Should I Buy, or Should I Rent?

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© Provided by The Motley Fool Should I Buy, or Should I Rent?

A trio of Florida college professors has come up with a way to compare renting a house versus buying one in markets across the country. Their goal sounds sort of like our motto at The Motley Fool: to help people get “smarter, happier, and richer.”

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The Beracha, Hardin & Johnson Buy vs. Rent Index (BH&J Index) is, in their own words, “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 relative to historical market conditions and alternative investment opportunities.”

In other words, would you be better off buying a home or renting a similar home in the same market but, instead, reinvesting all the money you would have spent on homeownership in, say, the stock market?

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And, in their second-quarter report — which includes detailed graphs for 23 major markets — real estate academicians Ken Johnson from Florida Atlantic University and Eli Beracha and William Hardin of Florida International University say renting and reinvesting currently bests buying in Atlanta, Los Angeles, Pittsburgh, Philadelphia, San Diego, Minneapolis, and Portland, Oregon.

“Worries of a correction continue”

That’s also the case in the following cities, where the researchers say home prices have reached or are near their peak: Dallas, Denver, Houston, Seattle, Miami, and Kansas City. “In these housing markets, worries of a correction continue,” Johnson, associate dean of the FAU School of Business, said last month in a press release about the report.

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“At this time, buying carries considerable risk. Consumers can build wealth faster if they sit out these sharp price increases and instead rent a similar property and reinvest their savings in a portfolio of stocks and bonds,” Johnson said.

On the other hand, the good professors determined that buying and building equity makes more sense in Boston, Chicago, New York, San Francisco, Cincinnati, Cleveland, Detroit, Milwaukee, Honolulu, and St. Louis.

Countering the conventional wisdom

The report’s authors said the BH&J Index is intended to help inform multiple stakeholders — including consumers, real estate professionals, developers, lenders, and policymakers — about the health of local markets.

They do that by crunching the numbers on multiple factors, including rent-to-price ratios, mortgage rates, expected inflation, long-term stock market returns, maintenance costs and property taxes, tax benefits, and more.

The second-quarter report says the researchers’ data continues to help counter the traditional argument that homeownership is far superior to renting over the long term. “The BH&J Buy vs. Rent Index, first published in 2013, shows that renting and reinvesting can be equally or more lucrative for disciplined savers,” they said.

The Millionacres bottom line

At Millionacres, we’re here to help, especially if your strategies shift to real estate investing beyond simply buying, moving in, and committing to a mortgage and all those other expenses that go with such a home sweet-leveraged home. But either way, choose well, and you’ll do fine.

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The Motley Fool has a disclosure policy. Editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. Editorial content from Millionacres is separate from The Motley Fool editorial content and is created by a different analyst team.

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