The usefulness of rent ratios

My colleague Jim Poniewozik's epic post about why he didn't write about the John Edwards affair sooner got me to thinking about a story I haven't yet shepherded into print—the rent-ratio heat maps at Hotpads.com. Okay, not exactly equivalent, but I wanted an excuse to mention Jim's amazing post, which was eye-opening even to someone who sits down the hall.

Onto Hotpads.com. It's a map-centric real-estate site started by some Notre Dame grads four years ago. They recently added a feature that shows buy-rent ratios, that old trick of the real-estate trade. Take the cost of a house and divide by the amount you'd pay to rent a comparable space for a year. If the number is high, then houses are pricey—you're better off renting for the time being.

It's my impression that this is a question a lot of people have in their heads nowadays: Is it time yet to sell/buy or is my market still "correcting"?

Take a look at this map of downtown Phoenix:

Red areas mean a high rent ratio (pricey to buy), and blue means low (better deals). So if you're looking to buy a place in downtown Phoenix, you might want to focus your search between Central Avenue and 7th Street. (Hotpads.com data is for two-bedroom rentals and two-bedroom homes for sale. When they don't have enough observations, they leave the map that gray color you see on the lefthand side.)

It's really cool to look at. The problem, though, is that you're comparing neighborhood to neighborhood in real time, and some places have naturally higher rent ratios than others —coastal California, for example. What would be better to know is how an area's rent ratio compares to what it has been historically. As a broad rule of thumb, any rent ratio over 20 is high, but Pittsburgh's first-quarter rent ratio of 11.9 (according to data-tracker Economy.com) isn't necessarily a steal—it's still higher than the area's 15-year average of 10.7.

I asked HotPads.com if they'd like to offer historical data, and they would. But it's not there yet.

UPDATE: Not that if you wanted to buy a house, you could even get a loan.

Barbara!