Time is right to rent, reinvest, professors say

Rising home ownership costs diminish chances to create wealth

As U.S. housing markets — including South Florida’s — approach the peaks of their price cycles, it’s better to rent than buy a home, according to the latest “Buy vs. Rent” index produced by two South Florida professors.

But don’t squander the savings generated by renting — re-invest the money in stocks and bonds, said Ken Johnson, one of the index’s creators and a real estate economist at Florida Atlantic University.

“We see people shifting into renting,” he said. “We don’t see any signs that this is going to be like 2007, where we’re going to have a market crash in terms of housing prices.”

The quarterly Beracha, Hardin & Johnson Buy vs. Rent Index is designed to signal whether

market conditions favor buying or renting a home in terms of wealth creation over a fixed holding period, relative to historical market conditions and alternative investment opportunities. The index focuses on 23 major metropolitan housing markets. The Miami area market encompasses Palm Beach, Broward and Miami-Dade counties.

Johnson said slowing housing starts, rising mortgage rates, decreased demand and unsustainable price increases are all combining to slow housing markets around the country.

Of the 23 separate metro areas in the index, many are nearing the top of their current housing cycles, which means they are above their longterm pricing trends, Johnson said. Besides Miami, the areas include Atlanta, Denver, Dallas, Honolulu, Houston, Kansas City, Los Angeles, Minneapolis, Pittsburgh, Portland, San Diego, San Francisco, Seattle and St. Louis.

The professors said other cities in the survey are not above their longterm pricing trends, which means buying homes and building equity is the better road to take there. These cities include Boston, Chicago, Cincinnati, Cleveland, Detroit, Milwaukee, New York and Philadelphia.

The biggest contributor to rising ownership costs is rising home prices, Eli Beracha, co-creator of the index and associate professor in the Hollo School of Real Estate at Florida International University, said in a statement.

The costs of ownership, including mortgage payments, taxes, insurance and maintenance, Beracha said, “are rising faster than the cost of renting a comparable property. Therefore, renters who take the money they’re saving each month and reinvest it are going to build wealth faster than those who buy a home, on average.”

According to an unrelated monthly rent survey of 250 large cities taken by the research firm Yardi Matrix, rents in May rose year over year in 79 percent of the locations. They were unchanged in 17 percent of the cities and declined in 4 percent of the locations surveyed.

In Fort Lauderdale, average rents rose by 6.5 percent to $1,853. In West Palm Beach, they rose by 5.1 percent to $1,397, and by 2.5 percent to $1,623 in Miami.

But nationally, the Yardi Matrix survey found the rate of yearover-year increases slowed to 2 percent in May, the weakest annual growth for this time of year since May 2010, according to RentCafe, a blog affiliate of Yardi Matrix.

Johnson said saving, not spending, is the preferred course for renters to take.

“We are not encouraging anybody to rent and not reinvest,” said FAU’s Johnson. “That is the wrong thing to do.”

As with all investing, patience is a virtue.

Stocks rose more than 1 percent last week, although gains were restricted by persistent tensions between the United States and its major international trade partners. The Dow Jones Industrial average closed at 25,316.53 after ending the week above 25,000 for the first time since March. The Nasdaq Composite index ended at 7,645.51, while the S&P 500 was 2,779.03.

“We are not encouraging anybody to rent and not reinvest. That is the wrong thing to do.” Ken Johnson, index co-creator