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Buy or Rent? What’s Really Best for Your Bottom Line?

by Realty News ReportJune 27, 2018
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HOUSTON – (By Dale King, Realty News Report) – A trio of professors from two South Florida universities who create a quarterly housing report have offered people in the home acquisition market a riddle — and a possible redirection — in their latest publication.

How can a person make more money – purchase a house or rent a residential unit?

The answer: “Renters who reinvest their money have an increasingly better chance at creating wealth than individuals who purchase a home,” says the latest Beracha, Hardin & Johnson Buy vs. Rent (BH&J) Index produced by two instructors at Florida International University in Miami and one at Florida Atlantic University in Boca Raton.

The real estate educators say the index offers timely advice to residents of 23 separate metro areas in the BH&J Index, including the Greater Houston and Greater Dallas regions, whose home purchasing candle is apparently still ablaze, but is burning low.

“Information concerning slowing housing starts, rising mortgage rates, decreased demand and unsustainable price increases provides evidence that housing markets around the country are slowing, resulting in many people deciding to opt for renting,” said Ken Johnson, Ph.D., a real estate economist at FAU’s College of Business and one of the index’s creators.

The two Texas metros are among communities “nearing the top of their current housing cycle, meaning they are above their long-term pricing trend,” says the index. Also on this list are Atlanta, Denver, Honolulu, Kansas City, Los Angeles, Miami, Minneapolis, Pittsburgh, Portland, San Diego, San Francisco, Seattle and St. Louis.

The biggest contributor to the rising cost of ownership is a hike in 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.”

“All of these costs are rising faster than the cost of renting a comparable property,” Beracha added. “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.”

RealtyNewsReport.com contacted Johnson directly to get information specific to Houston and Dallas. “Two things stand out in these two communities, and also in Denver,” he said. “They have an energy-related economy” comparable to municipalities in the “shale belt” with home markets that are “overheated.”

In addition, Houston, Dallas and Denver “largely escaped the economic downturn of the recession years of 2007-2008. They didn’t suffer as much as other communities. Dallas had barely a hiccup. Now, Dallas and Denver are the most overheated housing markets, and Houston is the next most overheated.”

Houston, he noted, “is still suffering some of the aftermath of Hurricane Harvey. But these three cities certainly stand out.”

So, what does this mean for those intent on purchasing a home? Bargain aggressively, the professors suggest.

“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 index reports that many other cities are below their long-term pricing trend, meaning “buying and building equity is the superior option.” These metros include Boston, Chicago, Cincinnati, Cleveland, Detroit, Milwaukee, New York and Philadelphia.

To arrive at an index value for each location and point in time, professors Johnson, Beracha and William Hardin III, Ph.D., director of the Hollo School of Real Estate at FIU, conduct a “horse race” comparison between an individual buying a home and an individual that rents a similar quality dwelling and reinvests all monies he or she would otherwise invest in homeownership.

The comparison between buying and renting considers many factors including, but not limited to, rent-to-price ratio, mortgage rates, expected rate of inflation, real past stock market long term returns, long term rent growth and housing price appreciation, costs associated with maintenance and property taxes, homeownership tax benefits, transaction costs and average homeowners’ duration between relocations.

The BH&J Index is published quarterly and is available online at http://business.fau.edu/buyvsrent.

June 27, 2018 Realty News Report Copyright 2018
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