As rents in some areas continue to rise, people are beginning to realize that home ownership might be a better choice. Three Florida economists say this truly is a good time to buy a home in most U.S. cities.
Research on this issue was performed by Ken Johnson, Ph.D., Florida Atlantic University; William G. Hardin III, Ph.D., Florida International University; and Eli Beracha, Ph.D., Florida International University. Together, these economists author The Beracha, Hardin & Johnson (BH&J) Buy vs. Rent Index.
"This is great news for home ownership and the financial returns to ownership," said Johnson, a real estate economist who is an associate dean of graduate programs and professor in FAU’s College of Business. "We are not where we were in 2012, when nearly any purchase was a sound financial decision. However, overall, we are now in a situation where aggressive marketing from sellers combined with due diligence and sound negotiation from buyers is creating a housing market that's more in line with what we've seen historically."
The latest BH&J Index comes on the heels of the latest S&P/Case-Shiller Home Price Index, which found that home prices rose 5.8 percent year over year, the highest annual increase since June 2014.
The BH&J Index is designed to signal whether current market conditions favor buying or renting a home in terms of wealth creation over a fixed holding period in a particular market relative to historical market conditions and alternative investment opportunities. The index summarizes 23 major metropolitan housing markets and the U.S. real estate market as a whole (represented by the member index metropolitan areas).
In order to arrive at the index value for each location and each point in time, 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 home ownership. The end results of each comparison are calibrated to yield a value between -1 and 1. 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 major goal of the BH&J Index is to provide information on the health of housing markets around the country enabling consumers, real estate market professionals, developers, lenders and housing policy makers to make more informed decisions.
Both indexes incorporate property appreciation from housing markets around the country, but unlike Case-Shiller, the BH&J Index adds additional rental, maintenance and alternative investment data streams, among others, to indicate when and why housing markets might be changing direction.
These latest numbers show that 15 of the 23 cities in the index are solidly in buy territory, while another five are only marginally in rent territory. Only three cities—Dallas, Denver, and Houston—present scores that are worrisome in terms of local housing market conditions.
"The scores for Dallas, Denver, and Houston have worried us for some time now," said Beracha, co-author of the index and assistant professor in the T&S Hollo School of Real Estate at FIU. "The last time we saw scores of this magnitude, housing market crashes soon followed."