Rent vs. Buy Debate Heats Up

As the housing market malaise continues, the American Dream of homeownership is facing a more realistic economic paradigm shift. More and more Americans are separating the emotional aspects of home ownership from harsh economic reality and jumping into rentals instead.

And many real estate professionals are taking note. Here is an interesting post from a real a Bay Area real estate agent on HousingStorm.com:

A person’s decision to buy or to rent is based on a combination of economic formulas and emotion. And while emotions are certainly justifiable reasons to buy a house, prudent buyers will view those emotions in context, as an “emotional premium” beyond economic fact.

David Leonhardt of the New York Times has brought attention to another measure: Price-to-Rent Ratios.

A simple way to do the comparison is to look at something called the rent ratio: the purchase price of a house divided by the annual cost of renting a similar one. The number 20 provides a useful rule of thumb. When you do the math, you discover that a ratio above 20 means you should at least consider renting, especially if you may move again in the next five years or so. When the ratio is well below 20, the case for buying becomes a lot stronger.

In many large metropolitan areas, including New York, Los Angeles, Chicago, Houston, Dallas, Atlanta and South Florida, the average ratio is now 16 or lower. It was more than 25 in several of these places at the peak of the bubble, about five years ago. With a ratio as low as 16 and interest rates as low as they are, the costs of owning can be less than the costs of renting — and buyers will end up worse off only if prices fall considerably more.

A price-to-rent ratio is simply the home price, divided by the annual rent paid for that (or a similar) home. For example, a house that rents for $1,000 per month has an annual rent of $12,000. If that house has a market value of $240,000, the price-to-rent ratio is 20.

David Leonhardt suggests this is a point to consider buying. I suggest not.

Read the full post here.