Monday
March 27, 2017

Rent vs. Buy? This Index Says Definitely ‘Buy’

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Rent vs. Buy? This Index Says Definitely ‘Buy’

A nationwide buy versus rent index is moving deeper into the “buy” territory, indicating that housing markets across the country are strong. This study by Florida Atlantic University and Florida International University also shows that home prices rose 5.4 percent in the first quarter.

Read more: Rental Costs Eat Up 70% of Your Income Here

“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,” says Ken Johnson, a real estate economist and one of the index’s authors. 

The index looked at the relationship between buying a property and building wealth through a buildup of equity versus renting a comparable property and investing in a portfolio of stocks and bonds, and concluded that “In terms of wealth creation, the U.S. housing market, when considered as a whole, has 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 index also revealed that 16 of the 23 metro markets examined moved in the “buy” territory direction.

The metro areas remaining solidly in the “buy” territory include Boston, Chicago, Cincinnati, Cleveland, Detroit, Milwaukee, Minneapolis, New York, Philadelphia, and St. Louis.

“These cities should have room for price growth without much worry of overheating,” says Eli Beracha, 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.”

On the other hand, index authors say cities like Honolulu, Kansas City, Los Angeles, Miami, Pittsburgh, Portland, San Diego, San Francisco, and Seattle are near an “indifference point” between buying versus renting.  In nearly all of these metro markets, the 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 says. “This is a good sign for future housing price stability in these markets.”

Houston, meanwhile, is deep in the “rent” territory. Also, two other housing markets – Dallas and Denver – moved deeper into the “rent” territory, but at a slower rate than previous quarters, the authors note.

“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 says.

Source: Florida Atlantic University