Thursday, July 28, 2011

Renting Instead of Buying

For many people, home buying is not a good option, renting an apartment is better. Finances, short term move, and many other reasons can be factors when deciding to rent or buy a home. Below is an exerpt in an article from the National Real Estate Investor. It explores the housing market and where renting is a better use of your money. Find the complete article here.


The U.S. housing market has been declining since the expiration of the tax credit last spring, although recent data show some signs of leveling off. Helped by the 2011 spring selling season, the April S&P/Case-Shiller Home Price Indices dipped 0.1% month-over-month, the smallest decline since July 2010.

Nonetheless, U.S. home prices have declined by approximately 30% on average since peaking in the summer of 2006. As both current and potential homeowners consider their housing options, we believe that continued price declines and a slow recovery in home prices are reshaping the economics of the “rent or buy” question.

With housing affordability near its all-time high, does it still make sense to rent? Here we compare the costs of renting versus owning in the top 49 markets across the country.

The price-to-rent ratio is one of the most common metrics used in assessing the health of housing markets. Historic data from 1983 through 1998 show a steady relationship between median home prices and rents at the national level [Exhibit 1].

Starting in 2000, rent growth did not keep pace with the steep home price appreciation, pushing the price-to-rent ratio well above the historic average. Many market observers have identified the dislocation between prices and rents as both an indicator of the housing bubble and as a tool for helping to understand the relative affordability of these two housing options.

Home prices have been declining since 2006, forcing the price-to-rent ratio to revert to its long-term average. As of the first quarter of 2011, the price-to-rent ratio is slightly below 1.0, suggesting that on the national level renting is essentially the same as buying economically, although the trend seems to be tilting toward buying going forward [Exhibit 1].

Although the price-to-rent ratio is a simple and effective comparison of the costs of buying and renting, it does not take into account the full range of economic considerations associated with the two housing options.