Home Purchase Cheaper than Renting in Many Cities - But So What?

March 25th, 2012
in econ_news

for-rent-signSMALLEconintersect: Trulia, a national information company for people looking to buy or rent residential real estate, reports that renting is cheaper than buying in only two of the top 100 metropolitan areas in the U.S. The two cities where renting is cheaper: Honolulu and San Francisco. However, the report finds that in some metros where the overall data indicates buying is a better deal than renting, there can be large areas that the reverse is true. In the five boroughs of New York City, for example, three (Manhattan, Brooklyn and Staten Island) have prices still too high compared to rents. The boroughs of Queens and the Bronx, along with many suburbs, have buying favored.

Follow up:

Trulia reports data as Price-to-Rent ratios.  The lower the price to rent ratio, the better it is to buy rather than rent.  From Trulia:

  • Price-to-Rent Ratio of 15 or less: Buying a home is a better deal than renting for people planning to live in a home for at least five years. However, if the buyer is planning to live the home for less than five years, buying could be a better deal if the index is 10 or less, depending on moving and closing costs.
  • Price-to-Rent Ratio of 15 to 20: Renting or buying a home could be a better deal, depending on a prospective homebuyer’s tax bracket and if they plan to itemize their tax deductions.
  • Price-to-Rent Ratio of 20 or more: Renting is a better deal than buying a home, except for people planning to live in a home a very long time (fifteen years or more).

Here is a ranking of the 100 major metros with the most favorable for buying ranked higher:

So why aren’t housing sales picking up?  After all, there have been an estimated net 1.3 million new households formed in the three years 2009-2011.  That would seem to provide some upward pressure on demand for housing.  But that compares to a much larger number of households which have been removed from the home buying market due to the collapse of prices since the housing bubble burst. Since 2008 more than 5 million homes have been lost through completed foreclosures, another 6 million plus are in various stages of foreclosure and more than 4 million homes are expected to still be waiting to enter the foreclosure process.

So approximately 15 million households have been removed from the home buying population because of ruined credit resulting from foreclosure history, much larger than the net new household formation gains (1.3 million since 2008) and an estimated 3 to 4 million over the next 5 years (600,000 to 800,000 per year, compared to a little over 400,000 per year 2009-2011).

Adding these numbers up, 2008-2017 will see up to 5.3 million new households formed (net) and approximately 15 million households removed from the buyers’ market.  The pressure will be on rental prices to increase as all these millions who cannot get credit to buy keeping increasing the supply of renters.

Recent data has shown that residential construction permits have been increasing.  A large portion of the increase is coming from permits for multi-family units (apartments) indicating that the construction industry is reacting to the higher demand for rental units.

Econintersect would suggest that the price-to-rent ratio has little meaning when the demand for rental units is much greater than the demand for homes to purchase.  The numbers reviewed in this article indicate that price-to-rent ratios may well move even more in favor of buying being cheaper.  The problem will be that it may take most of a decade to work out of the huge supply of “disenfranchised home buyers.”

John Lounsbury

Sources:

Buying is Cheaper Than Renting in Nearly All Major Cities (Realtor Mag, 22 March 2012)

Amid Rising Rents and Record-Low Prices, Homeownership More Affordable than Renting in 98 out of 100 Major Metros, Press Release, 21 March 2012)

Housing Recovery Hinges on Household-Formation Gain, Case Says (Kathleen M. Howley, Bloomberg, 30 November, 2011)

Foreclosure Problem Still Has 2/3 to Run (John Lounsbury, GEI Analysis, 12 February 2012)

February 2012 Residential Permits Adding A Lot of Fuel for Expansion (Steven Hansen, GEI Analysis, 20 March 2012)









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