Rental Prices Climb, Buying Remains More Affordable
With home prices still sliding in the wake of the housing bust and credit as tight as ever, rental prices continued to increase at a fast pace this year.
Rental prices in the top 20 most-populated metro areas climbed 3.75 percent in 2011, while home prices dropped by 1.83 percent, according to a report by HotPads.com, a rental listing service that also generates data on the rental housing market. The measurements were based on the median prices of two-bedroom rentals and homes in the 20 cities.
The company says that it expects rental prices to continue to tick up during 2012, but at a slower pace, since home prices are expected to slide further. Mortgage rates are also expected to hover around historic lows, providing another incentive for Americans to buy rather than rent. However, a growing inventory of foreclosed homes may also slow the rise in rental prices, because some of those homes will likely be converted in rentals, thereby increasing supply and pushing prices down, according to the report.
"That should drive the price of rentals down," said Paul Gleger, who compiled the HotPads.com report. "But by no means are rentals going away," he adds, noting that Americans' remain reluctant to invest in a home which they see as a depreciating asset.
As it stands, it's currently cheaper to buy than rent in most U.S. cities. In fact, home affordability recently hit a 40-year high.
"In a lot of cases it's getting to a point where it makes more sense for people to buy because rent has been going up significantly faster, while home prices have been falling," Gleger said.
Buy-vs-rent ratios calculated for the report shed light on how major cities compare in this regard. Calculated by dividing a major city's two-bedroom median home price by its two-bedroom annual rent, the numbers suggest that it might make the most sense to rent in San Francisco, while in Detroit, with its rock-bottom real estate prices, it might be more economical to buy.
Buying is now often more affordable than renting because of the glut of foreclosed homes that have flooded the housing market and driven down prices as a result of the housing meltdown.
Recently, foreclosure activity has slowed because of government investigations into alleged foreclosure abuses by banks, but is expected to rise once banks adjust to new regulations and settle lawsuits.
New York rental prices were the highest, according to HotPad.com's report; there the median rent on a two-bedroom apartment was $2,653. That beat out runners-up Boston and Miami by more than $700. The most expensive place to purchase a two-bedroom home was San Francisco, where the median price was $293,471. New York and Los Angeles followed close behind.
Studios vastly outpaced the price increases of other rentals covered in the report, climbing 7.12 percent over the year. That's nearly double the rent increase for two-bedrooms. Gleger speculated that the discrepancy is attributable to young couples who are renting studios -- which he says are more popular than other units among couples -- instead of homes.
"I think it's telling of what younger, especially younger would-be first-time homeowners are considering," Gleger said.
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