Index Shows Renting a Home Beats Buying in Many Cities Even as U.S. Housing Market Thrives Amid Pandemic

Rising Mortgage Rates Could Hurt Surging Property Values

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BHJ BOCA RATON, Fla. (Sept. 3, 2020) – The U.S. housing market has remained surprisingly resilient during the coronavirus crisis, pushing home prices even higher and making renting the more attractive option in many markets across the country, according to the latest national index by professors at Florida Atlantic and Florida International universities.

The Beracha, Hardin & Johnson Buy vs. Rent Index determines whether consumers will create greater wealth by buying a home and building equity or renting the same property and reinvesting the money they would have spent on ownership, such as taxes, insurance and maintenance. The BH&J index examines the entire U.S. housing market but isolates 23 key metropolitan areas, factoring in home prices, rents, mortgage rates, investment returns, property taxes, insurance and home maintenance costs.  

The quarterly figures show that home prices are above their long-term average in 13 markets – Atlanta, Dallas, Denver, Houston, Kansas City, Los Angeles, Miami, Philadelphia, Pittsburgh, San Diego, San Francisco, Seattle and Portland, Oregon. That means consumers should rent and reinvest rather than buy and build equity in those markets, according to Ken H. Johnson, Ph.D., a real estate economist in FAU’s College of Business and one of the index’s authors.

In particular, buying in Dallas, Denver, Houston and Kansas City carries significant risk due to soaring home prices and the potential for declines off the peak, Johnson noted. 

Meanwhile, the demand for ownership is facing little to no downward pressure in Chicago, Cincinnati, Cleveland, Detroit and New York City, so buying makes more sense in those areas, while the decision to rent or buy is a virtual toss-up in Boston, Honolulu, Milwaukee, Minneapolis and St. Louis.  

While analysts feared uncertainty caused by the pandemic would deliver a serious blow to the housing market, the willingness of many Americans to pursue historically low mortgage rates has exacerbated the shortage of homes for sale and kept the market sizzling, according to Johnson.

“In the middle of a pandemic, with people unemployed, businesses closing and disaster looming, the government stepped in and kept interest rates low through its action to prop up the economy,” Johnson said. “That’s really what insulated the market from buyer apathy and serious price declines.”

Still, the professors say consumers should watch for rising long-term mortgage rates as new treatments and vaccines lessen the threat of the pandemic in the weeks and months ahead.

“Even if rates rise only from 3 percent to 4 percent, this could cause buyers to exit the market, dropping the demand for homeownership precipitously and having a destructive impact on home values,” said Eli Beracha, Ph.D., an assistant professor in the Hollo School of Real Estate at FIU. “Also, Florida and other states have enacted moratoriums on evictions and mortgage foreclosures, but eventually those will be lifted and could lead to a rash of foreclosures and bankruptcies, which would be a serious challenge for the housing market.” 

Homeownership traditionally has been considered the far better option than renting for building wealth, but many Americans have reconsidered that notion following the historic housing crash from 2006-2011. The buy vs. rent index, first published in 2013, shows that even when home prices are rising, renting comparable property and reinvesting can be equally or more lucrative for disciplined investors.

But Johnson, Beracha and William Hardin, Ph.D., associate dean of FIU’s Chapman School of Business, all agree that renters who don’t plan to reinvest the money they would otherwise be spending on ownership are better off buying a home over the long term because homeownership serves as a forced savings plan.