Rent vs. buy: Top five cities where it's better to buy (or rent) a home

house with sale pending signWith interest rates on 30-year mortgages hitting yet another record low this week -- 4.27%, according to Freddie Mac -- it makes sense to rush out and buy a home, right?

Maybe not. New York-based real estate research firm Reis Inc. reported Thursday that a surge of renters in the third quarter pushed the national apartment vacancy rate down to 7.2%, from 7.8% the quarter before, one of the steepest drops ever. So more people are renting. And somewhat surprisingly, despite the strong rental demand, rent prices have remained relatively flat. So it's better to rent, right?

If you're confused, keep this in mind: Whether it's more economical to buy or rent depends on where you live.

Cities with high foreclosure rates and bottom-of-the-barrel home prices, such as Fresno, Calif.; Miami, Fla.; Mesa, Ariz.; and Detroit, Mich., are key areas where it doesn't make sense to rent, according to Trulia.com's Rent vs. Buy Index, released today.

Top Five Cities Where it's Better to Buy vs. Rent

Rank City State Price: rent ratio
1 Arlington TX 7
2 Fresno CA 8
3 Miami FL 9
4 Mesa AZ 9
5 Phoenix AZ 10
Source: Trulia.com

Conversely, in high-priced cities where home values are holding and jobs are more plentiful, such as New York City, Seattle, San Francisco, and Boston, renting is the most cost-effective option.

Top Five Cities where it's better to Rent vs. Buy


Rank City State Price: rent ratio
1 New York NY 35
2 Seattle WA 31
3 Fort Worth TX 30
4 Omaha NE 25
5 Sacramento CA 23
Source: Trulia.com

"Choosing to buy a home or continue to rent is a highly personal financial and life decision that many people are grappling with right now," says Trulia CEO and co-founder Pete Flint. The Rent vs. Buy Index was created to "help prospective buyers make the right decisions for their own personal situations."

The top city in which to rent, rather than buy is, of course, New York City, where the price-to-rent ratio is 35 (read below for the significance of that number). The median rent there is $3,000. The top city in which to buy compared to renting is Arlington, Texas, where the median price of a single-family home is $107,960, and the price-to-rent ratio is 7. What does that mean?

Here's how the price-to-rent ratio breaks down:
  • A price-to-rent ratio of 1-15: It is much less expensive to own than to rent a home in that city.
  • A price-to-rent ratio of 16-20: It is more expensive to own a home. The total costs of ownership of a home in this city are greater than the costs of renting, but it might still make financial sense.
  • A price-to-rent ratio of 21+: The total costs of owning a home are much greater than the costs of renting.
Now for the math: The ratio numbers are derived from using the average list price in a particular city compared with the average rent there of a two-bedroom apartment or condo, town home or co-op. The index includes the total cost of homeownership versus the total price of renting. So, for example, if the average list price in a city is $90,445 and the average rent is $936, the price-to-rent ratio ($90,445 divided by [$936 x 12] ) is about 8.05. Get your real estate agent there, quickly!

Los Angeles is No. 37 on the 50-city rent-to-buy index, with a price-to-rent index of 19. Certainly not in the New York range, but still a place where it's cheaper to rent.

Apartment seeker Molly Schmidt was hoping to find a Hollywood rental this week, complete with incentives -- one month's free rent and a free parking space. Common earlier this year, most landlords aren't offering such goodies today. She just landed a one-bedroom apartment in Hollywood for $1,250. The average rent in Los Angeles for a two-bedroom apartment with one bathroom in the second quarter was $1,893, according to RealFacts.com, which analyzes rental data. So she did pretty well.

Still, "$1,250 is going to be tough," says Schmidt. "But it's a lot cheaper than buying."

What the study doesn't consider is that while rents may escalate, mortgages don't. So if you plan on staying put for awhile, it may make more sense to think long-term than short-term. Rental units also frequently dictate whether you can have a pet, paint the dining room red, and put in new carpeting.



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