It is widely known that in some cities in America, it is cheaper to buy than rent. Chart 1 shows a ratio of renting versus buying during Jan-18. In that month, it was cheaper to rent than own in roughly six of 20 core-based statistical areas (CBSAs). Renting (R) and owning (B) are two different ways to obtain shelter. The rents are median rents and the cost of owning is based upon the median home price for three bedroom residential properties.
The reason a household might be forced to rent, even if it is cheaper to buy, is often that a household’s income is too low to get a downpayment together or if the household’s credit score were too low to apply for mortgage. Or, both.1
In cities on the left-hand of Chart 1, investors step into the market to provide shelter to these households. Households that rent transfer wealth to the investor each month in exchange for a given quantity of shelter. If the property investor lives outside of the CBSA then wealth is transferred out of the CBSA and acts as wealth drain on the CBSA. Chart A1 in the appendix shows that a rising share of home sales are purchase by larger investors. On the other hand if the renter had purchased the house, they could consume the same quantity of shelter (live in a three bedroom property) and would build wealth. The impact of low incomes and weak credit scores on the rate of wealth loss by households has not been studied in a systematic way because a long history of CBSA-level rental price data never existed until currently.2
Mortgage lenders will lend more money for bigger houses if the borrower’s credit score is high enough. There is some evidence that this is also true for rents -- landlords might rent better properties and charge more to renters with good scores than to renters with poor scores. Thus median home prices and rents move with scores.