I’ve been slammed lately with the day-in, day-out of running an investment firm hence the lack of blog posts. However, I ran across this chart last week in the Wall Street Journal and thought it deserved at least a note here.
For the first time in as long as most people can remember houses are now cheaper to own than to rent. This is a major development for the industry and the economy at large because I believe this means we are, at the very least, near a floor for housing prices.
If housing prices get any cheaper they just become too attractive for investors to ignore. When cash-on-cash yields for investing in residential property approach 2x long-term treasuries (not including any appreciation at all in the value of the underlying property) they simply can’t be ignored. Factor in simply the inflation rate as an appreciation variable and the asset class becomes even more attractive.
This is why I believe home prices just can’t go much lower. Having said that they may not immediately go higher, either. In fact, the prevailing sentiment towards home ownership may prevent them from doing so. It seems everyone and their mom is now happy to rent for eternity. Housing today, in such stark contrast to the view of only five or so years ago, is seen as a bad investment which is precisely why it is so cheap.
Still, if housing can find a bottom then the economy may find itself freed from its biggest anchor. If housing were to simply be upgraded to a recessionary condition from its current depressionary one the economy may finally start to show real signs of life.