FAU Buy vs. Rent Index Shows Rising Prices and Mortgage Rates Moving Housing Markets in the Direction of Renting

BOCA RATON, Fla., June 7, 2017 /PRNewswire-USNewswire/ -- Slowing rents coupled with rising home prices and mortgage rates are pushing many housing markets in the U.S. into rent territory, according to the latest national index produced by Florida Atlantic University and Florida International University faculty.

"The major drivers for this quarter's scores appear to be slowing rents relative to the costs of ownership and climbing mortgage rates," said Ken Johnson, Ph.D., a real estate economist and one of the index's creators in FAU's College of Business. "Thus, on the margin, more potential owners should favor renting and reinvesting in a portfolio of stocks and bonds as opposed to ownership. This shift should slightly lower the demand for ownership and contribute to the slowdown in housing prices."

Based on numbers from the end of the first quarter of 2017, the latest Beracha, Hardin & Johnson Buy vs. Rent (BH&J) Index follows recent S&P/Case-Shiller 20-City Home Price Index scores, which find an average annual increase in home prices of 5.78 percent, suggesting that prices, while increasing, are slowing.

"Higher BH&J scores favor renting over ownership in terms of wealth accumulation," said Eli Beracha, Ph.D., co-creator of the index and assistant professor in the T&S Hollo School of Real Estate at FIU. "All of this upward pressure in the tradeoff between renting and buying should serve, in general, to slow property price appreciation around most of the country."

The latest BH&J scores show 11 of 23 cities in the index remain in buy territory. Another nine cities hover around a BH&J score of zero, suggesting a tossup between buying and renting in terms of wealth accumulation.

Many metro markets, including Chicago, Cincinnati and Cleveland, among others, remain soundly in favor of ownership. The remaining three metro areas (Dallas, Denver and Houston) are in heretofore unseen territory in terms of both pricing and BH&J scores.    

"Interestingly, housing price appreciation continues to increase at a double-digit pace in both Dallas and Denver in the face of increasing BH&J scores," Johnson said. "However, in Houston, annual property price increases have slowed to 4.4 percent, seemingly in response to conditions that favor renting and reinvesting over buying."       

The BH&J Index and other FAU real estate activities are sponsored by Investments Limited of Boca Raton.

SOURCE Florida Atlantic University College of Business

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