Rent-to-Buy Ratio

In the current housing situations, with the home price dropping 10% annually, is this the right time to buy a house and live the American dream of owning a house?? Well we all know the housing price has drop, but how much lower can it go? Today, I read this article talking about “rent-to-buy ratio,” (http://www.ocregister.com/news/rentbuy-ratio-for-2075632-news-metro) this article further assures my thinking about the current housing market, that the housing price is still too high. This article gives you another point of view about the housing price. I think it is very helpfully in purchasing the biggest asset of your life.

“The P/E ratio (price-to-earnings ratio) of a stock (also called its "earnings multiple", or simply "multiple", "P/E", or "PE") is a measure of the price paid for a share relative to the annual income or profit earned by the firm per share. A higher P/E ratio means that investors are paying more for each unit of income.” (Wikipedia.org)

The rent-to-buy ratio is like the P/E ratio of stock, to calculate the ratio; you take the home price divided by 12 month rent. The higher the Rent-to-Buy ratio means higher housing price and it is better off renting the property. The lower the ratio means lower housing price and it is better off buying the property.

The housing prices are determined by the usual supply and demand of housing, when housing demand increases the home price will increase. Also the rent will increase, because people who can’t own or buy a house will resort to renting. However, if the housing prices increase, and the rent stay relatively the same, it means there are speculator in the market which bump up the price.

Back in 2005-2006, the height of our housing market, the rent-to-buy ratio shot up to 31.5 in LA, and 29.7 in OC. To put it in perspective, with an average rent of $2,000 per month ($24,000/year) and a ratio of 30 will yield a home price of $720,000. If the rent stated the same and the housing market came down to yield a ratio of 20, your home price would be $480,000, that’s a difference of $240,000 ($720,000 – ($24,000 x20)). From the article the different between the LA’s peak ratio and the first quarter 2008 is 7.4 (a difference of -23.5%); therefore, a difference in ratio of 10 point is possible; giving that current housing price has not bottom out yet.

In conclusion, if currently you are looking to purchase a house and start your American Dream, then don’t let this opinion hold you back because your home value have drop 7 point from the peak. However, if you can wait the saving would be greater over time.

*~Ethan~*