BH&J Buy vs. Rent Index Shows Property Appreciation Slowing
Property appreciation is slowing in housing markets across the country as upward pressure on the demand for homeownership declines, according to the latest national index produced by Florida Atlantic University and Florida International University faculty.
“Unraveling our model, we see that property price appreciation is decelerating in most of our measured 23 markets,” said Eli Beracha, Ph.D., a real estate professor in the Hollo School of Real Estate at FIU and one of the creators of the Beracha, Hardin & Johnson Buy vs. Rent (BH&J) Index. “Looking back over the past few quarters, we see slowing property appreciation, which suggests that the rapid property appreciation witnessed in recent quarters is almost certainly over.”
The index measures the difference in wealth creation between renting and reinvesting versus owning the same property and building equity. BH&J scores approaching +1 strongly suggests individuals would be better off renting and reinvesting as opposed to owning and building equity. Scores approaching -1 favor home ownership over renting. Scores close to 0 suggest a tossup in terms of wealth creation between the two alternatives.
In 20 of the 23 metropolitan markets tracked in the BH&J Index upward pressure on the demand for homeownership is declining.
“In all but three markets – Atlanta, Chicago and Detroit – BH&J scores are declining from near record levels,” said Ken H. Johnson, Ph.D., a real estate economist and one of the creators of the BH&J Index in FAU’s College of Business. “This occurred prior to the housing crash a decade ago as well; however, current macro market factors, high employment and low mortgage rates, among others, should serve to buoy prices. There is a low probability that we will experience a catastrophic housing crash.”
What is going to happen next in the nation’s housing markets is an open question. Will housing markets plummet as they did over a decade ago resulting in a national crisis or will housing markets continue to appreciate at nearly record levels?
Both Johnson and Beracha agree that a likely scenario for the nation’s housing market is a “bumpy” ride back to a long-term property pricing trend.
“Home prices have historically been cyclical around a long-term trend,” Beracha said. “This time around should be no different and this cycle should not be as extreme as the previous housing cycle.”
According to Johnson, what is most likely is that “we will see slightly positive to slightly negative property appreciation rates this time around as the nation’s housing markets revert to their long-term means.”
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.