Purchase a home in 67 of the nation’s 100 largest metropolitan areas and you should be able to build positive equity by 2012, according to a new study comparing ownership and rental costs.
The report from the Center for Economic and Policy Research concluded that prospects for building equity by 2012 have improved somewhat in 36 cities, compared with an analysis performed in the spring. In many markets, declines in house prices and modest increases in rents are helping return rent-to-price ratios closer to historical levels, the report found.
But the report identified 33 bubble markets areas where home buyers still face an elevated risk of being "upside down," or owing more than their home is worth, four years from now. One-third of those markets were in California, including San Jose, San Francisco, Los Angeles, Sacramento, San Diego, Fresno, Stockton, Bakersfield, Modesto and Riverside.
Nevertheless, home buyers in six bubble market areas should be able to build positive equity by 2012, the report predicted. The markets were Las Vegas; Philadelphia; Milwaukee; Hartford, Conn.; Virginia Beach, Va.; and Richmond, Va.
Prospects for purchasing a home and building positive equity by 2012 are also good in all 61 markets that don’t fit the report’s definition of a bubble market, its authors said.
The study defined a bubble market as an area where the median home price exceeds annual rent by 18 times or more. An area where monthly rent averages $1,500 a month, for example, would be considred a bubble market if the median home price exceeded $324,000.
Historically, the ratio of annual rent to price has been closer to 15 to 1, but rose to more than 25 to 1 in 2007 at the peak of the housing boom, the study said.
The report argued against direct intervention in markets where prices remain elevated above historical norms.
"Given the remaining mismatch between home prices and rent levels in most bubble markets, we argue it is still unwise for policymakers to attempt to directly intervene in housing markets to maintain what are historically unprecedented high home prices," the report concluded.
The best way to assure prices don’t fall further than neccessary is to implement policies encouraging occupancy, discouraging vacancy, and maintain employment to stabilize hard-hit communities, the report said.
The study’s authors recommended creating affordable rental housing to keep people in their communities and stabilize housing markets.
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