Reconsider Renting: Housing Index Shows Buying Costs Decline

Low Mortgage Rates Keep Monthly Payments in Check 

Renting a home and reinvesting the money that would have been spent on owning has been the better way to build wealth, on average, for several years. But as house prices escalate across the nation, that strategy is losing momentum because of interest rates near historical lows, according to the latest national index by professors at Florida Atlantic University and Florida International University.

The Beracha, Hardin & Johnson Buy vs. Rent Index analyzes 23 key metropolitan markets and determines whether consumers will create wealth faster in buying a home and building equity or renting the same property and reinvesting. An index score approaching 1 in a given market means that renting and reinvesting is strongly favored. A score approaching -1 means owning and building equity is the better option. A score near 0 indicates a tossup between the two. 

The fourth-quarter figures show an across-the-board decrease in scores for all 23 metros, an indication that ownership costs are declining while rents are increasing. 

“The real interesting takeaway from the latest run of the index is that it clearly illustrates the benefit of near-record-low mortgage rates and how they far outweigh the risk from inflating housing prices,” said Ken H. Johnson, Ph.D., co-author of the index and an economist in FAU’s College of Business. “Essentially, very low monthly payments stemming from low mortgage rates are going a long way in terms of expected wealth creation.”

Boston, Chicago, Cincinnati, Cleveland, Detroit, Honolulu, Milwaukee, New York and St. Louis all came in with negative scores, indicating it is better to own and build equity, all else being equal. Three of those markets – Boston, Milwaukee and St. Louis – became buyers’ markets after being in rent territory during the third quarter.

Atlanta, Dallas, Denver, Houston, Kansas City, Los Angeles, Miami, Minneapolis, Philadelphia, Pittsburgh, Portland, San Diego, San Francisco and Seattle all had positive scores and remain renters’ markets. But six of those metros – Los Angeles, Minneapolis, Philadelphia, Portland, San Diego and San Francisco – could soon reach buy territory.

“As rates fall, potential buyers bid up prices in this very competitive market for homes,” said Eli Beracha, Ph.D., index co-author and a professor in FIU’s Hollo School of Real Estate. “Thus, a future rise in mortgage rates becomes the greatest threat to future housing prices.”

The professors examine the U.S. housing market by factoring in home prices, rents, mortgage rates, investment returns, property taxes, insurance and home maintenance costs.

Homeownership traditionally was considered the far better option than renting and reinvesting, but the historic housing crash from 2006-2011 changed that perception for many Americans. The BH&J Buy vs. Rent Index, first published in 2013, shows that even when home prices are rising, renting and reinvesting can be equally or more lucrative for disciplined investors.

Still, renters who would not invest the money they otherwise would have spent on ownership are better off buying a home because it is a self-imposed savings plan, the professors said.

“Consumers should pick a strategy, whether it’s buying and building equity or renting and reinvesting,” Johnson said. “The worst thing you can do is rent and not reinvest while spending the savings on disposable goods, like beer and cookies.”

-FAU-