There's a lot of things I love about DC, but high rent is not one of them. According to Elizabeth Razzi's Washington Post article, DC's price-to-rent ratio is 13, which makes it a favorable market for home buyers. When you think about it, the idea that after 13 years, you'll have spent enough in rent to have paid off an entire home makes buying seem especially lucrative.

(from Mr. T in DC on Flickr)

After I saw a pretty sobering presentation last week about housing in DC, including this graph, which shows the inflation-adjusted median rent in the district, I crunched the numbers, but the result wasn't especially encouraging.

Consider a hypothetical young couple. They both have modest careers and earn $100,000 a year, combined. Using the traditional 30% metric, they can afford to pay up to $2,500 on rent and utilities per month. It also means they could afford monthly mortgage payments for a house that costs roughly $350,000 (the exact price depends on the interest rate and other factors). Now, that amount of money won't buy this couple a rowhouse in Dupont Circle, but it might get them a decent condo or house in an up-and-coming part of the city.

Here's the problem. This couple walks into their local bank branch and applies for a conventional mortgage, but the banker says they're buckling down, and she want a 20% down-payment. That's $70,000 on a $350,000 house. Even a couple that brings home $100,000 a year is going to have to save for quite a while before they'll have that much money in the bank.

Now, it's possible that this couple could qualify for an FHA loan, which requires a much lower down-payment. And if they can afford the inevitable maintenance costs and other emergency expenses, then it might be a wise move. I've been critical of home ownership in the past, but the real value of buying is relative to local market conditions, and when renting is so expensive compared to buying, then admittedly it makes a lot more sense than when it isn't.

1 comments:

    On May 26, 2011 Anonymous said...

    There isn't one easy answer to the question, "Rent or Buy." Even in your example, questions abound that would affect the decision...what can they get for the $350K they could potentially spend? Where are they in life (I.e. no kids, plan to have kids, don't plan to have kids, have kids and don't want more). That factor alone is a major consideration in whether to buy or rent. Consider careers - are they planning on working in the same place for years and years or do they want the freedom to move places and change jobs? Others are: Where is the market in terms of home prices in the particular area? Where can the market go (I.e. does it have lots of undeveloped space, or is it at/near saturation)? Considering those, and other factors, are necessary before deciding whether to buy because it's a market environment that favors home buyers. 13 years is a long time for a young couple...it also doesn't factor in things like debt (student loan, credit card, etc.) that impact available funds and may warrant being paid off first.