I am retired and take educated guesses on all things financial.

July 23, 2009

July 23, 2009: An Investment Decision: Rent or Buy?

How you decide to best allocate housing monies is not often discussed in a financial magazine or blog. Yet,housing generally consumes a large part of our income (unless you are still freeloading off mom and/or dad) and is considered by many financial planners to be the average person's largest single "investment".

What to do in today's housing market? Buy? Rent? Live in your Prius? Discounting option #3, here is a sane approach to determining whether renting or buying is appropriate.

Using a simple Price to Rent (PR) ratio over the largest fifty metropolitan areas which was arrived at by calculated by dividing the annual rental cost for a unit by the price of a single family home in the same area, I arrived at the ratio of 13.9. Thus, a ratio of OVER 13.9 signifies that renting makes more sense than buying.

For example, the average price of a home in a section of Portland, Oregon is $248,600and the median rent is $813. The PR Ratio is 25.5 and indicates that renting is much better than buying. Some other cities where renting is preferable to buying include Seattle,San Francisco, Salt Lake City, San Jose, Washington D.C.,Los Angeles and Chicago.

On the other side of the coin, the average price of a home in a section of Indianapolis is $94,000 and the median rent is $707. The PR Ratio is 11.2 and indicates that buying is preferable to renting. Some other cities where buying is preferable to renting include Memphis, Pittsburgh, Dayton (OH) and Cleveland (OH).

Obviously, there are opportunities in all markets that contradict this simple decision process, but as a rule of thumb it works well - especially for the less sophisticated home buyer. Watch interest rates, the state of the home market in your area and, importantly, the desirability of the area before renting or buying.

On a national average, the medium home price in late June was $169,000, the median rent $1013.00 and the PR rate was 13.9.

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