Thanks for your feedback & questions. Just wanted to chime in and hopefully clarify the methodology that goes into Trulia's Rent vs. Buy Index. To make an apples-to-apples comparison, we only looked at the median list price and annualized median rent for two bedroom apartments, condos and townhouses in the 50 largest U.S. cities based on population. As such, this index does not look at single family homes.
To calculate the actual ratio, we divide the median list price by the annualized median rent. Here's a sample Price-to-Rent Ratio Calculation:
---Median List Price: $140,201.37
---Median Rent: $1,871.65
---Price-to-rent ratio: $140,201.37 ÷ ($1,871.65 x 12) = 6
To interpret this ratio:
----Price-to-Rent Ratio of 1-15: It is much less expensive to own than to rent a home in this city.
----Price-to-Rent Ratio of 16-20: It is more expensive to own a home in this city. 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 depending on the situation.
----Price-to-Rent Ratio of 21+: The total costs of owning a home in this city are much greater than the costs of renting.
By using 15 as our baseline for the interpretation key as opposed to 12 (which would only account for a year's worth of rent), we are able to account for the additional costs such as property tax and homeowners insurance.
Of course, we understand that the decision to buy or to rent is a deeply personal decision based on ones unique financial situation. The Rent vs. Buy Index was designed to be a guide to help folks gauge whether it's more affordable to buy or to rent a home in one of the 50 largest cities.
Feel free to contact us with any additional questions. We love the lively conversation and appreciate everyone's comments.
This is a great infographic idea, but the census 'incorporated city' boundaries/populations is not that good of a data set for this use case.
Metropolitan statistical areas would've been a more reasonable choice here, since in many cities the city proper (as defined by incorporated bounds) is either vastly under or vastly over-priced compared to where people actually live, not to mention throwing off the relative populations.
As an aside, the way my map renders, Baltimore is north of New York =P. Great job though, and kudos to your developers for not using flash =)
By using 15 as our baseline for the interpretation key as
opposed to 12 (which would only account for a year's worth
of rent), we are able to account for the additional costs
such as property tax and homeowners insurance.
Sorry you completely lost me on this line of reasoning, and I actually suspect you've got it quite wrong.
Why does 12 account for a year of rent as you say? The ratio is already the price of the house divided by the ANNUAL rent, is it not? Why 15 vs 12 vs 20 vs 30??? Also, additional costs of homeownership like tax and insurance means you should demand a LOWER ratio to truly make the cost of renting and owning equal, not higher as you suggest!
My understanding is the ratio is basically a proxy for the P/E ratio (just like P/E ratio in stocks). It is the price of the house divided by the income you would receive renting it. That ratio can float to whatever the market is willing to pay.
The graphic on Trulia specifically says though that the ratio is the point where renting == buying. How do you get 15?
One metric some people in this discussion are using is the ongoing carry costs of buying vs renting. With borrowing costs at 5% interest rates on 30-year fixed mortgages, along with a 40% marginal tax rate in places like NYC and SF, then the ratio that makes buying and renting about equal is much higher than 15; it has an upper bound at 33, because you can borrow at 3% factoring in tax deduction (1.00 / 0.03), but needs to be adjusted to account for HOA dues, real estate taxes, state income tax, nasty transaction costs, etc.
I'm wondering why they chose 15 / 20 as the cutoff ratios though. I'm a licensed real estate agent in NYC and I've helped a number of clients make purchases where it was actually cheaper to buy than rent (usually a studio or 1BR, or outside Manhattan).
It seems like you can finance a home purchase these days at 5% or less on 30-year fixed. Add in the mortgage interest tax deduction and you are really borrowing at 3.00% (assuming your marginal tax is 40% including state / local taxes, which would be true of anyone buying a $1.3M 2br as referenced in the site).
That seems to justify a break-even ratio of about 33, not 16 or 20. Of course, you do have to add back HOA dues / coop maintenance + property taxes, and the nasty transaction costs for buying and selling. That is somewhat tempered by your rent (and property values) going up with inflation while your mortgage payments are fixed. Therefore, all the usual disclaimers apply that you need to be willing to stay there and own the property for quite some time.
EDIT: clarified that 5% rates are for 30 year fixed mortgages; 15-year amortizations would get 4.25% or so, changing by the day.
EDIT2: The tax deduction is LESS good in other metro areas. When I used to live in Redmond, WA, my marginal rate was not 40% (there is no state income tax in WA and houses are much cheaper). Also far more subtle but often ignored, in Washington most renters would take a standard deduction and only home-owners would itemize their deductions. Itemizing mortgage interest means you lose out on the standard deduction. In NYC, just about everyone itemizes because state / local income tax is already compelling enough to do so, therefore almost all the mortgage interest is deductible except for the amount subject to Pease provisions.
I agree. I just ran the numbers for SF. Based on mid-point of Trulia's buying and renting price ranges ($750K to buy, $3.25K monthly rent), I get the following annual real costs:
buying: ~$24K
renting: ~$36K
That is based on the following assumptions: 40% margin tax rate, principal repayment is not a real cost (it's a saving account...) 15% down payment (renters invest the equivalent amount in a 3% annual return fund), 30 year ammortization of loan with a 4% rate (available now on 5 year ARMs -- you can always go back to renting in 5 years, and if rates soar then that means the economy has recovered, which means your house is worth more..), property tax of 1.16%, closing costs of $10K (that's high), spread over 5 years, home-owner insurance of $600 per year (that's what I pay), no insurance for renters
EDIT:
less risky buying option : ~$30K
(now assuming a 5% loan (30-yr fixed), and PMI insurance of 0.5% of loan value, per year - require for less than 20% down)
There are many good replies to this thread, that essentially point out that buying a house is risky, and that my assumptions do not deal with any 'bad case' scenarios. But nor do my assumptions deal with any 'good case' scenarios (house prices being higher in 5 years time in San Francisco - it might just happen..) But the topic of the original article is about costs, not risk, so I kept the topic at parity, and only dealt with costs. If I were advising anyone for real on rent-vs-buy I would strongly encourage them to consider the risk and reward element of the rent-vs-buy decision, in the context the general financial situation.
Summary: buying is riskier than renting, and it can also be substantially cheaper. Right now, with a 30-yr fixed mortgage, it's cheaper. You have to take on the 'house price risk', but that also carries a potential reward, as this is San Francisco..
I hope people aren't buying at 30x rental. The current US interest rates are at historic lows, so unless you get a fixed-rate mortgage you're going to be struggling when the interest rate goes up again.
I agree that the cutoffs are a bit low, and, at least for Seattle, I think the numbers for buying ($400-500K) are a bit high of reality.
I was able to buy last summer, trading in a rented two bedroom condo at $1350/mo for a two bedroom house in the same neighborhood, and I'm paying less than $50/mo more for my 30-year fixed mortgage than I was paying in rent. Yes, I've got more skin in the game with my downpayment, but it's in a growing neighborhood and I'm pretty confident that values in my area will go up in the next 5 years or so (its already appraised for higher than my purchase price).
Plus there are a lot of benefits to home ownership that I can't really assign a dollar value to. When I come home from my tech job and I don't want to sit in front of a keyboard anymore, I hack on my house. I've done a bunch of plumbing and electrical upgrades on the house, and I'm planning on building a backyard office / guest house "shed". And nothing can erase the stress of a long day quite like taking your shoes off and walking around in YOUR grass and relaxing in the backyard hammock.
If that stuff doesn't appeal to you, you'll probably be happier renting anyway. If I'd looked at it in purely financial terms I'd probably be in a rental myself.
I was hoping to see how affordable it is to buy in different cities around the world. Unfortunately, this data covers 50 cities in just one country.
It should really be the "Top 50 Cities in the US". The US-centric nature of websites like this is even more irritating when they don't state it up front.
Trulia's Q1 2011 Rent vs. Buy Index provides guidance to help you make a smart decision on whether it is better to rent or buy in each of America's 50 largest cities by population.
This same page for the largest 50 cities in the world would be useless. Unless you're very rich or European, it's very likely that the only comparisons that matter are domestic.
The choice of a red-green gradient is probably not wise, considering the prominence of people with red-green colorblindness. ( Screenshot http://bit.ly/fcRHRk vs filtered screenshot http://bit.ly/frqlxP — Note the similarity of NYC and Jacksonville.)
Otherwise, I really dig the execution of the map.
EDIT: Cached the filtered screenshot so as to not hit the (relatively slow) colorfilter.wickline.org server.
I have come to the conclusion that buying to occupy is no longer a rational decision.
Consider a grid. On one axis, housing purchases are cheap or expensive. On the other axis, the local economy is vibrant or moribund.
Hence:
* Cheap + Vibrant: Basically doesn't exist.
* Cheap + Moribund: Bad place to buy, you're tied to a high-risk location.
* Expensive + Vibrant: Purchase cost will eat up the advantage of the local economy.
* Expensive + Moribund: Get out ASAP.
Why buy anywhere?
Similar logic applies to buying to rent. Why not diversify? Long term rates of return on share indices are competitive with property and do not have mortgage risk. They also don't have local property market risks. Vanguard will set you up with an international share fund, hedged or unhedged, very cheaply and easily.
The statistics on this infographic are misleading. It does not cost 200,000 to buy a house in San Diego or San Jose!
Maybe the average for downtown San Jose and San Diego are close to 200k, but that is the poorest area of both cities and not what should be used to compare. The green bubble on the point for San Diego should be much much smaller in radius(like miniscule), otherwise you think the 200k number refers to the entire city!
People should not be using this to make informed decisions (obviously).
I believe that they're basing this data on stats collected by the census, so you have take the city as defined by the census bounds, which aren't necessarily similar to common conceptions of what area is 'in' a city.
I noticed they are using "listing prices" instead of sale prices or any kind of constant quality index to calculate their ratios. That's probably not ideal, but since price series are hard to find for homes it's at least understandable (that and it's their business model to collect listings).
I do a lot of work in this domain and the price-to-rent and price-to-income ratios for California look higher by my calculations. Using median sales prices for the broader metro area and income and rent data from the Census, I'm finding California is still quite expensive.
This visualization assumes that a condo for sale is the same quality as an apartment for rent. At least in Seattle, that is not true--there has been a rash of (ill advised) condo construction in the area which has resulted in a lot of really nice two bedroom condos for sale, with new construction and spectacular views. Two bedroom apartments on the market are nowhere near as nice--and, of course, nowhere near as expensive. That's not to say that the condos aren't overpriced, just that the distribution of supply may not be uniform in every city.
I'm from Australia but now live in NYC and I've been debating the question about whether to buy or rent. It's amusing to me to see a big red circle on this graphic for NYC. I can understand why.
NYC is a special case in many ways. For one thing, from a purely financial perspective, your best bet is to find a rent stabilized apartment that is well under market value and then invest your money elsewhere, possibly on buying a property you don't live in in NYC!
In Australia, buying property is a big thing. I'd imagine that in OECD rankings for home ownership, Australia ranks reasonably highly. Interestingly, the Guardian (in the UK) years ago did a study that showed that economic growth in Europe was inversely proportional to the rates of home ownership (meaning the countries with the highest rates of home ownership--eg Spain--had the worst performing economies and vice versa).
This makes a certain amount of sense: home ownership creates a less flexible labour market.
Anyway, in Australia, it's common to not only buy the property you live in but also investment properties. Investment properties are tax advantageous (in that the mortgage interest is a tax deduction) but you pay capital gains tax when you sell (but a good investment strategy will have you never selling; you just free up the equity to buy something else). The home you own is the reverse: mortgage interest is not tax deductible but your principal place of residence is capital gains tax free when you sell.
Now the thing about real estate is that it's a hedge against inflation. For example, 10 years ago you could buy a 3 bedroom house (built in the 70s) 10 miles from the city centre in Perth for <$100k. 5 years later? $350k minimum. There was a structural change in the economy that hasn't since reversed and doesn't look like ever reversing. Part of this was the increase in land cost but part of it is the increase in building cost (where once you could build a house for $80k, now anything less than $150-200k is unrealistic).
So if you'd rented in that time you would've missed out on that huge jump. Thing about real estate growth is that it is never smooth. It'll go through periods of high growth and others of stagnant prices if not negative price growth. So it's a long term investment (typically 7+ years).
But the real estate market in Australia is highly speculative.
I say that because I've also lived in Switzerland, which has an almost planned economy. The tax system stamps out property speculation, arguing that it is in the common good to have affordable housing. This is an opinion that I think has merit. To give you an example, if you sell a property within 2 years of buying it, the capital gains tax is 100% (iirc), meaning the entire gain is taxed.
Anyway, back to NYC. NYC has a lot going for it from a real estate perspective. It's a center for jobs but also land is a finite resource here. Manhattan isn't getting any bigger. Most industrial areas have already been converted to residential (or, more accurately, mixed residential/commercial). Manhattan is mostly gentrified now.
Betting on a limited resource is typically a good plan but the difference between renting and buying is huge here. Like a 1BR that might cost $2000 to rent will probably cost >$500K to buy and have significant ($300-600/month) maintenance fees to boot.
I really don't understand what motivates investors for that kind of return. So something will change in the future but will prices come down (or just stagnate for years) or will rents go up? If it's the former, rent. If it's the latter, buy.
So I'm really torn on whether I should position myself to buy in the future or simply resign myself to renting. At this stage I'll probably rent just because I may move around with my employer (Google) but I must admit: the prospect of owning an apartment in Manhattan is appealling.
I met someone once who purchased their place in Manhattan in November 2001. At the time it couldn't be lived in, but they had faith that the city and the affected area would recover, which it has and I think they would have done well. The thing with buying property anywhere is that it always seems like a bad deal, but that's because most people underestimate the propensity of governments to inflate currencies. It doesn't take many years of high inflation for 'real' things like property to quickly rise in value. And, purchasing at the top of bubbles notwithstanding, most of the time the land value underneath the property will stay pretty constant. The house itself must be seen as a depreciating asset, but the land underneath will increase in value as long as the location is both desirable and economically growing (even better if it is above trend of the economy).
The problem with long-term renting is that, while you can theoretically engineer a better return by allocating as much as the principal component of a mortgage payment to one or more investment classes - most people don't. The key benefits to owning a property are (IMO)
* inflation hedge
* forced savings (the principal component of your mortgage)
* security of tenure
* ability to modify the property as needs arise (like extending, remodelling, putting in network cables and server racks!)
* access to further credit for other investments after equity is accumulated
These things vary country by country but the list is pretty much constant. The most important thing is to not get carried away and only purchase what you can realistically afford, and to allocate as much money to paying down the mortgage in the first 5-10 years.
As for the yield equation - like value stocks, it's where the story is. Most places at some point or another in their economic cycle will end up where the yield is very attractive, and that's the time to buy. And, as a wise old italian investor who could buy and sell me many times over once told me (after I made my first mistake) : never sell your property. Ever. Buy right in the first place and keep forever. If you find yourself hearing everyone say that real estate is a bad investment and see that rents are approaching mortgage payments, then buy as much as you can as quickly as you can.
The last 50 years has been the story of real estate growing in value. This may or may not repeat over the next 50 years, because demographics, national politics and household formation have all changed in that time. But inflation has been with us since the first clever financier decided to use paper money, and will stay with us while that is still the case. If you purchase with your head and don't listen to anyone else, you'll do fine.
Finally - on the lowest economic growth - in Australia, in the USA - in a lot of places - the cheap credit of the '00s has led to an over-investment in residential property. This takes credit and investment away from other parts of the economy where it could be used productively. And it results in banks being dangerouslly over-exposed to residential property as an asset class. I think this needs to be addressed, and pro-ownership govt programs(see FHMC in USA, First Homeowners grants in Aus) need to be dumped, despite the short term pain this would cause. Because the economy isn't going to get going again until all the bad debts and bad investments are cleared up and swept away.
Buying property in Australia at the moment would appear to be highly risky. I was hesitant back in 2002, and it's far worse now. The only thing that has kept prices high is the incredible increase in rent, which I'm still struggling to fathom. In 2004 I was renting a 110^m 2 bedroom apartment on the Brisbane river for $780 a month.
Australia has managed to inflate their housing market further, thanks to government intervention, and it seems that it needs to pop at some point. Long term, these types of capital gains in housing are unprecedented.
Small nitpic: your example of a house in Perth is out on the end of the bell curve. Perth has seen explosive growth driven by the resources boom, which have driven more people with more money to the west.
> 5 years later? $350k minimum. There was a structural change in the economy that hasn't since reversed and doesn't look like ever reversing.
This was the fallacy that got the US into so much trouble. When real estate rises quickly and consistently, people think it's a guaranteed perpetuity. That's not the case. Any investment can go down in value and almost surely will at some point in time.
Veering off-topic, but how do people in Australia rent apartments? It seems the answer is NOT "craigslist."
Also, from just walking around Melbourne and Hobart, it seems that Australian cities are more ownership oriented than major American cities. I've seen maybe 2 "for rent" signs. Am I just not seeing the rentals?
without knowing your financial situation, I'd suggest to keep working in the U.S. and invest in housing back in Australia.
Both are great prospects but you might be able to buy 2 houses near the beach in Australia (say Perth / Adelaide) for the price of one in NYC. In a way, it gives you diversification that NYC doesn't. Also buying walking distance from the beach gives you that security that land value will never go down.
I agree about the tax system in Australia. But I like it.
Are you figures in real terms or nominal terms? If nominal, then sentences like "where once you could build a house for $80k, now anything less than $150-200k is unrealistic" are unsuitable for building an argument upon.
I'm confused about the populations. For example, it mentions the population of Kansas City is 143K. Wikipedia says 482,299, and "greater" KC is closer to a million. What exactly is measured here?
They probably should've used metro area, but that might've been a data challenge if they lacked lat/lon for each property.
EDIT: Looks like they're using the wrong Kansas City! That 143K population number is for Kansas city, Kansas, which is much less than half of the total city.
The other half, Kansas city, MO is 482,299, and in the top 50, unlike Kansas City, Kansas.
The population of Kansas City is 143,000--Kansas City, Kansas, that is. (They're mistakenly using population data for Kansas City, Kansas, instead of the much larger Kansas City, Missouri.)
It appears to be using the data from KCK. If it's pulling the population data from there it might be a safe bet that everything else is from KCK, too. That being said, regardless, I think the entire bit about KC being ranked up near San Fran and NYC is way off. There's very reasonably priced housing in the greater metro area. I don't think the sample they're using on this site is very accurate at all. I find it really hard to believe that of all the midwestern places to live on this site, Kansas City is the most expensive in terms of Rent:Buy. 200-300k? This probably isn't true of some of the big swaths of outer KC I've driven through, and it definitely isn't true of the suburban areas.
Aside from this little sampling problem, and it's easily fixed, no big deal, I think this site is really cool and a great way to look at affordable places to live.
This data seems extremely unreliable. For example, it claims that in KC you might be better renting, then lists a buying price range of $200-$300k. Then hop over to Denver and it says buying might be better, with a price range of $100-$200k. I've lived in both cities and looked at houses in each, and it is much, much more expensive to purchase a house in Denver than in the Kansas City metro.
What would be cool on top of this is if they figured in mortgage prices, the average home upkeep costs for a certain area, insurance prices, and property taxes (whew, it'd be hard) to determine if you're flat out better of renting or buying in an area over an arbitrary period of time. This has always been something I've wondered about, whether or not buying a home or renting an apartment is actually cheaper based on a bunch of different factors. In the US, there's always this big push for home ownership, but sometimes I question the wisdom (financially) of buying a home for 'equity building' or whatever else. That's not to say that owning your own home can't be totally fun and a great place to raise a family or whatever else..obviously that's pretty hard to weigh objectively, but still. I think this would be an interesting direction for this site to go.
Cleveland is included, but not Pittsburgh? Someone's a Jets fan...
On a technical note, the information in the hover bubble is mis-aligned; the right side is a space below the left side, at least on this older version of Firefox.
Use of City boundaries instead of MSA makes this inaccurate and not terribly useful as a tool for understanding anything about these markets, let alone making decisions from.
The concentration of high-population areas in California does some strange things to the map when the city circles are sized by population.
The positions don't even seem to be constant. If you sort by something else, the circle move around, but they don't necessarily move back to the same place.
I have nothing interesting to add about the content of this site; I was too befuddled by its presentation.
A note on the chart: it's very pretty, but why? As soon as you load it up you see cities floating around the map in a way that cities really don't. And once they stop floating around, the cities aren't quite in the right geographical locations; to find the unlabelled dot that's Oakland I had to first click on an unlabelled dot that happens to be Sacramento.
It's odd seeing lists like this that focus only on a specific country, ignoring important neighbors. Take Toronto, for example. That city is more important than 40-45 of the cities listed, but since it's a few miles North of some border, it gets completely ignored.
There are two meanings of the word "America" in common usage. The restricted meaning, used by the article, refers to the political entity USA. The general meaning refers to the continent(s). I don't think many people who saw the title were expecting data on, say, Buenos Aires.
As an American I noticed that when I visited Toronto, Canadians would always compare things to "North America" (as in "Toronto has the 7th largest metro area in North America").
Interestingly, the meaning of this would typically exclude Mexico and Central America, which by geography it should not.
Whereas in the US, we typically compare things to "America" and exclude Canada and Mexico as a matter of course.
I was talking to a real estate broker from phoenix on my flight last weekend. He said you can buy distressed homes for < $100k and condos/townhomes for < $50k. He's got clients buying properties, renting them in less than a month, and having instant positive cash flow.
[+] [-] Daisy|15 years ago|reply
Thanks for your feedback & questions. Just wanted to chime in and hopefully clarify the methodology that goes into Trulia's Rent vs. Buy Index. To make an apples-to-apples comparison, we only looked at the median list price and annualized median rent for two bedroom apartments, condos and townhouses in the 50 largest U.S. cities based on population. As such, this index does not look at single family homes.
To calculate the actual ratio, we divide the median list price by the annualized median rent. Here's a sample Price-to-Rent Ratio Calculation: ---Median List Price: $140,201.37 ---Median Rent: $1,871.65 ---Price-to-rent ratio: $140,201.37 ÷ ($1,871.65 x 12) = 6
To interpret this ratio: ----Price-to-Rent Ratio of 1-15: It is much less expensive to own than to rent a home in this city. ----Price-to-Rent Ratio of 16-20: It is more expensive to own a home in this city. 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 depending on the situation. ----Price-to-Rent Ratio of 21+: The total costs of owning a home in this city are much greater than the costs of renting.
By using 15 as our baseline for the interpretation key as opposed to 12 (which would only account for a year's worth of rent), we are able to account for the additional costs such as property tax and homeowners insurance.
Of course, we understand that the decision to buy or to rent is a deeply personal decision based on ones unique financial situation. The Rent vs. Buy Index was designed to be a guide to help folks gauge whether it's more affordable to buy or to rent a home in one of the 50 largest cities.
Feel free to contact us with any additional questions. We love the lively conversation and appreciate everyone's comments.
Cheers! Daisy Kong PR Manager, Trulia [email protected]
[+] [-] showerst|15 years ago|reply
Metropolitan statistical areas would've been a more reasonable choice here, since in many cities the city proper (as defined by incorporated bounds) is either vastly under or vastly over-priced compared to where people actually live, not to mention throwing off the relative populations.
As an aside, the way my map renders, Baltimore is north of New York =P. Great job though, and kudos to your developers for not using flash =)
[+] [-] leelin|15 years ago|reply
Why does 12 account for a year of rent as you say? The ratio is already the price of the house divided by the ANNUAL rent, is it not? Why 15 vs 12 vs 20 vs 30??? Also, additional costs of homeownership like tax and insurance means you should demand a LOWER ratio to truly make the cost of renting and owning equal, not higher as you suggest!
My understanding is the ratio is basically a proxy for the P/E ratio (just like P/E ratio in stocks). It is the price of the house divided by the income you would receive renting it. That ratio can float to whatever the market is willing to pay.
The graphic on Trulia specifically says though that the ratio is the point where renting == buying. How do you get 15?
One metric some people in this discussion are using is the ongoing carry costs of buying vs renting. With borrowing costs at 5% interest rates on 30-year fixed mortgages, along with a 40% marginal tax rate in places like NYC and SF, then the ratio that makes buying and renting about equal is much higher than 15; it has an upper bound at 33, because you can borrow at 3% factoring in tax deduction (1.00 / 0.03), but needs to be adjusted to account for HOA dues, real estate taxes, state income tax, nasty transaction costs, etc.
[+] [-] leelin|15 years ago|reply
I'm wondering why they chose 15 / 20 as the cutoff ratios though. I'm a licensed real estate agent in NYC and I've helped a number of clients make purchases where it was actually cheaper to buy than rent (usually a studio or 1BR, or outside Manhattan).
It seems like you can finance a home purchase these days at 5% or less on 30-year fixed. Add in the mortgage interest tax deduction and you are really borrowing at 3.00% (assuming your marginal tax is 40% including state / local taxes, which would be true of anyone buying a $1.3M 2br as referenced in the site).
That seems to justify a break-even ratio of about 33, not 16 or 20. Of course, you do have to add back HOA dues / coop maintenance + property taxes, and the nasty transaction costs for buying and selling. That is somewhat tempered by your rent (and property values) going up with inflation while your mortgage payments are fixed. Therefore, all the usual disclaimers apply that you need to be willing to stay there and own the property for quite some time.
EDIT: clarified that 5% rates are for 30 year fixed mortgages; 15-year amortizations would get 4.25% or so, changing by the day.
EDIT2: The tax deduction is LESS good in other metro areas. When I used to live in Redmond, WA, my marginal rate was not 40% (there is no state income tax in WA and houses are much cheaper). Also far more subtle but often ignored, in Washington most renters would take a standard deduction and only home-owners would itemize their deductions. Itemizing mortgage interest means you lose out on the standard deduction. In NYC, just about everyone itemizes because state / local income tax is already compelling enough to do so, therefore almost all the mortgage interest is deductible except for the amount subject to Pease provisions.
[+] [-] tomsaffell|15 years ago|reply
EDIT:
(now assuming a 5% loan (30-yr fixed), and PMI insurance of 0.5% of loan value, per year - require for less than 20% down)There are many good replies to this thread, that essentially point out that buying a house is risky, and that my assumptions do not deal with any 'bad case' scenarios. But nor do my assumptions deal with any 'good case' scenarios (house prices being higher in 5 years time in San Francisco - it might just happen..) But the topic of the original article is about costs, not risk, so I kept the topic at parity, and only dealt with costs. If I were advising anyone for real on rent-vs-buy I would strongly encourage them to consider the risk and reward element of the rent-vs-buy decision, in the context the general financial situation.
Summary: buying is riskier than renting, and it can also be substantially cheaper. Right now, with a 30-yr fixed mortgage, it's cheaper. You have to take on the 'house price risk', but that also carries a potential reward, as this is San Francisco..
[+] [-] mryall|15 years ago|reply
[+] [-] chrismetcalf|15 years ago|reply
I was able to buy last summer, trading in a rented two bedroom condo at $1350/mo for a two bedroom house in the same neighborhood, and I'm paying less than $50/mo more for my 30-year fixed mortgage than I was paying in rent. Yes, I've got more skin in the game with my downpayment, but it's in a growing neighborhood and I'm pretty confident that values in my area will go up in the next 5 years or so (its already appraised for higher than my purchase price).
Plus there are a lot of benefits to home ownership that I can't really assign a dollar value to. When I come home from my tech job and I don't want to sit in front of a keyboard anymore, I hack on my house. I've done a bunch of plumbing and electrical upgrades on the house, and I'm planning on building a backyard office / guest house "shed". And nothing can erase the stress of a long day quite like taking your shoes off and walking around in YOUR grass and relaxing in the backyard hammock.
If that stuff doesn't appeal to you, you'll probably be happier renting anyway. If I'd looked at it in purely financial terms I'd probably be in a rental myself.
[+] [-] shashashasha|15 years ago|reply
I think this is the main qualifier. As I understand it, the data is comparing prices to rent vs buy on similar 2 bedrooms.
[+] [-] mryall|15 years ago|reply
It should really be the "Top 50 Cities in the US". The US-centric nature of websites like this is even more irritating when they don't state it up front.
[+] [-] keiferski|15 years ago|reply
[+] [-] natrius|15 years ago|reply
[+] [-] kmfrk|15 years ago|reply
This would also require you to factor in exchange rates, but I guess that's not much of a problem when done as a snapshot view.
[+] [-] mtigas|15 years ago|reply
Otherwise, I really dig the execution of the map.
EDIT: Cached the filtered screenshot so as to not hit the (relatively slow) colorfilter.wickline.org server.
[+] [-] jacques_chester|15 years ago|reply
Consider a grid. On one axis, housing purchases are cheap or expensive. On the other axis, the local economy is vibrant or moribund.
Hence:
Why buy anywhere?Similar logic applies to buying to rent. Why not diversify? Long term rates of return on share indices are competitive with property and do not have mortgage risk. They also don't have local property market risks. Vanguard will set you up with an international share fund, hedged or unhedged, very cheaply and easily.
[+] [-] chanri|15 years ago|reply
Maybe the average for downtown San Jose and San Diego are close to 200k, but that is the poorest area of both cities and not what should be used to compare. The green bubble on the point for San Diego should be much much smaller in radius(like miniscule), otherwise you think the 200k number refers to the entire city!
People should not be using this to make informed decisions (obviously).
[+] [-] showerst|15 years ago|reply
[+] [-] bengebre|15 years ago|reply
I do a lot of work in this domain and the price-to-rent and price-to-income ratios for California look higher by my calculations. Using median sales prices for the broader metro area and income and rent data from the Census, I'm finding California is still quite expensive.
http://www.deptofnumbers.com/affordability/metros
Click on the table heading columns to sort and you see some pretty unaffordable stuff in California. For San Jose the rent ratio is ~35.
Note: In case it wasn't obvious, I'm linking to a site I maintain above.
[+] [-] iwwr|15 years ago|reply
1. That the value of the property will fall.
2. That you will be offered a better job in another town and it's too expensive to move
[+] [-] codex|15 years ago|reply
[+] [-] cletus|15 years ago|reply
NYC is a special case in many ways. For one thing, from a purely financial perspective, your best bet is to find a rent stabilized apartment that is well under market value and then invest your money elsewhere, possibly on buying a property you don't live in in NYC!
In Australia, buying property is a big thing. I'd imagine that in OECD rankings for home ownership, Australia ranks reasonably highly. Interestingly, the Guardian (in the UK) years ago did a study that showed that economic growth in Europe was inversely proportional to the rates of home ownership (meaning the countries with the highest rates of home ownership--eg Spain--had the worst performing economies and vice versa).
This makes a certain amount of sense: home ownership creates a less flexible labour market.
Anyway, in Australia, it's common to not only buy the property you live in but also investment properties. Investment properties are tax advantageous (in that the mortgage interest is a tax deduction) but you pay capital gains tax when you sell (but a good investment strategy will have you never selling; you just free up the equity to buy something else). The home you own is the reverse: mortgage interest is not tax deductible but your principal place of residence is capital gains tax free when you sell.
Now the thing about real estate is that it's a hedge against inflation. For example, 10 years ago you could buy a 3 bedroom house (built in the 70s) 10 miles from the city centre in Perth for <$100k. 5 years later? $350k minimum. There was a structural change in the economy that hasn't since reversed and doesn't look like ever reversing. Part of this was the increase in land cost but part of it is the increase in building cost (where once you could build a house for $80k, now anything less than $150-200k is unrealistic).
So if you'd rented in that time you would've missed out on that huge jump. Thing about real estate growth is that it is never smooth. It'll go through periods of high growth and others of stagnant prices if not negative price growth. So it's a long term investment (typically 7+ years).
But the real estate market in Australia is highly speculative.
I say that because I've also lived in Switzerland, which has an almost planned economy. The tax system stamps out property speculation, arguing that it is in the common good to have affordable housing. This is an opinion that I think has merit. To give you an example, if you sell a property within 2 years of buying it, the capital gains tax is 100% (iirc), meaning the entire gain is taxed.
Anyway, back to NYC. NYC has a lot going for it from a real estate perspective. It's a center for jobs but also land is a finite resource here. Manhattan isn't getting any bigger. Most industrial areas have already been converted to residential (or, more accurately, mixed residential/commercial). Manhattan is mostly gentrified now.
Betting on a limited resource is typically a good plan but the difference between renting and buying is huge here. Like a 1BR that might cost $2000 to rent will probably cost >$500K to buy and have significant ($300-600/month) maintenance fees to boot.
I really don't understand what motivates investors for that kind of return. So something will change in the future but will prices come down (or just stagnate for years) or will rents go up? If it's the former, rent. If it's the latter, buy.
So I'm really torn on whether I should position myself to buy in the future or simply resign myself to renting. At this stage I'll probably rent just because I may move around with my employer (Google) but I must admit: the prospect of owning an apartment in Manhattan is appealling.
[+] [-] brc|15 years ago|reply
The problem with long-term renting is that, while you can theoretically engineer a better return by allocating as much as the principal component of a mortgage payment to one or more investment classes - most people don't. The key benefits to owning a property are (IMO) * inflation hedge * forced savings (the principal component of your mortgage) * security of tenure * ability to modify the property as needs arise (like extending, remodelling, putting in network cables and server racks!) * access to further credit for other investments after equity is accumulated
These things vary country by country but the list is pretty much constant. The most important thing is to not get carried away and only purchase what you can realistically afford, and to allocate as much money to paying down the mortgage in the first 5-10 years.
As for the yield equation - like value stocks, it's where the story is. Most places at some point or another in their economic cycle will end up where the yield is very attractive, and that's the time to buy. And, as a wise old italian investor who could buy and sell me many times over once told me (after I made my first mistake) : never sell your property. Ever. Buy right in the first place and keep forever. If you find yourself hearing everyone say that real estate is a bad investment and see that rents are approaching mortgage payments, then buy as much as you can as quickly as you can.
The last 50 years has been the story of real estate growing in value. This may or may not repeat over the next 50 years, because demographics, national politics and household formation have all changed in that time. But inflation has been with us since the first clever financier decided to use paper money, and will stay with us while that is still the case. If you purchase with your head and don't listen to anyone else, you'll do fine.
Finally - on the lowest economic growth - in Australia, in the USA - in a lot of places - the cheap credit of the '00s has led to an over-investment in residential property. This takes credit and investment away from other parts of the economy where it could be used productively. And it results in banks being dangerouslly over-exposed to residential property as an asset class. I think this needs to be addressed, and pro-ownership govt programs(see FHMC in USA, First Homeowners grants in Aus) need to be dumped, despite the short term pain this would cause. Because the economy isn't going to get going again until all the bad debts and bad investments are cleared up and swept away.
[+] [-] timcederman|15 years ago|reply
Australia has managed to inflate their housing market further, thanks to government intervention, and it seems that it needs to pop at some point. Long term, these types of capital gains in housing are unprecedented.
Here's a good summary. http://en.wikipedia.org/wiki/Australian_property_bubble
[+] [-] hartror|15 years ago|reply
[+] [-] newmediaclay|15 years ago|reply
This was the fallacy that got the US into so much trouble. When real estate rises quickly and consistently, people think it's a guaranteed perpetuity. That's not the case. Any investment can go down in value and almost surely will at some point in time.
[+] [-] rdouble|15 years ago|reply
Also, from just walking around Melbourne and Hobart, it seems that Australian cities are more ownership oriented than major American cities. I've seen maybe 2 "for rent" signs. Am I just not seeing the rentals?
[+] [-] keyle|15 years ago|reply
without knowing your financial situation, I'd suggest to keep working in the U.S. and invest in housing back in Australia.
Both are great prospects but you might be able to buy 2 houses near the beach in Australia (say Perth / Adelaide) for the price of one in NYC. In a way, it gives you diversification that NYC doesn't. Also buying walking distance from the beach gives you that security that land value will never go down.
I agree about the tax system in Australia. But I like it.
[+] [-] vaksel|15 years ago|reply
In midtown, that 1BR will run you ~$2,500 to rent and close to $1 million to buy.
Maintenance fees should also be higher, at least $800.
[+] [-] stevoski|15 years ago|reply
[+] [-] teyc|15 years ago|reply
[+] [-] aik|15 years ago|reply
[+] [-] showerst|15 years ago|reply
They probably should've used metro area, but that might've been a data challenge if they lacked lat/lon for each property.
EDIT: Looks like they're using the wrong Kansas City! That 143K population number is for Kansas city, Kansas, which is much less than half of the total city.
The other half, Kansas city, MO is 482,299, and in the top 50, unlike Kansas City, Kansas.
Probably a bug.
[+] [-] 41latitude|15 years ago|reply
[+] [-] grav1tas|15 years ago|reply
Aside from this little sampling problem, and it's easily fixed, no big deal, I think this site is really cool and a great way to look at affordable places to live.
[+] [-] mkinsella|15 years ago|reply
[+] [-] grav1tas|15 years ago|reply
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[+] [-] scblock|15 years ago|reply
[+] [-] grav1tas|15 years ago|reply
[+] [-] ck2|15 years ago|reply
[+] [-] keiferski|15 years ago|reply
On a technical note, the information in the hover bubble is mis-aligned; the right side is a space below the left side, at least on this older version of Firefox.
[+] [-] showerst|15 years ago|reply
https://secure.wikimedia.org/wikipedia/en/wiki/List_of_Unite...
(Cities vs metro areas, oh the perils of using census data.)
[+] [-] cincinnatus|15 years ago|reply
[+] [-] ianferrel|15 years ago|reply
The positions don't even seem to be constant. If you sort by something else, the circle move around, but they don't necessarily move back to the same place.
I have nothing interesting to add about the content of this site; I was too befuddled by its presentation.
[+] [-] jpwagner|15 years ago|reply
It seems to load them in alphabetical order and fits the next one as best it can given the already plotted bubbles.
[+] [-] hugh3|15 years ago|reply
[+] [-] cryptoz|15 years ago|reply
It's odd seeing lists like this that focus only on a specific country, ignoring important neighbors. Take Toronto, for example. That city is more important than 40-45 of the cities listed, but since it's a few miles North of some border, it gets completely ignored.
Why not focus on a geographic region instead?
[+] [-] gyardley|15 years ago|reply
[+] [-] zeteo|15 years ago|reply
[+] [-] 100k|15 years ago|reply
Interestingly, the meaning of this would typically exclude Mexico and Central America, which by geography it should not.
Whereas in the US, we typically compare things to "America" and exclude Canada and Mexico as a matter of course.
[+] [-] unknown|15 years ago|reply
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[+] [-] callmeed|15 years ago|reply