Rising Rents Making Many Renters to Re-Examine Homeownership
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Apartment asking rents increased 2.8 percent last year according to Rents Marcus and Millichap while effective rents (after consideration of all discounts, giveaways and specials) jumped 4 percent. At the same time, median U.S. home values declined 3.9 percent. Marcus and Millichap expects 2012 to see even added increase in rental rates with a forecast 85,000 new unit deliveries but with demand for at least 120,000. Apartment vacancy rates, which nationwide declined from 6.6 percent in 2010 to 5.4 percent in 2011, are expected to drop to 5 percent in 2012. The bottom line is that rents are going up once again in 2012—and depending on where you live, buying may become a better economic decision.
Again I invoke the TINSTAANREM clause—There Is No Such Thing As A National Real Estate Market, as every market is different.
To examine the relative favorability of buying versus renting, typical rents were gathered from 141 different markets and compared to median home prices. Rental information was taken from ApartmentRatings.com which compiles online reviews and rental rates for more than 1.2 million units across the U.S. The rental data are for two bedroom units with any number of baths. These monthly rents are annualized by multiplying times 12. This annualized rent is then divided by the median home price (actually, the median home price average from the first three quarters of 2011) as reported by the National Association of Realtors®. I believe all would agree they would rather live in the typical median priced home than a two bedroom apartment. Never-the-less, the ratio does have a usefulness in assisting in the decision to buy or rent. The cost of owning a home with 30-year interest rates at 4 percent (actually, a little less), and property taxes, insurance, homeowner association fees and maintenance residing in the 3 to 4 percent range, is 7 to 8 percent of the value of the property per year. This very simplified analysis ignores many obvious negative and positive factors such as the down payment, closing costs, the tax benefits of interest and property taxes and any increase or decline in the property value.
This first table shows the rents, median home prices and the ratio of annualized rents to median home values sorted alphabetically by market. The ratio of annualized rents to median property value ranges from a high of 15.92 percent to a low of 3.27 percent with an average of 6.99 percent. Renters in markets with high ratios should give homeownership a serious consideration. Is the sample of rents a true representative random and representative listing of rents? Probably not. But the sample is large and the comparison consistent.
The following table ranks the Metropolitan Areas from the largest to the smallest ratio between annualized rents and median home prices. The larger the ratio, the more favorable it is to own rather than rent.
The bottom line is that rental rates are going up, and many that are renting today could reduce their housing costs and at the same time hopefully upgrade their housing environment.