Do your agents know how to answer the buy-versus-rent question from clients? Essentially, what people are asking is what’s the best way to accumulate wealth, says Ken Johnson, a real estate economist, associate dean of graduate programs, and professor at Florida Atlantic University College of Business. “Historically, housing has won,” he says.
Of course, that changed with the onset of the housing bubble in the early 2000s. But brokers can breathe a sign of relief and instill market confidence in their agents and clients alike with the results of the latest Beracha, Hardin & Johnson Buy vs. Rent Index released this month. The index shows that in 15 of the 23 large metropolitan areas surveyed, it makes solid financial sense to buy, while another five cities are borderline or marginally leaning toward renting.
The reason the results of the index are significant, is that it reflects a housing market that’s more in line with historical trends, says Johnson, who coauthored the index. “This is great news for homeownership and the financial returns to ownership,” he says.
Read more: Consumers Are Super Confident About Housing
There are three cities on the list of concern to Johnson and co-author Eli Beracha: Dallas, Denver, and Houston. Lack of purchase affordability is causing the index to deeply favor renting in those markets. Beracha, assistant professor in the T&S Hollo School of Real Estate at Florida International University, says, “The last time we saw scores of this magnitude, housing market crashes soon followed.”
The index, which is based on data from the end of the fourth quarter of 2016, takes not only housing prices into account but also the cost of maintenance, property taxes, insurance, and other expenses. The study also considers financial benefits of owning, such as the mortgage interest deduction and property appreciation. On the flip side, the index analyzes comparable rental properties, while assuming that renters could reinvest the rent differential into a market portfolio of stocks and bonds.
As a general rule, agents should encourage clients to be honest with themselves when considering the buy or rent question. Will they actually reinvest the cost saving of renting (if there is one) into the stock market? Looking beyond short-term market fluctuations, no matter how significant, Johnson says, “Ownership, at its heart, is a forced savings plan.”
—Erica Christoffer, REALTOR® Magazine
Source: Beracha, Hardin & Johnson Buy vs. Rent Index, March 2017, Florida Atlantic University and Florida International University
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