The Rent Ratio
This New York Times article is a very interesting demonstration of determining whether you should rent or buy.
This is for those of you who want to geek out on numbers a little this morning.
This is a great way to look at the situation without getting all hung up on predictions about where the market will go next. Because, as I’ve spoken about many times, you can never guess exactly when the market will be at its lowest point until that point is gone. But, if the conditions are right for you now, that is the best measure.
Basically, you take the price of the home for sale and divide it by the annual rent of a comparable rental home. If the resulting number is higher than 20, then continue renting. If it is below 20, then you are better off buying. Got it?
So, I want to apply this demonstration to a case here in Phoenix. Let’s take, for instance, 2214 N 12th Street, which is my listing.
This beautiful historic property is listing for $189,000. It is a 4 bedroom, 2 bathroom, 1,600 square foot home in a popular neighborhood. Let’s say you buy it with 10% down at 5.5% interest and a 30-year loan. You are looking at about $960, principle and interest. Add $115 per month for taxes and $70 per month for mortgage insurance and $40 per month for home owners insurance (all rough estimates). This home costs about $1,185 per month.
So, what should we compare it to? I did a search of 4br/2ba homes, minimum 1,400 square feet that are also in popular neighborhoods in CenPho. I found no 4 bedroom homes. So, I found eight 3 bedroom homes in the area. The cheapest at $1,050 per month and the highest at $2,995.
Just so you know I’m not cherry picking an example that best makes the case for buying, let’s take the cheapest one, at 1805 E. Willetta, as a case in point. I’ve posted all of the homes in this study here for your reference.
$1,050 x 12 months equals $12,600 annual rent. (You could keep much of that money by owning –just had to say it.) Divide that in to the price for the home above and you get a factor of 15. So, even in this case it is better to buy.
On the high end, let’s take 902 W. Verde as an example. That one is renting for $2,750 per month. So, that is $33,000 per year going to a landlord. That results in a Rent Ratio of 5.7.
I think this is pretty accurate analysis, especially as you consider that these are all 3 bedroom homes, and any 4 bedroom homes would certainly cost more to rent.
So, what have we learned, besides how fun numbers are?
We’ve learned that you can divorce yourself from the daily back and forth speculation about where the market is going so that you can make a decision that is good for you.
Will the market go lower? I don’t know. I doubt it. Will it go higher? Probably, yes. How quickly, we don’t know. But we know that prices have been going up in more popular neighborhoods in CenPho.
But I’ll say it again: you can never find the lowest point until it is gone. If you buy when the market is generally low and sell when the market is generally high, you are in good shape. This ain’t the stock market, after all!
If you would like to get out there and explore the market, or if you have specific questions, please give me a call at 602-456-9388.
