Should you buy or rent?
WASHINGTON – June 7, 2010 – To rent or to buy? For millions of Americans, that is the question. The recent housing boom and subsequent bust seem to provide a clear answer – that given an affordable mortgage, we would all rather be buyers.
With the piercing clarity that is 20-20 hindsight, many people burned by the mortgage market may now think differently. After all, you can’t be foreclosed on if you don’t own in the first place. For them, renting has become not only the smart move, but also the sensible one.
“Many Americans are questioning if homeownership is an inherent element of their dream,” says Tara-Nicholle Nelson, real estate consumer advocate for real estate website Trulia.
Part of that dream is also based on economic common sense. Besides stability and status, owning a home can help build equity, improve credit ratings, and be a tax deduction. Given these benefits, the dream of homeownership is hard to give up. Much as sales of pickups and SUVs are rebounding, Americans seem to need only the slightest nudge to jump back into the housing market. In April, sales of existing homes rose 7.6 percent nationwide, according to the National Association of Realtors. For new homes, sales surged 14.8 percent, according to the National Association of Home Builders.
Measuring rents vs. sales prices
In some markets, however, people are better off renting. That’s because in these areas, the cost of buying a new home is still prohibitive, especially given tighter lending standards. To determine which urban areas are best for renters and which are best for buyers, Trulia surveyed the country’s 50 largest cities.
“We took current list prices of the average cost to rent or own a two-bedroom apartment, condo, or town home in a city and divided it by one year’s rents,” says Nelson. Trulia broke the data into three categories and scored each city on a price-to-rent ratio ranging from 1 up to more than 21. If the price-to-rent ratio is between 1 and 15 – that is, if the price to buy is only one to 15 times prevailing rents – it’s much less expensive to own than to rent. If the ratio is between 16 and 20, owning a home is more expensive but might still make financial sense, depending on the individual situation. If the ratio is higher than 21, the total costs of owning a home are much greater than the costs of renting.
With a price-to-rent ratio of 33, New York City is highest on the list. The average cost to rent a two-bedroom apartment was $3,537 and to buy a comparable unit was $1,383,612. The next highest city, Omaha, came in at 26, where the average cost to rent a two-bedroom was $870 and to buy was $275,844. At the opposite end of the spectrum, with a price-to-rent ratio of 8, is Minneapolis, where an average two-bedroom unit rented for $1,699 and sold for $153,843.
Of course, more expensive, high-end homes are on the market in Minneapolis, but “you can own a house [here] very easily for less than you pay for rent,” says Aaron Dickinson, a broker at Edina Realty in Plymouth, Minn.
Some rebounding sales prices
Dickinson says prices in many areas are still below peak levels and may have hit bottom – prices have been increasing the past four months after falling for more than 40 months, according to the Minneapolis Area Association of Realtors. One of the most dramatic changes came in North Minneapolis, where the median sale price in April jumped 171 percent year-on-year, to $64,000, he says. It is one of the city’s older neighborhoods, adjacent to downtown, with smaller homes targeted for first-time buyers. Dickinson adds that the area was hit badly by foreclosures, so the resurgence is relative.
Even in a city as expensive as New York, some argue now is the best time to buy. Neil Binder, principal of the Bellmarc Companies, says that for those who can afford to own, renting is not the better option. “Not with 5 percent interest rates. If we had a different market, and prices were higher, and interest rates were higher, it would be a different story.”
Don’t be shy about negotiating
For the millions of New Yorkers who can’t afford to buy, or choose not to, renting in the city offers other advantages. Many developers overbuilt during the boom; rather than be stuck with empty apartments, many have been willing to negotiate rent reductions and shorter leases. According to Miller Samuel, the average rental for two-bedroom units in Manhattan dropped 6.6 percent year-on-year in this year’s first quarter, although brokers expect overall rental prices to stabilize for the remainder of the year.
Of course, many considerations other than price are involved – many see the flexibility of renting as a major advantage. Beth Sievers, a sales representative at the New York brokerage Bellmarc Realty, says one client who recently sold his Midtown co-op decided to rent instead, in order to stay liquid while he started his own business. He also wanted to avoid the difficulties that come with being approved by a co-op board, she says.
Another consideration: Renting might also be a better option until the economy fully recovers.
“For most people, now is not a good time to buy, for lack of security in people’s jobs,” says Mike Colpitts, editor of real estate forecaster Housingpredictor.com. While most analysts believe the New York market will stabilize, depending on employment, Colpitts holds a contrarian view: He expects housing prices in Manhattan to deflate by 13.8 percent this year as more foreclosures enter the market and properties remain overpriced.
Jerry Weigand, a commodity broker, also recently switched to renting after selling his Upper East Side apartment. He now lives in a two-bedroom unit for $6,500 per month. A newlywed, he says he and his wife wanted to try a different neighborhood. Their decision to rent was driven more by the desire for a new experience than by economics. He says they will look to buy again in a few years.
“I do feel that prices have a little way to go down, but not by a lot,” Weigand says. “And I don’t think they will rise by a lot like they did a few years ago.”
Copyright © 2010 The McGraw-Hill Cos. All rights reserved, businessweek.com, Venessa Wong.
Steve Geving
Premiere Plus Realty Co
239-573-1400
Steve@nextgenerationrealtygroup.com
www.nextgenerationrealtygroup.com
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