Housing

Should You Rent Or Buy?

Sale pending
Bill Sikes/AP

When we (and everybody else) report on real estate, we tend to focus on recent changes in home prices — prices fell last month, prices rose last year, whatever.

This is certainly relevant information. But if you're trying to decide whether to buy a house, its value is limited.

Home prices have fallen a ton in the past few years. Does that mean real estate is a bargain now? It's hard to say, because it's hard to know just how much homes were overvalued at the peak of the bubble.

So I'm always interested in measures that look at home prices relative to other variables — household income, say — to try to get a better sense of whether it's a good time to buy.

This ratio of home prices to household income was pretty stable for many years, but it shot way up during the housing crisis boom. That suggested lots of people were buying more house than they could afford.

By the fall of last year, the ratio had fallen back into line with historical norms in many parts of the country, the WSJ reported this week.

I wanted more details, so I called Moody's Analytics, the source for the data the WSJ cited.

I also asked Moody's for their data on another metric: the price-to-rent ratio.

This compares how much it costs to rent for a year versus how much it costs to buy. This is a useful way to think about home prices — particularly for people (like me) who are trying to decide whether to rent or buy.

As a very rough rule of thumb, a price-to-rent ratio of less than 20 suggests that buying may be a good deal. A price-to-rent ratio of more than 20 suggests that renting may be a better deal. (The NYT's David Leonhardt devoted a whole column to this ratio last year, and there's a rent-buy calculator that goes with it.)

Both of these ratios are different in different parts of the country, and the Moody's data are broken out by metro area.

Both tables include the historical average from the years before the housing bubble really took off, as well as the most recent figures that are available, from July through September of 2010. So you can find the area where you live (if you live in one of the areas on the list) and see how the ratios now compare to their historical norms.

Of course, buying a house is only partly an economic decision. As a professor of real estate finance recently told us, "The value of a home is the the value you get from living in it and two different people are going to get two different values from the same home. It's a very individual decision."

Still, it's nice to have data.

Here are the tables. Note that the data is for metropolitan areas, which typically include several cities and towns. Click on each table to see a larger PDF version.

Correction: An earlier version of this post incorrectly said the ratio of household income to home prices shot up during the housing boom. It was the other way around, of course. Thanks to the commenter who pointed out the error.

Price-to-Income, Based Upon National Association of Realtors' Median Existing Single-Family House Price
PPR, NAR, Fiserv, Moody's Analytics
Price-to-Rent Ratios, Based Upon National Association of Realtors' Median Existing Single-Family House Price
PPR, NAR, Fiserv, Moody's Analytics

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