Buy vs. Rent and Home Prices vs. Income Favor Buyers

Comparisons of the costs of buying a home to renting a home favor buying, though not by a huge margin currently.  The first chart shows the ratio of the S&P/Case-Shiller 10-City Home Price Index to the Consumer Price Index for Renting a primary residence.  The ratio is scaled so that the average value over the 1987-2012 period is 100.  When the ratio is above 100, home prices compared to rents are higher than average and renting is preferable; when the ratio is under 100, buy is favored.  The boom and bust from about 2003 to 2009 stands out on the chart.  Even with the sharp drop in prices, buying is less favored over renting today than in the mid-late 1990s.   Recently there have been several news reports of rising rents, suggesting that even if home prices continue their recovery, buying could still be favored over renting.

 

 One measure of how much home prices have moved is to compare them to disposable personal income per capita. “Disposable” means after taxes and “per capita” means that the aggregate personal income in the economy is divided by population so that income is seen to rise merely because the population rises.  There is no right number for this ratio but it can be compared to its average over several years to see if it is high or low currently.  The chart shows this ratio — S&P/Case-Shiller 10-city Home Price Index divided by Disposable Personal Income per capita. The scale is calculated so that the average of the 1987-2012 period is 100. As shown there, home prices are currently low compared to incomes, suggesting that the current market favors buyers over sellers.

Source: S&P Dow Jones Incies and US Bureau of Economic Analysis

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