A simple formula can give you an idea. Take one year’s rent and divide it by what you think your home would sell for. This is the amount you would receive if you decided to rent your house for a year instead of selling it. Example:
$3,000 a month in rent (what you think you could rent the home for.) divided by $500,000 (Expected selling price) = 36,000 Divided by 500,000 or 7.2%
Use the following ranges
8% or greater = Good Value
5-8% = Good value if the house is held 5 or more years
Less than 5% = Overvalued compared to Renting
This is a simple way to look at housing prices compared to renting. It shows the higher cost of renting will make buying a home the better choice by using a financial ratio. There are obviously other considerations involved but this is a great start to see if you are buying a home at a fair price
Anthony is currently heading the Educator/403(b) Division at Ritholtz Wealth Management LLC. The goal of our division is to transform the way teachers save for retirement. For disclosure information please see here.