Rent or Buy, a Matter of Lifestyle - By David Leonhardt

Found via Calculated Risk.

As this year’s spring buying season nears its peak, the relative merits of renting and buying are closer than they have been since the housing bubble began inflating almost a decade ago. So the best single piece of advice for most people is to make a decision based mainly on their stage of life, rather than on any complex financial calculations.

If you think you are ready to settle in one place for at least five years, if not more, buying often makes a lot of sense. That’s why I bought my first house, in the Washington area, a few years ago, despite thinking local prices remained high.

But if the chances are good that you will move again in the next few years, renting is usually the better bet. The various closing costs, including real estate agents’ fees, are just too high. Owning a house also makes it much harder to move when you want to because selling a house is complicated.

Within this basic framework, the numbers — specifically, something called rent ratios — are the next place to turn. A rent ratio is the sale price of a house divided by the annual cost of renting an equivalent house. When the ratio is below 15, most people should lean toward buying.