

However, our host was little better. He ignores the mortgage interest tax deduction, which strikes me as deeply misspecified. In my state, high earners get something like a 50% tax shield on their mortgage interest. That's *huge*. Even if the vast majority of recent-purchase homeowners don't itemize (which I don't believe, but don't have the data to judge), you simply have to run the numbers fairly.

If you're paying a pretax 1.8x to own, and your tax shield is 50%, and your purchase is recent (so most of your payment is interest), then your after-tax own-rent equivalence is very near 1-to-1. That's strike one.

Strike two is assuming that this doesn't matter if most people don't itemize. It matters even then, because like all markets housing is priced by the marginal purchaser. Fifteen buyers may look a house, but only the high offer sets the price. If only five of the fifteen had a tax situation as above, the price is still set to 1.8x rent -- because for those five, 1.8x rent is really 1x rent, after taxes.

Strike three is ignoring the capital gains tax break on housing. Pretend there is no mortgage-interest deduction. Even then, if you rent and invest the money you save, eventually you will pay capital gains taxes. If you buy a home and turn it over now and then, you will never pay a cap-gains tax so long as you live. Most residences under current law are immune. The result is similar: fair value for residences must be driven up by the marginal purchaser to whom this matters.

Now, I rent. I am happy to, but then, our apartment is nice, our landlord is great and our rent is controlled. However, even in the bubble market of San Francisco, a smallish drop in the housing market or a larger bump in salary at my next annual review would have me rerunning the back-of-the-envelope numbers above.

Do I think the US government should be subsidizing mortgage borrowers the way it does? Hell, no. Do I think analysts should pretend it isn't when they write about the housing market?

Take a guess.

Dean, the report you link to is excellent, but there seem to be some discrepancies between values listed in the tables and plotted in the figures. Compare Boston's data in Tables 1 and 2 with the values represented in Figs 1 and 2. I'm assuming the Tables list the correct values, but wanted to point this out.

Could you comment on just how much of the trillions we are spending on the war in Iraq is actually leaving America. Aren't most of the armaments still made here? Aren't the planes that take troops overseas ours? How about the materials used to rebuilt Iraq? Halliburton is peopled mostly with people living here. Those in Iraq send the money back here. And etc.

Ignoring the mortgage interest tax deduction was not an accident in my calculations. The bailouts are directed at homes owned by low and moderate income households. The vast majority of these people will have little or no income tax liability, and relatively few will itemize.

Furthermore, even if they do benefit from the mortgage interest deduction, their gain is likely to be extremely small. Remember, the benefit from the deduction is not the full value of the deduction, it is the difference between deductions including the mortgage interest deduction and the standard deduction ($10,700 for a couple filing jointly).

Let's say that mortgage interest and property tax deductions together are $14,000 push a couple's deductions $5,000 above their standard deduction. If this couple is in the 10 percent bracket, the deductions net them $500 a year, if they are in the 15 percent bracket, they net them $750 a year.

This is not trivial, but it will not substantially affect the basic story and this would likely be an extreme case. Since we're talking about families in an income range of $30k to $60k few will get beyond the 10 percent bracket.

"down the drain"?
And all those who bought in 2004-2006 who now own homes worth less than they owe on it. What do they have to show?
This is and always has been one of the biggest lies of the RE industry.

Yes, there was major incompetence involved in the bubble - it is the job of the Fed and others to keep a close watch on these things. But I don't find it "incredible" - in fact this kind of incompetence is drearily predictable. This is what makes bubbles - experts lose their judgment along with most others in the euphoria of a boom.

The Fed supposedly has powers apart from regulation, that is control of interest rates and/or money supply, to prevent booms from turning into bubbles. But if they excercise these powers, or even enforce the regulations, they are accused of killing the boom and turning it into a recession. Likewise Congress will never act against an ongoing boom in any way, such as by passing regulations or raising taxes.

Prevention of bubbles can't rely on the judgment of "experts" or "Maestros" who are in power. There must be a kind of automatic legal framework, and the laws must be enforced and not diluted during good times. As Dean often points out, existing laws, many passed during the Depression, are not enforced and speculators know it.

I'll be honest and say I threw that original posting out there as more as a devil's advocate type comment. I really don't have much of a head for fiduciary matters such as this and I trust Mr. Baker and his ilk more than my own understanding. However, I'm still trying to find a direct dissection and rebuttal of the equation: Rent = living space. Buy = living space + ownership. Assuming no bubble, how can you argue that the first is a better deal than the second?

Thanks for the response. I doubt I'd have replied with the same ire if you'd specified in your original blog post that you were restricting your analysis to earners in the 10% bracket and homes in the $200,000 range. In that situation, absolutely, the tax breaks are miniscule.

However, your blog post -- and it's the post to which I replied, not your white paper -- focused specifically on bubble-inflated markets, calling out those like San Diego, Miami, New York and Washington.

Now, a few $200,000 homes may still exist in Miami (07Q4 median sales price, $346,000). However, as you get to Washington (07Q4 median, $400,000), New York (07Q4 median, $460,000) and especially San Diego (07Q4 median, $522,000), the chances of finding such a beast start to get very slim indeed.

Moreover, as I noted, prices are set by the marginal bidder. Given the economic verities and the current tax regime, the marginal bidder almost certainly isn't a $40,000 earner in any of these markets.

I think current prices are unreasonable. However, under existing tax law, residential housing prices need not fall by 50% to reach an equilibrium. Might they? Sure. Any market that overshot on the upside can overshoot on the downside. Will they? Maybe. I never bet against the US consumer, in housing as in any other market. Given another 20% drop in real prices, I wouldn't be surprised.

That tax shield plus cap-gains break plus immunity from AMT is something else (property taxes I ignore; they're minimal by comparison). Any time you and CEPR can get this give-to-the-rich tax policy replaced by a tax credit that helps those who need the subsidy would be fine with me.

akachazz,

Simple. Assuming it costs less to rent than to own w/ a mortgage:

Buy = living space + ownership of an illiquid asset.

Rent = living space + ownership of more liquid assets.

This assumes, of course, that you put the money you save by renting vs. owning into investments such as stocks, etc. This is the type of comparison you should be making if you are looking at the situation from a pure investment point of view. More often than not, liquid assets tend to be better than illiquid assets because they usually have greater upside and you have more control to cut your losses if there are problems. The exception is a scenario where you own a house and rent it out, but of course this is a pure investment and there is no "living space" included.

why do politicians want to keep home prices high and therefore unaffordable.

Thanks Scott K

1. When you have a bubble, like we have had, then it will be a long time before equity is earned.

2. Where I live (outer sububan Virginia) prices have already dropped about 20 to 30 percent from bubble peak. There is still a lot inventory from what was built. It is going to take some time for that inventory to disappear. I expect prices to drop nominally by some small amount, but fall in real terms for at least another 3 years.

3. Family income in this region is pretty much built on two incomes, frequently Government/Contractor, so I think mortgage interest deduction really helps in that equation.

4. Virginia being taxophobic, the property tax here is about .5 percent on the value of the house I own.

5. A cost not stress by Dean is maintainance. However, maintaining a single family separage house on .25 to .5 acre of land is at least 3,000 dollars a year (a cost that will rise annually with inflation), something renters don't have to pay. (Of course, my experience is landlords try not to pay it either until the tenant screams enough).

As to why politicians want to provide "price supports" for home prices, see Dana Milbank's column from last Friday's Washington Post (lighting does strike and sometimes one finds some actual journalism) and as, they say, follow the money. This is why there is a spring back in Wall Street's step. It thinks the taxpayers are going to pay them to take all this shit off their books. And they get to borrow at 2.5 at the discount window and loan at 8% or better. It is a lot better than the total bankruptcy they were staring in the face the middle of last month.

Please write your senators and representatives that you might not be able to donate thousands, but that you do vote in primaries and elections and you will remember how they vote on this rip-off.

I agree that America's "hard-coded" conventional wisdom that favors homeownership vs. renting (including the mortgage interest deduction and a myriad of other wasteful housing-related governmental subsidies) largely led to the bubble. I also agree that most journalists overplay the "subprime" angle and minimize the bubble factor. However, your bureaucratic socialist idea of forcing property owners to rent to specific borrowers at governmantally imposed rents is absurd! We already have a system in place for renters to get decent housing at fair prices--it's called market capitalism and it works fairly well with far less need for huge bureaucracies and governmental intervention.

Look the housing bubble is a small bubble inside the larger derivatives bubble, which was created by the investment (and normal) banks under Fed supervision and support.

The derivatives bubble needed to be kept inflated so the derivatives players screamed for more paper, which the mortgage dealers supplied. See TakeBackTheFed dot com

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I don't understand how the homeowner's expenses remain at 77 percent above the renter's expenses in "each year" of this hypothetical. In year one of the mortgage, sure. But in year two, the interest portion of the homeowner's mortgage payment will be (ever so slightly) smaller, meaning that (a tiny bit) more of the payment is going toward paying down principal. Meanwhile (and more important), our renter will face a rent increase, as his landlord seeks (at the very least) to keep pace with inflation. Over subsequent years, the homeowner's sunk costs will continue to decline (faster, as time goes on) and the renter's will continue to rise, as long as the homeowner keeps paying her mortgage and the renter's landlord keeps adjusting the rent. Eventually, the homeowner's sunk costs (interest, taxes, upkeep) will be less than the equivalent rent. This is true even if falling property values wipe out all or more of the homeowner's equity in the short or even medium term.

Look, I'm a renter (by virtue of poverty and wanderlust, as much as by choice) and I agree that a > 20/1 price/rent ratio seems absurd. You have to hang out in one place for a really long time to make that work, and most of us lose jobs, relocate, get married, have children, divorce each other, or what have in the meantime. At the same time, long-term renting can have its own pitfalls, namely there's no protection against rent increases. We shouldn't have pretended that property values always go up, but we shouldn't pretend that rents don't go up as well.

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引越しの際には、住人が持っている家具や家電製品、衣服などを引越し先の住居へ運ぶ必要が出てくる。これらを引越しをする本人の手で運ぶこともできるが、 大きな家具などを運ぶのは個人では大変な作業のため、運送業者、引越し専門業者にこれらを代行させることもできる。一般的には、きめ細かいサービスとまごごろで対応いたします。確かな技術が支える安心の作業。作業員の姿勢が違います！ 引越見積,引越業者,引越格安,単身引越

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幸せな結婚のためには結婚式をしたほうがいいの？ 【結婚パレット】は既婚者もたくさん参加する「結婚準備の情報コミュニティ」。だから結婚準備に関するどんなお悩みでもきっと良い答えが見つかるはず。恋愛,婚約,入籍,結婚, 結婚式場,披露宴,格安,格安挙式,結婚費用妻も「お金あまり無いから結婚式はいいよ」と言っていたので、籍だけ入れて、早一年。妻と都内に買い物に出た時、俺は見てしまった・・・。ウィンドウ越しに少し寂しそうにウェディングトレスを見つめる妻の姿を！「結婚式挙げたいの？」と聞くと、恥ずかしそうに「うん・・・まあね・・・」と答える妻。なんか、その時きたんですよね。くぅ～ってものが！その瞬間決めましたね、結婚式！

男性下着のことならプロパガンダ。他にも女性下着、ビキニ、マイクロボクサー、トランクスからセクシー系まで。パンツのことならお任せください。"

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