Where to Rent and Where to Buy

10/11– Here is Forbes’ take on both Zillow and Trulia’s Rent vs Buy calculations. (h/t Cliff Freeman)

ORIGINAL POST

We have done many posts on the benefits of homeownership believing that owning a home remains a major piece of the American Dream. We have also posted on the pure financial benefits of purchasing a home. Today, we want to concentrate on one aspect of the financial decision in buying: is it less expensive to rent or to buy.

According to the new Rent vs. Buy Index by Trulia, it depends on where in the country you live. Pete Flint, CEO and co-founder of Trulia explains:

Choosing to buy a home or continue to rent is a highly personal financial and life decision that many people are grappling with right now. In the wake of the foreclosure crisis and ongoing struggles in the industry, we created the Rent vs. Buy Index to provide a bit more context about current marketplace conditions to help prospective buyers make the right decisions for their own personal situations.

Trulia calculates the price-to-rent ratio for the 50 largest U.S. cities using the average list price compared with the average rent on two-bedroom apartments, condos, townhomes and co-ops listed on Trulia.com. This Index considers both the total cost of home ownership against the total costs of renting (examples of costs for both home ownership and renting outlined below).

Sample Price-to-Rent Ratio Calculation:

Average List Price: $90,445.60

Average Rent: $936.30

Price-to-rent ratio:    $90,445.60 ÷ ($936.30 x 12) = 8.05

Trulia then takes each region and grades it by the ratios below:

• Price-to-Rent Ratio of 1-15: It is much less expensive to own than to rent a home in this city.
• Price-to-Rent Ratio of 16-20: It is more expensive to own a home in this city. The total costs of ownership of a home in this city are greater than the costs of renting, but it might still make financial sense depending on the situation.
• Price-to-Rent Ratio of 21+: The total costs of owning a home in this city are much greater than the costs of renting.

To see how the largest 50 cities in America ranked on this month’s rent vs. buy index, click here  and scroll down the page.

Bottom Line

We still believe that the majority of the more important benefits of homeownership are non-financial. However, for those who need to further justify their purchasing decision, this information may help.