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The Pendulum Swing Between Rental and Homeownership

HousingDemand for homeownership is waning as more residents prefer renting over buying a home, according to the latest national index produced by the Florida Atlantic University (FAU) and Florida International University faculty.

The report bases its data on the Beracha, Hardin & Johnson Buy vs. Rent (BH&J) Index. The Index's scores approaching 1 indicate very little chance for families that own to outperform those that rent and reinvest in terms of wealth creation. Scores approaching zero suggest indifference in terms of wealth accumulation between owning and building equity versus renting and reinvesting. Scores approaching -1 strongly favor homeownership to produce greater wealth for families.

According to Ken H. Johnson, Ph.D., a real estate economist, and one of the creators of the BH&J Index, the current downward momentum is not surprising since the nation's housing market is entering "the late stages of the current housing cycle."

Of the 23 metros tracked on the index, data indicates that 19 are in rent territory. This means, that on average, an individual family in these cities would be better off renting and reinvesting in a portfolio of stocks and bonds as opposed to building wealth through equity accumulation from homeownership.

“The opportunity to generate greater wealth by renting and reinvesting puts downward pressure on the demand for homeownership and prices should follow sooner rather than later,” said Eli Beracha, Ph.D., real estate economist, and co-creator of the index.

The index indicated that markets experiencing dramatic to slight downward pressure on the demand for homeownership are Dallas (.978), Denver (.867), Houston (.773), Seattle (.424), Pittsburgh (.414), Kansas City (.392), Miami (.349), Portland (.327), San Francisco (.311), Atlanta (.276), Los Angeles (.224), San Diego (.159), Philadelphia (.147), Minneapolis (.107), Honolulu (.076), St. Louis (.076), Boston (.041), Milwaukee (.030), and Cincinnati (.025).

“For markets near zero, I have very little concern about future home prices,” Johnson said. “Clearly, however, Dallas, Denver, and Houston are the canaries in the coal mine. As they go, so should the markets like Seattle, Pittsburgh, Kansas City, Miami, Portland, and San Francisco.”

Cleveland (-.124), Chicago (-.119), New York (-.079) and Detroit (-.007) are the only four metro areas remaining in buy territory.

“All four of these areas are currently experiencing slight upward pressure on the demand for homeownership,” Beracha said. “The coming peak in the housing cycle should have very little impact on these markets.”

Read the complete analysis here.

About Author: Radhika Ojha

Radhika Ojha is an independent writer and editor. A former Online Editor and currently a reporter for MReport, she is a graduate of the University of Pune, India, where she received her B.A. in Commerce with a concentration in Accounting and Marketing and an M.A. in Mass Communication. Upon completion of her master’s degree, Ojha worked at a national English daily publication in India (The Indian Express) where she was a staff writer in the cultural and arts features section. Ojha also worked as Principal Correspondent at HT Media Ltd and at Honeywell as an executive in corporate communications. She and her husband currently reside in Houston, Texas.
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