Oh Boy, Let’s Visit the Buy vs Rent Argument Again

There has been a bit of talk in the last few days about a New York Times story published on Tuesday that once again revisits the subject of buying vs. renting: In Sour Home Market, Buying Often Beats Renting

New York Times: Price-to-Rent RatiosIn some once bubbly markets, prices have fallen so far that buying a home appears to be a bargain, based on a New York Times analysis of prices and rents in 54 metropolitan areas. In South Florida, Phoenix and Las Vegas, house prices — relative to rents — are as low as in places that never experienced a bubble, like Indianapolis and St. Louis.

But in a handful of other areas, including San Francisco, Seattle and Portland, Ore., house prices remain significantly higher than they were before the bubble began. People who buy a home in these areas will face higher monthly costs than if they rented, even after taking tax deductions into account. As a result, buyers are effectively betting that prices will rise enough in future years to cover the difference.

A similar AP article from the day before (apparently based on a separate study) tells the same story: Should You Buy or Rent a Home? Cost Gap Narrows

Renting remains far more affordable than owning in traditionally pricer markets such as New York. In Manhattan, the gap is more than $4,000. Renters will save $1,000 or more a month in metro areas such as Los Angeles, Seattle, San Diego, San Francisco, and San Jose, Calif.

The New York Times article includes a nifty chart of the price to rent ratio of 46 metro areas around the country. Their chart of five metro areas in the west is shown at right in the quote above. They also published an updated version of their excellent buy vs. rent calculator that we have recommended here numerous times in the past.

We have visited the rent-vs-buy discussion here many times before, most recently in August, October, and January. I’m not really interested in rehashing everything that has already been said on these pages in recent months, but I will attempt to add some new thoughts to the discussion of this week’s articles.

First up, I wanted to point out a post by local title/escrow company The Talon Group in which Chris Lodge attempts to debunk the New York Times’ claim that Seattle’s price-to-rent ratio is still unusually high.

The rent vs buy ratio they use seemed simple enough to calculate. We just need the average sales prices in an area along with what the annual rents are for the same area.

For March, we found that we had an average sales price in Seattle of $493,971.

Average Rent, according to rentbits.com, were $2069 for all home rentals in Seattle. On a side note, here’s a graph of the rental rates for Seattle as well going back 12 months.

Using the NY Times model above, lets put in our own calculations:

$493,971/($2069*12) = 19.89.

Thats right, we come in right at the benchmark of where you should think about buying rather than renting.

While I appreciate Chris’ attempt to run the numbers for himself, there are a couple things that are missing from his assessment. In order to get any really useful information from the price-to-rent ratio, you need to have something to compare today’s data point to. This means running the ratio using the same data sets for price and rent over a long period of time. Today’s ratio of 19.89 according to Chris’ sources doesn’t really tell us anything, because we don’t know what those same data sources would have put the ratio at last year, two years ago, five years ago, etc.

The other thing that Chris seems to be ignoring is that the New York Times ran their ratios for 46 regions across the entire country. Speaking from experience, I can tell you that it is very tricky to find data sets that are uniformly available for that many metro areas. Running Seattle’s ratio with Chris’ particular data set and coming up with 19.89 doesn’t tell us how Seattle’s ratio compares to all the other cities, which was half the point of the New York Times article.

Moving on… Let’s get a little more context on the buy-vs-rent discussion. Over at the Center for Housing Policy they have a nifty online tool that allows you to compare the costs of buying or renting a home to the average income of various professions.

Here’s what the buying situation looks like for an assortment of ten occupations:

Center for Housing Policy

Now compare that to the rental picture for those same jobs:

Center for Housing Policy

So is someone really going to sit there and try to tell me with a straight face that renting is still not the most financially sensible choice for most people in the Seattle area? Granted, things are a lot less out of whack than they were in 2006 and 2007, but in many neighborhoods around Seattle there is still really no comparison. Everett, Federal Way, Kent… it may make sense to buy. But close-in, in Seattle, Bellevue, or Kirkland, the scales are definitely still tipped in favor of renting.


About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

40 comments:

  1. 1
    Chuck Ponzi says:

    I don’t know about you, but I’m buying and expecting the pink ponies to pay my mortgage.

    It worked for the past 2 years!!!

  2. 2
    Andrew says:

    When we first moved to Seattle in 2008 the rental house we got in Wedgwood cost us $1950/month. The landlords had just bought the place a couple months before we moved for $440k, plus they had to do a bunch of cleanup and rehab. The previous owner had died and the heirs let it sit for about a year and a half from what I’d heard. I’d guess they spent at least $30k fixing up the place. Probably more.

    Even at 5% on a 30 fixed with 20% down P&I alone would have been more than the rent. Add in property taxes and the difference between renters and homeowners insurance, plus the water/sewer/garbage the landlords paid for us, and there’s no way, even after income tax benefits, we could have bought for a monthly payment comperable to the rent. And then there’s the maintenance and repairs that would have to accounted for.

    Now, today, with the drop in house prices that might be a different story. I don’t think the rent has gone up. When we moved out in 2009 they said they weren’t planning to increase the rent for the next tennants.

    The house we’re renting now is in Carnation. I’d guess that it would sell for $300k today. At $1600/month I’d have to run the numbers carefully to see which would be better, and the assumptions made on investment returns, future price gains in the house vs selling costs would probably be what made the difference on which way that equation fell out.

  3. 3
    Raj says:

    Now I am renting a 2 bed Town home for $1200 per Month (was more than $1500 in 2007 & 2008). If I buy a 2 bed Town Home then I have to pay around 600 per Month only as HOA & PT (300(HOA) + 300 (Propert Tax)) in addition to Mortgage. So Am I doing right?

  4. 4
    Sleepwalker says:

    Software programmers don’t make anywhere near 75k a year. That’s even on the low side for a software tester. I certainly couldn’t hire a software developer for less than 3 figures.

  5. 5
    LA Relo says:

    The only problem is that we renters are second rate citizens.

    Only when you wise up, buy a house and thus have a forced savings plan are you a decent citizen.

    Then, you get to spend your mortgage payment – that you can’t afford anyway – on $800 cell phones, $1200 jeans, and $500 fake Louis Vuitton hand bags while the banks pretend foreclosures are limited to subprime and you talk about how much equity you have.

    Oh wait that was 2006. Where’s my H2?

    Renting is really no different than most of the underwater “homeowners” out there right now, except when my water heater breaks it doesn’t cost me a dime!

  6. 6
    EconE says:

    I posted a comment on the NYT disputing the Reporters facts regarding the supposed $7900 Beverly Hills rental condo that was used as an example in the article. Directly across the street in an identical building, 2BR’s were listed $4500

    That comment was never posted.

    The $4500 rental is now listed at $5500

    http://losangeles.craigslist.org/wst/apa/1704085825.html

    Here is the original (now expired) listing

    http://losangeles.craigslist.org/wst/apa/1692663488.html

    Gotta love transparancy and honesty!

  7. 7
    EconE says:

    Oh…and comment #163 was priceless. Here it is in it’s entirety…

    This is really funny, because in 2006 this SAME AUTHOR wrote:

    “Throughout the 1970s, ’80s and ’90s, the average rent ratio nationwide hovered between 10 and 14. In the last few years, though, it broke through that historical range and hit almost 19 by the time the housing market peaked, in 2006.”

    Now, suddenly, 20x is good, when in 2006 it was the peak?

    And “The rent ratio has long been higher in New York and San Francisco than most places” is also untrue for NY. CNN Money published the 15-year average for NY at 11.7x, and at 27.4x for San Francisco.

    I do wish the Times would stop shilling for the industry so they can get the ad revenue. Because when it’s possible to look back and see how what an author wrote just 4 short years ago completely conflicts with what he’s writing today – and with the objective facts – it detracts from the credibility of the entire paper.

  8. 8
    Scotsman says:

    RE: EconE @ 7

    The Times long ago lost what credibility it may have had. No wonder it’s going broke.

  9. 9
    JJG says:

    So elementary school teachers make more than accountants or police officers. Is this correct? Is the low-paid teaching career a myth when compared to other professions?

  10. 10
    EconE says:

    RE: Scotsman @ 8

    NYTimes is never going broke. Carlos Slim owns it.

    http://www.nytimes.com/2009/02/16/business/media/16slim.html

    Oh…BTW…I tried to italicize the comment in post #7. The whole post, other than my first line was the post #163 from the NYTimes article.

    Better check it out before they delete it!

    And here is the article referenced by the poster…

    http://www.nytimes.com/2008/05/28/business/28leonhardt.html

    It was actually 2008 instead of 2006.

  11. 11
    CCG says:

    RE: LA Relo @ 5

    Yep. And after they default on the mortgage and become squatters so they can keep buying the BMW/Prada/Gucci crap – got to keep that coming in at all costs, because “we deserve it”, after all – I’m sure they feel even more smugly superior to us renters who foot the bill for it all through taxes and inflation.

  12. 12
    Ross Jordan says:

    By Sleepwalker @ 4:

    Software programmers don’t make anywhere near 75k a year. That’s even on the low side for a software tester. I certainly couldn’t hire a software developer for less than 3 figures.

    At Microsoft, who supposedly aims to pay around 66th percentile of the industry, starting salary for engineering is around 70K-80K.
    I’ve seen government programming jobs in the 50-60K range, and at startups, wages can be a lot less (with the allure of future equity).

    The salary suggested here is certainly plausible.

  13. 13
    ray pepper says:

    ” Everett, Federal Way, Kent… it may make sense to buy. But close-in, in Seattle, Bellevue, or Kirkland, the scales are definitely still tipped in favor of renting.”

    Agree 100%….

  14. 14
    ray pepper says:

    BTW….anyone notice: STSA today? (Sterling Savings) up 70% and ticking higher after hours…FTBK up another 30%,,Banr up 100% in the last month….The regionals are on FIRE!

  15. 15
    BacktoBasic says:

    Real estate is local. Job market, location and many factors. How much it will cost your monthly to live in space station vs. on the ground. what do you think price/year rent ratio at 50 in Beijing and price/year rent ratio at 5 in Detroit. Even in Seattle area, the ratios are quite different from region to region. There is reason that number differs. Do you want to commute from Federalway to Everett and burn 10$ gas each way or pay more to live in Bellevue and spend 500$ more for rent. Did you count time as cost in your equation?

  16. 16
    S-Crow says:

    RE: ray pepper @ 14 – Pump and Dump, be careful.

    Beware of tinted window vans pulling up at closing time to any the aforementioned businesses. It is Friday. Lot’s of speculation surrounding FTBK and STSA. The CityBank closure and subsequent aquisition by Widbey Island Bank created a delay for one of our transactions earlier. Fortunately, resolved.

  17. 17
    SummitSeeker says:

    Price/Rent ratios like those described in the old grey lady are fairly meaningless, since interest rates, which have a major impact on affordability, do not factor into the calculation. A 20 ratio could favor renting or buying, depending on the rate. That’s why it is better to look at mortgage+hoa vs rent (property taxes roughly cancel the mortgage interest tax deduction in most cases).

  18. 18
    ray pepper says:

    RE: S-Crow @ 16

    agreed….but after all only 50 banks have been shut down of well over 7000. They project less then 150 will be shut down this year.

    Not that I’m buying but its hard to ignore 70% gains and an additional 14% after hours. Someone is making some serious cabbage!

  19. 19
    Chris Lodge says:

    Hi Tim,

    You make some great points in your post. I do agree data trends are important. I’m looking into refining those numbers into something more meaningful for the surrounding areas of Seattle. Real estate is local, especially outside the metro area. Since we maintain our own database for the local Puget Sound area, unfortunately we aren’t in the position to compare outside our area.

    My intent wasn’t to say “buy now” in Seattle. I think the conversation should be had though. It’s a little frustrating when these headlines are coming from the national “experts” that are often times more interested in creating drama. People may lose out when they focus on these headlines, and stop looking. There are many advantages of homeownership especially if you can find a good deal out there.

    Frankly I think it’s more valuable to compare apples to apples anyway. I’ve been reading your guest post from 2007 (Renton vs Buying: The Realities of Home-Ownership), and I think you hit the nail on the head there. The overall costs associated with buying vs renting can be a huge burden, especially for those that are looking at homeownership as an investment.

    Thanks for noticing,

  20. 20
    HappyRenter says:

    The question is also whether buying a house makes you happy.

  21. 21
    Scott Weitz says:

    RE: ray pepper @ 18

    Isn’t accounting fraud great?!

    Gotta love the repeal of mark to market….if you’re a bank executive.

  22. 22
    HappyRenter says:

    I played around with the NY times mortgage calculator

    http://www.nytimes.com/interactive/business/buy-rent-calculator.html

    I entered a home of 350,000$, 20% down payment and a rent of 1,200$ and home appreciation 4% per year and left the rest unchanged. The result is that it is worth buying if you live there 10 years or longer.

    What does it mean? If you sell within 10 years you actually lose money, if you sell after 10 years you will make a profit. After 30 years buying will have cost you $255,315 less than renting.

    The question is whether you could have offset this by investing the difference between mortgage and rent (+ the down payment). Alone by investing the down payment of 70,000$ with the total stock market index and a yearly gain of 6% your return will be a big chunk of those $255,315.

  23. 23
    Kent says:

    It’s all relative. When I moved my family of 4 moved here last summer we looked at rental houses for nearly a month. We were completely underwhelmed by what we saw in our price range of $2,500/month. Here’s what we needed:

    1. minimum of 3 bedrooms with enough indoor space for two young boys to play and romp around. (thus, no condos or apartments)
    2. a family-friendly neighborhood with a good a elementary school.
    3. a yard, fenced. (again, no condos or apartments)
    4. a landlord who would allow a medium-sized dog.
    5. 20-minute max commute to my office.

    After looking at about a dozen rentals we found exactly one that met all of the above criteria, and it was right at $2,500 — and we could only live there for a year (the UW prof who owned it was coming back from an overseas sabbatical in 2011 and would be moving in).

    So sure, it’s easy to use “the average” rent compared to “the average” home sale price, but when you start dealing with realities of your family’s specific needs, the equation and your options change, sometimes considerably.

  24. 24
    ray pepper says:

    RE: Scott Weitz @ 21

    Scott, a guy posted this today on the yahoo Message Boards and it cracked me up. Its in/re to the run-up of STSA of over 65% without any news….:

    “Geez, days like today sure make you realize…

    there’s no insider trading going on. Perfectly natural to see a 15x increase in volume, with 66% gain today. No insider moves going on here….wink wink. The SEC is a joke.

    So true and so funny!

  25. 25

    I do think more people are pondering this question–is it time to buy or should I still rent? And it is a personal question with more points IMO than what you can factor into a graph such as commute, job security, etc.

    I’m relieved to say say that overall, today’s home buyers seem more realistic than those of the “subprime era” who wanted to buy because their friend just did. Most really think hard before making this huge commitment…and they should.

  26. 26
    Herman says:

    By BacktoBasic @ 15:

    Real estate is local.

    RE is not just local. It’s hyperlocal. We all may as well disregard charts and trends, because your house is unique and probably went up in value.

  27. 27
    HappyRenter says:

    By Kent @ 23:

    So sure, it’s easy to use “the average” rent compared to “the average” home sale price, but when you start dealing with realities of your family’s specific needs, the equation and your options change, sometimes considerably.

    It all depends on your preferences. A lot of people think that you need a house with a yard to grow children. I think it’s not necessary. It works in an apartment, too. But that’s a personal preference. Of course, it’s nice to have a lot of space and knowing that you might not have to move out for a long time. It’s a luxury, though. And the question is: can you afford this luxury? The same applies to owning a SUV instead of a sedan. Can you afford a SUV, though? A sedan works too but a SUV is more comfortable. So, you make decisions.

    What did you end up doing after leaving the professor’s house?

  28. 28
    2ktngo@gmail.com says:

    I don’t know where are all these great stats and numbers coming from.

    Realistically, price to rent in Seattle is between 20 and 25 at the most. May be some homes in high-end suburbs are at 28, but I’d like to see them. Rental price per square foot is about $.90 to $1/sqf for SFR and $1.80 to $2 for condos. For FSR, sales prices are close to $220/sqf in Seattle. At $10.80 to $12/sqf, annual rent multiple is under 22 for homes.

    Condos are selling at $250-$350 sqf. With annual rent of about $18-$24/sqf, no matter how you slice it, multiple of 28 is not there.

  29. 29
    Steve Roth says:

    I’d still like to know:

    What have historical long-term home appreciation rates (nominal/real) been for various periods in seattle over the last 20 or 40 years?

    I remember reading something once that suggested 4%ish, but can’t remember what period it was referring to, or whether it was nominal or real.

  30. 30
    The Tim says:

    RE: Steve Roth @ 29 – I got your email requesting a table like that. I’m planning to post something like that next week.

  31. 31
    pfft says:

    By Scotsman @ 8:

    RE: EconE @ 7

    The Times long ago lost what credibility it may have had. No wonder it’s going broke.

    you mean just posted a profit?

    New York Times posts profit, says ready to take on WSJ
    http://news.yahoo.com/s/afp/20100423/tc_afp/usmediaindustrynewspapersearningsinternetnytimes

    vanity fair had a great article about the sulzberger family but it is no longer available in full on the site.

  32. 32
    Scotsman says:

    RE: pfft @ 31

    Educating you is hard work- the rosy tint on your glasses is so thick. Sure, they made a profit, and if they continue to make that same profit for three more quarters, four total, they will finally have restored the $74M they lost in the first quarter of last year. That puts them back at zero. Oh, except for the money they lost after that. . .

    But here’s the real story, this profitable quarter over the same quarter last year:

    “Revenue declined 3.2 percent year-on-year to 588 million dollars”
    “Advertising revenue declined 6.1 percent in the quarter to 313 million dollars ”
    “The Times Co. brought down operating costs by 18 percent in the quarter to 535.2 million dollars, helped by a series of job cuts ”

    Those jobs won’t be coming back. And from the attached comments section:

    “I canceled my subscription to the NY Times years ago and don’t miss them one bit. They are a poor excuse and example of journalistic integrity”

    Bingo. It’s a dying franchise. Slim may have deep pockets, but eventually he’ll move on to other interests, because any profit equation with a zero in it gets old fast.

  33. 33
    Sleepwalker says:

    I work at a software company and I don’t know a developer making less than 100k.

    RE: Ross Jordan @ 12

  34. 34
    One Eyed Man says:

    RE: Scotsman @ 32

    “It’s a dying franchise.”

    As the zen monk said: “We’ll see.”

    The Times has the same problem every other content provider has in the new found information age. How to get paid for content. Google, Comcasts, Facebook and a host of others have now become the gate keepers of the information machine and they extract a toll just like Goldman and the other gate keepers to financial markets extract a toll to obtain money. And just like all the other content providers, the NY Times needs to find a way to get past Billie Goat Gruff without losing their shirt. If they can do that, they can survive. And if I’m not mistaken, Carlos Slim controls the biggest telecom provider in Mexico. He and his kids may decide its not worth the trouble and the risks to marry a delivery system to the content. AOL and Time Warner couldn’t make it work. And Carlos may decide its a losing proposition and walk away. But I don’t think its quite as cut and dried as you make it out to be Scotsman.

    Besides, the NYT isn’t much of a proxy for the economy anyway. And if that’s true what’s the relevance of this discussion anyway except to feed our egos as we all try to one up each other in an intellectual bored game. Both of you have more relevant things to say about the economy and real estate than to bicker over whether the newspaper genre is a buggy whip.

    In order to put the break even time period in the own vs rent equation below 10 years, homes have to begin appreciating in value again at atleast 2.5% to 3% or more per year and either deflation in home prices or inflation in rents (and probably the general economy) will have to first bring the the gross rent multiplier under 20. And that’s assuming that 30 yr mtg interest rates stay below 6% as well as several other things. The heart of the issue is whether there will be a readjustment of the GRM back under 20, what long term rates will be, and whether we will have sufficient inflation to make leveraged investments profitable. If you can tell me that, you can tell me whether a house is just a home, or whether its potentially a profitable investment for the owner occupier.

    IMO its a game of probabilities. I can’t tell you the answer, but I can tell you in the short term I wouldn’t be putting new money on it. In the long run, I wouldn’t bet against the Fed cause that’s a little like betting against the referee. But then again I was 38 when I bought my first house, I’ve always paid cash for cars, I don’t buy lottery tickets and I was 34 before I had a credit card. I generally don’t risk buying what I might not be able to pay for. But, I’ve seen a lot of people get rich by taking on risks with leveraged investments I shy away from. Whether I’m smart or just as smooth as a Ken doll is probably an open question.

  35. 35
    David Losh says:

    RE: Scotsman @ 32

    It’s really hard educating you!

    The publication is for the sole purpose of public opinion. You add a link back to a news source and it becomes the truth for you.

  36. 36
    Scotsman says:

    RE: One Eyed Man @ 34

    Re: NYT: There are two parts to their business. The first is creating demand for the product. Second is getting paid for it. I submit they are failing at the first, slowly perhaps, but failing none the less. If no one wants the product getting paid for it is mute. If the public does want the product, getting paid for it is a much simpler problem to solve. In media, credibility, comprehensiveness, and timeliness are keys to success. The NYT is failing on several fronts, and their circulation numbers prove it. But you’re right in that it certainly isn’t a proxy for the economy at large.

    With regard to rent verses buy, if you think it through you’ll realize that we don’t need “inflation to make leveraged investments profitable”, and that in fact inflation/deflation are adjusted out in the final analysis and play no part in creating real value. Currency devaluations and their affect on real wages will probably have more influence. But that’s another topic.

    Whether you’re smart, or “just as smooth as Ken doll” I have no idea. Do you still use Aqua-Velva? I’m tempted to accuse you of being as verbose as Barbie (might be), but I won’t. Would she understand?

  37. 37
    wsuengineer says:

    RE: Ross Jordan @ 12

    I think the software engineer salaries posted here are 5 years old. Maybe a small start-up would pay entry level salaries in the 70s. The average 5 year professional grade software engineer makes 6 figures. Very few entry level employees run out and buy a home. They usually spend a year blowing their money, and several years saving up the down payment.

    Regardless, earning six figures as a home owner in Seattle is peanuts. You still need 2 incomes. We own a nice SFH in Sammamish, and over 50% of the people in my neighborhood work at Microsoft and have working spouses.

  38. 38
    Astro Kermit says:

    By Sleepwalker @ 4:

    Software programmers don’t make anywhere near 75k a year. That’s even on the low side for a software tester. I certainly couldn’t hire a software developer for less than 3 figures.

    Software testers make $75k on the low side? Who pays that much?? If it is Microsoft with their crappy bugs, then they have a lot of explaining to do.

  39. 39
    Mikal says:

    RE: Scotsman @ 36 – Verbose? Is that the pot calling the kettle…..

  40. 40

    RE: wsuengineer @ 37

    SWE Salaries

    Avg is $101K, but that’s with wraprate [pension, benefits, leave, etc, etc]; if you’re a contractor or own your own company wth no bennies, you’ll need about $40K extra to equal an employee with good benefits and retirement…..trouble is, most of the “Y” and “X” generation move around so much chasing base pay from company to company, they usually don’t have a good pension plan anyway.

    http://www.glassdoor.com/Salaries/average-software-engineer-salary-SRCH_KO8,25_IP5.htm

    The problem in a nut shell is the software engineering jobs are almost all for experienced workers [5+ yrs with S/W license type proof too], not college graduates. Software engineering, management analysts, accountants and college instructors are the only college jobs available in the top 30 with the highest employment growth….the rest are basically unskilled out of highschool jobs. It’s grim out there and not getting better, engineer or no engineer credential.

    http://www.bls.gov/news.release/ecopro.t06.htm

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