Renting vs. Buying: Which Is Cheapest Where You Live?

Photo (cc) by Julia Manzerova

Here’s good news if you are thinking about buying a home: Mortgage interest rates are still low and, The Washington Post reports, home prices finally appear to be settling down. If you have the credit and the down payment and think you’ll stay in the same place for several years, owning a home may be your best bet.

Buying’s expensive, renting’s worse

But, wait a minute. Home prices have been rising rapidly in the last two years all over the U.S. In some cities it’s become too expensive for many people to own. Just because buying is the cheaper option doesn’t mean you can afford it.

Unfortunately, renting is often even more expensive. You’d think that as buying has grown increasingly expensive, renting would be a refuge. But that’s not always the case.

Renters are in a bad spot. The rule of thumb for maintaining a balanced household budget is to limit housing costs to 30 percent of your monthly income or less. But many renters are finding this impossible. In the recent article, “In Many Cities, Rent Is Rising Out of Reach of Middle Class,” The New York Times says:

Nationally, half of all renters are now spending more than 30 percent of their income on housing, according to a comprehensive Harvard study, up from 38 percent of renters in 2000. In December, Housing Secretary Shaun Donovan declared “the worst rental affordability crisis that this country has ever known.”

But it all depends on where you live

It’s hard to believe, after home prices crashed and the U.S. was awash with empty houses a few years ago, but housing has become too expensive for a great number of Americans.

Whether buying or renting is more cost-effective for you depends largely on where you live. This Business Insider video explains how to know which is best:

If you can buy a home for 20 times the annual rent, then it may be a good idea. Otherwise renting is almost always a better deal.

Example: You’re renting for $1,600. If you can find an equivalent home to buy for $384,000 or less ($1,600 X 12 months X 20), it’s better to buy if you can.

Even easier

Here’s another dead-simple way to know which is cheaper: Find your community on this Zillow interactive table (midway down the page). It shows buy-rent ratios for every ZIP code, neighborhood, city, county and metro in the U.S.

The buy-rent ratio (sometimes called price-to-rent ratio) is figured by dividing a city’s median home price by its average annual rent. The lower the number, the better the case for buying. Above 20, renting is more cost-effective in the long run.

As the Zillow table shows, even in some of the country’s most expensive metros, like Washington, D.C., Santa Barbara, Calif., San Francisco, Boston and Portland, Ore., it’s slightly cheaper to rent than buy.

Data on your town

The table has lots of local data, including:

  • Predicted rent increases.
  • Home-price appreciation.
  • Median rent.
  • Median home value.
  • “Breakeven Horizon,” the point at which (in years) living in a home you bought becomes cheaper, overall, than renting a comparable place.

Zillow explains that last concept: “In other words, after buying and living in a home for more years than indicated by the Breakeven Horizon, homeowners begin to have more money and assets than they would have if they had rented the same home over that same time period.”

Here are a few highlights from Zillow’s research:

  • Santa Cruz, Calif., (21.3) and San Jose, Calif., (20.7) are the only two U.S. cities where renting is (slightly) more cost-effective than buying, according to the table.
  • The median rent in Santa Cruz is $2,218 and the median home price is $569,707. The median rent in San Jose is $2,894 and the median home price is $726,790.
  • Even in expensive Honolulu (19.7), buying has a slight advantage.There, the median rent is $2,235 and the median home price is $549,335.
  • The lowest price-to-rent ratio (4.6) is in Olean, N.Y. There, the median rent is $1,424 and the median home price is $77,302.

There are other calculators and ways of looking at the rent vs. buy problem. But your bottom line, in a very expensive city, may have less to do with the decision whether to rent or buy and more to do with the realization that it’s time to move somewhere more affordable.

How are you and your friends and family dealing with the increasing cost of housing? Tell us in the comments below or post a comment at Money Talks News’ Facebook page.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

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