How to calculate if you should rent vs. buy

In Los Angeles, you're far better off renting than buying. But that's not true in all major cities.

Sure, the housing bust was a disaster for the nation's economy, ushering in the Great Recession and the more than doubling of the nation's unemployment rate. But it did have a plus side: more affordable homes.

Home prices dropped so severely in many markets that it completely changed the equation of whether to rent or buy in many cities, according to a report released Monday by Trulia, the real estate website.

"Many former homeowners have flooded the rental market," said Pete Flint, CEO and co-founder of Trulia. "Following the principles of supply and demand, renting has become relatively more expensive than buying in most markets."

To determine whether it makes more sound financial sense to rent or buy, economists generally use a rule of thumb: They divide the purchase price of a home by the annual rent of a similar property. Anything over a 15, and you should rent because it will cost you less over a period of time. Below 15? Start looking for homes.

This buy-rent ratio is a rough gauge with many other factors entering into the buying decisions of individual home seekers, including their income, property taxes and whether home values are likely to rise. Still, it is a good starting point for those in the market for a new home.

Of the 50 major cities covered by the Trulia report, 36 fell on the buy side of the equation. Another 10 were rated as being cheaper to rent.

Should you be owning your own home now?

WASHINGTON — Bethany and Karl Schreiber are hunting for a nice big house in the pricey Washington, D.C., suburbs and they are facing a deadline: In just a few months their third child will be born, and the tiny two-bedroom they've been inhabiting will officially get too small.

But there's a second deadline looming for them as well. Beginning on Oct. 1, the government will dial back on the size of mortgages it guarantees in high-cost areas like San Francisco, New York and Washington.

After that, the maximum loan amount that Fannie Mae and Freddie Mac will back is scheduled to drop from $729,750 to $625,500. And that may make mortgages more expensive or harder to get for buyers like the Schreibers, who are shopping in the $700,000 range and would prefer to make a downpayment of 10 percent or less.

"If we wait a year, we may not be able to afford as big a house," Bethany said in an interview. "Rates and housing prices are probably going to go up."

The Schreibers concede their timing is mainly inspired by their own family circumstances. But others may be motivated to act now because of reduced government-backed loan assistance, housing experts say. Those programs were put in force as part of the stimulus package after the housing collapse.

"For people planning on exiting the market altogether (such as retirees), that is a compelling proposition," says Stan Humphries, chief economist at Zillow. Home sellers may have to be patient to get the price they want. The curbs on government-backed loans could, at the margin, reduce the available pool of buyers, he said.

Anybody who wants a government-backed mortgage for a $1-million home after Oct. 1 may have to come up with a $370,000 downpayment instead of $270,000, says Rob Chrisman, an independent mortgage banking consultant from San Rafael, California.

The deadline will mean most to upper-middle-class buyers and sellers in costly real estate markets where $1 million buys a nice house, but not a mansion.

To be sure, that part of the market is picking up. Real estate agents operating in tonier neighborhoods are reporting brisker business this spring than in recent years.

Sotheby's, which specializes in luxury homes, reports sales making double-digit gains for the first quarter of this year over last year. The National Association of Realtors reported that the sale of homes over $1 million were up 5.1 percent in March over the same month last year.

"We are seeing a normal recovery," said Jed Smith, managing director of quantitative research. "I'm sure somebody will accelerate their activity (because of the expected drop in government-backed loan limits), but I doubt you'll see a lot of acceleration because of that."

"That really isn't on anybody's radar," agreed Linda Chaletzky, the Schreiber's agent, and a specialist on Washington's tonier suburbs. "But things are hopping."

She said she is not worried about the loan clampdown,

"The mortgage industry will find a way around it, because they will have to. If they don't, they will go out of business," Chaletzky said. She expects private mortgage lenders to step in and fill that space when the government backs down.

It was only in recent years that the loan limits went so high. Mortgages that are too big to be sold to Fannie and Freddie are termed jumbo loans and are backed privately. Until 2008, all home loans over $418,000 were considered jumbo loans. In that year, a stimulus-focused Congress twice raised the limit on loans the government would back in high cost areas, first to $625,500 permanently, and then to $729,750, temporarily.

Since then, Fannie and Freddie have backed an increasing share of that market. In 2010, so-called "jumbo conforming" loans, those over $417,000 and government-backed, made up 6.73 percent of loan originations, according to CoreLogic.

That top temporary limit was extended twice, but is expected to expire at the end of September.

When that happens, lenders who want to make loans over $625,500 will have to hold onto the mortgage themselves or find private investors to buy them. And while an active and hungry secondary market for these jumbo loans has yet to materialize in the post-crash world, there's some evidence that lenders are preparing to move into that space and pick up any slack that the government leaves.

"There's plenty of money out there," said Steve Hopps, chairman of the California Mortgage Bankers Association.

Private lenders are preparing to step in, according to Guy Cecala of Inside Mortgage Finance, a research firm. In the last quarter of 2010, private lenders originated more loans over $417,000 (the traditional jumbo market) than did government agencies, he said.

The lower loan limits will leave about $10 billion more in loans for private lenders to handle, reckons Cecala, and he expects lenders to go after the market aggressively.

Investors like the fact that jumbo loans tend to be safer and more profitable than smaller ones. The privately-backed mortgages require bigger downpayments (currently about 30 percent of the home's value, instead of the 20 percent more typical in less expensive loans), which adds security.

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Also adding to their allure, the loans carry higher interest payments; the spread between the so-called conforming loans backed by Freddie and Fannie and jumbo loans is running about 0.5 percentage points higher, said Cecala. Furthermore, a higher proportion of jumbo loans are made on a variable rate basis, which is less of burden for holders, Cecala said.

Going still higher in the homes market, there will be less impact from the shrinking jumbo. Many buyers of multi-million dollar homes do all-cash deals and are relying on cash more than ever before, according to Stan Smith, a real estate agent who works in Beverly Hills area.

The biggest impact might be limited to that space and those neighborhoods occupied by people like the Schreibers — folks who see themselves as middle class but in very expensive areas.

"I see borrowers, if they want that kind of loan, paying a little more," says Chrisman. "But it's not going to be a life changing event for a couple of orthopedic surgeons in Beverly Hills."

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Fannie Mae announced Monday that borrowers purchasing a Fannie Mae-owned property through HomePath, the GSE’s REO disposition operation, will receive up to 3.5 percent in closing cost assistance.

The initial offer must be submitted on or after April 11, 2011, and the sale must close on or before June 30, 2011 to be eligible for the incentive. Fannie Mae said it can give no assurance on the time required to close, but initial offers submitted after May 15, 2011 are particularly questionable for closing by the incentive deadline of June 30.

To qualify, buyers must reside in the home as their primary residence; sales to investors are excluded.

“Attracting qualified buyers to the market and reducing the inventory of vacant homes remains essential to stabilizing neighborhoods and helping the market recover,” said Terry Edwards, EVP of credit portfolio management at Fannie Mae.

Fannie Mae acquired 262,078 single-family REO properties through foreclosure in 2010, compared with 145,617 in 2009.

Here's what Generation Y doesn't want: formal living rooms, soaker bathtubs, dependence on a car.

In other words, they don't want their parents' homes.

Much of this week's National Association of Home Builders conference has dwelled on the housing needs of an aging baby boomer population. But their children actually represent an even larger demographic. An estimated 80 million people comprise the category known as "Gen Y," youth born roughly between 1980 and the early 2000s. The boomers, meanwhile, boast 76 million.

Slide Show: How to Sell Your Home

Gen Y housing preferences are the subject of at least two panels at this week's convention. A key finding: They want to walk everywhere. Surveys show that 13% carpool to work, while 7% walk, said Melina Duggal, a principal with Orlando-based real estate adviser RCLCO. A whopping 88% want to be in an urban setting, but since cities themselves can be so expensive, places with shopping, dining and transit such as Bethesda and Arlington in the Washington suburbs will do just fine.

"One-third are willing to pay for the ability to walk," Ms. Duggal said. "They don't want to be in a cookie-cutter type of development. ...The suburbs will need to evolve to be attractive to Gen Y."

Outdoor space is important-but please, just a place to put the grill and have some friends over. Lawn-mowing not desired. Amenities such as fitness centers, game rooms and party rooms are important ("Is the room big enough to host a baby shower?" a millennial might think). "Outdoor fire pits," suggested Tony Weremeichik of Canin Associates, an architecture firm in Orlando. "Consider designing outdoor spaces as if they were living rooms."

Smaller rooms and fewer cavernous hallways to get everywhere, a bigger shower stall and skip the tub, he said. Oh, but don't forget space in front of the television for the Wii, and space to eat meals while glued to the tube, because dinner parties and families gathered around the table are so last-Gen. And maybe a little nook in the laundry room for Rover's bed?

In his presentation, KTGY Group residential designer David Senden showed slide after slide of dwellings that looked like a cross between a hotel lobby and the set of "Melrose Place."

He christened the subset of the generation delaying marriage and family as "dawdlers."

"A house in the suburbs is not for them," Mr. Senden said. "At least not yet."

Places to congregate are more important than a big apartment, he cautioned. He showed one layout of a studio apartment-350 square feet, as big as Mom and Dad's Great Room. Common space has migrated to "club rooms," he said, where Gen-Y residents can host meals and hang out before heading to a common movie-screening room or rooftop swimming pool that they share with the building's other tenants.

The Great Recession and its effects on young people's wages will affect how much home they can buy or rent for years to come.

"Not too many college grads can afford a lot of space in the city," he said. "Think lots of amenities with little tiny units-and a lot of them to keep (fees) down. ...The things these places are doing is constantly coordinating activities. The residents get to know each other and it makes for a much livelier and friendlier environment."

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