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BW: In These Cities, It’s Better to Buy Than to Rent

A new list tells you to leave your landlord for good

BusinessWeek recently announced America’s Cheapest Homeownership Markets. The report used the own-to-rent-ratio in coming up with the rankings. It explains, “… The own/rent ratio represents the annual cost of owning as a percentage of the annual cost of renting. The lower the ratio, the more favorable owning is over renting and in any metro with a ratio below 100%, it’s cheaper to own than rent. To make a fair comparison between owning and renting, annual ownership costs were calculated based on a loan of 100% of the purchase price.”

Detroit ranked at the top with an own to rent ratio of 94 percent. The report cites the city’s “… unemployment rate of 17.1% in June, the worst of any metropolitan area with a population over one million.” The Motor City was followed by Pittsburgh, PA (97 percent), Rochester, NY (113 percent), Memphis, TN (114 percent) and Tampa, FL (115 percent).

Other cities that had better buying options than renting are Cleveland, TN, Dayton, OH, Columbia, SC, Orlando, FL, Dallas-Fort Worth, TX, Las Vegas, NV, Riverside, CA, Providence, RI, Miami-Fort Lauderdale, FL, Little Rock, AR, Atlanta, GA, Jacksonville, NC, Boston, MA, St. Louis, MO, and Minneapolis, MN.

But don’t fill your suitcase yet. Here’s what we observed about it.

This list is highly affected by the plunge in home values. Remember how we blogged about Detroit’s $10,000 homes? The price has gotten so low that it’s obvious we don’t need the formula to know that Michigan’s recession-vulnerable area will rank first.

Second, the property tax rate at 3 percent and mortgage rate at 5.5 percent are quite safe for estimates. The justification to use a zero-down payment option for a 30-year mortgage is also acceptable (they avoided skewing the results). But what was not mentioned is the approximate length of stay in the house. Clearly, any homeowner would include that in the calculation when comparing rent and buy options. This leads us to think, who’s going to live for more than five years in Detroit when there are no employment opportunities around? You might as well decide to rent because you’d be considering leaving the city to look for out-of-state job prospects instead.

Finally, the list is just what it is, nothing more than that. It was made to come up with a list of comparables by using second quarter results for rent. The thing is, third quarter home sales are doing a slight rebound and if the study is to be conducted again, the rankings may change with the inclusion of new cities in the list. T herefore, buying still only makes sense if the renter seeks professional help for determining his best option.

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