Study: In­vest else­where, rent in­stead

Oth­ers dis­pute mar­ket ‘over­heated,’ says some fac­tors were missed

The Dallas Morning News - - Business - By KAREN ROBIN­SON-JACOBS Staff Writer krobin­son@dal­las­

If you’re look­ing to build wealth, it might be wiser to rent a home in Dal­las-fort Worth than to buy.

That’s the find­ing of a study by economists at Florida At­lantic and Florida In­ter­na­tional uni­ver­si­ties. Their re­search com­pares two North Texas con­sumers start­ing out with the same pile of money, with one buy­ing a home and the other rent­ing and rein­vest­ing in stocks and bonds over an eight-year pe­riod.

The renter would come out ahead fi­nan­cially, the economists con­cluded.

That’s be­cause Dal­las-fort Worth has the most “over­heated” res­i­den­tial real es­tate mar­ket, in terms of price ap­pre­ci­a­tion, among the 23 largest metro ar­eas in the U.S., ac­cord­ing to the economists. They don’t think the re­gion’s home price growth is sus­tain­able.

“I can’t tell you when it’s go­ing to hap­pen, but there’s go­ing to be some down­ward [pric­ing] pres­sure,” said Ken John­son, a real es­tate econ­o­mist at Florida At­lantic Univer­sity and co-cre­ator of the Ber­acha, Hardin & John­son Buy vs. Rent (BH&J) In­dex. “There’s 50 or 49 other times this has hap­pened, and prices al­ways come down. The prices of the houses will even­tu­ally get too high. I can’t tell you when, but I know they’ll come down.”

Not sur­pris­ingly, one of the na­tion’s top home sell­ers dis­agrees with the ba­sic the­sis of that study.

John­son’s in­dex is based on a sta­tis­ti­cal cal­cu­la­tion that as­sumes the buyer and renter have ac­cess to com­pa­ra­ble prop­er­ties and their only de­cid­ing fac­tor is how to gen­er­ate more wealth at the end of eight years.

In many of the most pop­u­lar North Texas neigh­bor­hoods, that choice is sim­ply not avail­able.

And the study doesn’t take into ac­count the in­tan­gi­bles of own­ing a home, such as your love of that de­signer kitchen.

John­son con­cedes that, in the long term, home­own­er­ship wins out be­cause your home loan is paid down each month while rents can rise each year.

The in­dex ranges from mi­nus 1, where you’re bet­ter off own­ing, to plus 1, where fi­nan­cially you’re bet­ter off rent­ing. The Dal­las area had an in­dex score of .888 in June, the clos­est score to 1 among the 23 metro ar­eas.

“At .888 ... there’s a very lim­ited chance of ac­quir­ing more wealth by own­ing and build­ing eq­uity as op­posed to rent­ing and rein­vest­ing,” John­son said. “Rent­ing and rein­vest­ing should win in Dal­las.

“You can think of it as a mea­sure of how over­heated is the mar­ket,” he said. “When you’re at .888, it’s pretty over­heated. I hope I’m wrong, but there are just in­di­ca­tions that the Dal­las mar­ket is priced too high right now.”

There are re­ports in­di­cat­ing that the red-hot pace of home price ac­cel­er­a­tion in North Texas is cool­ing.

The most re­cent Stan­dard & Poor’s/case-shiller Home Price In­dex showed that Dal­las-area home prices in June grew by the small­est per­cent­age in al­most six years. Dal­las prices were up only 5.2 per­cent from a year ago, less than the 6.2 per­cent na­tion­wide home price gain from June 2017.

North Texas home price in­creases have been de­cel­er­at­ing in re­cent months as the sup­ply of houses for sale has grown and pur­chases have slowed.

The Dal­las-plano-irv­ing metro saw a year-over-year in­crease of more than 32 per­cent in hous­ing in­ven­tory — homes, new and old, avail­able for sale — dur­ing the Apriljune pe­riod, ac­cord­ing to a re­port from home list­ing site Tru­lia.

That means the Dal­las metro’s in­ven­tory grew to in­clude 14,875 houses, up from 11,653 in the first quar­ter — and up from 11,234 houses for sale in the se­cond quar­ter of 2017.

The Fort Worth-ar­ling­ton metro was sim­i­lar, with nearly 35 per­cent in­ven­tory growth in that time pe­riod.

John­son said he thinks the de­cline is due more to con­sumers re­act­ing to prices than to an in­crease in sup­ply.

And rather than a bub­ble ex­plo­sion, John­son pre­dicted the mar­ket will see a num­ber of “pric­ing events,” such as houses tak­ing longer to sell.

The strong lo­cal econ­omy should pro­tect against a pric­ing free-fall, he said.

Ben Ca­ballero, founder and CEO of Ad­di­son-based Homes, makes his liv­ing based on con­sumers buy­ing homes. He holds a Guin­ness World Record as the most pro­duc­tive real es­tate agent in the world, in terms of sales.

What he’s not buy­ing is the no­tion that North Texas is fac­ing a hous­ing bub­ble.

“I don’t see that na­tion­ally or lo­cally that there’s any fear of a bub­ble,” he said, echo­ing the sen­ti­ment that prices are eas­ing lo­cally as sup­ply picks up. “I haven’t talked to any­body in the in­dus­try that’s con­cerned about a bub­ble and that’s Re­al­tors, ev­ery­body. If you’re talk­ing about a bub­ble, I don’t see it.”

He also thinks that, even at eight years, own­ing a home would still win out fi­nan­cially in most cases.

“I would say there’s been very few times in history where you have an eight-year pe­riod that if you held a home for eight years you’d be in a neg­a­tive [fi­nan­cial] sit­u­a­tion,” he said. “You could cherry pick. You might find an iso­lated case or two but not a ran­dom eight-year pe­riod.”

Ca­ballero said he bought a home near the be­gin­ning of 2006, “right near the top of the mar­ket in Dal­las . ... It’s been 12 years. I’ve en­joyed con­sid­er­able ap­pre­ci­a­tion and I’ve had a nice place to live. If I had rented, I would not be a cou­ple hun­dred thou­sand dol­lars up.”

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