April 3, 2012 at 7:42 AM ET
Wondering whether to renew that rental lease or take the plunge and finally buy a place? Well if you live in one of the country’s major cities, it may be more affordable to buy, if you can swing it. In 98 out of the 100 largest metropolitan areas, it is now cheaper to buy than to rent, according to Trulia’s Winter 2012 Rent vs. Buy Index.
“Certainly prices have continued to fall nationally, but rents have been rising so this would be the lowest price-to-rent ratio that we’ve seen,” says Jed Kolko, chief economist for Trulia, the San Francisco-based real estate site.
Home prices have plunged as much as 50 percent in some metro areas since the housing bubble burst in 2007, where they continue to bounce along the bottom now. Rents, on the other hand, have been rising in many markets over the past several years thanks to a swelling demand fueled by both foreclosed-upon homeowners and prospective buyers either afraid or unable to buy. Zillow, for example, estimates that rentals have risen 3 percent nationally since January of 2010 and a report from HotPads estimated a 3.75 percent rental price increase in 2011 for the 20 largest cities.
Even in the New York and Los Angeles metropolitan areas, where home prices are notoriously high compared to the rest of the country and where rentals have typically been the less costly living arrangement, it’s now cheaper in most neighborhoods to buy (more localized exceptions include the Big Apple‘s borough of Manhattan and The City of Angels’ Holmby Hills and Bel Air enclaves).
The two overall markets where it remains more affordable to rent than to buy are Honolulu and San Francisco.
Trulia tracked housing data in the 100 most populous metropolitan statistical areas and metropolitan divisions across the U.S. (MSAs and MSADs, defined by the U.S. Office of Management and Budget, include cities as well as their surrounding suburbs.) Trulia calculated a ratio of asking prices on for sale homes versus asking prices on rental homes, comparing pricing of homes with comparable attributes in similar neighborhoods from Dec. 1, 2011, and Feb. 29, 2012. The data were then broken down into the best and worst cities to buy versus rent.
Perhaps not surprisingly, hard-hit Detroit provided the best value for prospective buyers versus renters. “In places like Detroit where job growth is slow and there’s a lot of vacancy, it’s really unlikely that prices will rise,” notes Kolko. Nearby Warren, Mich., is the fourth cheapest place to buy on the index. Other cities that land among the top 10 places where ownership is cheapest relative to renting are Oklahoma City, Atlanta, Memphis, Tenn., and three Ohio cities (Dayton, Toledo and Cleveland).
Kolko says the index’s results have less to do with the housing bust and more to do with longer term market factors such as economic growth and population density.
”It has more to do with people’s expectations about what will happen in the future,” he explains. “People are willing to buy more relative to renting in markets where rents are generally expected to rise.” In other words, in areas like San Francisco and New York, where economic growth is relatively strong and the supply of housing units is limited thanks to building regulations, people are willing to bid up prices and spend more to buy believing their investments will be matched by rents eventually. In many Midwestern cities with weaker economies and more housing inventory to go around (like Detroit, Warren or Cleveland), that high demand doesn’t exist, keeping home prices low.
But one index’s results also don’t mean deals in cities like Detroit and Cleveland won’t be around for a while. Kolko doesn’t expect the Rent vs. Buy index to change dramatically as the year unfolds, meaning deals will continue to abound in these places for some time.
Of course, the question of whether to buy ultimately comes down to personal factors, low prices or not. If you aren’t planning on staying in a property at least five years, the upfront costs of buying may not be worth it.
And while location is important in the buy versus rent debate, taking into account home size is important too. “In the metro areas we looked closely at, the larger units looked more affordable for renting than the smaller units do,” notes Kolko. So you may choose to rent if you are looking to occupy, say, a four-bedroom apartment rather than buy it, despite the fact that buying may be more affordable for one bedrooms in the same neighborhood.
Then there’s the money question. Do you have cash to plunk into a property’s down payment? Can you even qualify for a mortgage, an arduous feat for a growing number of prospective buyers. The National Association of Realtors reports that nearly one-third of all pending home sales in the month of February collapsed because of failed financing. Many aspiring buyers who might like to own a home in one of these cities fail to qualify for a mortgage, an issue that also keeps home prices affordable relative to renting in most major cities.
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