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By Jeff Smith
It’s been over a decade since the collapse of the U.S. housing market and the ensuing Great Recession. After falling sharply during the housing crisis, home prices have not only recovered but are up by more than 50 percent nationally from the lowest levels.
But rent prices have only increased by approximately 20 percent nationally over the same time period, according to Zillow. That makes owning a home increasingly more expensive compared to renting. Not surprisingly, homeownership rates remain far below pre-recession levels.
The ratio of home prices to annual rents in a given area is known as the price-to-rent ratio. It indicates the relative affordability of buying compared to renting. A higher price-to-rent ratio indicates that a location is more favorable to rent and a lower price-to-rent ratio indicates that it’s more favorable to buy.
According to data from Zillow, the U.S. has experienced a steady increase in its price-to-rent ratio over the last eight years, meaning that buying a home has become relatively less affordable. In 2019, the average Zillow Home Price index was $240,481 and the average Zillow Rent Value Index was $1,584 per month ($19,008 annually), yielding a national price-to-rent ratio of 12.7.
While the overall price-to-rent ratio in the U.S. has been on the rise, price-to-rent ratios vary considerably across states and cities.
With an average home value of $106,627 and an average rent of $878 per month ($10,536 annually), West Virginia has the lowest price-to-rent ratio of any state, meaning it is the most favorable state for homebuyers on average.
At the upper end, Hawaii boasts the highest price-to-rent ratio, making it a more favorable state for renters. Home values tend to be significantly higher than rent prices on the West Coast, making the price-to-rent ratios likewise higher in those states.
To determine the U.S. cities with the highest and lowest price-to-rent ratios, researchers at Self Financial analyzed the latest data from Zillow. The researchers ranked cities according to the price-to-rent ratio.
Researchers also calculated the 5-year change in the price-to-rent ratio, the monthly mortgage payment for an average home, and the equivalent home price for a $1,500 per month rental based on the price-to-rent ratio.
The home value index and rent value index are Zillow’s measures of a typical home and typical rent value, respectively.
To improve relevance, only cities with at least 100,000 people were included in the analysis. Additionally, cities were grouped into the following cohorts based on population size:
Here are the U.S. cities with the highest and lowest price-to-rent ratios.
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With price-to-rent ratios all over 20, the cities with the highest price-to-rent ratios are places well-known to have high home prices. But just because their price-to-rent ratios are high, doesn’t mean that rent is affordable in these cities either. The average home value for these cities is over $750,000, while the typical rent is over $2,800 per month.
The cities with the lowest price-to-rent ratios—all under 12—have an average home value of $125,000 and average monthly rent of $1,057. While buying a home is relatively more affordable than renting in these cities, both home and rent prices are much lower than the national averages.
As home prices have rebounded since the recession, cities across the country have seen increases in their price-to-rent ratios in the last 5 years. From 2014 to 2019, the overall price-to-rent ratio in the U.S. increased by 14.7 percent.
Many cities experienced much larger increases, while a handful had their price-to-rent ratios decline.
To find the cities with the highest and lowest price-to-rent ratios, Self Financial analyzed data from Zillow. The price-to-rent ratio was calculated as the ratio of Zillow’s home value index to Zillow’s annualized rent index.
The typical monthly mortgage payment was calculated assuming a 30-year fixed mortgage, a 20 percent down payment, and a mortgage rate of 3.94 percent (the average national rate for 2019 from Freddie Mac). The home price for a $1,500 per month rental was calculated as ($1,500 x 12 x the price-to-rent ratio).
Additionally, cities were grouped into the following cohorts based on population size:
Jeff Smith is the VP of Marketing at Self.