- Where to move often indicated by home ownership affordability compared to renting
- Price-to-rent ratios can help determine affordability over time
The COVID pandemic continues to affect all aspects of our lives including where to live and where to move. As the pandemic continues, home purchase preferences change.
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Will people be concerned about COVID resurging in areas already impacted by it? Will people want to live in more rural areas as opposed to more densely packed urban areas? Will people want larger home spaces in order to accommodate remote working and/or multiple generations?
We’re already seeing some “leanings” toward changing preferences but one indicator that is always important to potential buyers is affordability. And, one indicator of affordability is to look at an area’s median home pricing compared to its rent pricing, or the price-to-rent ratio.
To calculate the price-to-rent ratio, divide the median property value or home price by the median yearly rent price.
The only caveat with this price-to-rent ratio used by the National Association of REALTORS® or NAR (with median property value data provided by the FHFA Home Price Index in 2019 and median rent price data from ApartmentList.com) is that the price-to-rent ratio does NOT include changes in mortgage interest rates.
NAR suggests that a price-to-rent ratio of 1 to 15 indicates that it’s more affordable to buy than to rent whereas a price-to rent ratio of 16 and above indicates that renting is more affordable than buying.
NAR found that the states with the highest price-to-rent ratios in 2019 included…
- Delaware – 46.6
- North Dakota – 38.9
- New Mexico – 36.9
- Maine – 36.6
- Arkansas – 29.7
- Alaska – 28.6
- Hawaii – 28.3
- Montana – 27.8
- Utah – 27.8
- North Carolina – 27.5
NAR found that the states with the lowest price-to rent ratios in 2019 were…
- Nevada – 15.5
- Texas – 15.4
- District of Columbia – 12.9
- Missouri – 6
- Wisconsin – 12.2
- Alabama – 11.0
- Massachusetts – 10.8
- Arizona – 10.8
- New Hampshire – 10.7
- New York – 10.1
Using New York State as an example, renters tend to live in New York City where rents are high. However, if and when those NYC renters move to suburban and rural areas of the state, home prices start to come down thus making it more possible and more affordable for those former renters to live as home owners.
Thanks to the National Association of REALTORS’ Michael Hyman.