How to tell if a home is fairly priced

By Kate Ashford, Money magazine


NEW YORK (Money magazine) -- Q: I heard you could check on the price of a house by comparing it with local rents. How does this work? -- Pedro V., Arlington, Va.

A: What you're talking about is the price-to-rent ratio, essentially the value of a home divided by the typical annual rent for something similar in the area. It's one of many numbers used to gauge the health of housing markets.

When prices rise far faster than rents do, the thinking goes, buyers will eventually move to the sidelines. As the gap narrows, owning starts to become more appealing again.

During the housing bubble, price-to-rent ratios climbed to crazy peaks -- it wasn't unusual to see numbers in the 20s and 30s in 2005 -- but the collapse of home prices has brought the nationwide average down to about 15.

Economists generally consider that level a sign of a balanced market. "If you had a very high ratio -- in the 20s, say -- I think it'd be appropriate to be very cautious about buying," says Dean Baker, co-director of the Center for Economic and Policy Research in Washington, D.C. "There's a strong likelihood that the price could fall."

But what you really want to look for is the long-term average for your area. Although Miami's price-to-rent ratio has dropped from 30 to 15, for example, it's still not as low as the average pre-bubble ratio of 12. Also keep in mind that a high number may be the norm -- the pre-boom average in San Francisco was 24 (it's 28 now).

"Some metro area houses will always be overpriced relative to apartments," says Andres Carbacho-Burgos, an economist with Moody's Analytics.

If you're buying a home for the long haul, the price-to-rent ratio is only one of many factors you should consider. But if you're going to stay for five years or less, do the math.

"There are no guarantees," Baker says, "but it's something you'd want to look at carefully."  To top of page

Just the hot list include
Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Overnight Avg Rate Latest Change Last Week
30 yr fixed3.80%3.88%
15 yr fixed3.20%3.23%
5/1 ARM3.84%3.88%
30 yr refi3.82%3.93%
15 yr refi3.20%3.23%
Rate data provided
by Bankrate.com
View rates in your area
 
Find personalized rates:
Index Last Change % Change
Dow 32,627.97 -234.33 -0.71%
Nasdaq 13,215.24 99.07 0.76%
S&P 500 3,913.10 -2.36 -0.06%
Treasuries 1.73 0.00 0.12%
Data as of 6:29am ET
Company Price Change % Change
Ford Motor Co 8.29 0.05 0.61%
Advanced Micro Devic... 54.59 0.70 1.30%
Cisco Systems Inc 47.49 -2.44 -4.89%
General Electric Co 13.00 -0.16 -1.22%
Kraft Heinz Co 27.84 -2.20 -7.32%
Data as of 2:44pm ET

Sections

Bankrupt toy retailer tells bankruptcy court it is looking at possibly reviving the Toys 'R' Us and Babies 'R' Us brands. More

Land O'Lakes CEO Beth Ford charts her career path, from her first job to becoming the first openly gay CEO at a Fortune 500 company in an interview with CNN's Boss Files. More

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.