Rent or buy? How 54 areas rank
Cleveland ranks as the most favorable city for homebuyers right now. How does your town measure up?
Deutsche Bank calculates that rising home prices have made renting less expensive than buying in many places. The bank compared monthly outlays for renters and for mortgage holders in 54 U.S. metropolitan areas. (See table below.)
Here's how the bank did the math.
Deutsche Bank calculates the average monthly rent as a percentage of the estimated monthly mortgage payment in each of 54 metropolitan areas over the course of a three-month period.
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The rents are for apartments, as reported by Reis, a New York-based real
estate research firm.
The estimated mortgage payments are based on median sale prices in the same period, according to the National Association of Realtors. The bank adjusts the estimates to reflect the tax deduction for mortgage interest. It also figures the typical homeowner pays 0.4 percent of the home's cost on insurance each year, and 1.5 percent of the cost on property tax.
If the resulting percentage is above 100 percent, buying is more favorable financially. If the percentage is below 100 percent, renting is.
The most favorable of the 54 metropolitan areas to be a buyer in last year's fourth quarter was Cleveland, at 155 percent. That means for every $1 a new buyer spent in Cleveland, a new renter spent $1.55.
By contrast, the most favorable place to be a renter was Oakland-East Bay, Calif., at 49 percent, meaning for every $1 a buyer spent, a renter spent $0.49.
Deutsche Bank assumes buyers take out a 30-year mortgage with a 5 percent down payment. The bank also assumes buyers are in the 25 percent federal income-tax bracket.
In addition, Deutsche Bank uses the average interest rate on one of the most affordable mortgages, which comes with an interest rate that is fixed for one year and then adjusts annually, which tends to make buying look more favorable generally.
The standard 30-year, fixed-rate mortgage that most borrowers take out carries an interest rate that is more than one percentage point higher on average.
Changing the assumptions can make renting or buying look more favorable. For example, a buyer who is in a higher tax bracket or who makes a larger down payment would be in a stronger position. But if a buyer had to pay a higher interest rate on a mortgage, renters would be relatively better off.
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