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Posted: 12:00 a.m. Wednesday, Feb. 25, 2009

Cost to rent vs. buy a home is key metric for housing recovery

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CLARKONOMICS: There's frightful news about housing everywhere you turn. Existing home sales have dropped to a 12-year low. Meanwhile, almost half of all homes sold across America in January were foreclosures. That's a startling statistic.

The home construction market is also in disarray. Housing starts are down 60% from just a year ago. Then there are the drops in the Case-Shiller home price index. Las Vegas is down 33%, Miami 29% and San Francisco 31%. The least-affected cities include Denver and Dallas, which are both only down 4% year over year.

Out of this ugly scenario comes the possibility of real opportunity. During the worst excesses of the housing bubble, the relative cost per month to rent was just a tiny fraction of what it cost on a monthly basis to buy. Yet now The Wall Street Journal reports the relative affordability of renting vs. the cost of buying is once again coming into synch.

That makes this a great time to buy a house, according to Clark.

Remember, the only important long haul factor for housing is supply and demand. Builders have stopped building, and that sets the stage for the excess in the market to be soaked up. Opportunists will be a necessary part of the correction. They start the healing by coming in and establishing a pricing floor that creates the stage for recovery.

Of course, "inertia bias" dictates that psychologically we feel home values will always be in decline -- because that's the way things are now. But that's not the case. Most of the bad news (and the decline) has already happened -- though it may not be over yet in every market.
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