The 'Buy vs. Rent Index' indicates some markets in U.S. are nearing pricing bubble territory
This report is from FAU and FIU.
The latest national housing market index produced by Florida Atlantic University and Florida International University faculty indicates the housing market in several cities -- including Dallas, Denver andHouston -- is nearing pricing bubble territory.
Based on numbers from the end of the third quarter, the latest Beracha, Hardin & Johnson Buy vs. Rent (BH&J) Index comes on the heels of the latest S&P/Case-Shiller Home Price Index, which found home prices across the nation rose 4.9 percent in a 12 month-period ending in September. While some may interpret the Case-Shiller Index as a sign to buy, the authors of the BH&J Index believe the national housing market is turning on the margin toward renting and reinvesting.
"The U.S. housing market across the board is moving toward rent territory," said Ken Johnson, Ph.D., a real estate economist who is one of the index's authors and an associate dean of graduate programs and professor in FAU's College of Business.
The BH&J Index measures the relationship between purchasing property and building wealth through a buildup in equity and renting a comparable property and investing in a portfolio of stocks and bonds. It examines the entire housing market in the United States and isolates the markets of 23 key cities. Johnson's collaborators in this ongoing independent research are Eli Beracha, Ph.D., assistant professor in the T&S Hollo School of Real Estate at FIU and William G. Hardin III, Ph.D., director of the T&S Hollo School of Real Estate at FIU's College of Business.
Currently, Dallas, Denver and Houston are all at or above previous index scores that strongly favor renting as opposed to buying in terms of wealth creation.
"It is no longer a matter of if but when, and to what extent, we will see a downward pricing event in these three cities," Johnson said. "Prices are rising too fast in these cities and there are no underlying fundamental changes in their economies to support current pricing, especially in the face of a booming stock market."
The housing markets in some cities, such as Miami, Honolulu, Pittsburgh, Portland, San Francisco and Seattle, are considered a tossup between ownership and renting in terms of wealth creation. While prices are on the rise, they are nowhere near the danger point for triggering dramatic pricing declines.
"A continuation of rapid and dramatic price increases in these real estate market places will almost certainly lead to pricing bubbles and resulting local real estate crashes," Beracha said. "On the other hand, a slowdown in pricing in these areas should allow these cities to pull back from the edge."
Some cities -- Chicago, Cincinnati and Cleveland -- remain strongly in buy territory with negative BH&J scores. These scores are suggestive of vibrant real estate markets that have room to grow in terms of pricing. The only real danger is that of market contagion, in which negative pricing events in one real estate market lead to down turns in other markets.
"Interestingly, Houston had relatively low BH&J scores back in 2006 and fared pretty well during the collapse," Johnson said. "Unfortunately, Houston is now leading the pack in terms of renter friendly markets, which is not good in terms of future expected housing prices."
The BH&J Index is published quarterly and is available online at http://business.fau.edu/buyvsrent. Due to data availability and the time necessary to calculate the most current index values, the index is produced two months after the end of the quarter.
About Florida Atlantic University
Florida Atlantic University, established in 1961, officially opened its doors in 1964 as the fifth public university in Florida. Today, the University, with an annual economic impact of $6.3 billion, serves more than 30,000 undergraduate and graduate students at sites throughout its six-county service region in southeast Florida. FAU's world-class teaching and research faculty serves students through 10 colleges: the Dorothy F. Schmidt College of Arts and Letters, the College of Business, the College for Design and Social Inquiry, the College of Education, the College of Engineering and Computer Science, the Graduate College, the Harriet L. Wilkes Honors College, the Charles E. Schmidt College of Medicine, the Christine E. Lynn College of Nursing and the Charles E. Schmidt College of Science. FAU is ranked as a High Research Activity institution by the Carnegie Foundation for the Advancement of Teaching. The University is placing special focus on the rapid development of critical areas that form the basis of its strategic plan: Healthy aging, biotech, coastal and marine issues, neuroscience, regenerative medicine, informatics, lifespan and the environment. These areas provide opportunities for faculty and students to build upon FAU's existing strengths in research and scholarship. For more information, visit www.fau.edu.