Trulia.com Rent vs. Buy Housing Ratios: First Quarter 2011

Buy vs. rent? It’s still a tough question for a lot of folks. According to real estate website Trulia.com, one rule of thumb is to divide the median list price compared with the median rent of similar properties. If the price/rent ratio is over 20, you should rent because buying is too expensive. From 16-20, it can be a grey zone, depending on a variety of factors. If it is under 15, you should consider buying. Very rough, but it’s a place to start.

Trulia has calculated this ratio for the two-bedroom apartments, condos and townhomes listed in their database for the largest 50 cities in the US, and illustrated them on an interactive chart. There are a few options to play around with. (Click to visit and enlarge.)

It looks like big red New York City is still more affordable to rent, with more cities being pockets of green. Supposedly, in 72% of major cities it is now more affordable to be a homeowner. I guess we’ll see if they’re right. I just added some nice vinyl fencing to my money pit home sweet home. Specific cities are highlighted in this related CNN Money article.

Comments

  1. This is cool! Being a map nerd and a demographics nerd, I really wish they had done this study using metropolitan areas instead of just within city limits though. City limits are pretty arbitrary – for example, in some Texas cities the limits will pretty much cover most of the sprawling suburbs, while in the Northeast they just cover the central city and maybe the innermost suburban areas.

  2. Interesting. That rule of thumb ratio of 15 times annual rent corresponds to an interest rate of around 6.125% on a 30-year mortgage with 20% down and a 15% allowance for property taxes and homeowner’s insurance. At lower rates, which we have now, the breakeven rent payment vis a vis a mortgage payment would imply a higher multiple=higher home price you’d be willing to pay. It isn’t a huge difference though. At a 5% rate you would be indifferent between renting and buying a house at about 17x your annual rent. I have not included a tax deduction in these numbers, but that may boost one’s affordable home price higher. But there is also maintenance to consider as an owner.

  3. Yet another reminder that I should spend more time house hunting in my city. Thanks for the motivation!

  4. Just don’t forget the gazillion dollars you spend on things just because you now own your own home. I’ve owned my home for 20 years and paid it off about 10 years ago. Even with modest yearly appreciation over 20 years, I can prove (through my records) that I’ll probably lose money if I ever sell. It doesn’t take very many new air conditioners/roofs/upgrades/etc to come out behind financially. Buy a house because you like owning a house – not as an investment.
    On the plus side, it was nice to know during this last recession that I didn’t owe anybody anything and I didn’t have to worry about losing my house. That’s worth a lot!

  5. MyMoneyMess says:

    I have to agree with Pat. A primary residence is not an investment. Real estate is an investment if you’re not living in it. Renting it out or flipping the property makes it an investment.

    That said I tend to find these comparisons to be more of an apples to oranges nature. Chances are most people are not going to want to buy a house that has the exact same size and number of amenities as the apartment they would rent. Comparing a 2BR, 1BA apartment to a 3BR, 2BA house that has a fenced yard, larger rooms and so on just doesn’t work.

  6. Dan (and others), if you’re anything like me, you’ll enjoy reading this report about international housing affordability: http://www.demographia.com/dhi.pdf

    The report compares cities from Australia, Canada, Ireland, New Zealand, United Kingdom, United States, and Hong Kong to one another, on the basis of their median home prices divided by their median household incomes. The person who created the report calls that index value the “median multiple”, and contends that values above 3.0 become progressively less affordable.

    One very salient point that the study makes is that it is very often local land use regulations preventing suburban land from being zoned for residential development that artificially inflate the price of existing desirable single-family homes.

  7. Pat – that hinges on where you live. In places where they have the temerity to raise your taxes based on land value it’s not always pretty. And yes if you can rent it works out nicely.

    Passive Activity Losses can pile up on rentals and when it comes time to sell they can offset recapture so the cash out ideally ends up costing the seller nothing. They simply get the benefit of the rental profit and then the benefit of cash on the sale (even if it’s just the portion of the mortgage the renters paid down). If you’re renting for a few hundred profit monthly and you’re carrying over a few k in PAL and your mortgage is getting paid down by a few k per year what you have is a perfect storm of profit while it’s around and profit when it’s sold.

  8. Good concept, but this data is terribly inaccurate. The listed price of homes in Arlington, TX (0-$100K) is obviously wrong. Of course, if a home costs nothing, it’s better to buy! But that simply isn’t a reasonable number in North Texas, where real estate prices have maintained well and job growth is strong. Certainly, home prices in that area are much higher than Detriot (listed at $100-200K), where there are many homes you can’t GIVE away!

  9. I can see some flaws in this graph, but overall, it probably makes sense.

    We made the decision to buy a condo (San Jose, CA) in 1999, because it was FAR cheaper than renting.

    This graph compared renting a 2-bedroom apartment to owning a similar townhouse or condo.

    #1 – If you shop carefully, a condo can be really low maintenance compared to a house. Condo ownership is not the same as home ownership – you don’t have land to maintain – nor do you own the roof or walls. You will pay HOA fees and possibly assessments, so it’s important to find a HOA that is solvent and on top of maintenance though. You also have to consider the HOA fees.

    #2 – Income tax breaks make home ownership even cheaper than renting. Particulary when you are talking about places with big rents and mortgages.

    I am not sure we came out ahead on the numbers alone, but the income tax breaks knocked it out of the park so that renting made little financial sense in our situation.

    As to the above post, I found the prices reasonable for 2-bedroom condos in the regions I am familiar with – just to clarify – these are not single family home prices.

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