A new metric for the rent vs. buy equation

File this one under “things that typically get me tarred and feathered,” but the rent vs. buy dilemma can be so all-consuming that any metric that makes the decision easier warrants discussion.

My take on the current rent vs. buy conversation is that the market is too toppy for first-time homeowners without any existing equity to roll forward (the median cost of a home in the 1970s was 3x median income; in 2021, it was 6x).

That said, not all markets are created equal—and that’s exactly where the price-to-rent ratio comes in handy. Someone who purchased a house in rural Kentucky in 1995 is sitting on a very different asset than someone who purchased a home of the same price in San Francisco. And while it doesn’t seem logical that rents don’t rise proportionally with property costs, it’s true: Just because a market is expensive to own in doesn’t mean it’s expensive to rent in, and vice versa.

The price-to-rent ratio can also be helpful for gauging whether or not an area is “fairly” priced, or if it’s in bubble territory (while bubbles are great for investors who get out before they pop, timing the sale of your primary residence is subject to life factors beyond the market, which makes it a risky game).

To determine the price-to-rent ratio in a given area, divide the median home price by the median annual rent. Generally, a price-to-rent ratio higher than 21 means it’s cheaper to rent in that area.

As of 2019, the price-to-rent ratio in San Francisco is over 50, the highest in the country. For every $1,000 you’d spend in rent, you’d have to pay $601,362 to buy something comparable (e.g., a place that rents for $4,000/mo. would cost roughly $2.4M to buy). At that rate, it’s cheaper to rent than to own, as the estimated monthly mortgage payment would be north of $10,000.

Compare that to a place like Oklahoma City, where every $1,000 you spend in rent would cost $188,109 to buy something comparable. When given the choice between $2,000/mo. rent or the mortgage on a place that costs $376,000, you’ll likely favor the mortgage. (The price-to-rent ratio in OKC is 15.7.)

The price-to-rent ratio localizes a decision that’s often treated as a black-and-white issue. Is it better to rent or buy? Well, it depends on three things: Location, location, location.

If things like the rent vs. buy dilemma make your head spin and you feel like you need to just get back to basics, this is a (free) mini course that’ll take you through a curated drip—day by day—of my best articles and episodes for beginners.

Katie Gatti Tassin is the founder of Money with Katie, the newest member of the Morning Brew family. Shop the Money with Katie store and manifest your #RichGirl lifestyle.