CEPR: Maintaining Ownership Makes No Sense

The Center for Economic and Policy Research came out with another great paper this month titled The Cost of Maintaining Ownership in the Current Crisis

Here’s an excerpt from the summary (emphasis mine):

The collapse of the bubble in the U.S. housing market is creating chaos in financial markets while throwing the economy into a recession. It is also threatening millions of homeowners and renters with the loss of their homes. In recognition of the problems in the housing market, Congress is considering measures that will alleviate the crisis. However, it is important that Congress recognize the full nature of the problem as it crafts legislation.

This paper compares ownership and rental costs in twenty major metropolitan areas. It shows that in many areas, ownership and rental costs are more or less in balance. This means that it might be practical and desirable to craft policies for these cities that are focused on keeping homeowners in their homes as owners.

However, the paper also shows that in many cities homeownership costs are greatly out of line with rental costs. These are cities, mostly on the two coasts, that have seen an extraordinary run-up in house sale prices over the last decade that have not been matched by any comparable increase in rents. In these markets, homeownership costs could easily be double, and even close to triple, the cost of renting comparable units. Paying these inflated ownership costs will take away money that might otherwise be used to pay for health care, child care or other necessary expenses. Similarly, a government that intervenes at these prices will have less money for other needs.

Furthermore, because prices are now falling rapidly in many of these markets, homeowners are unlikely to accumulate equity. In fact, it is likely that many homeowners will end up selling their homes for less than their outstanding mortgage, even if new mortgages are issued with substantial write-downs from the original mortgage. In these bubble markets, government efforts to support homeownership are likely to do little to help homeowners and could leave taxpayers with a substantial bill in cases where homeowners leave their houses with negative equity.

They compare 20 cities, of which Seattle is one. Here are the relevant data tables from the paper with Seattle highlighted.

CEPR: Ownership vs. Rental Costs

Note that yes, Seattle is in bold, which means that they classify us as a “bubble market,” despite what local realtors would like to believe. Also note that even the low end of the monthly ownership costs are more than double the monthly rental costs. This is of course not news, but it’s still nice to have it validated by another source.

CEPR: Equity After 4 Years

Translation: it’s a great time to buy a home in Seattle… if you don’t mind a high likelihood of being $100k under water in a few years.

They conclude the following:

In cities that have seen home price appreciation that has raced ahead of rental cost growth, however, it likely makes little sense to use public resources to encourage or subsidize severely troubled homeowners to maintain ownership. Similarly, it likely makes little policy sense to encourage or subsidize households to become homeowners in the near term as the market goes through a downward adjustment in prices.

All in all, an excellent paper. I suggest you download and read it for yourself. Keep in mind that the CEPR isn’t some “bitter bubblehead,” it’s a serious agency filled with economists and ivy-league professors. Not quite as easy to dismissively ignore.

I have added this paper to the Library for future reference.

0.00 avg. rating (0% score) - 0 votes

About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.


  1. 1
    Seattle Guy says:

    Believe it or not but houses still selling in Seattle. LOL.
    There are two houses in my Lynnwood neighborhood sold last month (after seating on the market for a few months).
    Poor “investors” but I don’t feel sorry for them.

  2. 2
    Lamont says:

    So how do I go about buying rental property in Houston?

  3. 3
    newbie says:

    I moved to seattle becuase of potential income growth. But with outstanding job offers in Spokane and houses under 100k does it make sense for me to get established here?

    Not a beautey of a house but for 70k who can complain.


  4. 4
    MacAttack says:

    yeah but you get to paint the walls any color you want. Isn’t that worth $100K?

    I wish Portland had been in there (we’re too small). By the way – Vancouver WA YOY SFH sales were off 63% in March.

  5. 5
    The Tim says:

    By the way – Vancouver WA YOY SFH sales were off 63% in March.

    But, but, my parent’s real estate agent told me that the Vancouver market was recovering!

    (Why do my parents have a real estate agent, you may ask? Well, I’ll be explaining that in a later post.)

  6. 6
    rose-colored-coolaid says:

    Response to #1, I was going to make a snarky comment about how you should have used the singular “in Seattle house is still selling” rather than the plural, but you preempted me by pointing out that in fact two houses have sold in Seattle this month.

    Tim, I would append to your comment that it’s a great time to buy if you don’t mind losing $100k, that it might also be a great time to buy if you can get at least $100k off the purchase price. If someone out there is looking at making ‘lowball’ offers and seeing if anyone bites, this document suggests to me you need to demand at least $100k off the price for anything within a couple standard deviations of the norm.

    In other words, do not pay more than $350k for that $450k house you are eying. And if the seller or realtor ‘laughs’ at you for making an ‘unrealistic’ offer, just laugh at them, and explain they will lose that much anyways over the next 4 years.

  7. 7
    Jon says:

    I am not sure why I am even responding to this… But as a realtor… I have three properties on the market and all three have received offers on them in the last week… the lowest offer – $10k under asking.

    I am seeing considerable movement in Seattle (though I don’t travel to the Eastside, up North or down South) and seeing places move…

    I seriously doubt that there will ever be a time when we lose $100k of value from our homes, except of course, in the case of the great Depression II.

    Am I disputing that it’s expensive to buy in Seattle? No. Am I disputing that it’s ridiculous to buy a place hoping to make $50k in the next year? No. Am I disputing that if you bought a house today it’s going to be worth $100k less next year? ABSOLUTELY!

    I am seeing my rental rates increase 20-40% right now, though I worry about the glut of invetory coming on in 2009 in both the commercial sector and the residential new construction sector.

  8. 8
    jon says:

    Comparing the cost of owning vs. renting is fine for short-term forecasting, but for long term you have to look at replacement cost instead. According to


    housing starts are down almost 50% from two years ago. That suggests builders are not making money in a lot of markets at the current prices. So eventually the demand will catch up to existing supplies.

    Since there is a disparity between cost of renting and owning, and the price of houses is already below replacement cost, this indicates a surplus of rental properties. That is due in part to past speculation, and also people renting out condos and houses because buyers don’t want to buy into a falling market. That can quickly turn around once the market is perceived as no longer falling. When that happens, rents will rise as units are sold to buyers who are now holding back.

    House prices aren’t going to fall by 50% unless the cost of building new houses also drops by 50%. There might be markets like Riverside, CA where there is ridiculous oversupply that will take years to clear out, but Seattle is only a smidgeon above the magic 6 month supply.

  9. 9
    Teacher_Greg says:

    Well since the real estate agents have been so tremendously accurate so far about what is going to happen in the real estate market, I for one find great comfort in Jon the real estate agent’s assurances that there ABSOLUTELY will not be a $100k downturn in home values in Seattle. I will get my agent working post haste on my offer for a $800k 3 bed 1 bath 1200sq, no off street parking piece of crap in Crown Hill this afternoon!!

  10. 10


    DOW Stocks collapsed 250 points today too, along with the real estate asset crash progressing down as us bubble brains predicted all along.

    I met this Lake Sammamish lady last night who bought an old Redmond home for $92K by the lake and alleges the 5 acres it comes on are worth $1M today. She also alleges that Redmond is special and even the mobile home on an acre fetches like $425K and no price decrease ever. By the way, her property taxes alone are $8000 a year. She’s 51.

    I told her cash in now and buy cheap later, that’s what a guy like Buffet would do. I could see in her eyes she totally agreed with me, but she said “what will I do with my three pets if I rent”?


  11. 11
    laxtosnoco says:

    “House prices aren’t going to fall by 50% unless the cost of building new houses also drops by 50%.”

    That’s not necessarily true. Much of the recent price increase was due to land getting more expensive. Also, as demand slows for building materials and construction labor, it gets less expensive.

  12. 12

    happy to write up that offer for you. But if you really really want that piece o’ crap, you better bid over the asking price and waive the inspection, after all it’s Crown Hill, and that’s special.

  13. 13
    Michael says:

    I’m thinking that Indianapolis Indiana is going to be a great place to invest. They were slammed by bad lending but they never had the run up in prices that you saw on the coasts.

    – You see a lot of stuff in the $60,000 – $140,000 price range that is undervalued.
    – The job prospects are getting better in manufacturing because of the cheap dollar
    – They are priced like detroit but with lower crime and more industry.
    – The city has had horrible sprawl but people are being forced back into the center because of higher gas prices

    What do you think?

  14. 14
    uptown says:

    Living on the south slope of QA, I see a forest of cranes. Also, 2 new townhome developments going up within blocks of me, even though townhomes in 3 spots nearby still haven’t come close to selling out. Several new apartment buildings in Uptown are in the planning stage.

    Price drops in Seattle will hit condos and townhouses the most. Then you will see new developments in the burbs undercut prices in the city, which will encourage families to move on out to where the better schools (and most jobs) are.

  15. 15
    Joel says:

    Am I disputing that if you bought a house today it’s going to be worth $100k less next year? ABSOLUTELY!

    That’s a straw-man argument as nobody has said that we’re going down $100k in a year.

    I am seeing my rental rates increase 20-40% right now

    Sure, that’s believable.

  16. 16

    A loan originator just emailed this to me. It’s a report that was just released that names almost all of Puget Sound as a distressed market.


    Looks like we’re all San Diego, Phoenix and Vegas now.

  17. 17
    Civil Servant says:

    Michael @ 13 — All disclaimers apply but on the face of it I like the way you’re thinking. I wonder whether unglamorous non-coastal places with less nutty housing markets, like Indianapolis, might also see some influx over the next few years of people and families who quit them for “up and coming” (oops!) cities like Phoenix and Vegas. If you lose your job and your house and you still have extended family back in the good old Midwest, that’s probably where you’re going to go to get back on your feet — and then, in a few years, perhaps decide to swap glamour for stability and settle down yourself. I also like your point about manufacturing jobs and wish someone would make the case for throwing some tax breaks in that direction.

  18. 18
    Ubersalad says:

    Jon, it’s obvious that you have not seen any evidence of real estate bubble…so why are you here?

  19. 19
    Angie says:

    What the heck can you rent in Seattle for $942/month?

    Go to craigslist, look under houses/apartments for rent, enter $900-1000 as your bounds and limit your search to Seattle. All studios and 1br units. People who’re living in studios and 1 br units almost certainly aren’t using the money they save to pay childcare costs. Dollars to dougnuts they don’t have kids.

    For that matter, its not too easy to find 1 bedroom houses, either.

    So, right off the bat you’re comparing apples to oranges. Even on the low end of that range for housing for sale, the units are bigger.

  20. 20
  21. 21
    Ubersalad says:


    Read this: http://tinyurl.com/6gptxk

  22. 22
    Ubersalad says:

    Also your perception of rent is perhaps skewed by the acceptance of the overpriced RE market.

  23. 23
    vboring says:

    Angie, rent for $942/month?

    my parents stay in a 2 bed place in Loyal Heights for $850/month.

    other than the rare good deal in town, it is good to keep in mind that it is referring to the metro area, not just Seattle proper. there are bunches of places in Renton, Bothel, Everett, etc in this price range.

  24. 24
    Angie says:

    So I read the paper. I wouldn’t call this analysis especially sophisticated, and I certainly wouldn’t christen the paper “great”.

    That $942/month is derived from Housing and Urban Development and is intended to represent a modest *two* bedroom apartment. Who knows what their metric is (maybe section 8 housing? one of the authors is from a low-income housing think tank), but it sure doesn’t represent “market conditions”. Run that craigslist scan again–I find that on the first page of results for 2 BR+ apartments in Seattle rents range from $900-$2500, with most in the $1200-1600 range.

    Next, their method for concocting “low”, “medium”, and “high” costs is atypical and not well justified. On first blush the low/med/high suggest home prices less than/equal to/higher than median, or something like that.
    Instead, their method was this: assume a house costing 75% of median. For “low cost”, assume it’s funded with a 6% mortgage and has low maintenance/utility costs. For “medium”, a 7% mortgage and somewhat higher maintenance/utility. For “high”, 8% mortgage and slighty higher M/U yet. No clue what this approach is trying to convey. Maybe if the emphasis is on lower-income homebuyers, it may represent higher-cost mortgages for people with worse credit scores (or who were taken advantage of by crooked lenders) and homes in worse shape, but unless I missed it this isn’t made explicit in the justification for the methodology.

    The equity loss numbers assume buying the aformentioned 75% of median house today and selling in 4 years, when rent-to-own cost ratios are 1:15, or whatever their yardstick is. Not everyone bought their house yesterday, and truly, where the rent-to-own ratio winds up four years from nowin is anyone’s guess–but it certainly not likely to be uniform across all those 20 cities.

    Shore do look fancy and all, but there ain’t a pony in there.

    Michael, you go on and enjoy yourself in Indianapolis. I know a guy who used to be a firearms examiner in Indy–he says the crime is ten times worse than it is out here. Hell of a lot colder in the winter, too. But go ahead, check it out. Write if you find work.

  25. 25
    Morfydd says:

    While I’m happy to agree we’re in a deflating bubble, I’m not sure the authors are comparing apples to apples. In my own case, for my Crown Hill home (not remotely worth $800K, thanks):

    My gross monthly ownership costs (mtg, ins, taxes) are indeed at the middle level. And my friends upstairs are indeed slightly below the standard monthly rental costs. However, they’re renting half my house from me. So they’re paying $X+ins to rent a 2-bedroom space, and I’m paying $2X+ins+taxes to own two 2-bedroom spaces.

    I’d imagine the square footage of the “median house” is significantly higher than the square footage of the average 2-bedroom apartment. I bet it has a few more bedrooms, too.

    The prevalence of huge homes available for purchase is another weird bubble issue, and not really the topic at hand, but I did want to point out the methodology weakness. On the other hand, you’ve got to compare something to something, and that’s the available data.

  26. 26
    deejayoh says:

    Seattle is only a smidgeon above the magic 6 month supply.

    Most of the PI blog realtors use 3 months as the cut between buyers and sellers market for seattle

  27. 27
    Ubersalad says:

    This argument remind me of what rose-colored-coolaid said:

    I guess you can never provide any data to satisfy anyone…

  28. 28
    Lionel says:

    “Am I disputing that it’s expensive to buy in Seattle? No. Am I disputing that it’s ridiculous to buy a place hoping to make $50k in the next year? No. Am I disputing that if you bought a house today it’s going to be worth $100k less next year? ABSOLUTELY!”

    Los Angeles median home prices have dropped 120K since June.

  29. 29
    Angie says:

    Oh, please.

    Invoking quantum mechanics in an argument about numbers is like invoking Hitler in an argument about an ethical point. Clearly a desperation move.

  30. 30
    Moe Ronn - Realitor® says:

    Angie, we’ll see where we are in a year. That’s what I wrote to Noel Sheppard (he’s well known, look him up in Google, read his older articles) in Jan ’07. I just wrote him again a few days ago to see what he thinks about his prior position in light of today’s financial debacles. Tell ya what, if you don’t think prices will drop significantly within a year, I’ll buy some Bear Sterns stock today and sell it to you at June ’07 prices, “umm kay”?

    Is she the new Meshguy? Hmm, Meshgal, kinda rymes with Mezcal, which is what a lot of people are going to need before this is over.

    The first bubble begat the next bubble by the seed of the FED! It is a most unholy abomination.

    There is optimism, there is pessimism and there is pragmatism. I choose door #3.

  31. 31
    rose-colored-coolaid says:

    #28. Angie, did you even understand my post? The real point was that the act of measuring prices (reporting them actually) disrupts the price movements. If no public data were released about prices, nobody would have ‘known what their house is worth’, and there wouldn’t have been a bubble. In fact, Zillow just exacerbates this effect even more with daily price updates. Likewise, measuring the collapse only makes it more profound.

    I never suggested that we apply the mathematics of quantum mechanics to housing, I merely observed a similarity.

    Invoking quantum mechanics in an argument about numbers is like invoking Hitler in an argument about an ethical point. Clearly a desperation move.

    And calling out nitty details is a power move? The point is, prices are falling and you are nervous because you’ve got a foot in the water.

  32. 32
    Joel says:

    Most of the PI blog realtors use 3 months as the cut between buyers and sellers market for seattle

    Actually I think 3 MOS is the cutoff between seller’s market and a balanced market and then 6 MOS is the cutoff between a balanced market and a buyer’s market. So we’re barely into a buyer’s market but still far from a seller’s market.

  33. 33
    Angie says:

    And calling out nitty details is a power move? The point is, prices are falling and you are nervous because you’ve got a foot in the water.

    One person’s “nitty details” is another one’s “critical thinking”.

    I like that this blog aspires to be “data driven”. However, I wager that Tim regards this report as “great” because the sound bite support his point of view. A closer examination reveals it’s simplistic, not especially relevant to the average Joe and Jane–and its ultimate conclusions are a shot in the dark. Nice sound bite, not a lot of meat.

    If our fearless leader can slice and dice NWMLS data six ways from Sunday, he can do better with this one. (Confidential to The Tim: I love ya, Tim; it’s just a tough kind of love.)

    Finally–I do have a “foot in the water”, but you couldn’t be more wrong about my take on the current situation. Frankly, I’m delighted about falling prices. There’s a long (long, long) way to go before I’m even close to the surface of the water, much less under it. I’ve got one rental more than paying for itself already, and our current residence could pay for itself if we rented it out at a reasonable rate for the size, condition, location. At this point we’re building up a down payment for the next house and we’ll get more for our money if prices keep going down. I hope the bottom will really be in about two years from now so we’ll have a nice big down payment ready.

    Relating this back to the report referenced above, ultimately the authors recommend government policies making it easier to turn foreclosed homes into rentals to keep from destabilizing communities even further. Even as someone who is a landlord and would like to hold more rental properties, I think this recommendation is kind of disturbing. What exactly would those policies do, what supports exactly could be used to do this? No matter how you slice it, what they’re advocating is lending more government support (presumably money) to investors rather than renters, to the “haves” rather than the “have nots”. That doesn’t sit right with me–and I can hardly believe the rest of the Bubbleheads swallow it, either.

  34. 34
    Buceri says:

    This information is very relevant to Jane and Joe. But for a few years they’ve been too busy watching Dancing with the Stars instead of getting informed.

    Jane and Joe would not be filing for bankruptcy if they’d have known that to take a $300K loan on a $50K salary was stupid….

  35. 35
    Michael says:


    Average household income in Indianapolis is around $36,000 per year while the average in Seattle is $57,000 last time I checked. The average home in Indianapolis is $140,000 and the average in seattle is $430,000. So if the average income in Seattle Indianapolis is 64% of what it is in Seattle and the average house is %30 of the cost in Seattle then I would say those are pretty good metrics. On top of that I would argue that the trends are in Indianapolis’s favor.

    If you look at the companies that made the biggest gains in the last quarter they were heavy equipment manufacturers like Caterpillar and International Harvester. Ben Berneke has stated that he has absolutely no fear of deflating the dollar so it only makes sense that our exports will become cheaper.

    This is standard real estate agent math. Since Seattle is a very desirable place to live people will keep coming here even if is double or triple the cost of other cities. Seattle has a good job market and that should justify higher home prices but mulitples of two or three times seem overvalued to me.

    Angie. I’m happy to hear about your expanding real estate empire and your fabulous rental prospect on a public message board. Keep up the great work.

  36. 36
    Michael says:

    I heard a great piece on NPR about the complex financial engineering that caused this mess.


    I’m having a lot of difficulty putting all the pieces together. It is amazing how complex the pieces of our financial system have become. This story should scare the hell out of you. I don’t know if anyone else noticed but Paul Volker came out of retirement last week. The former Fed Chairman gave an amazing speech at the New York economics club about the credit derivatives and off balance sheet, accounting that inflated the bubble.

    Volker sounds like he is predicting a 1927 style “Greater Depression” led by massive housing, credit, student loan debt. We got rid of the wall between commercial and investment banking so the bankers gambled on housing with heavily leveraged bets backed by your bank account. Have fun!

  37. 37
    SeattleMoose says:

    Well, this proves it IS a great time to buy….in Houston!!!

  38. 38
    Stephen says:

    I did my own version of this analysis on homes and rentals in Ballard. I searched for 2+ BR and 2+ Bath homes and analyzed the short-term and long-term cost and benefits of buying or renting.

    I assumed FHA loans with 3% down (jumbo rates applied), PMI insurance, 1.5% home maintenance, equity paydown, 30 year loan, and 0.85% property taxes. I also assumed 4% rental price increases on average in the coming 10 years.

    My numbers are quite different than this story, they tell a good story for someone like me looking for housing for the next 5-10 years in Seattle. BTW- we are relocating from San Francisco where we rented as we just couldn’t stomach (even though we could afford) buying a house.

    See my analysis summaries at http://stephenmcdaniel.files.wordpress.com/2008/04/rent_own_scenario_1.pdf and http://stephenmcdaniel.files.wordpress.com/2008/04/rent_own_scenario_2.pdf and http://stephenmcdaniel.files.wordpress.com/2008/04/rent_own_scenario_3.pdf .

  39. 39
    Buceri says:

    Stephen- who knows, by the time you are ready to buy, San Francisco might be cheaper.

    Amazing to look at the table and see Tampa NOT in a bubble; I have to give the good news to the 6 neighbors in my subdivision in foreclosure, and the endless owners with the “for sale” signs out for so long that the sun has discolored them.

  40. 40

    […] another report on the prospects for building home equity over the next four years, and much like their April report, their conclusions are not good for current home buyers hoping to build short-term equity. Despite […]

Leave a Reply

Use your email address to sign up with Gravatar for a custom avatar.
Your email address will not be published.

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

Please read the rules before posting a comment.