While buying a home remains a long-term investment many Americans will make at some point in their lives, the factors to consider along that road are definitely challenging. Home prices are way up in many markets, inventory is limited, and many homebuyers report having to compromise when it comes time to shop for that dream home. Another factor to consider: renting might actually generate more wealth for potential buyers in the long run, according to a new report.
The latest installment of the Beracha, Hardin & Johnson Buy vs. Rent (BH&J) Index shows that many metros around the nation are above their long-term pricing trends, suggesting that “significant price retractions” may be on the horizon for these markets. If that proves to be true, the BH&J Index suggests that existing renters would be financially better served by continuing to rent rather than purchasing a home, and investing the difference, a move the BH&J Index suggests would have “an increasingly better chance at creating wealth.”
“On the heels of information concerning slowing housing starts, rising mortgage rates, decreased demand and unsustainable price increases, these numbers provide additional evidence that housing markets around the country are slowing, resulting in many to opt for renting,” said Ken Johnson, Ph.D., a real estate economist and one of the index’s creators in Florida Atlantic University’s College of Business.
Of the 23 separate metro areas in the BH&J Index, many are “nearing the top of their current housing cycle, meaning they are above their long-term pricing trend.” Cities operating above their long-term pricing trends include Atlanta, Denver, Dallas, Honolulu, Houston, Kansas City, Los Angeles, Miami, Minneapolis, Pittsburgh, Portland, San Diego, San Francisco, Seattle, and St. Louis. On the other hand, cities operating below their long-term pricing trends include Boston, Chicago, Cincinnati, Cleveland, Detroit, Milwaukee, New York, and Philadelphia.
Eli Beracha, Ph.D., co-creator of the index and associate professor in the Hollo School of Real Estate at FIU, said that rising home prices are a primary factor driving up the overall cost of homeownership, but they’re not the sole contributor.
“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.,” Beracha said. “All of these costs are rising faster than the cost of renting a comparable property. 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.”
Not that renting itself will be exactly cheap—a recent study by RENTCafe found that millennials are paying an average of $100k in rent by age 30. That certainly suggests there are plenty of opportunities for savvy investors targeting sectors such as single-family rental. (You can click here to read a recent breakdown of the best markets for single-family rental investment.)
Of course, plenty of consumers are eager to get out of the rental market, regardless of how the current market will impact long-term wealth creation. What should those borrowers keep in mind when it comes time to finding a home?
“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.”
Produced by Florida Atlantic University and Florida International University faculty, the BH&J Index is released two months after the end of every quarter. You can view a brief video about the Index below.