Hat tip to SM for sending this along, from David Leonhardt at the nytimes.com:
Below is an updated list of rent ratios — the price of a typical home divided by the annual cost of renting that home — for 55 metropolitan areas across the country.
We last covered this subject about eight months ago, and you’ll notice that most ratios have not changed much since then. A good rule of thumb is that you should often buy when the ratio is below 15 and rent when the ratio is above 20. If it’s between 15 and 20, lean toward renting — unless you find a home you really like and expect to stay there for many years.
|East Bay, Calif.||35.9|
|San Jose, Calif.||32.7|
|Orange County, Calif.||27|
|New York (Manhattan)||26.7|
|North – Central New Jersey||25.2|
|Long Island, N.Y.||21.4|
|Washington – Northern Virginia – Maryland||18.3|
|Palm Beach County, Fla.||17.6|
|Salt Lake City||17.6|
|Fort Lauderdale, Fla.||15.7|
|Kansas City, Kan.||15.3|
|Inland Empire, Calif.||15.1|
|National average for metro areas||15.1|
|Dallas – Fort Worth||13.8|
It’s pretty amazing when you think about it. The country has suffered through a terrible crash in home prices, yet buying a house remains an iffy proposition in many markets.
The data comes from Mark Zandi of Moody’s Analytics and covers the second quarter of this year. Home prices haven’t changed very much since then, so I would expect ratios in most places to be quite close to the numbers you see here.
i just bought a HOUSE for $180k in Homepath. Put 10% DOWN and total payment is $1100. I just got a 2 year lease for $1800 – SO YES – its better to BUY!
Price/rent is still around 26x at the Varones lair in Encinitas.
I’m still waiting for Zimbabwe Ben to bail me out by destroying the currency, though that’s looking a little less likely now with a conservative House of Reps and Ron Paul chairing the subcommittee on debt monetization.
The house I want to buy is a couple doors down from the house I rent in La Jolla. My ratio is currently 25. Guess I’ll keep renting.
These ratios are good guidelines for real estate investing as well. A ratio of 22 says that San Diego real estate isn’t a great investment proposition.
This stat is somewhat BS… all the under 15 cities are places you’d want to escape, excepting Phoenix and/or Dallas. You’d be a damn fool to buy in Cleveland or Pittsburgh.
Somewhat shocked to see Milwaukee so high on the list.. didn’t realize Hoth was so appealing.
ChrisG-That’s exactly the point-nothing BS about it. The more expensive the city is, the more that people will naturally gravitate towards buying. Poorer areas that people will “want to escape” will have more renters and fewer buyers (due to low/unsteady/undocumented incomes, poor/no credit, and no down payments), so buying is a better deal there. (Other factors are availability of land to build upon in the future and recent overbuilding.) In high demand, prime, expensive areas, renting is a better deal.
San Deigo, and all of coastal Southern California, is an expensive, high demand, prime area, therefore renting is a better deal. This is precisely because lots of people like the area. It’s all about supply and demand, folks.
I live in Riverside (included here under the Inland Empire), and I bought my house last year for what I estimate to be 8 times yearly rent (or about half of the stated average here and a screaming deal). I actually like it here, so I am extremely happy with my purchase.
I’m not sure I buy the analysis. Is there any way to come up with yearly ratios going back to, say, 1980?
If OC, where I’m currently buying, trends to 30 as a long-term stable average, buying at 27 seems like a reasonable proposition. If it trends to 23, buying at 27 seems a bit overpriced.
As an investment, if the ratio tends to hold firm over time, an increase in $1200 in yearly rent ($100/mo) is a home price gain of $32.4K. That of course is a very big IF, but it suggests even more that relative changes in a specific metro over time are a LOT more important than relative differences between metro areas with wildly different economic, social, and desirability characteristics.
The BS is the value proposition… the “rule of thumb” is you should buy when 15 and under.
My point is that it’s not rational to buy in ANY of those 15 and under cities… they’re guaranteed to be a worse investment than stocks/bonds/anything else.
I am stunned to see LA near 15. I know that real estate in LA isn’t cheaper than here so the rents must be much higher.
A lot of people dont have a choice to buy anymore.they rent because they have to.
Montreal has been hovering between 20 and 25 for years now. We’ve always been known as a renter’s paradise where you could rent excellent digs at a reasonable price.
Currently paying $940/month for a one bedroom place in the highly attractive “Plateau” district, heat and light included.
ChrisG-But you don’t live in a stack of bonds. You live in a house. So, if you are going to be living anyways in one of the cities with an under-15 ratio, you should probably buy your house as opposed to rent.
Now, as an investment, the goal is cash flow, not price appreciation (buying real estate hoping for appreciation is a dumb idea). Again, you want to buy a place that makes you more in rent compared to what you paid for it, in one of the under-15 ratio cities.
It is perfectly rational to buy in an under-15 city. Just because you personally don’t want to live there doesn’t change that fact.
I agree with Brad (and most others on this thread, it seems) that the best way to analyze this is not to have a single cross-country average, but to compare a given region’s current ratio to the ratio that has been sustainable in the past. To that end folks might be interested in the second chart here:
(it goes through mid-2010; I am going to be updating these soon for year end 2010 but they won’t have changed significantly)
The second chart is calculated by taking the typical home price (per the Case Shiller Index) divided by average rent (per the CPI rent component). By that measure, San Diego — while way down from its bubbly heights — is near the top of the range that was sustained for the past few decades.
In other words it is still expensive to buy in San Diego, compared to renting (unless you factor rock-bottom rates into it, which make monthly payments as cheap as ever but also pose a headwind for appreciation, since rates have only one way to go in the future).
Of course, it’s different for different areas of SD but that’s the scoop on the county in aggregate.
South African average…….6%-7% of house price as average annual rental in a middle class area.