Tuesday, May 5, 2009

Rent or Buy: San Jose or Columbus?

David Leonhardt has an article in The New York Times (hat tip Wehr in the World) about his decision to switch from renting to buying a house. There is an accompanying graphic showing the ratio between the purchase price of a house and the annual rent for an equivalent house by city. I’ve highlighted the ten markets with the highest ratio in green, and the ten markets with the lowest ratio in red:


(Click on image for a larger version in a new window)

To me the most interesting thing about this information is the premium people are still willing to pay to own a house in bubble markets. The ten markets with the highest ratios are all California coastal cities, south Florida, and New York and Boston. The cities with the ten lowest ratios are all Midwest cities, plus Pittsburgh, Dallas, and New Orleans.

The city with the highest ratio is San Jose (30.7); the lowest ratio is Columbus, Ohio (11.4). Keep in mind we are not comparing house prices and rents between the two cities, we’re comparing the ratio between house prices and rents within the city. People value ownership in San Jose much more than in Columbus.

There is a long term trend away from the Midwest and to the coasts. The reasons are complex, but boil down to changes in the employment base and geographic attributes of the areas like weather and topography. For more on the employment base issues, a good starting point is Richard Longworth’s Caught in the Middle: America’s Heartland in an Age of Globalization. For more on the role of geographic attributes, see the research of David McGranahan, an economist with the United States Department of Agriculture (summarized in this post).