Breaking Down the Price-to-Rent Ratio in Your Market

Breaking Down the Price-to-Rent Ratio in Your Market

The price-to-rent ratio is a measure of the relative affordability of renting and buying in a given housing market. It is calculated as the ratio of home prices to annual rental rates. So, for example, in a real estate market where, on average a home worth $200,000 could rent for $1,000 a month, the price-to-rent ratio is 16.67. That’s determined using the formula: $200,000 / (12x$1,000).

It’s a useful statistic for comparing the relative costs of buying and renting across different markets, and it can be especially helpful when deciding whether to buy or to rent. As a general rule, a lower price-to-rent ratio indicates that a place is more favorable to homebuyers, while a higher ratio indicated a better environment for renters.

National and city price-to-rent ratios have risen and fallen over the years depending on the state of the housing market. In the years before the housing crisis, as the housing market heated up, the national ratio rose from 22.73 (in 2005) to 24.50 (in 2007). Then, however, after the real estate market turned, as home prices fell and rentals grew more expensive, the ratio began to fall, dipping below 20 to 2011, down to the current rate of 19.21.

What Price-to-Rent Ratio Says About Affordability

While the price-to-rent ratio is useful for comparing buying to renting, it does not reflect the overall affordability of buying or renting in a given market. In theory, a place where renting and buying are very expensive could have the same price-to-rent ratio as a place where both renting and buying are very cheap.

Denver: The average Denver rent is expected to increase 4% during 2016. So how can we convert more renters to buyers?

Assuming the median home price nearing $400,000 in Denver and rental prices averaging $2,400 per month, the Price-to-Rent Ratio would be 13.88.

Definitely time to convert more renters to homeowners!