Rental Prices and Home Ownership Costs in Metropolitan Philadelphia

The Center for Economic and Policy Research (CEPR) and the National Low Income Housing Coalition (NLIHC) have released a short briefing paper estimating the cost home ownership and rental costs in 20 metropolitan areas including Philadelphia.

In the following table rental costs are Fair Market Rents. Monthly ownership costs are calculated based on 75 percent of the median sale price of homes in the region and three different interest rates, 6% (low), 7% (middle), and 8% (high) on a thirty year fixed rate mortgage.

The authors argue that because ownership costs are significantly higher than rentals costs the housing market in the Philadelphia metropolitan area was one of the bubble markets.

Although a bubble, Philadelphia's was not as large as in other metropolitan areas. As you can see in the following table the spread between ownership costs and rental costs is lower in Philadelphia than other Eastern cities also characterized by a bubble in prices.

The authors of this report go a step further and try to estimate the impact of falling prices on home equity. Assuming falling housing prices after four years a Philadelphia homeowner that purchased a home in 2007 can expect to have negative equity of $2,318 (middle scenario).

Although not the best news for new homeowners in the region, this is a figure well below most other cities with a bubble in housing prices. Of course whether homeowners feel this impact will depend in part on whether they need to sell a home in the near future or were planning to access home equity in a few years to help finance consumption.

It is also important to remember that Cleveland a city not characterized by a housing bubble in terms of prices is facing a foreclosure crisis. In Cuyahoga County where the city is located, foreclosures are up by 66.3% since 2002. A mixture of predatory lending and a weak economy raises substantially the risk of foreclosures whatever the past trends in housing prices. What follows are estimates from the Federal Reserve Bank of New York of the number of subprime loans and the number of subprime loans in foreclosures as of December 2007 in Philadelphia and Cuyahoga County.

Philadelphia is doing better than Cuyahoga County but it faces the same risk of a foreclosure crisis if economic conditions worsen and policy makers fail to act.

And perhaps I should add, fail to act to help homeowners rather than spending billions to allow home builders to write off their current losses against their profits from the last four years.

I mean sure I feel for Robert Toll the Chief Executive Officer of Toll Brothers Inc, who has gone from making $50.2 million in 2005, to $23.4 million in 2006 to a paltry $7.1 million in 2007. But seriously should home builders be first in line to get help?

--Mark Price

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