U.S. housing markets, when viewed as a whole, are now in rent territory, meaning renting and reinvesting, on average, will outperform owning and building equity in terms of wealth creation, according to the latest national index produced by Florida Atlantic University and Florida International University faculty.
The last time U.S. markets as a whole crossed from ownership territory into rent territory was in June 1999. In January 2010, U.S. housing markets crossed back into ownership territory and have remained there until now. U.S. homeowners have, on average, outperformed renting and reinvesting in terms of wealth creation ever since.
Currently, 16 of the 23 cities covered in the Beracha, Hardin & Johnson Buy vs. Rent (BH&J) Index are in rent territory. Those cities include Atlanta, Dallas, Denver, Honolulu, Houston, Kansas City, Los Angeles, Miami, Minneapolis, Philadelphia, Pittsburgh, Portland, San Diego, San Francisco, Seattle and St. Louis, all of which will be experiencing downward pressure on the demand for ownership.
What does this mean for the future of U.S. housing prices?
“It is clear that we are at a point where markets will begin to see downward pricing pressure, implying in some markets annual pricing increases will begin to slow,” said Ken Johnson, Ph.D., a real estate economist and one of the index’s creators in FAU’s College of Business.
The best buys in the country appear to be in the Midwest and Northeast, with Chicago and Clevelandpossessing the lowest/best ownership scores. Of all the cities in the BH&J Index, Johnson said, Dallas is most alarming with a score of .888.
“Across all of the data for the Index going back to 1982, only 49 times has a market in any given quarter been at this score or higher,” Johnson said. “All of these markets experienced significant price declines in their residential housing prices.”
Currently, the biggest driver for moving the U.S. into rent territory is the fact the cost of ownership is outpacing the cost of renting a like-kind property, said Eli Beracha, Ph.D., co-creator of the index and director of the Hollo School of Real Estate at FIU.
The BH&J Index is published quarterly and is produced two months after the end of the quarter.