The housing market has certainly been in the dumps lately, and now with the scandal involving flawed foreclosure paperwork on the part of a large number of lending institutions throughout the country, many people are taking a long, deep breath and pausing before jumping into the housing market. Hesitation might not be such a bad strategy anyway. If you have been considering purchasing a home in one of the country’s more expensive cities like San Francisco, Seattle or New York, you might want to wait just a bit longer, and in the meantime, rent.
When choosing between renting and buying a good way to know if you are truly getting your money’s worth is by taking the ‘price-to-rent’ ratio. This number compares the price of homes with the cost of renting, helping consumers know if they are going to pay a lot more for the privilege of owning their own home, or just a little more. To find this useful number, find two similar houses, one for sale and the other for rent. Divide the sale price by the yearly rent, and that is the rent ratio.
Historically the rent ratio throughout the US has averaged around 10 to 14. In the past few years the ratio has continued to climb until it topped out at close to 19 in 2006 when the housing market reached its price summit. In the most expensive cities the rent ratio went even higher than that, reaching the amazing number of 35 in Northern California, a historical record.
In New York the rent ratio is still quite high, and until the real estate market in the city has made the inevitable correction, it might be prudent to wait until buying makes more financial sense; when for just a small amount more money you will get the security and other less tangible benefits of owning a home than its ‘monetary investment value.’