Many analysts have pointed out that housing is in the midst of a catch 22 where renters cannot afford a down payment for a home because they are putting such a large percentage of their income toward rent, but at the same time the reason they are spending so much on rent is because they cannot afford a down payment for a home.
In 2014 and 2015, more families turned to renting as the single-family rental market substantially increased its viability as an asset class. Some studies lately have indicated that there has been a shift toward buying in the housing market, namely an annual study by the New York Fed released last week and survey by Redfin released in late May.
The Beracha, Hardin & Johnson Buy vs. Rent (BH&J) Index, released this week by Florida Atlantic University (FAU) and Florida International University (FIA), suggests that the housing market as a whole is moving deeper into buying territory and that residential housing markets around the country are sound based on numbers at the end of the first quarter.
“This appears to be driven by a steady but strengthening job market, rising rents relative to rising ownership costs and recent slower growth in traditional financial portfolios consisting of stocks and bonds,” said Ken Johnson, Ph.D., a real estate economist, one of the index’s authors, and a professor at FAU.
The index measures the relationship between purchasing property and building wealth through building up equity versus renting a comparable property and investing in a portfolio of stocks and bonds. The index considers the whole housing market nationwide while isolating the markets in 23 large U.S. cities and found that 16 of them favored homeownership versus renting a comparable property and investing.
Markets solidly in buy territory were Boston, Chicago, Cincinnati, Cleveland, Detroit, Milwaukee, Minneapolis, New York, Philadelphia, and St. Louis. Cities hovering around what the index terms the “indifference point” between buying versus renting were Honolulu, Kansas City, Los Angeles, Miami, Pittsburgh, Portland, San Diego, San Francisco, and Seattle. All the markets around the “indifference point” saw their BH&J Index score for the first quarter move in the direction of ownership since the previous quarter.
“This movement suggests that most consumers in these markets appear to have learned from the real estate crash and now understand that residential property prices can get too high,” Eli Beracha, Ph.D., co-author of the index and a professor at FIU. “This is a good sign for future housing price stability in these markets.”
Dallas and Denver were deep in rent territory, according to the index, and continued to move that way in Q1 but at a slower rate than previous quarters. The index score of Houston, which had previously been deep in rent territory, moved deep into buy territory in Q1. In the past, that scenario has foreshadowed noticeable property declines in that market.
“A perfect storm seems to be developing in Houston,” Johnson said. “I expect a lot of folks in Houston to be on the safe side and opt for renting over ownership.”