Maps

What to Consider in Deciding Whether to Rent or Buy

Updated data from metros across the United States.

What makes more sense today — to rent or to buy? And where to do it?

Real-estate website Trulia's "Summer 2012 Rent vs. Buy" report, released Thursday, points to the large U.S. metros where owning a house, when taxes and other transaction and opportunity costs are included, is actually considerably cheaper than renting one. These latest findings echo numbers found in prior reports.

Screenshot of Trulia's interactive map.

In fact, in every single one of America's 100 largest metros, according to the report, owning is now cheaper than renting. For renting, these numbers include renter's insurance and a security deposit. The numbers for owning include closing costs, maintenance, insurance, and property taxes, and assume the house won't be sold for at least 7 years.

Top 5 Metros Where Homeownership Affordability Is Highest

Metro Monthly cost of homeownership ($) Monthly cost of renting ($) Difference ($) Difference (%)
Detroit, Michigan $349 $1,149 -$800 -70%
Gary, Indiana $616 $1,649 -$1,033 -63%
Oklahoma City, Oklahoma $590 $1,576 -$987 -63%
Lakeland-Winter Haven, Florida $495 $1,276 -$781 -61%
Toledo, Ohio $476 $1,222 -$746 -61%

Table data courtesy of Trulia

Top 5 Metros Where Homeownership Affordability Is Lowest

Metro Monthly cost of homeownership ($) Monthly cost of renting ($) Difference ($) Difference (%)
Honolulu, Hawaii $1,519 $2,007 -$488 -24%
San Francisco, California $2,327 $3,226 -$899 -28%
New York, New York-New Jersey $1,857 $2,687 -$831 -31%
San Jose, California $1,819 $2,646 -$827 -31%
Los Angeles, California $1,379 $2,020 -$641 -32%

Table data courtesy of Trulia

There's no doubt that home ownership is far more affordable today than it was before the bubble burst. Even so, it still makes sense to balance the short-run costs of owning versus renting with longer-run expected returns. Four of the five metros above — New York, San Francisco, San Jose, and L.A. — may be expensive because the market is pricing in predicted appreciation over the long-run. The reason prices are lower, and more affordable, in other metros likewise may be because the market expects lower rates of appreciation. There's also the all-important question of ability to exit — whether and how quickly you can sell if you need to.

In a previous Atlantic article, I wrote about this very topic, and found that housing price-to-rent ratios track reasonably closely with housing prices, human capital levels, and incomes and wages. Overall, it is more expensive to own versus rent in richer, more educated, more expensive places — which of course makes basic economic sense.

I quoted an email from economist David Albouy of the University of Michigan on just this point:

If prices reflect the present discounted value of future rents, then a low price-to-rent ratio today suggests that future rents will be low, probably because local amenities or job opportunities will be less desirable. Financially, you're putting a bet on a place that now looks like a loser, but more importantly you're making it harder to move out of a place where the prospects don't look so good. The other thing is that homeownership may be over-rated socially. It eats up tremendous time and money. Talented people may benefit themselves and society more by providing or developing products for the larger public, rather than devoting their time to amateur home-improvement (although some fix up houses pretty nicely).

According to Albouy's research, three of the most expensive places to buy as opposed to rent on Trulia's list — San Francisco, New York, and L.A. — are also the three most economically productive U.S. metros, which is closely related to housing prices. Albouy's research, which combines economic productivity with the value of natural and cultural amenities to define a metro's overall "value," also finds that San Francisco "claims the prize for being the most valuable city in the United States, as it has the most valuable combination of amenities in consumption and production." New York, Honolulu, and L.A. all number among the top 15 on overall value, according to Albouy.

And I concluded that:

In the end, the costs of owning are relatively higher in communities with higher levels of economic output, higher incomes, and higher wages — that is where there is higher effective demand. They are also places with among the lowest levels of homeownership and where there is likely a relatively large pool of people who would like to be able to buy a house there someday. Not to mention they are the places with stronger underlying economic prospects — witnessed in their higher levels of human capital and more high-tech and creative economic structures. They are the places that, generally speaking, are attracting skilled people, generating new technologies and industries, which provide the greatest economic opportunity. 

Regardless of price differentials or rent vs. buy calculations, I said these are just the kinds of places that I would myself buy or recommend my friends or relatives to do the same. And I said that I sensed the higher cost of owning as opposed to renting in these cities and metros — like their higher housing prices to begin with — reflects just that. Even though buying a home is much more affordable in many places today, my general feeling remains the same.

About the Author

  • Richard Florida is Co-founder and Editor at Large of CityLab.com and Senior Editor at The Atlantic. He is director of the Martin Prosperity Institute at the University of Toronto and Global Research Professor at NYU. More
    Florida is author of The Rise of the Creative ClassWho's Your City?, and The Great Reset. He's also the founder of the Creative Class Group, and a list of his current clients can be found here