Attention Renters: Buying Is Now Cheaper
The numbers may encourage fence-sitters to finally buy a bargain, or offer renters justification for sitting out the ownership market. But as with any index, there are lots of variables at play, and living in a market with an index score tilted toward buying doesn't necessarily mean that's a slamdunk decision, as Reuters notes.
Economists frequently develop price to rent ratios using home price index data from the now-defunct Office of Federal Housing Enterprise Oversight (OFHEO) and Owners Equivalent Rent data from the Bureau of Labor Statistics to look at how real estate markets are functioning. HotPads.com, a site that lets consumers compare renting with owning, shows "heat maps" of different markets based on the costs of both choices.
Monthly housing cost -- which is what a price to rent index uses as the basis of its comparison -- is not the only factor to consider when debating rent versus own. In the distress-filled real estate landscape, would-be owners need to ponder not only whether they can finance the purchase, but sustain and remain in it long-term. Part of this calculation is personal and home values decline, and you need to sell within a few years, will you have negative equity? San Francisco-based Trulia, which published the rent versus buy numbers, admits they're just one piece of the puzzle for consumers.
"This index doesn't take into account the potential for appreciation or depreciation, or the fact that rents can change from one year to the next," says Tara-Nicholle Nelson, consumer educator for Trulia, which will release updated index numbers quarterly. "What it can do is help you see how your market is trending, and it can also help if you're comparing dynamics in two different cities."
Consumers also need to understand how any index they use is calculated and what it includes. To develop scores, Trulia compares the median price of a two-bedroom home in a multi-family community divided by the median price of rent on a similar two-bedroom apartment. A resulting number lower than 15 suggests it's cheaper to buy, a result between 16 and 20 means owning costs more than renting but a case can be made to own, and a result above 21 suggests it's cheaper to rent.
The costs of owning include a down payment of up to 10 percent, a monthly housing payment (mortgage principal and interest, property taxes, insurance, closing costs, homeowners dues, private mortgage insurance, and offsets for tax benefits of owning), while the costs to rent include monthly rent and insurance. These costs don't, however, include maintenance -- a fee implicitly included in rent but not entirely represented by homeowners dues.
Depending on the source consulted, maintenance of an owned home can cost anywhere from 1 percent to 4 percent of that home's list price annually. While that sounds high, consider that while some years you may spend next to nothing on home repairs, in other years replacing appliences, tackling an expensive plumbing problem, or facing a "special assessment" from a condo board can cost thousands of dollars. In a rental, these costs are all included; in an owned home, you're paying.
In addition, consider that some of the larger metros where buying is now more affordable on Trulia's list have been hammered by the foreclosure crisis, which promises to loom over the national landscape for a few more years. Trulia's top ten cities where buying is cheaper than renting include the following: Miami (6), Las Vegas (6), Arlington, Tex. (7), Mesa, Ariz. (8), Phoenix (8), Jacksonville, Fla. (8), Sacramento (10), San Antonio (11), Fresno (11), and El Paso (11). RealtyTrac names Las Vegas, Chicago, Phoenix, Miami, and Los Angeles among top cities in terms of foreclosure activity.
So the deals in these cities are good, but if the goods are foreclosures, then they may require expensive upgrades or suffer from the depressed values found in heavy foreclosure markets. According to some housing market analyses -- such as this report from Radar Logic -- the American housing market won't see year-over-year price gains for years to come.
If anything, as consumers begin to see trends in price to rent data in their own markets, they'll have a sense of which type of housing costs more in recent months. But, as the Great Recession has shown, the price to own can come with hidden costs not immediately evident at time of purchase.
Still trying to decide which is right for you? Here are some AOL Real Estateguides to help you no matter whether you choose to buy or rent:
More on AOL Real Estate:
Find out how to calculate mortgage payments.
Find homes for sale in your area.
Find foreclosures in your area.
Get property tax help from our experts.