WSJ: Buy low, rent high

This article says people do it exactly the reverse.

Note the typical behavior. People want to buy when prices are up, and turn more wary when they’ve collapsed. Logically it makes no sense. Research out Thursday adds some hard numbers.

Real estate website Trulia.com has looked at major real estate markets across the country and asked: Is it cheaper to buy, or to rent?

Rent in Manhattan: Home prices there are way too high, says Trulia. (Ditto San Francisco.)

Buy in Miami. And Phoenix. And Las Vegas. And most of the other places that have been flattened by the crash. Homes there are cheap compared to rents.

The cross-over point is about 15 times annual rent, the company believes. In other words, as a rough rule of thumb, homes are probably fairly valued in a city when they cost about 15 times a year’s rent. So, for example, if you’re paying $10,000 a year to rent a place, think twice about buying a home that costs more than $150,000. Dean Baker, economist at the Washington, D.C. think-tank The Center for Economic and Policy Research, came to a similar conclusion in research on the subject in recent years. Fifteen times is the historic average, he said.

So what’s the multiple in New York right now?

About 32 times, says Trulia. The average two-bedroom condo or townhouse in New York city costs about 32 times as much to buy as it does to rent. Other major markets over 20 times include Seattle (24 times), San Francisco (22 times) and Portland, Ore. (22 times).

On the other hand Miami list prices are now about eight times annual rents, says Trulia. Phoenix is about 10 times and Las Vegas about 11.

Trulia’s data need to be taken with some caveats.

Trulia looked at list prices rather than actual transaction prices, so its figures for prices may be too high.

Furthermore drawing the cut-off point at 15 times rents may be on the low side.

5 Comments

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5 responses to “WSJ: Buy low, rent high

  1. So what’s the multiple in Greenwich?

  2. pulled up in OG

    Buy low . . . Sell low.

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  3. Since no one else wants to try, I’ll take a stab at it. Let’s assume a $2.5 million house as typical. At $7,000 per month you have an annual rent of $84,000 and a multiple of 29. People should rent instead of buying. Please correct me if you think the monthly rent is way off.

  4. Retired IB'er

    FYI article on NYC on this very point. Rent multiplier in late ’90’s was 8.1, hit a peak of 22 and has now fallen to 19, but Miller Samuel expect it to continue to drop:

    http://www.businessweek.com/news/2010-06-04/manhattan-empty-condos-may-be-rentals-as-leases-reign-update1-.html