In the Hottest Markets,
Renting Is the Real Bargain

Potential home buyers increasingly are facing a difficult economic and emotional quandary: Soaring housing prices in many parts of the country have made renting a bargain.

In the past, home prices and rents tended to move in alignment. But the relationship between the cost of renting and owning has broken down as low interest rates and an array of new mortgage products have helped turn many renters into homeowners. That has helped propel home prices upward -- and, in turn, has weakened the rental market, prompting landlords to cut rents or at least raise them less aggressively.

THE GAP WIDENS The monthly cost of renting an apartment and the monthly cost of buying a home has widened nationally since 2001. See a chart of how the ratio between the two has changed from 2001 to 2004, in 21 major markets. RENT OR BUY? Check out a rent vs. buy worksheet, and other home-buying calculators,

The result is a widening of the gap between the cost of renting and the cost of buying in some of the nation's hottest housing markets -- a gap now at its biggest since at least 1994, according to Torto Wheaton Research in Boston, and by some accounts at its biggest since the 1970s. The data suggest the economic case for renting, at least in the short term, has grown significantly in these markets.

Since 1999 and 2000, the relationship between rents and home prices has "broken down," says Mark Zandi, chief economist of Economy.com. With interest rates falling, it's "not surprising that the relationship has changed," Mr. Zandi adds. "What is surprising is that it has changed so much."

In San Francisco, the monthly cost of renting an apartment is just 45% of the monthly cost of buying a home, down from 67% in 2001, according to an analysis of 21 key markets prepared for The Wall Street Journal by Torto Wheaton. In Washington, D.C., rental costs are now just 59% of the cost of owning, down from 82% in 2001. In Miami, rental costs are 63% of the cost of homeownership, down from 89% in 2001.

In San Francisco, the monthly cost of renting is just 45% of the cost of buying.

The potential cost savings for renters could well be even larger, given that the analysis doesn't factor in property taxes and other expenses associated with homeownership. Mitigating that is the fact that mortgage interest and property taxes typically are deductible from federal income taxes. Homeowners often can deduct interest and real-estate taxes on their state and local tax returns, too. And many borrowers have opted to lower their current monthly payments by using an adjustable-rate or interest-only mortgage. (The 21-city analysis compared average-price apartments and median-price homes and assumes that a home buyer takes out a 30-year mortgage. Those properties may not be directly comparable, but the analysis shows how the relationship between renting and owning has changed over time.)

Despite the lower comparative cost of renting, the enduring tug toward homeownership -- coupled with the fear of missing out on further price appreciation and even being shut out of the market for good -- still is driving many people to buy. The rate of homeownership in the U.S. was 69.2% in the fourth quarter of 2004, compared with 67.5% in 2000.

Many buyers who have done the math are betting that rents eventually will rise and that any savings from renting will be more than offset by rapid gains in home prices -- a pattern that has been true in recent years as prices have moved up at above-average rates. Still, many economists say those outsize gains are likely to become a thing of the past as interest rates move higher.

"People have formed expectations for future price increases based on past price increases," says Susan Wachter, a professor of real estate at the Wharton School at the University of Pennsylvania. "Their expectations may not play out the way they thought they would....They may in fact find that they are buying in at the top of the market."

Some would-be buyers are having second thoughts. Tanvir Mangat, a management consultant in Washington, D.C., has been looking for a condominium or a townhouse off and on for the past year. "Unless we can get a good price for what we want, we're going to continue to rent," says Mr. Mangat, who has had trouble finding something in the $600,000 to $750,000 price range that meets his needs. "The only thing we're losing [by renting] is we're not building equity right now."

The fact that the cost advantage of renting has widened in many areas is even more remarkable given that apartment rents have begun to edge upward. Those modest rent increases were more than offset by strong gains in home prices in many parts of the country.

Average home prices climbed 8.3% last year and 7.5% in 2003, according to data compiled by M/PF YieldStar, with many markets posting double-digit gains. Rents, meanwhile, inched up 1.7% last year, after falling 1.6% in 2003.

Because housing and rental markets depend on local circumstances, the relationship between home prices and rentals varies significantly around the country. The median home price in metropolitan Las Vegas is $266,400, which works out to $1,274 a month, assuming a buyer puts 20% down and takes out a 30-year fixed-rate mortgage, according to HSH Associates. The average rent for a two-bedroom apartment there is $860. In the San Diego metro area, the median home price is $551,600, which works out to about $2,686 a month, while the rent on a two-bedroom apartment is $1,625.

The national apartment market was hurt severely by the economic downturn. In Phoenix, a one-bedroom apartment that fetched $700 a month a year or two ago now can be had for $550, says Lisa Sampson, a broker with All Star Apartment Rentals. Meanwhile, "the same house you could have bought for $150,000 last year is now $250,000."

Whether renting or buying is the best move depends on a variety of factors, of course. These include how long you expect to stay in the home and whether what is on the market to buy or rent meets your needs. Michael Dubis, a financial planner in Madison, Wis., says he also advises clients to consider what their money could earn elsewhere.

The longstanding rule of thumb has been that buyers need to stay put for five to seven years to justify the closing costs and other outlays involved. But in the hottest markets, says Raphael Bostic, director of the real-estate development program at the University of Southern California, that length of time has shrunk, in part because home prices have moved up so rapidly.

"I see a lot of people who are choosing not to stay very long and are still buying," says Lauren Goloboy, a sales associate with Coldwell Banker in Brookline, Mass., a suburb of Boston. Ms. Goloboy says she is frequently asked how long you have to own a home to receive favorable tax treatment on capital gains. (The answer: more than one year to qualify for the 15% rate.)

Mara Schonberg, an attending physician, bought a two-bedroom condo in the Boston area last summer for about $295,000, even though she may move in three to five years. "I would probably spend less per month on a rental," she says. But, she adds, "I'd rather take a risk on the real-estate market. I'm tired of having landlords."

The rental bargains aren't limited to the nation's hottest housing markets. Steve Hendry of Re/Max Associates of Dallas says he recently found a tenant for a home in Plano that had been vacant for four months by agreeing to a lease that runs for six months instead of a year. "I've reduced the price on probably all of the listings I have at least once to create more activity," adds Mr. Hendry, who recently dropped the price on a home in Allen to $1,200 a month from $1,295.

"For the near term, it's pretty clear that rents are a bargain in many places relative to the cost of buying the same unit," says Eric Belsky, executive director of Harvard University's Joint Center for Housing Studies.

Write to Ruth Simon at ruth.simon@wsj.com and Ray A. Smith at ray.smith@wsj.com

Return to story.

	Sponsored by