That Popping Sound

The state's housing bubble and the renters who love it

If you bought a house in the Twin Cities in the last couple of years, you may be congratulating yourself for having gotten in on the Great American Housing Boom. If you spent the last decade sitting on the housing sidelines while writing out your rent check each month, you may be congratulating yourself for having dodged the Great American Real Estate Bubble.

In recent times, the precipitous run-up in real estate prices has bestowed bragging rights on the first group, the homeowners. Over the last five years, state housing prices have soared 56 percent. The consumer price index, meanwhile, has toddled along at about 14 percent. That run-up left the Twin Cities ranked 32 out of 130 metropolitan areas for highest housing sales prices, according to the National Association of Realtors' data. (The boom, it seems, was even louder elsewhere.)

Now, however, the argument may be turning in favor of those folks who've saved their money under the mattress instead of buying the whole building. An article in March 22's Wall Street Journal compared the costs of renting an average-priced unit with those of owning a median-priced residence. The title of the article leaves little doubt where the smart money is: "In the Hottest Markets, Renting Is the Real Bargain."

A survey conducted for the piece presents a ratio of the monthly cost of renting versus the monthly cost of buying in 21 major markets. In 2001, renting in the Twin Cities metro registered as a ratio of .94 against 1 for owning. (Another way to look at that is 94 cents for every dollar.) Last year, the spread reached .77 to 1.

The exact methodology of this study by Boston-based real estate analysts Torto Wheaton Research seems a little daffy. The survey weighed a monthly rent check against a monthly mortgage payment on a 30-year loan with a 20 percent down payment. Significantly, the figures don't reflect the tax write-off that homeowners claim on mortgage interest--the great middle-class tax giveaway.

But the other omitted residential costs will almost make you feel nostalgic for your last landlord, the stoner who made a habit of letting himself in when you weren't home. The WSJ figures, for instance, don't account for property taxes, insurance, water and waste bills, utility bills, bill bills. And what younger house buyer these days (heiresses excluded) has 20 percent to put down?

Backing up that analysis is the steady upward march of metro rental vacancies. Over the last five years, according to the real estate analysts at GVA Marquette Advisors, the empty rate has gone from 2.1 percent (We're going to have to see your seventh-grade report card before you even fill out an application) to 7.3 percent (You say you'd like to host dogfights in the basement? No problem!). While the parade of homebuyers may have taken a left turn toward la-la land, rent prices continue to follow the more earthbound laws of supply and demand: Since 1999, they've climbed a mere 3.5 percent.

What may happen when interest rates rise is anyone's guess. (Or no one's--who really wants to imagine the deep recession that the next bust might bring?). Here's one free piece of financial advice, however, which is worth what it cost you: Today would be a fine time to unload that adjustable rate mortgage. Yesterday would be better.

 
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