Trulia Steps Into The Rent Vs. Buy Game

by Joe Marhamati


Trulia’s Rent vs. Buy Index, which launched earlier this month, provides an interesting glimpse into the value of purchasing a home versus renting in the fifty largest cities in the U.S.

Using two-bedroom units as its baseline, Trulia calculates the price-to-rent ratio using the average list price compared with the average rent for apartments, condos and townhomes listed on its site.

The Rent vs. Buy Index essentially uses a rule of 15. That is, it follows the logic that it makes sense to buy in places where properties cost around 15 times a year’s rent. So, for example, if you’re living in a city where the average rent for a two-bedroom apartment is $2,400 a month in rent ($28,800 a year), then the median home price for a two-bedroom should be $432,000.

Trulia’s scale is split into three categories. The first included cities with scores ranging from 1-15, places where it is more expensive to rent than to buy; the second, with scores of 16-20 are that middle group where renting or buying is more situation dependent; cities with scores of 21 or higher are places where the total cost of homeownership is significantly greater than renting.

On Trulia’s scale, DC comes out with a score of 14, just making the list of cities where it’s more financially sensible to buy than to rent. For comparison, New York and San Francisco (which scored 33 and 22, respectively) are cities where you should rent, rent, rent, according to Trulia.

So, where does it make the most sense to buy in the U.S., according to Trulia? Minneapolis, Minnesota, where prices for two-bedrooms are just eight times the annual rent .

You can see the whole list of rankings here.

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This article originally published at http://dc.urbanturf.com/articles/blog/trulia_steps_into_the_rent_vs_buy_game/2172


  1. Jeanne Gorman said at 10:01 am on Wednesday June 16, 2010:

    The trulia index assumes that property taxes are equal in all states/DC.  When one adds property taxes the ratios change considerably.

  1. GTS said at 10:07 am on Wednesday June 16, 2010:

    While not foolproof, I do like the rule of 15 theory. Does anyone know what the median price for a two-bedroom in DC is? $432,000 seems close to me based on the properties I have been looking at.

  1. Janson said at 10:36 am on Wednesday June 16, 2010:

    It’s a great index generally for discovering bubbles, and it might even have some utility in an individual city, but obviously if you want to use this rule for yourself, you have to adjust several variables in total cost of ownership for your own case. For example, your tax and mortgage interest rate. The rule, which is generally fine, is based on a 1/15th expected return on capital - or 6.66%. If your opportunity cost is lower than that right now (which it is for most people given current interest rates) the rule might shift higher - to say a piddling return of 4% - the implicit multiplier would be 25. Just saying.

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