Steadily Increasing Rent Prices Give Green Signal to Purchase Property, In Spite of Buyer Fears

Although it’s been a few years since the United States real estate market came to an abrupt halt, Americans are still feeling the negative effects of the downward market—whether it’s actually justified or not.  As experienced real estate agents in Northern Virginia, Linton Hall Realtors know first-hand that regardless of it costs to purchase a property, people will have conflicting opinions of any real estate transaction. (This is particularly true for the Washington DC Metro Area.)

It makes sense that United States citizens would have strong feelings regarding the housing market, particularly when one takes into account how influential home-ownership truly is. According to the Federal Reserve, two-thirds of Americans own a home that generally accounts for two-thirds of their income. When looking it from this perspective, one would think that people would be rushing to buy, as making residential investments is one of the most effective ways to drive local and national economies.

In spite of its importance, would-be homeowners concentrate on the wrong things. Many people will disregard buying property in a badly-hit area with lower home prices in fear of a bottoming out market consumed by a “shadowy inventory” of unsold foreclosures. Instead of making a residential investment in a home, several Americans don’t think twice paying sky-high rent prices in New York or San Francisco.

From the way Americans are playing the real estate market in recent years, one would think that renting (as opposed to buying) would be the most ideal and cheapest option. However, home prices in the United States are down a third since 2006, while rent has been increasing steadily for years, according to the Department of Labor—ultimately making it cheaper to buy than rent in the current market. Let this example put things into perspective: average home prices in Las Vegas during 2011 were about six times the annual rent, while New York prices are 36 times rent.

Unfortunately, this happens because many don’t understand real estate as a principle, despite it being a simple asset to comprehend. When one buys a home, they can live in it rent-free or lease it out to someone else—there is no other value to it. Think of rent to housing as earnings are to stocks, and it’s clear that the only qualified approach to real estate is to compare a home’s price to the present and future rents and nothing else.

So when is the right time to buy? Many real estate economists claim that the best time to enter into home ownership is when the prices are 15-times annual rents or lower, which is the case in about 75% of American cities. Economist for the Center for Economic and Policy Research, Dean Baker, explains that according to “…a historical examination of the price-to-rent ratios, home prices are the closest to fair value when they are about 15-times gross annual rents.” Using this rule of thumb, the hardest-hit cities are incredibly cheap while already-pricey areas look even more expensive.

If you happen to live in a city were home prices fall under this index and it fits your lifestyle, buying property now is a smart financial investment. Entering into home ownership offsets the permanent need for housing, a hidden liability often neglected when choosing between buying and renting. Regardless if a home is purchased or not, you’ll always need somewhere to live. Each year one waits to buy another year that they must accumulate rent money, in an economy where rent prices have traditionally risen to align with inflation.

Should the idea of purchasing a home be attractive to you, the best course of action is to contact experienced real estate brokers in your area. This can be very beneficial to investigating your local market as agents are the ones who would have home and rent pricing information in your area. Most importantly however, reaching out to knowledgeable real estate experts can help you make an informed decision about a long-term investment that not only effects your finances but also your family as well.