Should You Rent or Buy? Calculate It!

Julia Chang
Posted

ownerrenterIt’s the age-old question: To buy or to rent?

Common wisdom had always made buying the priority because a home was considered a solid investment that offered a surefire return. But the housing bust changed all that, making prospective homeowners much more cautious than in decades past. Nowadays, to rent or to buy is a much harder question to answer, and one that is largely dependent on where you live, according to the New York Times.

Nationally, home buying seems like a good deal due to low mortgage interest rates and home prices about 13% below their 2006 highs. In places like Phoenix, Las Vegas and Orlando, Fla., buyers can indeed find good deals, with the typical home price about 30% to 40% below 2006 levels.

But when you take a look at pricey urban markets like New York, San Francisco, Los Angeles, Washington, D.C., and Boston, buying is a less rosy proposition if you compare the region’s home prices against rent or income. Take the San Francisco Bay Area, for example: The current sale price of a home is about 20 times what it would cost to rent a similarly sized home for a year.

There are a number of factors that contribute to the disparities across the country. For one, many areas did not suffer as much as others during the 2008 recession and have seen strong job growth over the past few years. Also, low interest rates that entice homebuyers have a different effect in, say, Dallas than they do in San Francisco: In Texas, there is more room to build new housing to meet demand; not so in the already dense Bay Area.

To help potential buyers, the New York Times created a new online calculator that takes into consideration factors like a home’s price, the amount of time you plan to spend in your next home, the home prices’ growth rate, the rent growth rate, and tax rates, among other numbers, to compute the equivalent in rent. If you can find a rental for a similar type of home that falls under that amount, then it would make more sense to rent.

Still not sure if that’s enough information to help you make an informed decision? You might want to try taking your mortgage and home costs on a test run, and seeing if the monthly amount still fits within your budget.