May 28, 2008

Is It A Good Time To Buy? And Figuring Out The Rent Ratio

We’ve had some discussion on this board about whether the time is right to buy or not. Some experts say, “yes“, while others watching the market slowly drop say, “No Way!”

Well, I found one perspective from New York Times writer, David Leonhardt. Apparently, once a staunch supporter of renting, Leonhardt writes about his newfound point of view.

When two of my colleagues were moving to Los Angeles, I e-mailed them a spreadsheet that helped persuade them not to buy a house there. That same spreadsheet was the basis for an article in 2005, when I argued that “renting has become a surprisingly smart option.” Last spring — like any good evangelist, comfortable with repetition — I wrote a similar article.

The case for renting has been simple enough. House prices rose so high in the first half of this decade that you could often get more for your money by renting. You could also avoid having a large part of your net worth tied up in a speculative bubble.

But by the end of his article, Leonhardt, who has since recently had an offer accepted on a house, writes how he has apparently changed his mind about renting.

The housing bubble, unfortunately, forced a reconsideration of this standard, because houses became so overvalued. But they’re slowly coming back to reality, which means that buying has again started to make sense for more people. Apparently, I’m one of them.

But - he does live on the East Coast. Leonhardt does mention he wouldn’t be so keen on a purchase in most of California.

I’m still not sure how good our timing was. Based on the backlog of houses on the market, I fully expect that our new house will be worth less in six months than it is today. I’m also not sure that we would have been willing to buy in Boston, New York or much of California, where the rent ratios remain above 20, according to data from Moody’s Economy.com.

According to the article, rent ratios that exceed 20 mean that home ownership and its associated costs would exceed those of renting. Want to figure out the rent ratio for an area you’re looking at? Take two comparable homes - one for sale and one for rent. Divide the sale price of the home by the year’s cost in rent. Whalah! You have your rent ratio.

Here are a few properties that have dropped in price in the LAX area, by the way.

Playa del Rey

8162 Manitoba St., #306/2bd, 2bth/$549,000 to $529,000

Playa Vista

5625 W. Crescent Park, #110/2bd, 2bth/$655,000 to $568,000

Westchester

7320 Ogelsby Ave./3bd, 1.75bth/$1,069,000 to $1,045,000

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