Wall Street Journal: American Dream 2: Default, Then Rent

[marmar]

American Dream 2: Default, Then Rent
By MARK WHITEHOUSE


PALMDALE, Calif. -- Schoolteacher Shana Richey misses the playroom she decorated with Glamour Girl decals for her daughters. Fireman Jay Fernandez misses the custom putting green he installed in his backyard.

But ever since they quit paying their mortgages and walked away from their homes, they've discovered that giving up on the American dream has its benefits.

Both now live on the 3100 block of Club Rancho Drive in Palmdale, where a terrible housing market lets them rent luxurious homes -- one with a pool for the kids, the other with a golf-course view -- for a fraction of their former monthly payments.

"It's just a better life. It really is," says Ms. Richey. Before defaulting on her mortgage, she owed about $230,000 more than the home was worth.

People's increasing willingness to abandon their own piece of America illustrates a paradoxical change wrought by the housing bust: Even as it tarnishes the near-sacred image of home ownership, it might be clearing the way for an economic recovery.

Thanks to a rare confluence of factors -- mortgages that far exceed home values and bargain-basement rents -- a growing number of families are concluding that the new American dream home is a rental. ..........(more)

The complete piece is at: http://online.wsj.com/article/SB126040517376983621.html

[mike_c]

1. I've rented most of my life, and the MAIN reason is that my quality of life...

...is massively higher this way. I pay $900/month for a hundred year old, recently renovated, two bedroom house in rural northern California. It has big bay windows, 12 ft ceilings, great insulation, and all the other stuff I like in a home. It's full of light and easy to heat. My pets are safe here. I've rented this house for a decade now. I'd pay two to three times that monthly amount on a mortgage payment for the very same house-- I know this because the owner offered to sell it to me several years ago, then changed his mind before we sealed the deal. Instead, he raised my rent from the $750/month I paid for the first six or seven years here.

Why on Earth would anyone willingly pay three times as much to buy a house they can rent for so much less? Instead of barely scraping by each month, I enjoy my life immensely. AND I'm not responsible for major repairs, property taxes, lawn care, etc.

Frankly, at this point in my life-- I'm in my mid-fifties-- I'd be hard pressed to think of ANY good reason to buy a home rather than rent one. There just isn't any downside to renting.

[happyslug]

2. The General rule on Renting, is Renting cost more then owning...

The reason renting cost more is that a Tenant;s only concern is the rent, while an owner can be accessed additional costs, such as street repairs, repairs to the house NOT covered by Insurance, improvements mandated by law and other such costs. Since Tenants never accept these risks, they pay a premium over someone who owes a building.

Having said the above, the old rule of thumb when it comes to valuation of homes reflected the difference between Tenants and owners. Whenever renting is CHEAPER then owning then home prices are over valued and will drop. It may take a while, but prices will drop. In may ways this has been true in some parts of the US since the 1980s but efforts were made to keep the prices up. Today, those efforts to keep those prices up are failing and prices are dropping. You can keep artificial price for a while, but the efforts to do so requires more and more money as times goes by and sooner or later people run out of money and the whole bubble collapses (which is what is happening now). I expect prices to continue to drop till renting is again MORE EXPENSIVE THEN OWNING. That looks like it will take a few years. The old rule of thumb when it comes to price bubbles is that it take twice as long to deflate then to inflate the bubble, if we assume this bubble is from 2002 onward to about 2007, that is five years, which means it will take ten years of price dropping to achieve what is needed. If inflation is achieved (The Federal Reserve has been doing its utmost to get double digit inflation but failing do to the weakness of labor i.e. Labor is to weak to demand wage increases to cover inflation so there is no wage push for inflation) it may take less time, but given the overall economic situation (Including the weakness of Labor) ten years from 2007 still sounds about right.