3 October 2008 236 views 2 Comments

A year over year decline in housing prices in the US are very rare, but the failure of financial giants like Lehman and Washington Mutual mean it will probably be a while before housing prices start recovering. Smart Money editor Jack Hough told the Wall Street Journal This Morning Podcast on September 30th that “I think we could enter a period where we have a decade or so of not housing decline but just flat prices, and if you have a flat price remember inflation keeps creeping along every year, so if prices don’t move and inflation is rolling along at 3% you’re actually losing 3% each year.” He goes on to argue that it makes more financial sense to rent than to buy.

Patrick Killelea lists several reasons why it is “a terrible time to buy” on Patrick.net, a site about the real estate bubble. He writes “It’s still much cheaper to rent than to own the same thing. On the coasts, yearly rents are less than 3% of purchase price and mortgage rates are 6.5%, so it costs more than twice as much to borrow money to buy a house than it does to rent the same kind of house. Worse, total owner costs including taxes, maintenance, and insurance are about 9%, which is three times the cost of renting.” In addition the combination of less competition for mortgage lenders due to WaMu’s failure and tightening credit markets will likely mean interest rates will increase.

In contrast Mexico real estate has several factors that make buying in Mexico an attractive alternative. Real estate is much cheaper overall compared to the US, especially coastal real estate. The financial markets are in better shape since subprime mortgages are essentially non-existent in Mexico and the mortgage backed security market is still in the infant stages there. Traditionally Mexican’s pay much higher down payments like American’s did after World War II. There is growing demand for homes with the combination of 70 million American baby boomers, the Mexican government’s push to get people in homes, and the maturation of the mortgage market in Mexico. Developers are building as fast as possible to catch up to demand. There is a shortage of 4 million homes according to Inter-American Development Bank while in the US will have a surplus due to excess inventory built during the boom period and the record numbers of foreclosures. Simple economics suggest that growing demand and a shortage of supply will lead to growth in home values in Mexico, while more people in the US will rent rather than buy and sellers will have to drop prices to move their excess inventory.