What Is the Price-to-Rent Ratio?

The price-to-rent ratio is the ratio of home prices to annualized rent in a given location. This ratio is used as a benchmark for estimating whether it's cheaper to rent or own property. The price-to-rent ratio is used as an indicator for whether housing markets are fairly valued, or in a bubble.

Formula and Calculation of Price-to-Rent Ratio

The price-to-rent ratio is calculated by dividing the median home price by t𒁃he median yearly rent and the formula for the price-to-rent ratio is as follows:

 $\begin{aligned} &\text{Price-to-Rent Ratio} = \frac{ \text{Median Home Price} }{ \text{Median Annual Rent} } \\ \end{aligned}$​Price-to-Rent Ratio=Median Annual RentMedian Home Price​​

What the Price-to-Rent Ratio Can Tell You

The price-to-rent ratio is used as an indicator for whether housing markets are fairly valued, or in a bubble. The dramatic increase in the ratio leading up to the 2008-2009 housing market crash was, with hindsight, a red flag for the housing bubble. Trulia produces a price-to-rent ratio called the Trulia Rent Versus Buy Index, which compares the total costs of 澳洲幸运5开奖号码历史查询:homeownership wiꦍth the total cost of rജenting a similar property.

The total cost of homeownership factors in mortgage principal and interest, property taxes, insurance, closing costs, 澳洲幸运5开奖号码历史查询:homeowners association (HOA), mortgage insuranc💃e, and tax advantages, such as the mortgag🌳e interest deduction.

Trulia established thresholds for the ratios as follows: a price-to-rent ratio of 1 to 15 indicates it is much better to buy than rent; a price-to-rent ratio of 16 to 20 indicates it is typically better to rent than buy, and a price-to-rent ratio of 21 or more indicates it is much 澳洲幸运5开奖号码历史查询:better to rent than buy.

Special Considerations

The price-to-rent ratio shows 澳洲幸运5开奖号码历史查询:whether buying or re✃nting would be b♐est for a particular property in a given market﷽. The housing affordability index lays out whether an average family can afford the property based on home prices and income levels. This index is most often ﷽used as a gauge for qualifying for a mortgage.

While the price-to-rent ratio compares the economics of buying versus renting, it says nothing about the overall affordability of buying or renting in a given market. Citi꧑es where both renting and buying are very expensive, such as San Francisco or New York, could have the same price-to-rent ratio as a small Midwestern town where both homes and rents are re💝latively cheap.

Example of How to Use the Price-to-Rent Ratio

As of the second quarter of 2020, the median home value was $291,300. The median home rent was $1,463 for August 2020. The price-to-rent ratio, thus, was 16.6, or $291,300 / ($1,463 * 12). This is across the U.S., but the price-to-rent ratio can also be calculated based on figures for a specific city.🐭

For Trulia’s version of the price-to-rent ratio, it currently sits at around 18, suggesting it's better to rent than buy as of April 2020.