Buy vs. Rent Redux

We’ve looked at the issue of Buy vs Rent quite a few times over the years. You can imagine my thrill at seeing the map (below) showing various city ratios of Purchase to Rent prices from around the country.

It is consistent with our main Housing theme: Prices remain way too high for any sort of a bottom to be near.  Why? During the 1970s, ’80s and ’90s, the average rent ratio nationwide was between 10 – 14.

It broke out of that historical range in 2003, hitting ~19 when the housing
market peaked in 2006.

Where is the ratio today? Pick a city:


click for larger graphic


As Home Prices Drop Low Enough, a Committed Renter Decides to Buy
NYT, May 28, 2008

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What's been said:

Discussions found on the web:
  1. John Borchers commented on May 28

    When my wife and I first shopped for a home in 2002 we laughed at that time for what most people were looking for pricewise.

    As for the market I’m navigating into already deflated assets; home depot for example. Since lumber and building materials prices have already started deflating this should be a better choice than let’s say a home builder.

  2. PHB commented on May 28

    Having relocated to Naples in the summer of 2005 with a home to sell in Michigan, I was unable to purchase until the old house sold.

    Now, some three years later, even with the old home sold and the growing number of foreclosures/short sales flooding the market, I apply a different analysis on my buy or rent decision: Is the amount of depreciation in the coming rent term greater or equal to the expense of rent? My argument even becomes more persuasive when property insurance/taxes/homeowner association fees are applied. This is not a “buyers” market at all…it is clearly a renters market (I even negotiated my rent lower).

    I will not even consider a purchase until the rate of foreclosures begins to top out and decline. Thoughts?

  3. Philipp commented on May 28

    An average purchase to rent ratio of 10-14 seems a bit low in a low inflation environment. A ratio of 10 would mean a 10% annual return for the homeowner which I regard to be on the high side.


    BR: I think you are looking at a still picture instead of the video, leading you to conflate inflation with rates.

    Low inflation means low interest rates, which often sends prices higher. We saw that process start in 2003.

    Now, we are on the other side of that cycle — house prices are coming down, rates are also down — but inflation is much much higher.

    Hence, the Ratio should be dropping, not going up

  4. VennData commented on May 28

    The tendency for this blog to delve into all things sexual is getting a bit annoying: Rent or Buy? … oh… you mean real estate. Sorry.

  5. Mel commented on May 28

    rents could be the next bubble. the better equation is price to income.

  6. Giovannoni commented on May 28

    Well it seems to me that, for the price-rent ratio to return to any previous historical average, there are two possibilities:
    -either the the price falls, which is to be expected
    -or the rent increases. Why wouldn’t that be possible? It seems to me that in much of the country the rent prices can increase.

  7. pmorrisonfl commented on May 28

    > rents could be the next bubble. the better equation is price to income.

    I imagine the argument for this is that there’s a captive audience, because it’s harder to get loans, and out of fashion to buy. Please enlarge on this if you think otherwise.

    I think there won’t be a bubble in rent because a) wages would need to go up, b) rent competes with gas and food for a given supply of dollars, and those things are winning right now and c) there is an increasing supply of rentable units (foreclosures) that owners will need to do something about, renting being the tradional thing.

    But, being a renter now, I worry anyway. What am I not thinking of?

  8. Mel commented on May 28

    bubble could come about in certain rental niches–upscale has less supply and people with the money to bid up rents. renting out condos will be tricky–condo boards can veto some rentals. also, families will double up, as they did in houses. bubbles are irrational, and thus, so are their consequences.

  9. pmorrisonfl commented on May 28


    Thanks for the clarification. I agree that ‘bubbles are irrational’, but I’d add that they have a rational feature; the expectation of gain through appreciation. Whether it’s tulip bulbs, stocks or South Florida condos, the buyer’s expectation is that they can sell it for more later. I don’t see how that dynamic applies to the people doing the renting.

  10. Mel commented on May 28

    pmorrisonfl said:
    ‘I don’t see how that dynamic applies to the people doing the renting.’
    If your fear of buying becomes irrational, you will bid up a rental. When horror stories abound about foreclosures, bubblers will again do the wrong thing–that’s America today.

  11. Prophet of Profit commented on May 28

    “Rents could be the next bubble. the better equation is price to income”

    I agree and expect rents to go up as more people are forced to rent because they are either foreclosed out of their homes or the pool of potential buyers who can qualify for a loan diminishes. However, rent is consumption of shelter and an expense, so when the price of consumption goes up, this is actually another form of inflation rather than a bubble – bubbles are created from higher asset prices.

    So this is simply another case for higher inflation.

  12. Brendan commented on May 28

    Wouldn’t location have a large effect on this? I keep seeing articles that don’t take this into account, which seems completely out of context for most every city not located on the north Atlantic coast. Rational or not, $4.00 gas has gotta produce some additional demand closer to employment centers, where apartments and condo’s are generally located versus the average house.

    I live in bubblicious Phoenix, but I haven’t seen home values in my neighborhood drop by much more than 10% from their peak because I’m close enough to the city core. I would say most or all of that drop happened in the 12-months previous to the last 12-months. Other neighborhoods further out are doing much much worse. As a personal datapoint, my girlfriend’s rent (which seemed about right for the market last year) was going to go up by about 20% in only one year (if she stayed there), while home values in my neighborhood have been pretty steady for the last 12-months. She was a few miles closer to the employment core, but in the same neighborhood and zip code as my house, so neighborhood shouldn’t have had much effect. Seems to me, for better or worse, that this is another indicator that we are going to inflate our way up to match the high home, stock and commodity prices and that home prices are not going to deflate much to match the rest of the economy.

    I guess, all things being equal, if you’re in the position to make the choice, renting seems to still make more sense than buying right now, but I don’t expect to see it stay that way for very long.

  13. pmorrisonfl commented on May 28

    > Wouldn’t location have a large effect on this?

    Indeed, and this is probably the best argument I’ve seen for boosting rent, to the degree that it saves someone commute costs. But, roughly, you’d only be able to raise rent by the amount of commute costs, unless wages are going up. I guess where 20% of someone’s budget is commute cost, they might be willing to trade for a 20% bump in rent.

    > was going to go up by about 20% in only one year (if she stayed there)
    I bet she didn’t stay. If people can reasonably substitute, they will.

    > …another indicator that we are going to inflate our way up

    But because rent is an expense, this inflation has to happen in wages, or by substitution as people trade gas expense for rent expense.

  14. Conor Neu commented on May 28

    I do not think purchase price to rent ratio is the best way to analyze this. Rent as a percentage of After-Tax Monthly Payment (ATMP), as defined by Deutsche Bank seems to be the best analysis I have seen yet.

    Discussed here:

  15. David commented on May 28

    Barry, your numbers don’t jibe with several reports, including the one from the Univ. of Wisconsin (I believe that you even posted on here) stating that the average Price/Rent ratio for a SFR from 1965-1995 was about 18-20, or a 5-5.5% yield.

    Are you including apartments/condos in your ratio?

    If you crunch the math too, for your personal house, it starts making economic sense to buy when the house is about 18-20X rent, i.e. with my 5.75% note on a $435K house (20% down), it’s equivalent to $1950/month rent after taxes, and assuming a modest home appreciation of ~2% and a tax-free ROI of 7% on the down payment (living in it for 10 years). Those are pretty modest assumptions.

    I agree for an INVESTOR, you can’t cash flow on a property unless it’s 10-12X rent or less, but if you’re occupying a SFR, it makes sense at a higher ratio due to “you have to live somewhere” and the tax break + inflation hedge.

    Additionally, HSBC’s “Froth finding mission” published in 2006, IIRC, has long-term Price/Rent ratios for SFR in all metro areas, and they don’t jibe with the NYTimes. For example, Oakland’s peak was more like 35X rent, and the 30 year average=23.8, so Oakland is actually now priced under its long-term price/rent ratio. This corresponds to my experience also, actually living here.

    So, what kind of ratio are you using, cuz it doesn’t seem to be right.

  16. Lord commented on May 28

    Higher inflation raises rents and lowers real mortgage costs which will limit how much prices fall. Incomes are useful for national figures; for coastal zones, income sorting operates forcing lower income people away and attracting higher income people who can afford to live there. Metro centers may well increase even as prices of exurbs are forced down to incorporate the increasing cost of commuting to them.

  17. LoneLibertarian commented on May 28

    I can’t see rent increasing in a market with rising foreclosures.

    These “buyers” will again become renters of the houses they could not afford in the first place.

    The market will dictate rents and as I see it rents will remain flat as inflation and foreclosures continue to mount.

  18. David commented on May 28

    I think you’re wrong on the rents.

    Rents will increase. People were stretching to pay 50% of their income on a house, they’ll pay 35-40% on a rental and think they have breathing room. Landlords are jacking up rents every chance they get.

    The only reason rents would stagnate would be if unemployment rises more dramatically and household formation slows, etc.

  19. David Sucher commented on May 28

    In Seattle will we have “price support” under housing — it’s called “nimbyism” which acts to limit supply. I still predict less of a fall here than other places because the supply is more constrained.

  20. DBulkley commented on May 28

    Tis a shame to not know the methodology – without knowing what is, or is not included, I can’t be terribly impressed with the findings for certain markets. If condominiums are included in San Francisco, then the findings are NOT terribly useful as a guide for the single family dwelling type asset.

  21. Nick-Los Angeles commented on May 29

    Rents will be under pressure from oversupply. The housing run up was not just ballooned asset prices; it was over-building in anticipation of greater fools investors to sell to.

    No one leases multiple properties for investment reasons.

    Empty buildings will find their way onto the rental market, the only way to monetize them.

  22. David commented on May 29

    The oversupply is in the far-off burbs where builders could build. No one wants to rent there. With gas prices etc the way they are, your ex-homedebtor will be cutting costs and moving closer in. There is no oversupply in many real cities (not counting Las Vegas as a “real city” or anything in Florida, as they have no industry outside tourism), with the possible exception of Chicago and San Diego condos. Rents will go up in desirable areas in and near cities; they will be crushed in outlying areas.

  23. NotSureAboutThis commented on May 29

    Somebody mentioned on another blog that apartment RENTS will rise in the short term as people foreclosed out of their houses end up competing against the normal pool of apartment renters. And the normal pool of apartment renters is rising artificially as apartment renters who were “ready” to buy a house or condo decide to wait indefinitely until the market bottoms. In other words, there is currently a high demand for apartments even though lots of single family houses and condos are empty. People still get transferred, etc., but if they are scared that they won’t be able to unload their “old” house, they will move into an apartment till the old house sells, rather than getting a bridge loan as they would have a few years ago.

    Sooner or later, the shake out will be complete, house prices and the cost of renting a house will drop, and apartment rents will drop to compete.

  24. Chris commented on May 30

    In the Dallas market the cheap labor force used by the builders led to a huge increase in apartment/condo construction in the suburbs, and of “loft” style units in the more central markets (Downtown Dallas, Downtown Plano, Addison). The prices went up for a while as the amenities grew, then went back down as the supply seemed to out pace the demand.

    Now people looking to avoid the commute, and gun shy on buying a the suburban McMansions that where the hot choice for a while, are starting to move back into the central hubs. I expect we will start to see the rent in those place go back up. We are already seeing more condos, lofts, and luxury town homes go up in Addison where I work, as well as Las Colinas.

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