Both rents and prices are falling. So is this a better time to rent or buy?

The answer is obvious. Rent.

Isn't one of the basic ratios traditionally used to track prices rent / own? So, if rents have dropped like $50 / month (according to the article) and home prices have dropped 11% are they back in line with each other? I suspect they are not given the huge run-up over the last couple years, but it'd be interesting if someone with access to real numbers could put this in perspective. (The caveat being that all numbers really need to be localized).

If I were a betting man, I'd say the drops in rents are steeper outside the metro Boston area, which would roughly correspond to sales data we've seen where non-Boston / lower-quality Boston neighborhoods are taking it on the chin, where more premium mid-range neighborhoods are seeing a more moderate effect.

Lance? Hung? Marcus? Got some numbers to fill out the article?

You only "lock in" a low rate for rent for the term of the lease, right? So one year from now, the rent can increase. And with a one-month-free offer, it effectively will.

Also, the article is talking about a specific, rather high, range of rentals. If you check the neighborhoods and the non-luxury market, the rents have not come tumbling down, despite the vacancy rate. (I'm a landlord, and I keep a close eye on rents in my area. I've seen units go un-let for more than a year without any decrease in the asking rent. Makes no sense to me.)

And I think a decision to rent or buy is based on a lot of factors, not all of which are whether the decision makes economic sense. Sometimes it makes personal sense. The state of the economy merely makes it easier or harder for people to act on those factors to make the decision that suits them.

Sure, there are vacancies in large "luxury" complexes that were all built in the last 10 years. Their rental rates have been FAR too high, and the perks they offered have become financially unstable for them as their vacancies are increasing as well.

What you WON'T find plentiful are single-family rentals, duplexes, and other privately-owned rentals. As my husband and I have considered upgrading our rental situation (instead of buying), we've found single-family homes for rent to be quite the endangered species.

I plan to wait until purchase prices are no longer dropping by double-digit percentages every year before I buy anything. For now, I'll enjoy the lack of rent increases.

As a Real Estate Agent in the south-end I know no landlords that are lowering rents....Some are staying the same.

As Susan says, there are many factors that go into the decision. In my mind, the economics take precedent. Look at how many people that could never afford a home, bought during the bubble because of the personal reasons. That decisions has not worked out so well for them.

There are probably many people that want to own a Mercedes, but a Honda will still get them from point A to B. Same goes for housing. An apartment provides the same shelter as a home. And, if like my case, you can rent for half the price of owning, it makes sense to forgo buying until prices drop further. At some point, I want that roof over my head to be a home, but right now, it just doesn't make sense financially.

Easy. Rent. The numbers make it obvious. It's not even close.

And it's what I do and will continue to do, until it actually makes sense to buy. I didn't sell all (ok, almost all) of my real estate back in 2005 just to catch a falling knife because the NAR sees green shoots.

Buying now, with prices predicted to drop through 2010 by all reasonable analysts, is just idiotic. Even if rents were going up.

renting is without a doubt the way to go. With at least another 30% decline to go, as well as subtantial transactions costs, and an illiquid, high-maintenance "asset"
one would have to be delusional to think buying is the way to go. I am still sticking by my forecast of a return to 1997 pricing. Once this market hits bottom, it will be a very long time before housing generates any kind of "returns". But of course the NAR will continue to tell people the market has bottomed, rates are low, buy now, blah, blah, like a broken record....

Renting economically makes more sense over buying, however there is more into it. It's all good and simple when you have no kids. Once you have a family you add more things into the equation like: location, school system, suitable rental units available in your target town or lack therof etc. It is more difficult to find a descent rental 3bdr units in towns with good schools. These towns' rental complexes are not targeted to families with 2+ children, and some have age restriction.
Also, once kids go to school you would like to provide some stability by staying put in one schoold district. Finding a SFH for rent is NOT cheap and finding them isslim picking and you can not assuem you will stay there for a long time if the landlord decides to sell. Our exact situattion, moved into SFH last year, they did not extend our lease, because they are selling. For some reason everybody on this board assumes renting 1-2bdr apt, wich in case of a family is NOT enough space.Try it with a 6 and 8 year siblings of the opposite sex and visiting MIL from out of town and once a year 3week visit from your relatives from across the worlsd. I'd LOVE to have my own house, and I may bite a bullet and say "enough is enough" renting a SFH comes up to almost the same as a mortgage on one.

Now is the time to buy. Buy low and sell high. Real Estate market is ripe for the picken. Low intrest rates and seller willing to negotiate make now the best time.

When the market moves upward, intrest rates will move up.

Over time Real Estate is the best investment one can have, history tell us that.

Do not wait, and talk about how you should have taken advantage this low market.

Speaking of price drops charles, what's your prediction of further drops from here?

My husband and I are considering a purchase in the Boston area. Before I did the calculations, I had the gut feeling that renting was definitely better based on the still quite high cost of purchasing. The numbers surprised me though. Here's what I came up with:
- Closing costs are covered by the 8K federal tax credit
- Assume maintenance costs of 1% house value/year
- Assume property tax of 4-5K/yr
- Factor in tax benefit from deducting your mortgage payments and property tax, assuming you itemize deductions.
- Factor in equity built per month
- Assume no further declines in the market- this is the biggie, obviously it makes no sense to buy into a depreciating market

I found that the cost of renting vs owning was nearly identical for a 350K mortgage.

scigirl: your estimate of 1% maintenance cost is too low.

You might be correct if you buy a house that is in tip-top shape and if you or your husband can do a lot of the work yourselves. But eventually stuff will break and eventually you'll stop wanting to spend all your free time fixing your house. I once estimated that it costs $1000 a year just to keep paint on your house.

Hey accidental,

Good question. Didn't we have something of a side bet on what would happen this spring? I can't remember.

But basically I think prices will be dropping to 1999/2000 levels (see, I'm more optimistic then hung!). This will be more of a drop on the high end then the low end, since the low end has dropped more already.

scigirl,
You mention that you considered a purchase in the Boston area, and that you based your rent vs own analysis on a mortgage for $350K. The question I have for you is where in Boston will you be able to find a decent home for $350K without needing to wear a bullet-proof vest every time you step outside the house, or invest a substantial amount of money for repair and improvements?

Yes. Prices have and continue to come down considerably everywhere in and around Boston regardless of what the folks in the RE industry claim but we are not at the point where prices are realistic. In order for a easonable price to income ratio (which historically has been in the 3-3.5x range) to reach fundamental levels again, prices will need to drop another 20% across the board. If it doesn't, then this scenerio in the housing market will be dragged out for many many years until wages eventually catch up.

Well, actually in some decent parts of Somerville we've seen nice 3 br condos for around 400K and we have enough saved to make a 50K downpayment, which would mean a 350K mortgage. Rental prices for a 3 br in Somerville are around 1800-2000 according to Craigslist. It's true, if I assume higher maintenance costs (say 3%/yr or $10,500 instead of 1%/yr or $3500) the calculation comes out more in favor of renting ($~2400/mo to own vs $1800-$2000 to rent).

charles,
At one point early on (at least a year ago) you'd said that my place, which I bought for $280,000 in 2003, was headed to between $235 and $250,000. When I read that the blood drained from my face, naturally, but I've carried that with me since. At this point I'd say you will be right, if not optimistic. If we do go back to 1997 prices as hung/lance, et al expect I'm looking at as low as $210,000.

When Boston was at a 10% total drop my wonderous prediction was that we'd fall 19% total, based on some Goldman Sachs prediction, now long forgotten.

So at this point I'm wrong, and you still have a chance to be right!

By the way folks, there's one scenario that doesn't come up much on this blog, and that's the effect of inflation on house prices. Now, you'll correctly point out that inflation means you're losing real value even if the median stays put or rises. But inflation would help nominal prices, which is important if you're under water. An investor hates inflation, but for someone needing to sell it's a friend.

RE #19, I meant nominal, not "median".

I really like the NY Times rent vs buy calculator (I'd put in the link but I know that will get this post labeled as spam so you'll have to Google for it). Anyway I used $2000 a month rent $400,000 purchase price and a 12.5% down payment (50k). The neat thing about that tool is after you enter the initial criteria you can play with sliders for housing appreciation and rent increases.

I remember that traditionally you wanted to be ahead owning after 5 to 7 years. I don't remember the thinking behind that number but it makes an intuitive sense, There are pluses and minuses to owning and one of the big minuses is a decreased ability to change housing, and keeping the break even time low mitigates that downside somewhat.

In order to get a 6 year break even point I had to use both 3% appreciation and 3% rent increases. I think even the bulls will admit that that is FAR from a sure thing.

Interestingly enough the the other way break even point in around 6 years is to assume 0% appreciation and 12% rent increases. So if you're looking for inflation to make houses look like a good bet at current prices you're talking about really, really painful inflation numbers for the indefinite future.

accidental - oh, yep. Yeah, I stick by that prediction.

One piece of good news for you is that your neighborhood has gentrified, if I remember it correctly. Going back to 99/2000 assumes all variables equal, which yours aren't in that case - you should be a bit above that as there has been structural change.

You are quite right about the effects of inflation. That worries a lot of people, since to the political class inflation is a very tempting way out of this mess. Hence the chinese warnings.