Wednesday, October 20, 2010

The Rent vs. Price ratio in Baltimore sends a strong “Buy” signal

One overlooked metric is measuring whether a real estate market is over or under priced is the “Rent vs. Buy”  Index.  This index compares the average rent in a particular locale with the selling price of a similar  property. For example, if an apartment rents for $12,000 a year ($1,000 a month) and a similar condo sells for $180,000 then the rent/buy ratio is 15 ($180, 000/$24,000 = 15).

In a given market, if the ration is 15 or less,  the “for-sale” market is under-priced as compared with rentals. If it is over 20, renting is less expensive. Ratios between 16 and 19 may fall either way depending on locational and amenity factors.

Cities in the United States where renting is much cheaper includes the nations most populous and include New York, Boston, San Francisco and Seattle. The good news is that Baltimore is clearly in the “Buy” category with a ratio of 12, as reported by Trulia.Com, the real estate analytics  site.

To test the validity of Trulia’s research, we ran comparables in MRIS for a modern upscale 3 B.R townhouse in the suburbs of Baltimore County. We found one that rents for $1930 a month, with an almost identical one that sold for $355,000 after 79 days.  The ratio comes to 15.32…definitely a buy but not a bargain. Then we tested a condo in Hartford County where we found a 2 BR/2BA rental in Bel Air for $1,200 a month, and a similar unit in the same complex that sold for $150,000 after 79 days. The ratio comes to 10.41….a real steal. Lastly we tested a 3 BR/2 BA split-level in Columbia (Howard County). We found one for $2,000 a month and another almost identical down the street that sold recently for $308,500. That’s a ratio of  12.8. So the Trulia research looks pretty solid all across the region and all product types.

As further evidence that the for-sale market in the Baltimore Region may be under priced, a recent story in the Baltimore Sun reports that rents are expected to increase 10% over the next 12 months.
Rents, particular for apartments, are a function of vacancy. As vacancy drops below 5%, landlords feel confident in raising rents. Apartment vacancies in the Baltimore Region have dropped below that level. This trend means that for-sale housing will will continue to be a wise consumer choice in the Baltimore Region for the forseeable future.

The Rent/Buy Index is a rough rule of thumb and fails to take into account mortgage rates. With the low rates today the evidence is even more compelling.  If you want to do an exact calculation taking all factors into consideration, including your tax bracket, try this very sophisticated “Rent/Buy”calculator which appeared in the New York Times.  

We tested it with the upscale townhouse in Baltimore County with the following assumptions: 20% down, a 4.5% loan, property tax equal to 1% of the purchase price, insurance at $700 per year, annual appreciation at a very conservative 2% and a tax bracket of 28%.

Here’s what we found…after 4 years "buying" is better than "renting" and the advantage gets better the longer you stay. 

For years home-builders and mortgage lenders shouted “Stop wasting your money on Rent!”  When prices were at their peak that may not have been the best advice. But today "buying" in the Baltimore area is definitely a good idea if you have confidence in your financial future.

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