At the current pace of the housing market, people are not buying as they are waiting for the prices to reach the bottom before deciding to buy.

But some people just decide to buy if they see that it is cheaper to buy than to rent. One factor they consider in this decision is the price-to-rent ratio. Is it cheaper to rent or buy?

Housing price-to-rent ratio (P/R) is a measure of how much it cost to buy a home, relative to the cost of renting a similar house for a year.

For example, take the price of the type of home you want in your area. You can compare this with the annual cost of renting a property which icontains the same real estate comparables as the one you want. For example, if you can buy a home for $405,000 but can rent a similar one for $27,000 for a year, the price-to-rent ratio would be 15.

As a general rule, the ratio is around 15 or lower, that would be a good buy. As the P/R ratio falls, more buyers are enticed to buy. While P/R ratios in many markets have come down lately, they're still high relative to their long-term average.

As your market's P/R ratio falls, more sellers are likely to come into the market. So demand could pick up and help stabilize home prices. 15 is just a ball park figure and you can make a more sophisticated analysis and compare the current P/R to its pre-housing-boom levels.

The findings in most areas are that home prices are still over-valued using the relationship between house prices and rents. The ratio of prices to rents is a sort of price/earnings ratio for the housing market. Just as the price of a share should equal the discounted present value of future dividends, so the price of a house should reflect the future benefits of ownership, either as rental income for an investor or the rent saved by an owner-occupier.