Maybe Americans Just Aren’t Dumb Enough To Keep Buying Houses

The housing market remains soft, so we’re told, and the best minds of central economic planning are struggling to understand why and what new government gimmicks can be applied. I’m wondering if former homeowner sentiment has been factored in. 

This article from Zillow says that approximately 37 per cent of home sellers are selling at a loss. Whatever the loss figured by Zillow you also have to add another 5-6 per cent in real estate commission, equivalent to more than a year of rent in many markets. Psychologically, a person who just lost enough money to have paid for 5-10 years of rent is not a very likely candidate to go back into the market where he was just burned.

Thus the more houses are sold, the worse the buyer-seller ratio will get. Every sale has a roughly 37% chance of removing a person from the real estate ownership market. More and more Americans will be conditioned to the idea that home ownership is a waste of time and money, not to mention the inflexibility that it imposes on a person who might otherwise have been able to get a better job by moving.

The New York Times has some data on the price-to-rent ratio in various markets. In Manhattan it is 30:1. San Francisco and Seattle aren’t far behind. Thus for about 3.3 per cent of the cost of buying, a person could rent. A buyer, by contrast, would pay at least 6% in real estate commissions and other transaction costs (the commission might be deferred until the property must be sold, but it will have to be paid eventually; or you could view at least half of the commission as built into the sale price). The buyer will have to pay perhaps 2% every year in property tax and maintenance, plus an additional 5% for mortgage.

In our wealthy suburb of Boston, rents are 3-4% of house prices. That would barely pay for property tax, maintenance (winters are harsh), and landscaping (weeds are aggressive). So the landlord who rents, and there are plenty, is basically giving the house for free to the renter. When it is time to sell, it takes 9-12 months of leaving the house empty, so the cost to sell is 8-10%, even if the market remains flat.

Another advantage for renters is that they can free their minds from the clutter that prevents homeowners from doing or thinking anything interesting. People in Manhattan, even when they own, never do any maintenance or yard work. So they can write novels and build empires. The rest of us go to Home Depot every few days and pull weeds.

Summary: Why would house prices continue to fall then? The longer that house prices fall, the more people will critically assess whether it makes any financial sense to own and conclude “it does not.”They withdraw themselves from the market of potential buyers, at least for 10 years or so until they forget what wounds they suffered and how boring they were when they owned.

This post originally appeared at Philip Greenspun’s blog.