David Leonhardt buys a home

David Leonhardt of the New York Times, among the most prominent apostles for renting, wrote a piece this week explaining why he just bought a home in Washington, D.C. The crux is that falling home prices and rising rents have made ownership relatively more affordable.

"I’m still not sure how good our timing was....

"In fact, if you’re now renting — almost anywhere — and do not need to move, I’d probably recommend that you wait to buy. The market is still coming your way.

"But it’s O.K. with me if our timing wasn’t perfect. After several years of reporting on the housing market, I’m convinced that the most common real estate mistake is viewing a house first as a financial investment and only second as a home."

Leonhardt is a numbers guy, and he grounds the decision in a simple comparison I've written about before. I'll let him describe it: "You find two similar houses, one for sale and the other for rent, and divide the sale price by the annual rent. You can call the result the rent ratio."

More sophisticated versions of this comparison adjust the cost of ownership by considering factors such as the down payment and the mortgage interest rate, which can differentiate the actual cost of ownership for two homes bought at the same price. The Times offers a calculator on its Web site.

Leonhardt writes that a rent ratio above 20 means ownership is very expensive compared to renting.

"At current mortgage rates, for example, a $500,000 house would typically bring monthly expenses of about $3,000 (taking into account taxes, repairs, a typical down payment and, yes, the mortgage deduction). When the rent ratio is 20, that same house could be rented for only about $2,000 a month.

"There are two problems with buying a house in this situation. The first, plainly, is the extra $1,000 you’re paying each month for the privilege of owning, on top of the thousands of dollars you spent on closing costs. The second problem is that a rent ratio above 20 is a good indication of a bubble. When the prices of houses get out of line with the competition’s prices — that is, those in the rental market — a correction is coming."

For both of these reasons, Leonhardt says he probably still wouldn't buy a home in Boston, where the rent ratio generally remains above 20.

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