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A new metric for the rent vs buy equation

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File this one under “things that usually make me tar and feather,” but the rent-vs-buy dilemma can be so all-consuming that any measure that makes the decision easier is worth discussing.

My take on the current conversation between rent and buy is that the market is too crisp for new homeowners without any existing capital to carry on (the median cost of a house in the 1970s was 3x the median income ; in 2021, it was 6x ).

That said, not all markets are created equal – and that’s exactly where the price to rent the report is practical. Someone who bought a house in rural Kentucky in 1995 is sitting on a very different lot than someone who bought a similarly priced house in San Francisco. And while it doesn’t seem logical that rents don’t increase in proportion to real estate costs, it’s true: just because a market is expensive to own doesn’t mean it’s expensive to rent, and vice versa. poured.

The price-to-rent ratio can also be useful in assessing whether an area is “fairly priced” or is in bubble territory (while bubbles are ideal for investors who get out before they burst, timing the sale of your principal residence is subject to off-market life factors, making it a risky game).

To determine the price/rent ratio in a given area, divide the median house price speak median annual rent. Generally, a price to rent ratio above 21 means it is cheaper to rent in that area.

In 2019, the price-to-rent ratio in San Francisco is over 50, the highest in the country. For every $1,000 you would spend on rent, you would have to pay $601,362 to buy something comparable (for example, a home that rents for $4,000/month would cost about $2.4 million to buy). At this rate, it is cheaper to rent than to own, as the estimated monthly mortgage payment would be north of $10,000.

Compare that to a place like Oklahoma City, where every $1,000 you spend on rent would cost $188,109 to buy something comparable. When given the choice of $2,000/month. rent or mortgage for a home that costs $376,000, you’ll probably prefer the mortgage. (The price-to-rent ratio in OKC is 15.7.)

The price-to-rent relationship locates a decision that is often treated as a black-and-white matter. Is it better to rent or buy? Well, it depends on three things: location, location, location.

If things like the dilemma between renting and buying make your head spin and you feel like getting back to basics, this is a (free) mini-course that will walk you through a drop curated – day by day – of my best articles and episodes for beginners.

Katie Gatti Tassin is the founder of Money with Katie, the newest member of the Morning Brew family. Buy it Money with the Katie store and manifest your #RichGirl lifestyle.