Bigger Buys, Bargain Rents

The FWD #155  •  353 Words

This summer’s hottest housing indicator is the price-to-rent ratio.

We know there’s a good chance you spent at least some of your July 4th BBQ chatting about the housing market—specifically how expensive everything seems to be these days. But did you bring up the housing price-to-rent ratio? This indicator, which compares the cost to buy versus the cost to rent, is at its highest in at least 46 years. Some economists are concerned this means homes are selling higher than their fair market value.

This statistic has some substantial nuances to keep in mind, particularly regional variations and the rural versus urban dynamic. In fact, certain metros have a low enough ratio that purchasing a home can be lower cost (on average) than renting. But looking at the US market as a whole—and other countries, too—the ratio is trending upward significantly. This is due to both the rise in home prices and also the fall in rents. Both add fuel to the fire. 

So renting, which often gets a bad rap, may not be such a bad deal these days. Next time you find yourself defending your choice to rent or lamenting your inability to buy, remember that as of March the nationwide house price index was about 30% higher than the estimate of fair value for US homes.

One big question still remains: what will meaningfully shift housing inventory? Let’s hope it’s not the end of the foreclosure moratorium or a rebound in rents. Instead, maybe all the single-family homes purchased by investors after 2008 could return to owner-occupancy. We know new home starts won’t be helping anytime soon, unless Jeff Bezos returns to earth with a newfound alien homebuilding gizmo.

Those of us in the affordable housing industry continue advocating for funding to increase the supply of starter homes in the absence of the market’s ability to create this housing type. Starter home resources such as zoning changes to allow “gentle density,” funding to bring the cost of acquisition and construction down, as well as the use of manufactured housing are all tools in use today to address the housing shortage.

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