Some thoughts on the subject from David Leonhardt in today's New York Times.
Over the last several years, I’ve come to like a simple, back-of-the-envelope way to compare the costs of renting and owning. You find two similar houses, one for sale and the other for rent, and divide the sale price by the annual rent. You can call the result the rent ratio.
The concept will probably sound familiar to stock market investors. It’s the real estate market’s version of a price-earnings ratio — a measure of how expensive an asset is, relative to the underlying economic fundamentals. Like a P/E ratio, the rent ratio provides something of a reality check.
Throughout the 1970s, ’80s and ’90s, the average rent ratio nationwide hovered between 10 and 14. In the last few years, though, it broke through that historical range and hit almost 19 by the time the housing market peaked, in 2006.
I never looked at my home purchase in terms of a rent vs. buy ratio, but I estimate it was about 15 at the time when I bought. (This is the sale price of the home divided by what the annual rent would be.) Compared to the NYC ratio of 26.8 at peak, and 22.2 now, I think I did just fine. But I was more concerned about things like making my monthly expense budget work, and whether I could cover my costs by renting the place out if I ever had to move. On all fronts, I feel like I made a good choice-- my only regret is that I didn't buy something sooner. But that's just me and how my situation worked out. I'm sure for many other people, renting has probably been a wise choice these past couple of years.