Buy or Rent

That is the Question!

DYI:  This blogger grew up during the 50’s and 60’s before setting out on my own since the 1970’s.  Yep I’m one of those Boomers who is now at the tender age of 64 [will you still love me when I’m 65?].  Growing up during the high growth/plentiful & cheap energy when Moms and Housewives stayed at home and where Dad/Husband made enough money to provide.  My Dad was a non supervisor mailman who delivered the downtown and adjoining residential area of Willoughby, Ohio and yet was able to support four kids himself and his wife.  Wow!  Unless you are high up in government or business who is able to do this today with only one working?  One of the big differences between then and now is real estate costs.

For the longest time I always heard that by renting an apartment/house all you would end up with are rent receipts.

Today is buying better than renting?  Or is it the other way around with renting being superior to buying?  How do we know in a constructive manner?  Only until recently in a historical content buying property was similar to the purchase of a government bond.  The term rent is derived from the French and is spelled rente only later that included land and buildings.

 

This change began slowly just after WWI not so surprising with the formation of the Federal Reserve in 1913.  The bankers had a toe hold into the financializing of real estate but it was not until 1980’s when everything jumped into high gear.  So back to the original question renting or buying which is superior?  Simple arithmetic is involved.  Since buying property has gone by the wayside of bond equivalent interest rate to the financialization of property with its subsequent booms and busts our measurement takes on the same nature as the wild and woolly swings of the stock market.

We’ve all heard of price to earnings ratio or more commonly called the PE multiple as a measurement of value for stocks.  That same concept is applied to price to rental or in this case what is the PR ratio for my city?  Here at DYI I went to the website of SmartAsset [must be some play on words?] and here is what they had to say!

  Our data comes from the U.S. Census Bureau, which provides median home values and median monthly rent. As a simple example of the how the formula works, consider Phoenix, Arizona. Phoenix has a median home value of $231,000 and a median annual rent of $12,156. Its price-to-rent ratio is 19 because $231,000 ÷ $12,156 = 19. 

To help you in your renting and buying decisions, we found the price-to-rent ratio in every U.S. city with a population over 250,000. Applying that ratio, we also calculated a projected average home price for a house or apartment that rents for $1,000 in each market. Note that these home values are just projections. Actual home values will vary based on other factors such as proximity to commercial centers, access to transit and home size. Rentals tend to be smaller (and therefore less expensive) than for-sale properties, so these values may overestimate true market prices.

The cities with the highest price-to-rent ratios are San Francisco, Oakland and Honolulu [39 to 50 PR]. That means they’re the least friendly to homebuyers (since home values are significantly higher than what you’d pay in rent). 

At the other end of the spectrum are cities like Detroit, Cleveland, Memphis and Toledo. These markets are very favorable to homebuyers, with ratios below 10.

Just as with the stock market when the Shiller PE is under 10 stocks are at a secular low and future returns historically have been spectacular!  The same can be said for housing PR when under 10!  If you have a good job with reasonable to a bright future you are in the cat bird seat for buying a home.  Anytime above 20 even if you have a great job making an above average wage no matter what on a strictly financial basis you are over paying.  At 30 Price to Rent Ratio you’ve set yourself up for one of the lousiest investments you could have ever made!

What about from 10 to 15 or 15 to 20 PR?  This is a judgment call.  From 10 to 15 if you have a decent job and reasonable prospects and you are debt free of consumer, car/truck and student loans and you plan on staying put then go ahead and buy.  From 15 to 20 better think long and hard before even entertaining the idea of home ownership especially as you encroach closer and closer to 20 PR.

 Also of note for your simple calculation add all other debts on top of the sale price of the home.  This will give you a better idea as to how much you are actually paying in its totality.  Remember money is fungible where your increase in net worth arrives is of no importance whether it is real estate, stocks, bonds or precious metals.

DYI