Renting Vs. Buying in Manhattan: New York City Real Estate

New York City has the most expensive real estate market in the world. With the current mortgage crisis and dropping home values, NYC is the only place that has witnessed increasing real estate prices. The city is the financial hub of the country - the major financial banks and the stock exchanges are a big attraction to many. Also, many foreign buyers invest in properties for prestige in the city. So population is dense and space is at a premium. Consequently, both buying and renting in NYC are a strain on personal finances.

CNN reports that in the first quarter of 2008, the average home in Manhattan touched $1.6 million with the median price rising by 13% over the first quarter of 2007. CNN further estimates that price increases will be smaller in the coming quarters. While real estate gurus claim that New York City has the potential to continue sustaining rising prices, there seem to be many factors indicating that the market may be cooling off.

One key indicator is the historical price-to-rent ratio of homes. According to CNN, in NYC, that 15-year average is around 15:1. But in the last couple of years, it has sky rocketed to around 25:1. Rental prices have also increased but sales prices has risen at more than 1.5 times that rate. Today it costs between $4500-$8000 to rent a two bedroom apartment in the decent neighborhoods of the city but condos sell for a million dollars! So renting is a better option than buying in the current market.

Other factors that weigh against the option of buying include the ailing financial market. Reuters reports that many financial institutes and banks are cutting staff or at least in a hiring-freeze. Also increasing mortgage rates are making it harder for people to afford housing in the city. Besides property taxes are quite high in the city. Suburbs of the city are already experiencing flat price trends over the last couple of quarters as reported by ABC News. All these factors work against the advantages of buying, one of which is savings from tax exemptions on the mortgage interest when purchasing a home.

So in the short-term, renting which is also expensive, is definitely the safer option for single people and families alike. Unlike when buying, you do not need to worry about losing equity if home prices drop. It is common for families to rent in the neighborhoods of New York City - northern regions in New Jersey, in Long Island, etc. Metro connectivity is excellent and many people commute back and forth from these neighborhoods. Even in these neighborhoods, rentals are significantly higher than the national average and hover around $2000 for a two-bedroom apartment.

I am based in Pennsylvania but live and work in NYC 2-3 days a week. When having to decide on whether we should buy a place in NYC and move, we weighed these factors and thought it to rent in the existing market. In fact, it is not uncommon for people living in Philadelphia, PA commute daily to save on the cost of living in New York.

Renting is also the best option for students - many students live in the city to minimize their commute and share an apartment with room-mates to limit their expenses.

With the last few years being an exception, NYC has the reputation of providing a strong and healthy real estate market. Once the mortgage crisis abates and housing prices stabilize (sale price-to-rent ratio returns to its historic average), buying in the city may be a prudent long-term investment particularly for families and professionals who can afford and intend to live in the city for long period of time. A robust economy with a stable housing market and mortgage interest tax exemptions can make buying in NYC a sweet deal.