Price-to-Rent Ratio isn’t the Bottom Line for the Renters
ANNAPOLIS, DAVIDSONVILLE, EDGEWATER, ARNOLD AND SEVERNA PARK REAL ESTATE
Last week, Annapolis area residents who keep their eyes on real estate trends got some fresh information about one factor that seeks to put numbers to the relative benefits of buying versus renting. When real estate values head south, buying may seem to be a particularly risky proposition…even though later it’s clear that the value proposition was actually improving. The trade-offs Annapolis area hard to quantify. Even now, if Annapolis area listings reflect prices on the rise, renters who failed to lasso the most extreme bargains may assume they’ve missed the boat.
Putting numbers to the problem is a complicated, pencil-snapping exercise. In addition to current dollars spent, it involves speculating on future market values. But Annapolis area readers who checked into CoreLogic’s Insights blog found some new data toward the end of last week, presented in an interesting way. It arrived in an article that looked at one particular aspect of today’s national real estate landscape “seven years after the last housing bubble.”
What CoreLogic’s market trend analyst Shu Chen did was to calculate the ratio of median home listing prices versus home rental prices, and chart it over the past decade. To come up with the numbers, national median home prices in key markets were divided by median annual rent figures. The beginning 2005 ratio was set at (indexed to) 100: the starting point for this “Price-to-Rent” ratio. The idea would be that when the ratio shows less than 100, it’s a good time to buy; when it goes over 100, the relative advantage has faded. It’s all relative, of course…and it doesn’t work out to be much more than a footnote to history—but you have to check the graph carefully to come to that conclusion.
Tracking the ratio’s movement over the past ten years, the graph shows a more or less steady Price-to-Rent ratio from 2005 until sometime in 2007. English translation: until the onset of the housing crisis, the financial incentives to continue renting versus buying remained pretty much unchanged. But then we see a bumpy but pronounced drop from 2007 until 2012. Aha! The housing crisis/mortgage meltdown! This would verify that listing prices were falling even as rent levels were rising. This would mark a point where purchasing became more advantageous—even though the risk level at the time seemed daunting.
Then, beginning in 2012, the graph does an about-face. It shows a steady rise as the Price-to-Rent ratio returned to previous heights. Right at the end, as we near today’s data, there is a minor drop: but it’s only slightly below the peak—which you’d think should coincide with the least advantage to buying versus renting.
That this conclusion is the opposite of our area’s current situation is because the Price-to-Rent ratio isn’t the only game in town. The spoiler on the US Price-to Rent Ratio graph is a second line (a faint orange one that all but disappears next to the in-your-face deep purple of the Price-to-Rent line). The orange one is the mortgage interest rate curve. It mimics Price-to-Rent’s ups and downs almost exactly…until it doesn’t. At some point in 2012, the mortgage interest rate flat-lines near the bottom, then stays there, hugging the depths even as Price-to-Rent’s purple line heads skyward.
In other words, the relative advantage to buying versus renting, which should have all but disappeared as Annapolis area home prices climbed, did no such thing. Today’s historically low mortgage interest rates continued to make buying a fantastic opportunity. If you’re one of those who’d like to check into those current opportunities in the Annapolis area, I’ll stay close to the phone!
DEBORAH LAGGINI, Long and Foster Real Estate, Annapolis, MD 21403
REALTOR, Annapolis, Davidsonville, Edgewater, and Surrounding Communities