Rent vs. Buy
I read an interesting article today on whether it is "better" to rent
or buy in today's real estate conditions. One thing that made sense to
me was the price-to-rent ratio (PTR). This is done by taking the
average annual rental rate and dividing it into the realistic price that
the home would rent for. According to CNN Money, the intruiging
figure to go off is 15. Anything above 15 is typically a time when
prices are too high. Anything below 15 is typically when more
buyers become interested. Let's look at an example.
In Hoboken, NJ, I can purchase a 2 bedroom 2 bath condo for $500,000,
about a mile inland from the Hudson River which connects NJ to NYC.
The best I can do on a rental there is $2,800 per month or $33,600
annually. So let's take the following equation:
$500,000 / $33,600 = 14.88
Some trends that I found were that the 15 year average for this area
has a PTR of 14.7. In the first quarter of 2000, the PTR was 12.4.
At Hoboken's peak, the PTR was 21.3, and in 2008 the first quarter
reported 20.5 on an average. In my example above with the $500,000
condo, the price seems pretty good considering the PTR. At 14.88,
we have nearly achieved the 15 year average and are about 25% lower than
the average in that marketplace.
This is a very good equation to work off of when you are considering
renting or buying real estate. Your home is your investment.
As in all investing, it is not necessary to force your own hand just to
own something. You want to make sure the statistics and numbers
are in your favor. I am personally guilty back in the day of
owning something just for the sake of telling people that I owned it.
Maybe you can call it "Keeping up with the Jones's".
In today's society, people are going to have to make careful
decisions on what they pursue. This Price To Rent ratio is just
one way to justify the difference between renting and owning.
What is it like in your market? See the table below, retrieved
from
CNNMoney to determine what your PTR is and whether or not you should
look to rent or buy wherever you are looking.
Housing Price-to-Rent Ratios
A market's price-to-rent ratio measures how much it costs to
purchase a home, relative to what it costs to rent a similar one
for a year. As the P/R ratio falls, more buyers are likely to
enter the market. While P/R ratios in many markets have come
down lately, they're still high relative to their long-term
average.
|
2008 (First Quarter) |
Peak |
2000 (First Quarter) |
15-year average |
| Atlanta |
17.3 |
19.8 |
13.6 |
15.1 |
| Austin |
19.4 |
19.4 |
16.7 |
16.6 |
| Baltimore |
20.1 |
21.4 |
10.8 |
13.2 |
| Boston |
20.5 |
24.8 |
16.2 |
18.4 |
| Charlotte |
25.9 |
27.0 |
16.1 |
18.8 |
| Chicago |
20.8 |
24.4 |
15.3 |
18.5 |
| Cincinnati |
14.3 |
16.4 |
15.4 |
15.1 |
| Cleveland |
11.4 |
15.6 |
14.3 |
14.3 |
| Columbus |
16.8 |
20.0 |
16.8 |
17.1 |
| Dallas - Fort Worth |
16.6 |
18.5 |
15.3 |
16.1 |
| Denver |
21.5 |
25.5 |
18.1 |
19.6 |
| Detroit |
9.8 |
12.6 |
11.8 |
11.0 |
| East Bay, CA |
42.0 |
50.0 |
28.3 |
32.7 |
| Fort Lauderdale |
22.6 |
28.7 |
12.3 |
16.4 |
| Hartford |
19.5 |
20.4 |
13.5 |
15.2 |
| Honolulu |
32.6 |
37.5 |
21.4 |
26.0 |
| Houston |
15.9 |
16.7 |
13.6 |
14.4 |
| Indianapolis |
14.3 |
16.3 |
14.6 |
14.9 |
| Inland Empire |
20.2 |
29.9 |
14.2 |
19.0 |
| Jacksonville |
19.0 |
21.2 |
12.5 |
14.7 |
| Kansas City |
15.4 |
17.5 |
14.1 |
15.0 |
| Las Vegas |
22.7 |
31.9 |
15.1 |
19.4 |
| Long Island |
23.6 |
25.7 |
12.2 |
16.3 |
| Los Angeles |
20.0 |
27.4 |
11.5 |
16.4 |
| Memphis |
17.4 |
22.4 |
16.3 |
18.1 |
| Miami |
22.4 |
28.2 |
12.4 |
16.9 |
| Milwaukee |
22.8 |
24.5 |
17.1 |
18.7 |
| Minneapolis |
17.2 |
21.4 |
14.0 |
15.8 |
| Nashville |
25.6 |
26.8 |
18.5 |
20.9 |
| New Orleans |
15.5 |
25.6 |
14.0 |
15.0 |
| New York |
15.6 |
18.9 |
9.5 |
12.1 |
| Norfolk |
25.9 |
26.6 |
16.1 |
18.4 |
| North - Central New Jersey |
20.5 |
21.3 |
12.4 |
14.7 |
| Oklahoma City |
14.5 |
16.3 |
11.2 |
12.9 |
| Orange County |
29.9 |
40.0 |
19.9 |
25.1 |
| Orlando |
22.2 |
26.7 |
11.6 |
15.5 |
| Palm Beach County |
24.9 |
33.5 |
12.4 |
18.2 |
| Philadelphia |
17.7 |
18.5 |
9.1 |
12.8 |
| Phoenix |
19.0 |
24.8 |
12.6 |
14.5 |
| Pittsburgh |
11.9 |
12.2 |
10.1 |
10.7 |
| Portland |
30.5 |
32.1 |
19.8 |
21.7 |
| Raleigh |
27.2 |
27.8 |
17.5 |
19.8 |
| Richmond |
23.9 |
25.6 |
15.3 |
17.4 |
| Sacramento |
21.2 |
33.8 |
13.9 |
19.9 |
| Salt Lake City |
22.6 |
23.7 |
15.9 |
16.8 |
| San Antonio |
17.8 |
18.0 |
12.3 |
13.8 |
| San Diego |
25.1 |
37.4 |
18.4 |
23.1 |
| San Francisco |
32.9 |
40.0 |
25.8 |
28.1 |
| San Jose |
38.5 |
42.9 |
25.0 |
28.2 |
| Seattle |
34.9 |
37.9 |
19.9 |
24.3 |
| St. Louis |
12.9 |
16.6 |
13.0 |
14.0 |
| Stamford |
23.8 |
26.8 |
20.9 |
22.2 |
| Tampa |
19.3 |
23.5 |
12.4 |
14.9 |
| Washington - Nor. VA - MD |
22.0 |
28.6 |
11.1 |
16.5 |
| U.S. |
12.5 |
15.5 |
10.2 |
11.4 |
Sources: PPR, National Association of Realtors, Moody's
Economy.com
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