Moody's emphasizes that its ratios have limitations. They do not, for example, compare the quality of a market's housing stock. Perhaps the median-priced home is nicer than the average apartment, for example. Still, the ratios provide a rough idea of where you'd come out by renting instead of buying.
These ratios are most commonly used in comparisons of homes purchased with a mortgage. In such cases, according to Leonhardt and others, buying beats renting when the ratio is 15 or lower. But the advantages of buying at these ratios decreases in a downsizing scenario when a home is purchased with cash and there is no tax deduction for mortgage-interest expenses.
Based on the most current set of ratios, the depressed housing market in Cleveland is the only metro area tracked by Moody's where the rental equivalent of a $250,000 home is more than $2,000 a month.
Interestingly, homes outside of these 50 metro markets are even more reasonably priced, with the median U.S. home costing slightly more than 13.8 times an equivalent rental unit. For our case study, this translates into $2,055 in monthly rent on a home equivalent to one selling for $250,000.
Here is the current list of buy-to-rent ratios as of the first quarter of the year. The ratio over the 15-year period from 1989 through 2003 is also listed. It will help provide a view of the long-term relationship of home prices and rental costs. Also, we've calculated the monthly rental in each market for a home equivalent to one costing $250,000.
In nearly all cases, renters would come out ahead, and still have their $250,000 as a retirement nest egg.
Metro area Buy-to-rent ratio: Q1 2011 Buy-to-rent ratio: 1989-2003 average 2011 equivalent rent for $250,000 home
|Metro area||Buy-to-rent ratio: Q1 2011||Buy-to-rent ratio: 1989-2003 average||2011 equivalent rent for $250,000 home|
|East Bay, Calif.||29.59||27.05||$704|
|Fort Lauderdale, Fla.||13.09||12.23||$1,592|
|Inland Empire, Calif.||13.95||16.59||$1,493|
|Kansas City, Kan.||14.25||13.46||$1,462|
|Long Island, N.Y.||20.71||12.50||$1,006|
|North-Central New Jersey||22.67||17.07||$919|
|Orange County, Calif.||28.36||19.60||$735|
|Palm Beach County, Fla.||14.93||13.61||$1,395|
|Salt Lake City||16.69||14.23||$1,248|
|San Jose, Calif.||29.57||22.79||$705|
|Washington D.C. / Northern Va. / Maryland||17.24||13.40||$1,208|
|Metropolitan area average||13.83||12.00||$1,506|
This article was reported by Philip Moeller for U.S. News & World Report.
VIDEO ON MSN MONEY
At first glance this appeared to be an interesting article, but I do see some real problems.
1. There is an assumption that you can make 6% on your investments consistently. I wonder how many people have been able to do this in the past 10 or so years (I know I haven't). Without this consistent return, the whole article becomes bunk.
2. This statement also needs some serious consideration " the ratio compares the median price of a single-family home with the annual rental cost of a typical apartment." This is a stupid comparison, because it is apples to oranges. You should be comparing the price of a single family home to the rent of a single family home, not to renting an apartment. They are likely comparing an average house that is1800 sq ft to an average apartment that is probably less than 1000 sq ft.
I also like a house as being a real, tangible asset that provides a direct benefit (i.e. a place to live). Stocks can easily go away, but even if the value of your house goes down it still provides shelter. Furthermore, I like houses because they add diversity to your investments. Of course, neither stocks nor houses have been good performers lately.
So this only works with people that have too much house to begin with. Saying that their basis is that you will have $250,000 after paying off the rest of your mortgage is crazy. If that is the case, most people probably are close to paying off their loan or have a huge house that they want to sell. If you are in that position, I doubt you need to look for ways to save money.
It seems that MSN likes to give these brilliant ideas on how to save money but only the rich can really put them into effect for good returns.
I think you could make a fortune going against the prevailing wisdom at any given time. So get up tomorrow and ell your gold, buy a house, when the market recovers, sell your house and use the profits to buy gold. While your buying a house, get ready to buy some stock the next time you see Dow loses 2011 profits in a day. Remember you have to be fast.
Seriously - using internet filler stories to base financial decisions on is a bad idea. LOL only believe the comments.
"Set aside another $5,000 for annual home maintenance expenditures. Utilities -- heating, cooling, water and sewage, cable, Internet and phone expenses -- would generally be higher for homeowners than renters. To make the comparison easy, tack on $2,000 a year for those higher homeowner utilities."
These are very generous estimates. 400 per month for repairs on a house. This assumes the house is very very old. Homeowners pay more in utilities. How is that? This assumes that the homeowner has a house from 1950 that is 4000 square feet and the renter lives in a 600 square foot apartment?
Renting is the way to go for me at the moment. Being that I'm not wealthy (not poor either) I do enjoy the flexibility renting gives me to pursue life/work opportunities anywhere in the country/world. Much easier to terminate a lease when its up than it is to sell a home. At least this is generally true for the majority of the country at the moment.
I also enjoy not having to worry about expenses like water pipes bursting, air conditioner's going out etc. I just pick up the phone and put in a maintenance request. Emergencies are generally addressed within hours; routine stuff within a day or two. (my experience). Plus there are gorgeous women in my apartment complex. I enjoy sitting on the balcony drinking a beer as they cool off in the swimming pool below. (don't tell my girlfriend...awe who am I foolin...she already knows...)
My utilities are pretty cheap, its just me in a 1000 sq ft Apt. don't have to pay to heat/cool 2000+ sq ft. Liberals would probably appreciate the fact its a little more efficient and easier on the earth, but I don't care about all that tree hugging crap.
When I finally get tired of running around and find a community I want to plant roots, grow old and die in, hopefully I'll have squirrled away enough cash to pay 75% or more of the home value... dread dealing with banks...
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