Waffles aren’t just for Wednesdays — I’ll happily have them any day. Today’s post comes from blogging friends out west: Waffles on Wednesday. Grab some of Canada’s best organic maple syrup, tighten your robe, pop on your reading glasses, and enjoy a piece about the price-to-rent ratio. It might convince you never to buy a house!
We’ve talked about real estate on the blog before, and people often think we’re against owning property. Living in one of the priciest markets in the country, it naturally comes up whenever we talk to friends. People always ask if we’ll ever buy a house. Our answer is usually “no.” Prices are just too inflated where we live, and the Price-to-Rent Ratio here is above 15, which suggests renting makes more sense.
The price-to-rent ratio measures how pricey homes are compared to renting. You get it by dividing a home’s price by its annual rent. For example, if a one-bedroom rents for $1,000 a month, that’s $12,000 a year. If a similar place for sale costs $120,000, the price-to-rent ratio is 10 ($120,000 / $12,000). You can find recent ratios for different areas on SmartAsset.
So, does the Price-to-Rent ratio actually work? As Sean Connery joked on Celebrity Jeopardy, “Does it work??”
Historically, the ratio has hovered around 15, meaning houses were often worth about 15 years of rent. It’s gone up and down with the market. Before the housing crash, the national ratio climbed from 22.73 in 2005 to 24.50 in 2007. After prices fell and rents rose, the ratio dipped below 20 by 2011 and is around 19.21 now. Compared to the long-term average of about 15, today’s numbers still favor renters more than buyers.
I’d heard of the “rule of 15” before and even mentioned it on our site about crazy real estate in LA. That doesn’t mean a ratio under 15 makes housing cheap — both buying and renting can still be crazy expensive. It’s just a way to compare the two.
Curious, I spent a Saturday building a simple model to see why the inflection point seems to be 15. The model isn’t fancy, but it was enough to show what goes into the calculations. I listed out the assumptions, put together the back-end data, and built a small dashboard to roll it up.
The result? It lined up surprisingly close to the Rule of 15. That reinforced a few things: across different scenarios, the point where buying and renting offer about the same benefit falls near 15. In plain terms, that’s where the leverage from owning a house roughly matches the combination of market returns and inflation. If the ratio is lower, ownership tends to work in your favor. If it’s higher, you’d likely see better returns by investing instead of buying.
A simple rule of thumb: multiply monthly rent by 200 to get a comparable home price. If you pay $1,500 a month, aim for a house under $300,000 — good luck finding that in D.C., San Francisco, or L.A.
For us, it’s a no-brainer: our local price-to-rent ratio is around 35, so renting makes way more sense. I put our numbers into the calculator and it basically laughed at me: “Don’t you ever buy, knucklehead!”
People sometimes think we’re anti-real-estate. We’re not. It just doesn’t make sense for us to buy in the current L.A. market. There are plenty of things I’d rather do with $1 million than buy a tiny, run-down 1,000 square-foot house.