To rent, or to buy?
By Elizabeth Razzi,
A new index out this week from online real estate company Trulia says it’s much less expensive to buy a two-bedroom condo or townhouse in the District than to rent a similar apartment. Their price-to-rent ratio for D.C. (not including the suburbs) is 13.
They arrive at that ratio by taking the median list price on for-sale properties and dividing it by the annual median for apartments. Las Vegas, one of the worst for-sale markets in the country, tops the pro-buying list, with a ratio of 6. New York City, with a ratio of 39, most clearly favors renting.
So, does that ratio of 13 settle the rent-vs.-buy dilemma for those seeking a Washington-area address? Not quite. (And certainly not if you’re in the market for a house.) Not only should other pocketbook and lifestyle factors carry the most weight in this decision, but various economic clues can lead you to conclude that it’s safer to play the field as a renter. Then again, the economic tea leaves may lead you to conclude that buying can’t wait.
First, consider your lifestyle — and whether it’s really the right time to marry yourself to a specific piece of land and a mortgage payment. Liz Weston, personal finance columnist and author of “The 10 Commandments of Money” (2011, Hudson Street Press, $26), says the recession has changed attitudes toward owning. “It’s not the slam dunk people thought it was,” she said. “People have learned that prices can go down.”
In the Washington area, those prices are down nearly 29 percent from their peak, according to the National Association of Realtors.
Weston says people should plan to live in the same place at least five years — preferably 10 — if they buy a home. “Even with normal appreciation, which is slightly above inflation, it takes five years to offset the costs of selling real estate, considering a 6 or 7 percent commission,” she said.
Then consider your budget. It’s not just a matter of accruing the necessary down payment (at least 3.5 percent of the home’s price, for a loan insured by the Federal Housing Administration). “Homeownership is expensive,” Weston said. Owners need to be prepared to pay for routine maintenance and emergency repairs. “If money is really tight, I’m almost always in favor of renting vs. buying,” Weston said. “If your rent goes up, well, you can move someplace cheaper.” And renters can more freely move to take advantage of better job opportunities, whether across town or across the country.
The fear, of course, is that by continuing to rent, you might miss a good buying opportunity. Home prices were driven down by the housing bust, and mortgage interest rates are near record lows. Plus, federal lawmakers are batting around proposals that might eventually make buying more difficult, increasing down-payment requirements or restricting — even eliminating — the tax deduction for mortgage interest. There is a chance that federal policy could back away from the pro-ownership stance that has been in effect for decades.
Let’s examine the latest economic clues that may guide your decision.
The word on rentals
Finding a good, affordable place to rent isn’t all that easy. Nationwide, a quarter of all renters spend more than half their income on rent and utilities, according to a report issued this week by Harvard’s Joint Center for Housing Studies.
According to an analysis by Alexandria-based market research company Delta Associates, the Washington-area market has the lowest apartment vacancy rate of any major metro area in the U.S. except New York City. The vacancy rate for investment-worthy apartment buildings is 3.8 percent. (That’s less than half the 8 percent vacancy rate that traditionally marks a balanced market.)
The supply of available rental apartments will probably shrink further through the rest of this year, leading to “widespread shortages” in the Washington area by early 2012, according to Delta Associates.
Low vacancies mean landlords can charge higher rents. Rents rose 7.8 percent from March 2010 to March 2011, twice the long-term average, according to Delta Associates, which predicts shortages through most of the Washington area next year.
But those statistics have not gone unnoticed by developers. In the first three months of this year, Delta says in its report, “construction broke from a mere trot into a flat-out run, with 4,201 units breaking ground.” They say landlords may have to return to offering rent concessions as soon as 2013.
Apartments are only part of the rental market, of course. Single-family homes typically account for 34 percent of the rental stock, according to Harvard’s Joint Center. Nationwide, the number of single-family houses on the rental market jumped by 2.3 million during the second half of the 2000s, the worst of the housing bust. They conclude that many people who lost homes to foreclosure and short-sales relocated to these houses.
As the job market recovers, economists expect more young people to venture away from their parents’ homes and set up housekeeping in a rental of their own, potentially boosting the competition for limited supply, which usually leads to rent increases. And the authors of the Harvard report say homes that switched from owner-occupied to for-rent during the housing bust may quickly revert to the for-sale market as the housing market stabilizes.
And the for-sale market?
The Washington-area market is recovering from the housing bust ahead of most other U.S. metro areas. In March, the median list price was up 4.11 percent over March 2010, compared with a national median that is 0.25 percent below last year’s median asking price, according to NAR.
But time on the market increased lately. That’s usually a sign of a market growing weaker, but perhaps not this time. Homes stayed on the market an average of 82 days during the first quarter of this year, which is higher than the long-term average of 78 days, according to Delta Associates. “The driver of this increase in days on market is not a lack of demand,” the report says. “It is primarily a function of sellers holding out for, and eventually nearly achieving, their asking prices.” The average selling price was 97.2 percent of list price in the first quarter—the highest since the end of 2005, when the market was turning from boom to bust.
Also the supply of home listings throughout the metro area is down to 4.1 months’ worth at the current sales pace, according to Delta Associates. That’s a level not seen since the end of 2005.
While condos in new buildings, especially in popular neighborhoods, may be selling well, some resales are languishing on the market. Would-be buyers can’t get mortgages if the condo development already has too many renters or unstable finances coming out of the recession.
Glenn Kelman, president of the Redfin real estate brokerage, said buyers are growing frustrated in the Washington area, especially at the low end of the price scale, because they’re losing out to investors making all-cash offers. “There’s not much good inventory available at the low end,” he said. “Investors are being very aggressive.” He said about a third of all sales are to investors now, often for all-cash deals. That appeals to sellers who don’t have to worry about a low appraisal derailing their deal.
The opinions of others
Finally, consider the consumer opinions revealed in Fannie Mae’s latest National Housing Survey, which was conducted in the final quarter of 2010. The random telephone survey of 3,407 people found that, while 84 percent of all respondents said owning makes more sense than renting, even those who are struggling with the housing bust voiced similar views.
Among people who are delinquent on their loan payments, 83 percent said owning makes more sense than renting. Among those who are under water, owing at least 5 percent more on their mortgages than their homes are worth, 89 percent still favored owning. (Respondents skipped some questions, so totals are less than 100 percent.)
Renters, not surprisingly, were the group most in favor of renting; 28 percent said it’s the better choice, up 8 percentage points since the beginning of 2010. Yet 68 percent of them said owning makes more sense than renting.