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BOCA RATON, Fla. â€“ March 10, 2015 â€“ An index launched by professors at Florida Atlantic University and Florida International University 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 Beracha, Hardin & Johnson Buy vs. Rent (BH&J) Index â€“ named for the three professors who developed it â€“ was designed to signal whether current market conditions favor buying or renting a home in terms of wealth creation over a fixed holding period in a particular market. They base their analysis on historical market conditions and compare the real estate investment to alternative investment opportunities.
“If you’re buying the right house because it’s in the right school district and it has the right amenities, I wouldn’t hesitate to pull the trigger,” Ken Johnson, an FAU economist and one of the authors, told the Sun Sentinel. “But if you’re buying a house to buy low and sell high, it’s probably too late.”
According to the latest BH&J Index, for the fourth quarter of 2014, the U.S. as a whole and seven cities (Atlanta, Boston, Chicago, Cincinnati, Cleveland, Detroit and New York City) are in strong buy territory, with scores that have historically favored wealth accumulation through homeownership.
Eight cities (Kansas City, Los Angeles, Milwaukee, Minneapolis, Philadelphia, San Diego, Seattle and St. Louis) are marginally in buy territory.
Five cities, including most of South Florida (Palm Beach, Broward and Miami-Dade counties) are at or near the indifference point between monthly rent payments and ownership, so neither option has an edge. The four other U.S. cities at the breakeven point include Honolulu, Pittsburgh, Portland and San Francisco.
Three cities (Dallas, Denver and Houston) are clearly in rent territory, with property pricing out-pacing rents.
“While the nation as a whole and several markets are in a strong buy territory, the BH&J Index suggests that some cities are already renter-friendly,” says Ken Johnson, Ph.D., one of the index’s authors and an associate dean in FAU’s College of Business. “This is not surprising given the recent rise in housing purchase prices, climbing mortgage rates, relatively slower growth in market rents for comparable properties and the expected return on alternative investments.”
The index compares an individual buying a home to one renting a similar quality home, and assumes the renter reinvests money saved, if any, by renting. The index’s results are standardized between 1 and -1, with negative scores favoring ownership and positive scores favoring renting. The BH&J Index, which examines the United States and 23 key cities, somewhat mirrors the Standard & Poor’s/Case-Shiller Home Price Indices, which track changes in residential real estate both nationally as well as in 20 metropolitan regions. It’s published quarterly and available online.
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