Let’s try another rent vs. buy exercise to see if “all the excesses have already been removed” as some have claimed. Rather than delve into depth on a specific randomly-selected Seattle-area neighborhood, let’s instead look at what a specific type of house might cost you in multiple Seattle-area neighborhoods to rent vs. how much it would cost to buy.
The prices quoted below are for a 3-bed, 2-bath single-family homes with 1,750 to 2,000 square feet. For the rentals, these are based on actual houses I found currently on the rental market. For the sales, I used sale records of actual prices that people have paid in the last three months. Where possible, I have located multiple samples that match the description above and taken the average price.
To calculate the monthly payment (principal + interest only), I’ll be using a 5.15% interest rate (roughly the average over the last three months), (generously) assuming 20% down on a 30-year mortgage. Keep in mind that the true cost of buying also includes insurance, taxes, maintenance, and a host of other costs generally not paid by a renter. For a more detailed breakdown of the total costs (and tax benefits) of buying, hit up this 2007 post.
I have also indicated the price to rent ratio, which is simply the home price divided by the total rent paid in a year.
|Area||For Rent||P + I||Home Price||Ratio|
According to a table of data from Fortune Magazine, Seattle’s price-to-rent ratio just before the local peak in prices was at 38.0, compared to a 15-year average of 23.3. In our table above, the average price-to-rent ratio for a 3-bed, 2-bath home in a handful of Seattle-area neighborhoods comes out to 24.3. Unfortunately, the two are not directly comparable since Forbes’ calculation included houses, condos, and apartments all among the rentals (which would drive the rental prices lower and the long-term average price-to-rent ratio higher), while my data was drawn only from single-family homes.
While home prices have come down some since I first researched the rent vs. buy discussion in detail back in 2007, a growing oversupply of repartmenting condos and accidental landlords is also pushing down rents recently, so the price-to-rent ratio hasn’t actually changed as much as one might expect.
Overall, price-to-rent ratios in the low-to-mid 20s still seems a bit high. Not crazy out of control bubble high, but it still looks like there is room for a bit more correction. Especially when you consider that the current prices are being artificially propped up by unnaturally low interest rates and the $8,000 tax credit in the midst of nearly 10% unemployment and a local economic scene that has yet to show any clear signs of turning the corner.
* [Updated, see comment #71 below.]