The economic downfall continues to produce startling statistics. In September, 2010, one out of every 371 housing units received a foreclosure filing for a total of well over 2 million houses. The unemployment rate has remained virtually unchanged since May, hovering at 9.6% - the equivalent of 14.8 million unemployed people in the United States. High foreclosure rates have led to falling home prices, and combined with the widespread unemployment, it's easy to see how the decision to buy or rent a home is weighing on people across the nation. One resource that people facing this dilemma can take advantage of is the Trulia Rent Vs. Buy index, which tracks whether buying or renting a home is more affordable in the 50 largest cities in the United States. (Thinking of buying a home? We look at the initial and ongoing costs as well as the so-called benefits. Check out To Rent or Buy? The Financial Issues.)
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The Rent Vs. Buy Index
The Rent Vs. Buy index is released by Trulia (www.trulia.com), an online marketplace for homebuyers, sellers and renters. Trulia created the index to provide relevant information regarding current marketplace conditions to people choosing between renting and buying a home. The site calculates a price-to-rent ratio by comparing the average list price with the average yearly rent of two-bedroom apartments, condos and townhomes that are listed on its website. The index analyzes the 50 largest cities in the United States based on population.
The Price-to-Rent Ratio
The Rent Vs. Buy index compares the total costs of homeownership with the total costs of renting. The total costs of homeownership that the index considers include:
- Mortgage principal and interest
- Property taxes
- Hazard insurance
- Closing costs
- HOA dues, if applicable
- Mortgage insurance, if applicable
- An offset for the tax advantages of homeownership
The total costs of renting usually include only rent and renter's insurance
To calculate the price-to-rent ratio, the average list price is divided by the average rent, then multiplied by 12 months.
|Average List Price||$100,000|
|Price-to-Rent Ratio||$100,000 ÷ ($900 X 12) = 9.26|
Trulia sets thresholds for the ratios as follows:
|Price-to-Rent Ratio of 1 - 15||Much better to buy than rent a property|
|Price-to-Rent Ratio of 16 - 20||Typically better to rent than buy a property|
|Price-to-Rent Ratio of 21+||Much better to rent than buy a property|
Current real estate market conditions, fueled by foreclosures, mortgage rates, unemployment rates and other economic factors, will affect the Rent Vs. Buy index. Consequently, a city in which it is currently better to rent than own may change in a future index to a city in which it is better to own than rent.
The Rent Vs. Buy index released October 8, 2010 highlighted the top 10 cities to rent vs. buy, and the top 10 cities to buy vs. rent:
|Top 10 Cities to Rent Vs. Buy||Top 10 Cities to Buy Vs. Rent|
|City||Price-to-Rent Ratio||City||Price-to-Rent Ratio|
|New York, NY||35||Arlington, TX||7|
|Seattle, WA||31||Fresno, CA||8|
|Fort Worth, TX||30||Miami, FL||9|
|Omaha, NE||25||Mesa, AZ||9|
|Sacramento, CA||23||Phoenix, AZ||10|
|Kansas City, MO||23||Jacksonville, FL||11|
|Portland, OR||22||Detroit, MI||11|
|San Diego, CA||21||Columbus, OH||12|
|San Francisco||21||El Paso, TX||13|
Using the ratio thresholds from above, one can see the degree to which a particular city is either a better place to rent or buy and vice versa. (Your lifestyle, level of commitment and the trade-offs need to be carefully weighed. For further reading, see To Rent or Buy? There's More To It Than Money.)
Trulia's Rent Vs. Buy index uses data based on the listings featured on the company's website and, therefore, does not provide a view of the entire market. While the list provides a comprehensive database of real estate information, the data on which the Rent Vs. Buy index is based is not representative of all properties that are listed within the United States. The percentage of listings on Trulia compared with the number of listings on the market as a whole can reach 100% in certain cities or areas; in others, the number of listings represents a smaller percentage of the actual number of listings in an area.
In addition, since the Rent Vs. Buy index only compares two bedroom units, it may not offer clear advice to those seeking significantly larger homes. The basic logic for such an analysis is that not many renters are looking for seven-bedroom rental units, and therefore the two bedroom comparison is a more accurate picture of the types of units that are actually rented. The Trulia index is intended to be advisory in capacity, and not definitive.
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The Bottom Line
The decision to buy or rent a home is complicated, especially during challenging economic periods. The Trulia Rent Vs. Buy index is one tool that individuals and families can use to help make more informed choices regarding the costs of renting and the costs of homeownership. (This method can help first-time buyers afford a home using a rent-to-own strategy, and it can also be good for investors. Read Rent To Own; Own To Rent.)