Conventional wisdom has always been that it is better to buy than rent. For many real estate agents, this idea has been at the very foundation of their business.
A CNBC report offers some insight that may show buying isn’t necessarily the best option in today’s market. Owning a home has long been held as an opportunity to build wealth, but that equation is turning. It just might be financially beneficial to invest money elsewhere.
An index from Florida Atlantic University shows that as home prices rise quickly and mortgage rate increases loom, the rent versus buy equation is tilting increasingly toward rent.
Ken Johnson, a real estate economist and one of the index’s creators at FAU’s College of Business, said the index factors in home prices, rents, mortgage rates and alternative investments that create wealth. The end result is a calculation that compares the potential wealth accumulated when owning a home compared with the wealth accumulated when renting the same property and investing a potential down payment elsewhere.
“The major drivers for this quarter’s scores appear to be slowing rents relative to the costs of ownership and climbing mortgage rates.”
For potential home owners who have their eye on long-term financial growth, Johnson said the investment paradigm has shifted.
“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 around the country.”
The FAU index measures 23 cities and 11 are in the “buy” category. These include Boston and New York. A few, it is strongly favored to buy. They include Chicago, Cincinnati and Cleveland.
In the even-money range are nine cities, including Minneapolis, Atlanta, Miami, Philadelphia and Los Angeles.
Renting is favored in Dallas, Denver and Houston.
While all different, the FAU index shows all cities are moving toward the rent side of the scale. Drivers are home prices that have risen so steeply in the past few years and continue to gain while mortgage rates are expected to rise through the end of 2017.
Doug Duncan, senior vice president and chief economist at Fannie Mae, said increasing prices offer an indication that it is a seller’s market.
“However, we continue to see a lack of housing supply as many potential sellers are unwilling or unable to put their homes on the market, perhaps due in part to concerns over finding an affordable replacement home. Prospective homebuyers are likely to face continued home price increases as long as housing supply remains tight.”
