U.S. Cities Experiencing Downward Pressure on Housing Markets
Currently, 19 of the 23 metropolitan markets tracked in the index are in rent territory suggesting that, on average, an individual family would be better off renting and reinvesting in a portfolio of stocks and bonds as opposed to building wealth through equity accumulation from homeownership.
Most major cities in the U.S. are experiencing downward pressure on the demand for homeownership, according to the latest national index produced by Florida Atlantic University and Florida International University faculty.
“This is not surprising as the nation’s housing market enters the late stages of the current housing cycle,” said Ken H. Johnson, Ph.D., a real estate economist and one of the creators the Beracha, Hardin & Johnson Buy vs. Rent (BH&J) Index in FAU’s College of Business.
BH&J Index scores approaching 1 indicate very little chance for families that own to outperform those that rent and reinvest in terms of wealth creation. Scores approaching 0 suggest indifference in terms of wealth accumulation between owning and building equity versus renting and reinvesting. Scores approaching -1 strongly favor homeownership to produce greater wealth for families.
Currently, 19 of the 23 metropolitan markets tracked in the index are in rent territory suggesting that, on average, an individual family would be better off renting and reinvesting in a portfolio of stocks and bonds as opposed to building wealth through equity accumulation from homeownership. Markets experiencing dramatic to slight downward pressure on the demand for homeownership are Dallas (.978), Denver (.867), Houston (.773), Seattle (.424), Pittsburgh (.414), Kansas City (.392), Miami (.349), Portland (.327), San Francisco (.311), Atlanta (.276), Los Angeles (.224), San Diego (.159), Philadelphia (.147), Minneapolis (.107), Honolulu (.076), St. Louis (.076), Boston (.041), Milwaukee (.030), and Cincinnati (.025).
“For markets near zero, I have very little concern about future home prices,” Johnson said. “Clearly, however, Dallas, Denver and Houston are the canaries in the coal mine. As they go, so should markets like Seattle, Pittsburgh, Kansas City, Miami, Portland and San Francisco.”
Current BH&J Index scores suggest that housing prices have far outpaced the cost of renting, providing opportunity for families to rent and reinvest and generate greater overall wealth.
“The opportunity to generate greater wealth by renting and reinvesting puts downward pressure on the demand for homeownership and prices should follow sooner rather than later,” said Eli Beracha, Ph.D., real estate economist and co-creator of the index in the Hollo School of Real Estate at FIU.
Cleveland (-.124), Chicago (-.119), New York (-.079) and Detroit (-.007) are the only four metro areas remaining in buy territory.
“All four of these areas are currently experiencing slight upward pressure on the demand for homeownership,” Beracha said. “The coming peak in the housing cycle should have very little impact on these markets.”
Both Johnson and Beracha agree that the U.S. is near the peak in its current housing cycle, and while they have worries for some markets, they do not foresee a housing decline similar to the major downturn that occurred from 2008 through 2012.
The BH&J Index is published quarterly and is available online at http://business.fau.edu/buyvsrent. Due to data availability and the time necessary to calculate the most current index values, the index is produced two months after the end of the quarter.