Is it better to rent or buy?
By Roxanne James

America's Property Markets Officially in 'Clear Buy Territory'

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A new report published by academics in Florida reveals that the US as a whole is moving deeper into buy territory, with home ownership expected to produce greater wealth on average than renting.

The Beracha, Hardin & Johnson Buy vs Rent Index (BH&J Index) reveals that as of the end of the second quarter of 2014, the housing market in the US is generally trending towards home purchase, as numbers of households in private rented accommodation have started to decline.

"The US as a whole is still in clear buy territory,” said Ken Johnson PhD, a real estate economist who is one of the index's authors. “The cities of Cincinnati, Chicago, Cleveland and New York City are deep into buy territory".

As prices for property in the US start to reflect better core value in certain areas, more affordable opportunities for home ownership are becoming available and American buyers are responding positively to the improved dynamics. Miami and Portland, two cities which in recent years have been edging further into rent territory have "pulled back from the edge," Johnson said. "It's coming back toward a toss-up between buying and renting. That's a good sign for home pricing in Miami and Portland as it suggests prices are going to level off in these metro areas".

According to the report, Dallas and Denver dipped slightly deeper into rent territory, making renting the preferred method of wealth accumulation on average. Houston however, was plunged alarmingly into historic levels of rent territory.

"Housing is particularly worrisome coming in with a score or .633," Johnson said. "Rapid property appreciation combines with shaky economic prospects to put Houston on the watch list for a near-term dip in housing pricing". Relatively flat income growth and rising index scores that strongly favour renting are attributed to growth in the rented sectors of Dallas and Houston.

Honolulu, Pittsburgh, San Francisco and Seattle all sit on the fence in terms of preferences for ownership and renting. The report concludes that in these areas, the spread between monthly rent payments and ownership payments is at the point where neither ownership nor renting is statistically favoured.

The BH&J Index attempts to answer one of the toughest questions American consumers face: Is it better to rent or buy a home in today's housing market? The quarterly index is designed to signal whether current market conditions favour buying or renting a home in terms of wealth creation over a fixed holding period in a particular market, relative to historical market conditions and alternative investment opportunities. The study examines the entire housing market in the United States and isolates the markets of 23 key cities.

The results of the index are standardised between 1 and -1, with negative scores favouring ownership and positive scores, renting. The BH&J Index provides information on both the direction and health of varying housing markets as well as collateral information for real estate professionals, developers, lenders and housing policy makers.

Realtytrac, a real estate information company, compiled data on 285 counties across the United States analysing the economics of buying versus renting a home in 2015. They found the average cost to rent or own a 3-bedroom house and determined the percentage an average worker would have to spend from their weekly income.

The report revealed some surprising results: "The separate Buy-or-Rent analysis released today found that making monthly house payments on a 3-bedroom property is more affordable than paying fair market rent on a comparable property in 188 of the 285 counties analysed, representing 66% of the areas included in the survey".

In general, the US is experiencing an increase in confidence among domestic home buyers that gives a strong indication economic recovery is improving nationally. Property prices in the majority of areas in America have reached levels that are more affordable meaning the rental option is becoming less attractive for those looking to increase their wealth prospects.

 

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