Why Mortgage Payments Should be Lower than Rents

It’s clearly Ryan Avent morning here at Market Movers, since I also find myself with a minor case of siwoti upon reading this:

We have folks trying to sell homes of necessity (and increasingly this will be due to job loss, rather than foolish borrowing) and finding that even prices corresponding to mortgage payments below prevailing rents are failing to draw interesting. This is not a desirable place to be, and it’s worth government attention.

It is not the job of government to prop up house prices to the point at which mortgages cost more than prevailing rents. In fact, right now, it is entirely rational that a new mortgage should cost less than prevailing rents. Here’s a few reasons why:

1. Mortgage rates are extremely low — which means that when you come to sell the house, they’ll probably be higher. Since resale value is an enormous part of the price you’re willing to pay for the house, this is a very important consideration.
2. Cash is king, right now — everybody wants liquidity. To get a mortgage, you need to make a downpayment, in cash. The opportunity cost of that downpayment has never been higher.
3. House prices rose for over a decade; they’ve been falling for a couple of years. It’s entirely reasonable to expect them to continue to fall, whatever happens to rents, for many years yet.
4. A house, right now, is a liability, not an asset. It ties you down to one place, which makes it harder to get a good job if you become unemployed. It needs constant maintenance, it comes with obligations to pay property taxes and insurance, and, if you do end up renting it out, there’s all the inevitable hassles with the renters. Without much if any expectation of house-price appreciation, why go there?

If government attention is to be paid to housing, I would love to see it concentrated on the affordable-housing front (which might conceivably include lower interest rates) rather than on the higher-house-prices front (which really do no good to anybody in the long term). Yes, falling house prices are very bad for credit markets, and we might need to intervene for that reason. But worrying about mortgages being lower than rents is silly.

Update: Avent adds that if someone can rent out an apartment for more than the cost of the mortgage, "money is lying on the ground, waiting to be picked up". Not true.

Yes, you need to look at the cost of the mortgage, but you also need to consider the total annualized rent, including the periods the apartment is empty and looking for a renter, and including the risk of rent default, not to mention the cost of eviction should that become necessary. You also need to consider the opportunity cost of both your home equity and your own time. And then, of course, you need to discount for the risk that home prices will fall.

Yes, it’s possible to make money being a landlord. But it’s not an easy occupation, nor is it risk-free. Some people are suited to it; most aren’t. And generally it’s something best done by professionals.