Rent Ratios: Key to When to Buy?
The Times based its conclusions on a figure known as the rent ratio. To get the rent ratio you divide the purchase price of house by the yearly cost of renting a similar property. If the resultant number is above 20, then renting should be a better deal; but if it is substantially below 20, then buying is your best financial bet. At least, that's the theory.The only problem is that many of the metropolitan areas with rent ratios now favorable to buyers happen to be ones that have been hit hardest by the recession. Cleveland is one example, with a rent ratio of 12.6. Right now, the unemployment rate in Ohio is hovering just over 11 percent; home values have plummeted around 32 percent since the market high in 2005, and more than 12 percent in just the last year. Unless you happen to live there and have a steady job, does that sound like a place you want to put down roots?
Then there's the issue of the down payment. Many people who rent don't have enough money in the bank to make one. That's why they rent in the first place. Those same people usually plunk down their cash to buy as soon as they have enough savings to do so. Folks do that in Oakland, Calif. (rent ratio: 36.3), Seattle (28.1), and Charlotte, N.C. (25.1) nearly as frequently as anywhere else.
Of course, things weren't always this way. Back in 2005, the Times was reporting that buying a home was a rotten deal in many markets compared to renting. David Leonhardt said then that renting "has become a surprisingly smart option" and home prices rose, and he repeated that message over the years that followed.
But people still bought, if they possibly could afford to. After all, owning your home has become a basic component of the American dream. The real point of rent ratios is that they're handy bit of information--along with many other shreds of data--that people use to support what they want to do in their gut. If you want to buy a house, buy one. If your city has a good rent ratio, you made a great decision. If it has a bad rent ratio, your decision may still be great--great for you, that is.