Renters Create More Wealth than Home Buyers in Many Markets
The BH&J Buy vs. Rent Index shows an increased possibility of significant price retractions in many metro areas around the country, while other markets’ pricing can be expected to remain stable based on their index scores.
With housing markets around the U.S. nearing the peak in their cycles, renters who reinvest their money have an increasingly better chance at creating wealth than individuals who purchase a home, according to the latest national index produced by Florida Atlantic University and Florida International University faculty.
This marginal move in the Beracha, Hardin & Johnson Buy vs. Rent (BH&J) Index shows an increased possibility of significant price retractions in many metro areas around the country, while other markets’ pricing can be expected to remain stable based on their index scores.
“On the heels of information concerning slowing housing starts, rising mortgage rates, decreased demand and unsustainable price increases, these numbers provide additional evidence that housing markets around the country are slowing, resulting in many to opt for renting,” said Ken Johnson, Ph.D., a real estate economist and one of the index’s creators in FAU’s College of Business.
Of the 23 separate metro areas in the BH&J Index, many are nearing the top of their current housing cycle, meaning they are above their long-term pricing trend. These cities include Atlanta, Denver, Dallas, Honolulu, Houston, Kansas City, Los Angeles, Miami, Minneapolis, Pittsburgh, Portland, San Diego, San Francisco, Seattle and St. Louis.
Other cities are below their long-term pricing trend — meaning buying and building equity is the superior option — including Boston, Chicago, Cincinnati, Cleveland, Detroit, Milwaukee, New York and Philadelphia.
The biggest contributor to the rising cost of ownership is rising house prices, said Eli Beracha, Ph.D., co-creator of the index and associate professor in the Hollo School of Real Estate at FIU.
“The current scores driving the markets in the direction of renting and reinvesting appear to be the results of higher mortgage rates, increase in returns, on average, in the stock market, and the cost of ownership, which includes your mortgage payment, taxes, insurance, maintenance, etc.,” Beracha said. “All of these costs are rising faster than the cost of renting a comparable property. Therefore, renters who take the money they’re saving each month and reinvest it are going to build wealth faster than those who buy a home, on average.”
So, what does this mean for those intent on purchasing a home? Bargain aggressively.
“Don’t be afraid to walk away from a deal in which you are not comfortable with the price,” Johnson said. “Never buy because you are afraid that you will not be able to afford to buy later. This was the attitude that many took in 2007, resulting in market collapse.”
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.