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Rent or Buy?

National Price-to-Rent Ratio 5.7 Percent Below Pre-Crisis Peak

Shu Chen    |    Housing Trends

Buying or renting a house is always a big decision for households. It’s also important for millennials who, recently graduated from school, may be moving to a different city to start a career, buy a house and build a family. Just like buying stocks, no one wants to buy a house when the price is high. Seven years after the last housing bubble bust, home prices, especially in the lower tier, have returned to pre-crisis levels. People may start to argue whether we are entering another housing bubble. A colleague of mine wrote a blog which examined overvaluation in the top markets.1 With home prices forecasted to increase by 5 percent in 2016 and the Federal Reserve expected to raise interest rates, is this still a good time to buy?

To answer this question, CoreLogic chose 30 Core Based Statistical Areas (CBSAs) across the country based on their Multiple Listing Service (MLS) coverage since 2005. We indexed the median home price and rent to 100 on January 2005 (Figure 1). According to CoreLogic MLS data, rent didn’t drop significantly during the crisis, and it has continued to increase as home prices have increased after the crisis. The median home price reached a new peak in June 2015, 3.5 percent higher than the pre-crisis peak and 40.5 percent higher than the trough in January 2008. Rent was more stable during the crisis because a number of households lost their homes to foreclosure. But starting in 2012, rent prices began to increase, following the home price trends with lags of one to two months. As the housing market continues to heal and the number of homes for sale remains low, the rental market is likely to remain robust over the next few years.

Figure 2 shows the price-to-rent ratio from January 2005. The ratio is calculated by dividing the CoreLogic median home price by the MLS median annual rent. This measure allows us to compare home prices to rent amounts. A lower price-to-rent ratio indicates a good time to buy. In January 2012, the price-to-rent ratio dropped to 9.9, which is only 71 percent of the peak in February 2007. Figure 1 shows that home prices dropped more than rent did during the crisis. We can see that the market is still adjusting after the crisis, but interest rates can’t remain low for too long. The price-to-rent ratio is up 24.5 percent from the trough and is only 11.4 percent below the peak.

Figure 3 shows the current price-to-rent ratio (as of July 2015), as well as the peak and trough levels nationally and for seven CBSAs. We can see that the national ratio is up 24.5 percent from the trough in January 2012, slowly returning to the pre-crisis level, but still 11.4 percent below the February 2007 peak. Detroit reached a new peak in July 2015, and is up 5.9 percent from the pre-crisis peak. West Palm Beach, Fla. and Cleveland, Ohio are up 80.3 percent and 58 percent from their troughs, respectively. Seattle has the smallest ratio increase, at 15.5 percent from the trough.

[1] 14 Top Markets Overvalued, Double the Number as of Q1 2015, Mark Liu, September 24, 2015

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