Moving to Chicago is an attractive proposition—particularly for young professionals—due to the city’s promising job market and comparatively affordable housing prices. Nevertheless, those who are drawn to the nation’s third-largest metropolitan area for these reasons will still have some careful decisions to make about how to best take advantage of Chicago’s relative affordability. The biggest such question may be: is it smarter to rent or to buy a home?
While home-buying has rebounded following the recession, people between the ages of 20 and 29 (currently the millennial generation) continue to buy homes at less than half the rate of previous generations at those ages. Furthermore, the recession and the collapse of the housing bubble seriously challenged the conventional wisdom that purchasing a home is always a better investment than renting. It’s no longer an automatic decision for those who can afford it: these days, you have to do the math.
Fortunately, that math is fairly straightforward. According to Business Insider, buying a home is generally cheaper than renting a home as long as the cost of buying is less than 20 times the annual rent of a comparable property. However, when the buy-to-rent ratio is greater than 20, renting may actually be the more prudent investment. This is a very simplified way of examining the rent vs. buy outlook, and people in regions where the ratio approaches but does not exceed 20 should still consider their options carefully.
Some regions can almost guarantee that purchasing a home will ultimately cost less than renting, and Chicago is one of these areas. Using data gathered from Zillow.com, Business Insider reports that the buy-to-rent ratio in Chicago is a very favorable 9.3. By comparison, the buy-to-rent ratios in New York, Los Angeles, San Francisco and San Jose are 13.6, 17.7, 19.5 and 21.3 respectively.
Other reputable sources also give the nod to buying a home in the Chicago area. Using data from Deutsche Bank’s annual calculation of housing market costs, The Wall Street Journal reports that Chicago remains one of the major cities where buying is a bargain, despite the fact that home prices there have risen the past few years.
This is great news for new Chicago residents, especially considering that home prices in many other metropolitan areas, including New York and Los Angeles, are not only higher relative to rental prices but higher overall. However, it’s still important to do your homework and to compare actual listings for rental and for-sale properties in your desired neighborhoods. Armed with Business Insider’s simple calculation, it becomes relatively simple to determine whether buying a home is a wise investment.
For anyone moving to Chicago, renting can present some advantages despite the favorable buying market. A new city usually means a new job, and new jobs don’t always work out. The hassle of breaking a lease is nothing compared to the hassle of unloading a newly-purchased property in the event of unexpected unemployment.
Renting also allows for a certain amount of flexibility and exploration. For those who are unfamiliar with a new city, online research and a few visits are no substitute for actually living there. You may think you’ve identified the perfect neighborhood, only to find that the reality fails to live up to your expectations. You may also encounter unforeseen lifestyle changes during the first few years in a new city, which render a once perfect location less than ideal. And in a city like Chicago with so many exciting neighborhoods, renting for a while can simply be more fun.
If and when you do choose to buy a home in Chicago, it’s best to proceed with caution and as much information as possible. A favorable housing market does not necessarily mean that buying is best for everyone, and the long-held belief that everyone should own a home has led many people into making a purchase before they could truly afford it. Home-owning has costs above and beyond the list-price of a house, including the interest on a mortgage, taxes, homeowners insurance and the loss of interest that the money for a down-payment would otherwise accrue. Buyers who fail to consider these costs and compare the relative merits of buying and renting may find themselves in serious financial straits.