A popular dinner table discussion topic these days is buy versus rent. Which is a better strategy today for personal investment planning and for minimizing living expenses? Uncertainties related to future housing prices, mortgage interest rates, and government tax policies do not allow for an easy answer.
Trulia.com has developed an index that aims to help navigate this precarious maze. The formula is pretty simple — take the median listing price for a two-bedroom home and divide it by the annual median rent of a comparable place. The result will show how many years of rent will buy you a house. They’ve published the results rating the 50 largest US cities. The most affordable place in the nation to buy is Las Vegas where the price to rent index was calculated to be 6. This means that only 6 years worth of rent payments will buy you the home you are renting. New York came out as the city where renting makes the most sense as it would take 39 years of rent to pay for a similar home.
Eight California cities made it to the list. Fresno was rated the 4th top city where it is better to buy than to rent, with a price to rent ratio of 8. It was followed by Sacramento in 8th place (price to rent ratio of 9). Los Angeles, on the other hand, was rated the 5th city in the nation where it is better to rent (price to rent ratio of 20).
Three Bay Area cities made it to the list. San Jose has price to rent ratio of 12 meaning that financially it makes more sense to own than to rent there. San Francisco’s ratio is 19 meaning that it is slightly more expensive to own than to rent. Oakland was between San Jose and San Francisco at 16, still slightly cheaper to rent. Other California cities on the list were Long Beach and San Diego, price to rent ratio of 14, and Sacramento, ratio calculated to be 9.
With quite a bit of hype given to the term “Renter Nation” over the summer of 2011 and even at the beginning of this year (see a story in USA Today), the survey shows that in most markets, it is still better to buy than to rent. In 36 cities out of 50 surveyed, the price to rent ratio was below 15—the cut-off number where cost of home ownership is getting to be even with the rental expenses. Home ownership rate is standing at 66 percent at the end of fourth quarter of 2011 according to the US Census Bureau. This is only a slight decline from the highest of 69.2 percent recorded during second and fourth quarters of 2004.
Based on the data available at the time of this writing, I calculated price to rent ratio in Palo Alto to be 16, making rental cost almost even with the cost of home ownership. Palo Alto continues to attract a large number of buyers. Over the last three months 87 single family homes were sold here, 71 of them were owner-occupied with only 16 being recorded with absentee ownership status.
This post originally appeared on PaloAltoCal.com