Real Estate June 3, 2010, 5:10PM EST

Should You Buy or Rent?

For many Americans, home ownership remains an important goal, but in some markets it makes more sense to rent

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To rent or to buy? For millions of Americans, that is the question. The recent housing boom and subsequent bust seem to provide a clear answer—that given an affordable mortgage, we would all rather be buyers.

With the piercing clarity that is 20-20 hindsight, many people burned by the mortgage market may now think differently. After all, you can't be foreclosed on if you don't own in the first place. For them, renting has become not only the smart move, but the only sensible one.

"Many Americans are questioning if home ownership is an inherent element of their dream," says Tara-Nicholle Nelson, real estate consumer advocate for real estate website Trulia. Part of that dream is also based on economic common sense. Besides stability and status, owning a home can help build equity, improve credit ratings, and be a tax deduction. Given these benefits, the dream of home ownership is hard to give up, though. Much as sales of gas-guzzling pickups and SUVs are rebounding, Americans seem to need only the slightest nudge to jump back into the housing market. In April, sales of existing homes rose 7.6 percent nationwide, according to the National Association of Realtors. For new homes, sales surged 14.8 percent, according to the National Association of Home Builders.

Measuring Rents Vs. Sales Prices

In some markets, however, people are better off renting. That's because in these areas, the cost of buying a new home is still prohibitive, especially given tighter lending standards. To determine which urban areas are best for renters and which are best for buyers, Trulia surveyed the country's 50 largest cities.

"We took current list prices of the average cost to rent or own a two-bedroom apartment, condo, or town home in a city and divided it by one year's rents," says Nelson. Trulia broke the data into three categories and scored each city on a price-to-rent ratio ranging from 1 up to more than 21. If the price-to-rent ratio is between 1 and 15—that is, if the price to buy is only one to 15 times prevailing rents—it's much less expensive to own than to rent. If the ratio is between 16 and 20, owning a home is more expensive but might still make financial sense, depending on the individual situation. If the ratio is higher than 21, the total costs of owning a home are much greater than the costs of renting.

With a price-to-rent ratio of 33, New York City is highest on the list. The average cost to rent a two-bedroom apartment was $3,537 and to buy a comparable unit was $1,383,612. The next highest city, Omaha, came in at 26, where the average cost to rent a two-bedroom was $870 and to buy was $275,844. At the opposite end of the spectrum, with a price-to-rent ratio of 8, is Minneapolis, where an average two-bedroom unit rented for $1,699 and sold for $153,843.

Of course, more expensive, high-end homes are on the market in Minneapolis, but "you can own a house [here] very easily for less than you pay for rent," says Aaron Dickinson, a broker at Edina Realty in Plymouth, Minn.

Some Rebounding Sales Prices

Dickinson says prices in many areas are still below peak levels and may have hit bottom—prices have been increasing the past four months after falling for more than 40 months, according to the Minneapolis Area Association of Realtors. One of the most dramatic changes came in North Minneapolis, where the median sale price in April jumped 171 percent year-on-year, to $64,000, he says. It is one of the city's older neighborhoods, adjacent to downtown, with smaller homes targeted for first-time buyers. Dickinson adds that the area was hit badly by foreclosures, so the resurgence is relative.

Some Minnesotans have been quick to take advantage of the lower prices. Terry Jaecks, a warranty department manager for an industrial company in Minneapolis, had been in the market for a house since moving to the city in 2005, when prices were skyrocketing.