By David Schawel, CFA, Economic Musings

In an interesting report today from Deutsche Bank, they write:

“Another all time high for rent-buy in 4Q11. The national rent-buy ratio (rent as a percentage of after-tax mortgage payments or ATMP) increased to 114.9% in 4Q11, the highest recorded level in our database which goes back to 1991. This quarter’s move represents an 810bps increase over 3Q11 and marks the fifth consecutive quarter the rent-buy ratio has been above 100%. We consider 100% the relative indifference point between renting and buying, and while there  has historically been a rent-buy gap of roughly 10-20% on average, the divergence  of home price and rents, combined with historically low interest rates, has reversed the trend starting in 4Q10.”

Their chart below shows Rent as a % of ATMP ramping up from 66% in Q407 to 115% in Q411.  It is now notably more expensive to RENT versus OWN.  How much longer will people decide to pay more by renting versus owning?  Will mean reversion eventually happen?

Finally, the chart below shows the Homebuyer Affordability Composite Index from the NAR, which combines home prices and mortgage rates.  As you can see, it’s at an all-time high.

It’s very reasonable that people are skittish to buy homes again coming off of the worst housing crisis this country has seen.  That being said, people were euphoric buying homes at 30-40% higher levels with rates 200 basis points higher. Now with affordability at record highs, these same people are piling into rentals.

Even with the recent back-up in rates, a 30yr mortgage provides an incredible opportunity to lock in cheap funding.  Many people say that taking a long term mortgage out is equivalent to being short long bonds – and that is a decent way of looking at things.  This is by no means an advertisement to buy, but nonetheless it is very interesting to see the psychology of Americans.  Like so many times during the stock market, it feels like they bought high and sold low.


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David Schawel

Economic Musings was founded by David Schawel. David is a husband and father of two living in Raleigh/Durham NC. He currently works as a fixed income portfolio manager. He spent time in NYC in both investment banking and equity research. He is a current CFA charterholder.

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  • Andrew P

    Renting can actually be cheaper than buying since a lot of landlords are underwater, and are happy to get any income at all.

    People were happy to buy with 30% higher prices because prices were going up, and that meant they could move at any time without bringing cash to the closing – or so they thought. Now that prices are stagnant and the job market is iffy, few people want to be stuck in a house until maturity or be forced to take a big loss if prices go down. Renting gives a measure of flexibility.

  • KB


    Remember, we are Japan (on steroids, some might argue). Just check where are mortgage rates in Japan now, and how housing price performed over last two decades…
    And Andrew brought very good point. In the current job market, flexibility might be the key advantage, thus commanding some sustainable premium for renting over buying. Such situation might continue for “extended period of time”.

  • Bruce


    “Now that the banks are confident that a settlement will be reached in the $25 billion robo-signing scandal, they’ve started aggressively processing the mountainous backlog of delinquent mortgages on their books. As the process gains pace, a deluge of REOs will be dumped onto the market pushing down home prices and adding to the 10.7 million properties that are already underwater. Fitch Ratings Agency estimates that home prices could fall another 9.1 percent before the market touches bottom.”

    Here’s more from CNBC’s Diana Olick:
    “… repeat foreclosures hit an all-time high in January, representing 47 percent of all foreclosure starts… This is going to cause some short-term pain in the housing market because as foreclosure starts increase, so do foreclosure sales…. (And) that pushes home prices down…..
    “We’ve also got … 60 months of inventory to get through in judicial states. Judicial states are the ones where you do need a judge to get through.” (“Unclogging the foreclosure market”, Diana Olick, CNBC)”

  • blagosaur

    Commenting from a would-be first time home buyer perspective.

    My friends that bought houses right out of high school or college all got hosed. They literally bought at the top and now they’re in a rut. It has certainly created a mood of despair that has permeated to even the renters in my age range.

    In addition, with unemployment rates hovering around 20% for the under 30 age bracket combined with a relative high in months to sell a house; it actually makes more sense for most people to wait for a more stable job/housing market and to pay a minor premium for that luxury rather than taking their chances.

  • ES

    House upkeep and utilities are very expensive and don’t seem to figure into the cost of ownership anlysis that much. One big difference that is lost in statistics is – a house is usually much bigger than an apprtment or a rental. You simply cannot buy anything under 3K sq.feet in a good area. Therefore all utilities and upkeep are 200-300% higher than in a rental.
    Mobility/ felxibility is a big one. Not only many people are undrerwater but even in good areas you have to pay 6% to real estate ( guild, mafia whatever you call it) to have a simple transction closed.
    We defnitely had much bigger cash flow before we owned a house. Yes, owning a house contributes to the quality of life but it also increases financial risks and makes a huge hit on a free cash flow.
    With interest rates so low, of course, it is hard to justify going for cash flow (where are you going to invest it ?) vs. owning a house and getting a tax break. But for many people having to pay 6% of the sale price just to move is still a big issue.

  • Philip

    The Deutsche Bank note completely disregards the tightening of credit standards as one of the drivers of the change in this ratio. Fogging a mirror no longer constitutes “qualified buyer”.

  • Tradeking13

    Yeah, you pretty much have to give a stool sample in order to get a mortgage nowadays.

  • David Llewellyn-Smith

    Very interesting. But what about over the full lifetime of the loan/rent, compared to the first year? That would make a big difference to the analysis.

    Owning should be more expensive because of the security of tenure, but it isn’t.

    That means there is a property bubble!

  • Phil

    The index would also return to long-term average levels if rents were to fall. Given the rising jobless rate, slowing economy & debt pressures this outcome seems more likely than rising house prices.