Photo: Bloomberg TV
Despite growing consensus that it is now cheaper to buy a home than rent one, Gary Shilling, president of A. Gary Shilling & Co. says by previous standards home prices are still high relative to rents.In his latest editorial in The Wall Street Journal, Shilling writes that while home prices have fallen 34 per cent since their peak in early 2006, they are not cheap if prices continue to fall:
“But even if homeownership was cheaper than renting, as some claim, buying a house now would be a disastrous investment if prices fall another 20% or more.”
Shilling says homes are going to lose market value in coming years because of excess inventories. He says there are an excess of 2 million inventories and that it will take at least four years to work off this excess and quite some time for those surplus homes to bring down prices:
“Additionally, our inventory estimate doesn’t even include future foreclosures, some five million of which are waiting in the wings.
…Now that mortgage servicers have reached a $25 billion settlement with Washington and state attorneys general, foreclosures are likely to roar back. That likely will trigger the additional price decline, since the National Association of Realtors says foreclosed houses sell at a 19% discount to other listings, and sizable sales of real estate owned by lenders drag down the entire market. The total peak-to-trough decline in single-family house prices then would be more than 50%.
If those foreclosed out of their abodes move to rentals, they’re occupying other housing units, so there is no change in overall inventories. But if they double up or move in with their parents—as statistics show they have been doing—even more excess inventory results.”