Many congratulations to David Leonhardt, who has just bought a house in Washington. Leonhardt is the person behind the NYT’s truly wonderful rent vs buy calculator, which should be the first stop of call on the internet for anybody thinking of buying a house.
The reasons Leonhardt always rented, when he was in New York, were very good ones – and the reasons why he’s buying, now, are good as well. Even though he believes the value of his house is going to fall, it can still make sense to buy, since a house is not an investment, or not wholly, and moving house if and when you think prices have bottomed is not easy or fun, and in any case only fools ever try to time the market. Plus, of course, in an inflationary environment, a fixed-rate mortgage is a much better bet than rents which are liable to rise at least in line with inflation and quite possibly even more.
Of course, just because Leonhardt is renting doesn’t make this a good time to buy, necessarily. Like most sensible buyers, Leonhardt is buying now because he’s moving, and not the other way around. And he also says that while he did decide to buy in Washington, he still thinks that renting is almost certainly still the better option in New York.
What he doesn’t mention is that he a very, very rare bird these days: a long-time renter, who has been saving up his down-payment for years, who is now buying his first home. Nationally, the opposite is much more common: people who bought homes they couldn’t afford, who are losing those homes, and who are finding themselves back in the rental market.
Most potential house buyers, then, aren’t just buying a house; they’re selling one, too. In this market, with sales plunging, that can be very difficult indeed. Leonhardt doesn’t have to worry about liquidating his old house in order to be able to make the downpayment on the new one; most Americans don’t have that luxury.
And of course Leonhardt has that downpayment, which, these days, is very likely to be at least 20%. Again, this is very rare: Americans got used to the idea of buying houses with no money down, or at least very little. They’re quite shocked when they discover, today, that even though they could affford a mortgage, no mortgage company is willing to lend to them unless they come up with a large downpayment – one which, most of the time, they don’t have.
The history of the housing boom is one in which potential buyers were perfectly happy to pay as much as the bank was willing to lend them. That’s still the case. Demand has fallen, but not enormously. The thing which has really dropped precipitously is the supply of home credit. Which is another reason why people like Leonhardt aren’t going to help turn the housing market around. In order for house prices to rise, we don’t need more would-be buyers, we need looser lenders. That isn’t going to happen any time soon – and nor should it.