Florida Atlantic University and Florida International University have concluded in a survey of the wealth-creating value of home buying versus renting that the U.S. housing market is moving deeper into buy territory, suggesting that, on average, residential housing markets around the country are sound.
Based on numbers from the end of the first quarter, the latest Beracha, Hardin & Johnson Buy vs. Rent (BH&J) Index, which measures the ability to create wealth by either saving through renting and investing the proceeds or accumulating equity in an owned home, came in at a reading of slightly below zero for the first quarter. The index runs from a high of positive one, which is the highest favorable score for renting, and negative one, which is highest for home ownership. The index has been generally moving toward renting since 2013 but swung toward buying in first quarter 2016.
"In terms of wealth creation, the U.S. housing market, when considered as a whole, swung marginally more in favor of home ownership over renting a comparable property and investing monthly rent savings in a portfolio of stocks and bonds," the schools said. Overall, 16 of the 23 metropolitan markets investigated moved in the direction of buy territory.
"This appears to be driven by a steady but strengthening job market, rising rents relative to rising ownership costs and recent slower growth in traditional financial portfolios consisting of stocks and bonds," said Ken Johnson, Ph.D., a real estate economist who is one of the index's authors and an associate dean of graduate programs and professor in FAU's College of Business.
"These cities should have room for price growth without much worry of overheating," said Eli Beracha, Ph.D., co-author of the index and assistant professor in the T&S Hollo School of Real Estate at FIU. "This is especially true for Chicago, Cincinnati, Cleveland and Detroit."
Cities such as Honolulu, Kansas City, Los Angeles, Miami, Pittsburgh, Portland, San Diego, San Francisco and Seattle are hovering around what the index's authors refer to as the "indifference point" between buying versus renting. In almost all of these metro markets, the BH&J Index score for the quarter moved in the direction of ownership.
"This movement suggests that most consumers in these markets appear to have learned from the real estate crash and now understand that residential property prices can get too high," Beracha said. "This is a good sign for future housing price stability in these markets."
"Strong economic support within these two markets should make for a soft landing in terms of slowing property price growth, increased marketing time for properties and lower probabilities that sellers will actually transact and close during a given marketing effort of their property," Johnson said.
One particular market, Houston, continues to cause concern. Houston was already deep into rent territory, and its recent BH&J score plummeted significantly toward buy territory – a scenario that has foreshadowed noticeable property price declines in the past.
"A perfect storm seems to be developing in Houston," Johnson said. "I expect a lot of folks in Houston to be on the safe side and opt for renting over ownership."
The BH&J Index and other FAU real estate activities are sponsored by Investments Limited of Boca Raton. 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.