To Buy, or Rent? By Anna Prior The Wall Street Journal 03-27-2010

To Buy, or Rent?
The answer, if you're moving in retirement, can be tricky. A look at some top markets.
By Anna Prior
The Wall Street Journal
March 27, 2010

People who think about moving to a new home in retirement invariably plan on buying that home. In some cases, though, renting might be a better option.

Real-estate markets remain volatile. Even though home prices appear to be stabilizing in some areas, there's still a chance that the house you buy today could fall in value tomorrow.

For anyone weighing a move, one of the easiest ways to approach the buy-versus-rent question is to use the "price-to-rent ratio," says Dean Baker, co-director at the Center for Economic and Policy Research in Washington, D.C.

Take two houses of similar size and quality—one for sale and one for rent—in the same neighborhood, or comparable neighborhoods. Take the price of the home for sale and divide it by the total cost of renting the other house for a year. If the resulting number is higher than 20, it's likely the price of the home for sale could fall further. Thus, renting might be a better option, says Mr. Baker. However, the price is most likely near its low if the figure is 15 or below; 15 is the general average price-to-rent ratio over time, Mr. Baker says, and the number at which rental and ownership costs are close to even.

Renting, particularly in urban settings, has "become a lot more attractive," says Hessam Nadji, the managing director of research services at Marcus & Millichap Real Estate Investment Services, a real-estate investment brokerage firm based in Encino, Calif. Apartments and condos offer retirees easy access to culture, entertainment and leisure, with reduced maintenance burdens.

But both Mr. Baker and Mr. Nadji say many factors should be weighed when considering renting versus owning. "If you have reason to believe you are building equity," Mr. Baker says, it's fine to pay more to own. A low price-to-rent ratio on a property that you plan on being in for a decade should be an attractive buy option even if the monthly payment is higher than renting, he says.

But on the flip side, he adds, "if you are paying more in a context where you are unlikely to build equity, either because house prices are likely to fall or you won't be there long enough to cover transaction costs, then you are throwing money away."

Here's a look at the housing and rental markets in 10 popular retirement destinations to help you decide whether to buy or rent. We've included data from Marcus & Millichap and from the Council for Community and Economic Research, a nonprofit in Arlington, Va. Appliance repair costs are estimates. The average monthly home payments are based on fourth-quarter median prices, assuming a 10% down payment and a 5.07% rate on a 30-year fixed-rate mortgage.

Mr. Nadji and Lawrence Yun, chief economist for the National Association of Realtors, also shared their analyses of the markets and numbers.

Albuquerque, N.M.
Median home price: $178,197
Average monthly home payment: $1,160
Average rent: $667
Price of appliance repair: $64.98 (7% above national average)

"Albuquerque isn't a growth market right now," says Mr. Nadji. "Housing prices are still higher" than where they should be, especially since "there's an ocean of excess housing supply yet to be absorbed."

Charlotte, N.C.
Median home price: $186,945
Average monthly home payment: $1,217
Average rent: $677
Price of appliance repair: $62.25 (2% above average)

Charlotte's home prices are above the national average of $174,227. When that's coupled with rental prices far below the $937 per-unit national average and a local vacancy rate of 11.3%, "it makes renting more attractive," says Mr. Nadji.

Greenville, S.C.
Median home price: $138,929
Average monthly home payment: $904
Average rent: $570
Price of appliance repair: $61.89 (1% above average)

Rents and home prices in Greenville are below the national average, a sign good deals can be had either way. "Rents in particular are sizably below the national average," Mr. Nadji says.

Las Vegas
Median home price: $139,700
Average monthly home payment: $909
Average rent: $758
Price of appliance repair: $62.44 (2% above average)

While there's been a lot of buying activity in Las Vegas as people look for deals, the oversupply of homes means buyers shouldn't expect a rebound in values for a while, says Mr. Yun.

Mr. Nadji says the rental and housing markets in Las Vegas both "have just been amazingly beaten down." So, he says, there's a surplus of "very high-end, high-amenity condos that are both for sale and for rent."

Miami
Median home price: $192,562
Average monthly home payment: $1,254
Average rent: $969
Price of appliance repair: $74.97 (23% above average)

"Florida was one of the earliest markets into the housing crash," Mr. Nadji says. "You would expect it to be coming out of it, but it's not," and probably won't be for three to five years, he says. For now, he sees urban, high-end condos for sale or rent as good opportunities.

Rental vacancies in Miami have climbed to 5.8% from 3.9% in 2007, he adds. Couple that with the high cost of repair services, and renting could be an attractive option for some.

Orlando, Fla.
Median home price: $140,779
Average monthly home payment: $916
Average rent: $773
Price of appliance repair: $65.17 (7% above average)

There's a good chance buyers can find a great deal on a home in Orlando, Mr. Nadji says. But, as in the rest of the state, the housing market in the Orlando area is still in flux.

Phoenix
Median home price: $143,744
Average monthly home payment: $936
Average rent: $676
Price of appliance repair: $59.79 (2% below average)

Phoenix also has an oversupply of homes. But from a lifestyle perspective, says Mr. Nadji, the low housing costs, relatively low cost of services and numerous amenities (read: loads of golf courses) make a good case for buying instead of renting.

Sacramento, Calif.
Median home price: $189,653
Average monthly home payment: $1,235
Average rent: $851
Price of appliance repair: $53.40 (12% below average)

"Prices have really come down in Sacramento," says Mr. Yun, and it's one of the more affordable locations in California.

Still, like Albuquerque, there is a large supply of rentals, especially of single-family homes, says Mr. Nadji. As such, renting remains a reasonable option.

San Diego
Median home price: $387,816
Average monthly home payment: $2,525
Average rent: $1,249
Price of appliance repair: $46.79 (23% below average)

San Diego presents an attractive buying opportunity. Prices have stabilized and in many cases are going up, says Mr. Yun.

Services are also below the national average, which puts another check in the buy column.

One locale where renting might make sense: downtown San Diego. Mr. Nadji says, "Right now, there's pretty good availability of rentals, even though it's below the national average at 4.9%. Even at that vacancy rate, there are nice, good-quality rental units that have been built in the last few years."

Tampa/St. Petersburg, Fla.
Median home price: $138,074
Average monthly home payment: $899
Average rent: $743
Price of appliance repair: $52.99 (13% below average)

Tampa used to get wealthier baby boomers moving into the region, says Mr. Yun. Lately, though, people have been leaving the area, he says. Like the rest of Florida, oversupply plagues the Tampa market.

With rental vacancies at 10.7%, well above the 8% national average according to Mr. Nadji, renting might prove to be a good choice. If you do buy, says Mr. Nadji, don't expect a big return on investment in the immediate future.