Who’s buying? Who’s renting? That depends

by Donald Horne19 Jun 2015
Is it better to rent or buy? That depends on where you live – and for mortgage brokers, whether it is feast or famine.

In some markets, it is now cheaper to buy a house and make monthly mortgage payments than it is to pay rent; but not everywhere.

The Beracha, Hardin & Johnson Buy vs. Rent (BH&J) Index – produced quarterly by Florida Atlantic and Florida International universities – measures how owning or renting affects wealth accumulation, and the numbers show that it is becoming more favorable for renters.

“Potential buyers should be cognizant that ‘the deals’ are out of the marketplace and that it is essentially a tossup between rent and ownership as to which way will, on average, provide greater wealth accumulation,” states Ken Johnson, one of the index’s authors, in a university press release. “Miami, in particular, deserves attention as it has been trending toward rent territory for several reporting periods. In Miami, potential buyers should seek to bargain more aggressively.”

Johnson is a real estate economist who is also an associate dean of graduate programs and a professor in FAU’s College of Business.

Where to rent?
Three cities (Dallas, Denver and Houston) are clearly in rent territory, with property pricing outpacing rents – meaning that buyers should proceed with caution.

On the cusp
Seven cities (Miami, Honolulu, Los Angeles, Pittsburgh, Portland, San Francisco and Seattle) are at or near the indifference point between ownership and renting. Here the spread between monthly rent payments and ownership payments appears to be at a point where neither ownership nor renting is statistically favored.

Time to buy
Four cities (Chicago, Cincinnati, Cleveland and Detroit) remain in strong buy territory with scores that have historically favored wealth accumulation through home ownership.

The index conducts a “horse race” comparison between an individual that is buying a home and an individual that rents a similar quality home and reinvests all monies otherwise invested in homeownership. Johnson’s collaborators in this ongoing independent research are Eli Beracha, Ph.D., assistant professor in the T&S Hollo School of Real Estate at FIU, and William G. Hardin III, Ph.D., director of the T&S Hollo School of Real Estate at FIU’s College of Business.

The index’s results are standardized between 1 and -1, with negative scores favoring ownership and positive scores favoring renting. The BH&J Index provides information on both the direction and health of varying housing markets, as well as collateral information for real estate professional, developers, lenders and housing policy makers.
 

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