Do real estate market conditions favor buying or renting? The Beracha, Hardin & Johnson Buy vs. Rent Index [1] is designed to provide guidance to consumers struggling with that choice.
The index, conceived by faculty from Florida International [2] and Florida Atlantic [3] universities, compiles data from 23 major metropolitan housing markets and the overall U.S. real estate market, but the data is not current. There is approximately a two-month delay in the availability of data needed to determine the values Those values range between -1 and 1. If the value is 0 or above, conditions support renting. If the value is less than 0, buying is preferred. The further the value is from 0 in either direction, the stronger the suggestion that buying or renting is favored in a given market.
The values are reached through a comparison between a consumer who is buying a home and one who is renting a similar home. The factors in the comparisons include rent-to-price ratio, mortgage rates, the expected rate of inflation, real past stock market long-term returns, long-term rent growth and housing price appreciation, maintenance and property tax costs, and average homeowners’ duration between relocations. The objective of the index is to provide consumers with information on the health of housing markets. With this data, more informed decisions can be made.
According to the index, most housing markets in the U.S. are nearing a peak in the real estate cycle. Of the 23 metropolitan areas in the index, 13 are slightly to moderately in buy territory, and 10 are slightly to moderately in rent territory. Atlanta, Chicago, and Cincinnati are among the cities in buy territory while Dallas, Denver, and Houston are in rent territory. The overall U.S. market is slightly in buy territory.
Eli Beracha of Florida International University, a co-creator of the index and Editor of the Journal of Real Estate Practice and Education [4], said the numbers suggest prices are higher than their 40-year trend but not as much as in 2007.
“Rather than a crash,” Beracha said, “I anticipate slower growth in prices accompanied by longer marketing times for sellers and increasing inventories, which should bring prices back in conjunction with their 40-year trend.”