In Addition to Affording Flexibility, Renting Seen as More Effective Option for Building Wealth Faster than Buying Homes and Building Equity in Some Markets
Across much of the country, consumers who rent and reinvest those potential savings can build wealth faster than people who buy homes and build equity, according to the latest quarterly findings in the Beracha, Hardin & Johnson Buy vs. Rent Index.
What’s more, renting is becoming a long-term trend, unlikely to lose ground anytime soon, said Ken Johnson of Florida Atlantic University in Boca Raton, FL, one of the study’s authors.
“If I was a developer, I would feel more comfortable about building multifamily because the demand there is more sound than perhaps it’s ever been,” he noted.
Johnson said buying a home traditionally was one of the best ways for average consumers to build wealth. But they now have easier access to other savings vehicles, such as stocks, bonds and 401(k)s.
“I don’t think we’re ever going back to the high levels of homeownership,” he added. “We have more people now who see the value is being mobile.”
The index, to be released Wednesday, looks at home prices, mortgage rates, rents and other data in 23 major metropolitan areas to determine whether it makes more sense to buy or rent and reinvest.
Many markets across the country appear to be nearing the peak of the current housing cycle, meaning it’s better to rent and reinvest, the study found.
Those areas include: Atlanta; Denver; Dallas; Honolulu, HI; Houston; Kansas City, KC; Los Angeles; South Florida; Minneapolis; Pittsburgh, PA; Portland, OR; San Diego; San Francisco; Seattle, WA; and St. Louis, MO.
Other regions are still below their long-term pricing trends, so buying makes more sense. That’s the case in: Boston; Chicago; Cincinnati and Cleveland, OH; Detroit; Milwaukee, WI; New York City; and Philadelphia.
Higher mortgage rates, steady returns in the stock market and the cost of ownership are the key factors pushing most of the country toward renting, said co-author Eli Beracha of Florida International University in Miami.
“All of these costs are rising faster than the cost of renting a comparable property,” he said in a statement. “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.”
Still, Johnson cautions that renters who have no intention of reinvesting should buy, adding that homeownership is forced savings. Also, there’s nothing wrong with buying if young families want to be near good schools and develop a sense of community, Johnson said.
“We encourage people to bargain aggressively,” he said. “Be willing to walk away from any deal where you think the price and the terms are too high.”
