Price to rent ratio

Divide a home's price by the annual rent for a comparable property to get the price to rent ratio. A low figure means homes cost little compared with rent, so buying tends to pay. When the number is high, renting the same type of place costs far less than owning it. It's a quick first check, not a final decision.

How to work out the price to rent ratio

You need two figures for the same type of home in the same area. After that, only one math step remains.

1. Identify the typical price. Use any of these: the Zillow home value index, a listing, or a recent sale.
2. Take the rent for a comparable property, then multiply it by 12 months.
3. Use the home's price and divide it by annual rent.

Test it across the whole country. According to the Census American Community Survey, the typical US home costs $332,700. The monthly median rent is $1,413. Annual rent comes to about $17,000, which puts the US ratio near 20.

Reversing the calculation gives the rent to price ratio, known by investors as a gross yield. When the ratio is 20, annual rent equals 5% of the price. The same idea appears on some sites as the price to rental ratio or the property value to rent ratio. Each version compares a single price with a single rent.

What is a good price to rent ratio?

No official cutoff exists. A lender website rule of thumb says buying is more favorable under 15 and renting is more favorable over 21. We applied it to Zillow's prices and rents across our 813 cities. Over 7 years, the test measures the full cost of ownership.

• Below 15: buying comes out ahead in 109 of 188 cities.
• Between 15 and 21: renting performs better in 240 of 337 cities. Your rate and your taxes, plus how long you stay, decide the rest.
• Above 21: renting performs better in all 288 cities.

At the high end the rule holds firm, but at the low end it wobbles. Your mortgage rate doesn't appear in the ratio. Today's 7.24% can make a home that looked worth buying a few years ago cost more to own than to rent. For that reason, each city verdict accounts for the full cost of owning rather than the ratio alone.

Sources: Zillow Home Value and Observed Rent indexes. Our rent vs buy method produces the verdicts at 20% down over 7 years.

Price to rent ratio by city

Zillow's typical home value and rent for each of 813 US cities let us work out the ratio. In areas with high ratios, renting performs better almost every time. The 15 highest ratios are:

Sources: Zillow Home Value and Observed Rent indexes. Our rent vs buy method produces the verdicts at 20% down over 7 years.

Coastal California and the Seattle suburbs lead the list. Homes in Palo Alto or Newport Beach cost what amounts to decades of rent payments. It only makes sense to buy there if you expect prices to keep rising quickly.

The opposite pattern appears at the low end. The 15 lowest are:

Sources: Zillow Home Value and Observed Rent indexes. Our rent vs buy method produces the verdicts at 20% down over 7 years.

In places such as Detroit, Gary and Cleveland, homes cost only a few years of rent. With our default assumptions, buying comes out ahead in every one, often in just 2 years or less. Our Zillow Research data provides the figures, while our rent vs buy by city table has the full list.

What the national ratio shows about prices

Economists use the US ratio to gauge how stretched home prices have become. The Dallas Fed reported that it increased 20% following the first quarter of 2020. The level was close to the 2006 peak.

The previous time it reached this level, it dropped sharply. From its late 2006 peak, the ratio dropped by more than 10% within two years. By four years, it had fallen more than 20%. Falling home prices caused most of that decrease, even as rents continued to rise.

Rents catching up with prices can also bring a high ratio down gradually. No one knows where it will go this time. One thing you can say: a high ratio leaves prices less room for a fast rise.

Limits of the ratio

This measure works well as a filter, but it leaves out most ownership costs. These are the things it misses:

• The rate on your mortgage. Interest on a 30-year fixed loan at 7.24% is the largest ownership expense in the early years.
• Taxes and insurance costs. Across the US, property tax costs about 0.94% of value each year. Insurance runs about $1,308 a year.
• Costs for upkeep. Plan on spending at least 1% of the value of the home each year.
• Costs to buy and sell. Closing costs are about 3.5% of the price, while selling costs are about 6%. You need years to earn those costs back.
• Homes that differ. Nearby rental homes are often smaller or older than homes for sale. As a result, the ratio may compare two homes that are quite different.

Enter your price and your rent in the rent vs buy calculator to see all of it at once. It displays the year buying catches up, if there is one.