Which is better for your clients: accumulating wealth through home equity or renting and investing their savings? That’s the fundamental question that the quarterly Beracha, Hardin & Johnson Buy vs. Rent (BH&J) Index aims to answer.
After examining 23 of the country’s largest metro areas in the second quarter, home buying still tops renting—but only slightly, and that has to do with prices.
The Detroit, New York, and St. Louis metro areas were the only ones where homeownership trended more favorably than renting. Meanwhile, the indices in the other 20 metro areas on the list moved toward renting to varying degrees, with some cities moving just marginally and others moving more dramatically in that direction.
Four cities are tipping into rent territory of the index—Miami, Pittsburgh, Portland and Seattle—namely because home prices have risen too high too quickly. Only two cities, Dallas and Denver, saw record index scores favoring renting. But William G. Hardin, index co-creator and director of the Hollo School of Real Estate at Florida International University, notes that housing development has not kept up with the massive job growth in these markets. That may change when development catches up, he says.
“While the trend is definitely in the direction of renting, many markets, namely in the Midwest, remain comfortably in buy territory,” says Eli Beracha, co-creator of the index and associate professor at FIU. “Prices in these markets should continue to rise without worry of overheating.”
Metro areas are scored between 1 and -1, with 1 strongly favoring renting, and -1 favoring homeownership, based on home price appreciation, rents, mortgage rates, and other investment data. The score for the U.S. as a whole (-.065 in the second quarter) could indicate housing prices continuing to rise, according to Ken Johnson, a real estate economist at FAU’s College of Business who also helped create the index. He adds that the data is comparable to 1999 levels. As the score moves closer to zero, that means there’s less difference between renting and ownership in terms of wealth accumulation. S&P CoreLogic Case-Shiller 20-City Home Price Index also recently showed an average annual increase in home prices of 5.7 percent, a level not seen since 2007.
Source: Beracha, Hardin & Johnson Buy vs. Rent Index, September 2017, Florida Atlantic University and Florida International University