Rent Ratios And Buying vs. Renting


The real estate market has crashed in much of the country. The $8000.00 tax credit ends in just a few days on April 30, 2010. Of course, there may be advantages to buying a home now or there may be advantages to holding out and just renting for the time being.

A recent New York Times article discussed the advantages of renting vs. buying and it even gave a simple strategy to decide if it was better to rent or to buy called the ?rent ratio?.

The rent ratio is the purchase price of a house divided by the annual cost of renting a similar home. The claim is that if the ratio comes up at 20 or above you should at least consider renting while a ratio of 20 or below means a stronger case to buy.

It says that many major metro areas now have a rent ratio of about 16 or lower whereas, before the market crash it was 25 or higher.

Just to test it out I ran the rent ratios on a few homes in my area. Rents in a certain neighborhood around here are running about $1100.00 a month for a home I will call ?model #1?. An identical home is now for sale for $194, 000.00. We will call the home for sale Model #2. The rent ratio would be 14.71?sounds like a case to buy, right?

But hold on just a minute. Model #2 has been on the market for almost a year and there is another identical home for sale at $164000.00 (unfortunately it is not selling either but?we?ll call that Model #3). The rent ratio for model #3 takes it down all the way to 12.49. Again, if you base it upon the rule of above or below 20, it sounds like it may be an excellent time to buy.

But is it really? The truth is that neither of these homes has sold.

Model #1 has been on the market longer, but Model #2 has also been on the market for quite a while, probably 4 to 6 months or longer. Even at the lower price it still isn?t selling and any Realtor who is telling you the truth will say that it always comes down to price, ?any house will sell in any market if the price is right? (that is Realtor talk, there).

So are the prices in this neighborhood going to continue to go down? (If only I could find my crystal ball when I needed it!).

However, if I were a betting person, I would bet that the prices will continue to go down.

And if they do wouldn?t it be better to rent now and wait for the bottom of the market? Of course, there are more reasons to buy a home than just money but for pure financial reasons isn?t it better to wait for the lower price, especially if you anticipate that it is coming?

Rent ratios or not, it would not seem that Model #1 will sell for that list price of $194000.00 at any time in the near future and if a buyer did happen to pay that much for it, they would have lost money before they even signed the papers. And just to throw in another wrench, the buyer would probably have to pay cash because the house won?t appraise for $194000.00 (since none have sold for that price in the past 6 months) and the banks won?t loan on a house if it doesn?t appraise.

So it would seem that ?rent ratios? may apply to some cities, some places, perhaps major metropolitan areas, but as for my neighborhood, I?m not buying it.