Home prices have been so badly hammered that in much of the country it now pays to buy rather than rent, reversing conditions of just a few years ago. That’s the conclusion The New York Times reached after studying “rent ratios” in 54 major housing markets.
On a purely financial basis, the Times’ conclusions make a lot of sense. But some important non-financial questions should be considered as well, especially the freedom that renting provides.
The rent ratio is figured by dividing a home’s value by the annual rent a similar property could command. When homes cost more than 20 times annual rent, they are expensive by historical standards. When they cost less, they are relatively cheap.
With housing in a bubble, rent ratios exceeded 40 times rent in some of the hottest markets, such as Oakland and San Jose, the Times study shows, comparing the fourth quarter of 2005 with the fourth quarter of 2009. Now, rent ratios are considerably lower in many places, thanks to falling home prices.
Interestingly, markets with especially high rent ratios five years ago tend to still have ratios over 20, though they’re not as high as they once were. Other places have experienced dramatic changes. Las Vegas, for example, had a ratio of 31.8 in 2005, but just 13.9 at the end of 2009.
Using the Rent vs. Buy Calculator, you can figure out which option makes the most financial sense. Key factors include the investment return you might make if you rented and invested your cash instead of using it for a down payment and closing costs.
But calculators can only crunch numbers. And some of the inputs are just guesswork, such as the future rate of home-price appreciation. It’s also worth considering the freedom that renting provides.
That obviously includes freedom from a long-term commitment and expense. Renters are usually locked in for only 12 or 24 months. Selling can be expensive and time consuming. And, because of a realtor’s commission and other costs of buying and selling, selling can leave you with a loss if you have not owned the home long enough to enjoy substantial appreciation.
As a renter, you might choose a neighborhood that’s close to work or fun to live in, even if it’s a little rough or the schools aren’t very good. A home buyer might be reluctant to commit to such a place, as home prices might languish or schools might not improve fast enough for the family one hopes to have someday.
While owning might make better financial sense for the long term, renting could provide a more luxurious life in the present, if that's your preference. You might agree to shoulder $3,000 in monthly rent, knowing you could get out of it in a year, while a mortgage payment that large might be terrifying.
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