To Buy or To Rent… You Decide

For the past decade or so, renting a home has typically been a better financial move than buying one. It’s been true in Southern California, San Francisco, Phoenix, Las Vegas and large parts of Florida, the Pacific Northwest and the Northeast.

By renting you most likely had to put up with friends and relatives who believed that owning a home was almost always superior. But renting also would have typically saved you thousands of dollars a year.

Now, as David Leonhardt of the New York Times continues to point out, the situation is getting more complicated because the housing bust has been playing out unevenly across the country.

“In some once bubbly markets, prices have fallen so far that buying a home appears to be a bargain, based on a New York Times analysis of prices and rents in 54 metropolitan areas. In South Florida, Phoenix and Las Vegas, house prices — relative to rents — are as low as in places that never experienced a bubble, like Indianapolis and St. Louis.

But in a handful of other areas, including San Francisco, Seattle and Portland, Ore., house prices remain significantly higher than they were before the bubble began. People who buy a home in these areas will face higher monthly costs than if they rented, even after taking tax deductions into account. As a result, buyers are effectively betting that prices will rise enough in future years to cover the difference.”

Below is an 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.

According to Leonhardt, 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.

Metro area Ratio
East Bay, Calif. 35.9
Honolulu 34.4
San Jose, Calif. 32.7
San Francisco 27.9
Seattle 27.3
Charlotte, N.C. 27
Orange County, Calif. 27
New York (Manhattan) 26.7
Raleigh, N.C. 26.2
Portland, Ore. 25.9
North – Central New Jersey 25.2
Nashville 24
Denver 22.6
San Diego 22.1
Long Island, N.Y. 21.4
Milwaukee 21.4
Austin, Tex. 20.5
Norfolk, Va. 19.9
Richmond 19.7
Memphis 19.3
Bridgeport, Conn. 18.5
Hartford 18.4
Boston 18.4
Washington–N. Virginia-MD   18.3
Oklahoma City 18.2
Baltimore 17.6
Columbus, Ohio 17.6
Palm Beach County, Fla. 17.6
Salt Lake City 17.6
Sacramento 16.7
San Antonio 16.7
Chicago 16.6
New Orleans 16.2
Philadelphia 16.1
Houston 15.9
Fort Lauderdale, Fla. 15.7
Miami 15.6
New York 15.4
Los Angeles 15.4
Kansas City, Kan. 15.3
Inland Empire, Calif. 15.1
**National Average for    metro areas 15.1
Indianapolis 15.1
Jacksonville, Fla. 15
Minneapolis 14.9
St. Louis 14.6
Las Vegas 14.3
Atlanta 14.3
Orlando, Fla. 14.1
Tampa, Fla. 14
Cincinnati 13.9
Dallas – Fort Worth 13.8
Phoenix 13.3
Detroit 12.4
Cleveland 11.7
Pittsburgh 11.4

 –Towers of Channelside Ratios ranged from 10 to 13, indicating that buying is better than renting if planning to stay in the home longer than 2 years.

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.

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