The Bucks Blog points to an infographic from website Trulia that attempts to tell when it's better to rent a home versus buy one (and vice versa). They give this as the conclusion of the pic:
Trulia calculated the ratio by comparing the median list price to the median rent of two-bedroom apartments, condos and town houses listed on its site. A ratio of 1 to 15 means owning a home is much less expensive than renting in that particular city, while a ratio of 16 to 20 means the total cost of ownership in that city is greater than renting but buying still “might still make financial sense,” depending on the situation. Finally, according to Trulia.com, a ratio score above 21 means “renting in this city is much less expensive than owning a home.”
Just to be clear what they are talking about, here's the calculation:
Median list price of homes in a given market / median rent of two-bedroom apartments, condos, and townhouses
An example from Trulia's press release:
- Median List Price: $140,201.37
- Median Rent: $1,871.65
- Price-to-rent ratio: $140,201.37 ÷ ($1,871.65 x 12) = 6
And here's the results summary from Trulia:
It is more affordable to buy than to rent a two-bedroom home in 72 percent of America’s 50 largest cities. Meanwhile, a nation of renters has emerged as more Americans rent by choice or due to unforeseen financial difficulties. In contrast to this nationwide trend, renting is only less expensive than buying in four of the cities included in this study – namely New York, Seattle, Kansas City and San Francisco. The remaining 10 cities are locations where buying may still be a financially sound long-term decision despite the relative affordability of renting.
Just to note, the costs for buying a home include all costs: mortgage, maintenance, insurance, and so on.
It's an interesting study -- and concept -- that a ratio can help you decide the often-debated "is it better to rent or buy?" question. I think that we're perhaps looking at a new rule-of-thumb to help settle the debate.
Of course, much more goes into the buy/don't buy decision (like size of place, location, family needs, etc.) But this does provide a way to see the relationships on one key factor: cost. Of course, you'll need to do the rent/buy ratio yourself based on the type of homes/apartments you're considering in your market. But this sure can be helpful.
We have a 2,500 (or so) square foot house that is probably worth $170,000 at the moment. If we rented a place, I'm guessing we'd pay $850 per month (for something not nearly as nice, but let's go with it for now.) So our ratio is:
$170,000 / ($850 x 12) = 16.7
So we're in the gray area. But I'm thinking that is someone wanted to rent an exact house like ours, it would be more like $1,200 per month, which then makes the ratio 11.8, well within the "buy" guidelines.
So, what do you think of the ratio? Think we're looking at a new rule-of-thumb when it comes to the "rent versus buy" discussion?
I think you have to compare equal to equal. Its always going to be less expensive to rent if you are looking at a place which isn't the equivalent of a home.
From what I've heard - with all the foreclosures and everything right now - rental prices are going way up. I have nothing to confirm that though. I'll let you know in November when my renter leaves, and I am trying to rent out my Condo again.
Posted by: Sarah | March 15, 2011 at 04:29 PM
I wonder if Trulia factored the association fees buyers will pay into their equation. Here in San Diego, those are $150-300 per month for apts/condos/townhomes, which makes a big difference in the calculation. It seems like a more fair assessment would be to compare single family homes to rent or buy.
Posted by: LL | March 15, 2011 at 05:26 PM
Our rental house ratio is about 12 in Gaston, SC -- $115,000/($800 X 12)... I am cool with that! Especially because we may eventually move back into that house within the next couple of years (depending on the job situation).
I like the ratio.
Thanks,
Posted by: Nate | March 15, 2011 at 05:59 PM
It doesn't account for interest rates. Are those ratios for historically low rates, moderate rates, etc? If rates change, do they adjust the ranges?
Posted by: Pop | March 15, 2011 at 06:06 PM
For me, this metric is bogus because it doesn't account for maintenance/repairs which are often included in rent but are paid out of pocket by homeowners. One major repair like a new roof, furnace replacement or busted sewer (all of which I've had to do in the last 10 years) and those percentages would flip pretty quickly in my opinion...but perhaps they are only looking at condos and are including condo fees.
Posted by: First Gen American | March 15, 2011 at 06:59 PM
ugh what the hell. A house that big around here would cost at least 2,500/mo
Posted by: Jeff | March 15, 2011 at 08:01 PM
I think it makes sense. Our 1600 sq ft house is worth about $160,000 in Tampa, FL and rent around here is $1000/month, so our ratio would be around 13.3, making it worth it to own. Several of the homes on our block were flipped in the height of the housing market a couple years back and the new owners are all renting them out. So we have renters all around us, the people who did buy are backwards or underwater on their mortgage. So I think Tampa is a renting kinda place.
Posted by: Frugalapolis | March 15, 2011 at 08:12 PM
In the first edition of my Home Buying for Dummies, my co-author and I laid out this concept in detail and showed you how to do the calcs. Should ALWAYS do this before buying any piece of real estate.
Posted by: Eric Tyson | March 15, 2011 at 08:47 PM
Rather than use some dubious formula for determining whether to rent or buy why not just go to zillow.com and type in the address of the home you are considering and see whether its price is trending up or down. If its trending down why on earth would you want to buy it at this time? Unless you were to make a big downpayment you are guaranteeing that you will be underwater in a matter of months. Why not rent until the prices bottom out and start up again whenever that might be?
I have been in my home since 1977, it was paid off in 1992 and I'm not going anywhere but I checked at zillow and found that its value peaked around January 2008, has lost about 24% of its value since then and is still trending downwards. Fortunately it's 8.2 times what I bought it for but that makes no difference to me at all. Even if it was only worth $1,000 it's still home and a nice place to live and hasn't changed a bit in the last three years.
Posted by: Old Limey | March 15, 2011 at 10:35 PM
I wish it was that easy! What a bunch of crap! As mentioned above, you have so many other things to consider....Appreciation/Devaluation, taxes, repairs and tax writeoffs come to mind. If you really want to make the right decision you must consider all of these factors!
Posted by: Dave | March 15, 2011 at 10:49 PM
Another factor to consider is your income tax bracket. The interest deduction and property tax deduction have a lot of value for some folks, no value for others. Yet another factor is the going mortgage interest rate.
Seems kind of tricky to simply have a one-size-fits-all ratio as a rule of thumb.
Posted by: Bad_Brad | March 15, 2011 at 10:55 PM
Its a reasonable rule of thumb to give yourself a first approximate answer. Theres far too many variables that can change and impact the decision to make this kind of rough figuring accurate. But giving a rough approximate answer is really all that a rule of thumb is meant for. If you're really looking at buying or renting then you should look at all the details yourself to figure out what makes more sense in your individual situation.
By their rule of thumb my house is in the border area around 16.
Posted by: Jim | March 15, 2011 at 10:56 PM
http://www.nytimes.com/interactive/business/buy-rent-calculator.html
Use the NYT tool to make the decision. The ratio fails to take the future into account thus its too simple and will lead to mistakes. It might be better to rent or buy today, but that doesnt tell you anything about tomorrow.
One can create any number of ratios that compare home prices to a variable that appears to be relevant but lacks any real value. (home price/median income/growth of pop/gold/dow/interest rates/etc)
Posted by: Tyler | March 16, 2011 at 01:06 PM
I agree with Tyler. The New York Times calculator is much more effective than this bogus ratio. It doesn't take into account property taxes (3%+ here in Houston), condo fees ($300+/month), and how long you plan to stay in the home. When I use the calculator it's clear I should stay renting, when I use this ratio I get a 10 which should make me run and buy a place.
Buying a house is the biggest purchase in most people's life, do your homework and take your time, don't use "rules of thumbs".
Posted by: Tony | March 16, 2011 at 03:28 PM
When I bought my condo, I paid $66000 for it. 1000 square feet, 8 minute drive to work. The rent I was paying on my apartment at the time (900 sq feet, 20 minutes away from work) was $550/month, so my index based on that would be 66000/(550*12) = 10.
But the rent for this condo would be 750/month: 66000/(750*12) = 7.3.
Either way, it made a lot of sense to buy - stable job in the area, family and friends factor, and I got the $6600 credit. I'm paying a bit more per month than I was renting, but when you factor in deductions and principal, it's about even for a nicer apartment with a shorter commute.
Posted by: Ryan | March 17, 2011 at 07:55 AM
As Jim said, the ratio is a good starting point, and it's what I've used whenever I wanted a quick intuive idea of whether a house is a good buy or not. A ratio of 15 should be about the cut-off, because 1:15 = 7%, your interest rate will be around 5% and you've gotta add a few % for maintenance and the like. What I'm basically doing here is comparing renting to buying with a perpetual loan and assuming no down-payment, in order to compare apples to apples. So basically you compare your rent to your perpetual mortgage payment. This isn't entirely accurate (rent goes up with inflation, owning brings in exta costs of its own), but it's a good quick assessment.
It seems like they're not taking condo fees into account, which is a major flaw. If a typical condo fee is 15% (?), then the cutoff ratio of 15 becomes 13.
Posted by: Concojones | April 15, 2011 at 03:54 PM
Seems like HOA fees are included after all. From their press release:
" Total costs of homeownership include mortgage principal and interest, property taxes, hazard insurance, closing costs at time of purchase and ongoing HOA dues and private mortgage insurance, where applicable. It also includes an offset for the tax advantages of homeownership, including mortgage interest, property tax and closing cost deductions. "
" Total costs of renting include rent and renter's insurance. "
Posted by: Concojones | April 15, 2011 at 04:01 PM