Price-to-Rent Ratios Foreshadow Further Home-Value Declines

After both rental costs and home prices soared far above what historic trends would predict during the pandemic, the path back to more normal price ratios has been uneven, according to the latest data from researchers at Florida Atlantic University (FAU) and Florida International University (FIU), with the trend currently favoring renters.

While both rental costs and home prices continue to swing above historic trends, the difference between these two numbers makes renting more favorable in most major metros, as home prices have mostly resisted major declines while rent increases have moderated significantly.

“Home prices are down, but they are still too high and near record levels, so we expect further price corrections in the future,” said Ken H. Johnson, a co-author of the report and an economist in FAU’s College of Business.

Homes remain broadly overvalued, according to data gathered through a similar project run by Eli Beracha (fellow FIU researcher) and Johnson, while at the same time, rental premiums have shrunk. Rental costs are now 5.74% overvalued, falling from 9.85% overvalued last June.

According to the National Association of REALTORS® (NAR), in 2019, it was better to rent than buy in 34 out of 50 states.

In the short term, Johnson and fellow FIU researchers Beracha and William Hardin say that renting is financially more favorable. But in the longer term, that price-to-rent ratio should move back toward historic levels, especially in areas where that price-to-rent ratio is particularly offset from expected levels.

Currently, 10 metros have price-to-rent ratios that are at least 15% higher than expected, with a majority of those located in the South. Only two metros had ratios that were below historic averages—that is, these cities were even more favorable to owning than trends would indicate.

Those two cities were Springfield, Massachusetts, and Cape Coral, Florida.

The researchers noted that Cape Coral is still recovering from devastation caused by Hurricane Ian, and this data point might have more to do with the damage caused to housing stock than it has to do with broader economic issues.

The choice to buy or rent is always more complex, even from a purely financial standpoint. From tax breaks to maintenance and long-term equity building, the simple price-to-rent ratio is only part of the equation.

Beracha suggested that those who choose to rent have to make “disciplined” investment decisions in order to mimic the financial benefits of homeownership.

“In order to replicate equity creation, renters should invest the money they otherwise would have spent on maintaining their homes,” he said.

Here are the top metros where renting is most favorable compared to owning: