Should I buy or I rent?

By Kevin Chambers

Anyone else think of the 1982 song “Should I Stay or Should I Go” by the Clash? Although the traditional American Dream is to own a home, sometimes it makes more financial sense to keep your landlord and stay in a rental. But how do you know?

An interesting indicator in the rental market is called the Price-to-Rent Ratio. The PRR compares the affordability of renting vs buying. A lower PRR indicates it is a more favorable market for buying a house. A higher PPR says it is more likely that renting is a better financial decision. However, keep in mind that a city in which buying and renting are very expensive might have a similar ratio to a city in which rents and housing prices are very low, as long as the ratio between the two is similar. You can see a trend of PRR increasing across the board.  That means in most major cities, renting is more attractive now than 7 years ago.

The US housing market is one of the largest markets in the world. It is extremely crucial to the total economy. Therefore, sometimes it is hard not to look at the national numbers reported for the housing market. However, it is also important to remember that housing markets are inherently local.

The same cities that have seen the largest increases in housing prices have also seen both big increases in rent prices as well as increases in PRR. This simply means that while prices have increased for both buying and renting, they grew slower for rent prices. Cities experiencing flat real estate markets have also seen stagnant rental markets. In the hottest real estate markets, it is becoming less attractive to own a home, especially because renting is relatively cheaper.

Looking at the PRR is one consideration when making the decision to buy or rent.  If only that decision could be made so simply. But life is complicated and when making your housing decision, you will need to consider many other factors than just a ratio of house prices to rental rates.  So although the PRR is an economic indicators of whether the housing markets are fairly valued or in a bubble, it says nothing about the overall affordability of housing in a given market.