TO BUY OR NOT TO BUY (OR PERCHANCE TO RENT). . . .
April 29, 2010
That is the question. Given that the first time homebuyer’s tax credit of $8,000 is about to expire if sales contracts are not signed by April 30 and closings do not occur by June 30, this is a particularly important question to consider at the moment.
A recent article in the New York Times suggests that one way to answer this pressing question is to use what is called the rent ratio in order to determine whether it is more beneficial to purchase an apartment now as opposed to renting. The rent ratio involves a simple calculation: dividing the purchase price of a home by annual rent (either actual if you’re already renting, or probable if you’re thinking of renting).If the calculation yields a figure above 20, renting should be strongly considered, as it indicates that purchase prices are very high. If the ratio is well below 20, buying may be the way to go. Obviously every situation is different – e.g. if you’re going to have to move within 5 years, say, even with a low ratio renting may be more practical.
In New York the ratio has been consistently higher than many other places. The higher prices here come as no surprise to those who follow the real estate market, and the cost of owning has therefore been, on average, greater than the cost of renting.
That being said, if you want to live in New York City, now may be the time to buy, regardless of ratios, the expiration of the tax credit, or other factors relevant to a purchase. While the ratio is still high, it isnow much lower than it has been historically. And this may have much more to do with greater rental opportunities than with a ballooned sales market, since New York’s sales market pricing is on the low sidecompared to what it was before the housing bust.
The case for buying is not just the security we feel with owning ourown home; it’s that prices seem no longer to be in freefall (they had dropped 25 to 30% in the City since the collapse of Lehman Bros. in the fall of 2008) and, in fact, seem to be inching up. The most recent report from the Real Estate Board of New York, which keeps track of quarterly developments in the real estate market here, notes that the average price of a New York City apartment was $850,000 in the first quarter of 2010, a 6% increase over all of 2009. In Manhattan and Brooklyn, the hottest boroughs in the City, average apartment prices rose 2% and 6%, respectively, compared to the last quarter in 2009. While there is obviously some variation from neighborhood to neighborhood in the figures, as the economy begins to recover, the housing market here will, too.
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